UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM 10-Q





(Mark One)


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




For the
quarterly period ended:  September 27,
2009




OR




 ̈
            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:  000-50373




Horne
International, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                      
                      90-0182158(State
      or other jurisdiction of
                        incorporation
      or organization)
                        
                        3975
      University Drive, Suite 100,
                        Fairfax,
      Virginia
                      
                      (I.R.S.
      Employer
                        Identification
      No.)
                        
                        
                        22030(Address
      of principal executive offices)
                      
                      (Zip
      Code)




Registrant’s
telephone number, including area code:  703-641-1100




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, and (2) has been subject to such filing requirements for
the past 90 days.


Yes x       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.





Large
      Accelerated filer   x
            Accelerated
      Filer    ̈
            Non-Accelerated
      Filer    ̈
            Small
      Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈       No
x




As of
November 11, 2009 there were 42,687,324shares of the
issuer’s common stock, par value $0.0001 per share,
outstanding.







TABLE
OF CONTENTS




PART I - FINANCIAL
      INFORMATIONItem
      1.  Financial Statements (Unaudited)Consolidated
      Balance Sheets as of September 27, 2009 and December 28,
    2008
                                                                
                                                                
                                                                2Consolidated
      Statements of Operations for the three and nine months ended September 27,
      2009 and September 28, 2008
                                                                
                                                                
                                                                3Consolidated
      Statement of Stockholders’ Deficit for the nine months ended September
      27, 2009
                                                                
                                                                
                                                                4Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      27, 2009 and September 28, 2008
                                                                
                                                                
                                                                5Notes
      to Consolidated Financial Statements
                                                                
                                                                6Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations
                                                                
                                                                13Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
                                                                
                                                                18Item
      4.  Controls and Procedures
                                                                
                                                                18PART
      II - OTHER INFORMATIONItem
      1.  Legal Proceedings
                                                                
                                                                19Item
      1A Risk Factors
                                                                
                                                                19Item
      6.  Exhibits
                                                                
                                                                
                                                                19





HORNE
INTERNATIONAL, INC.


Consolidated
Balance Sheets (Unaudited)


(Dollars
shown in 000’s except share amounts)





September
                                    
                                    
                                    December27, 2009
                                    
                                    
                                    28, 2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                    
                                    $
                                    108
                                    
                                    
                                    $
                                    22Receivables,
      net
                                    
                                    
                                    726
                                    
                                    
                                    
                                    1,384Prepaid
      expenses & Other current assets
                                    
                                    
                                    87
                                    
                                    
                                    
                                    98Current
      assets of Discontinued Operations
                                    
                                    
                                    125
                                    
                                    
                                    
                                    98Total
      current assets
                                    
                                    
                                    1,046
                                    
                                    
                                    
                                    1,602Property
      and equipment, net
                                    
                                    
                                    87
                                    
                                    
                                    
                                    132Investments
      in joint ventures
                                    
                                    
                                    -
                                    
                                    
                                    
                                    61Other
      assets
                                    
                                    
                                    57
                                    
                                    
                                    
                                    57Other
      assets of discontinued operations
                                    
                                    
                                    1,770
                                    
                                    
                                    
                                    3,480TOTAL
      ASSETS
                                    
                                    $
                                    2,960
                                    
                                    
                                    $
                                    5,332LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
                                    
                                    $
                                    421
                                    
                                    
                                    $
                                    454Accrued
      expenses
                                    
                                    
                                    559
                                    
                                    
                                    
                                    490Deferred
      revenues
                                    
                                    
                                    57
                                    
                                    
                                    
                                    97Current
      portion of debt
                                    
                                    
                                    375
                                    
                                    
                                    
                                    1,046Current
      liabilities of discontinued operations
                                    
                                    
                                    309
                                    
                                    
                                    
                                    1,771Total
      current liabilities
                                    
                                    
                                    1,721
                                    
                                    
                                    
                                    3,858Long-term
      liabilities:Non-current
      liabilities of discontinued operations
                                    
                                    
                                    1,726
                                    
                                    
                                    
                                    1,812TOTAL
      LIABILITIES
                                    
                                    
                                    3,447
                                    
                                    
                                    
                                    5,670Commitments
      and contingenciesStockholders'
      equity: r's DeficitPreferred
      stock, $0.0001 par value; 20,000,000 shares authorized, none
      issued
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Common
      stock, $0.0001 par value; 80,000,000 shares authorized,42,687,324 and
      42,687,324 issued and outstanding
                                    
                                    
                                    4
                                    
                                    
                                    
                                    4Additional
      paid-in capital
                                    
                                    
                                    79,027
                                    
                                    
                                    
                                    78,772Accumulated
      deficit
                                    
                                    
                                    (79,518
                                    )
                                    
                                    
                                    (79,114
                                    )Total
      stockholders' deficit
                                    
                                    
                                    (487
                                    )
                                    
                                    
                                    (338
                                    )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                    
                                    $
                                    2,960
                                    
                                    
                                    $
                                    5,332





See accompanying notes to consolidated
financial statements.


2


HORNE
INTERNATIONAL, INC.


Consolidated
Statements of Operations (Unaudited)


(Dollars
shown in 000’s except share and per share amounts)





Quarter toDate
                                                                          
                                                                          
                                                                          Year to DateSeptember 27,
                                                                          
                                                                          
                                                                          September 28,
                                                                          
                                                                          
                                                                          September 27,
                                                                          
                                                                          
                                                                          September 28,2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2008Revenues
                                                                          
                                                                          $
                                                                          1,007
                                                                          
                                                                          
                                                                          $
                                                                          1,093
                                                                          
                                                                          
                                                                          $
                                                                          3,230
                                                                          
                                                                          
                                                                          $
                                                                          3,315Cost
      of revenues
                                                                          
                                                                          
                                                                          714
                                                                          
                                                                          
                                                                          
                                                                          1,006
                                                                          
                                                                          
                                                                          
                                                                          2,245
                                                                          
                                                                          
                                                                          
                                                                          3,369Gross
      profit (loss)
                                                                          
                                                                          
                                                                          293
                                                                          
                                                                          
                                                                          
                                                                          87
                                                                          
                                                                          
                                                                          
                                                                          985
                                                                          
                                                                          
                                                                          
                                                                          (54
                                                                          )Operating
      expenses
                                                                          
                                                                          
                                                                          358
                                                                          
                                                                          
                                                                          
                                                                          676
                                                                          
                                                                          
                                                                          
                                                                          1,194
                                                                          
                                                                          
                                                                          
                                                                          4,291Loss
      from operations
                                                                          
                                                                          
                                                                          (65
                                                                          )
                                                                          
                                                                          
                                                                          (589
                                                                          )
                                                                          
                                                                          
                                                                          (209
                                                                          )
                                                                          
                                                                          
                                                                          (4,345
                                                                          )Total
      non-operating income(loss), net
                                                                          
                                                                          
                                                                          (3
                                                                          )
                                                                          
                                                                          
                                                                          (53
                                                                          )
                                                                          
                                                                          
                                                                          (66
                                                                          )
                                                                          
                                                                          
                                                                          (158
                                                                          )Gain(Loss)
      before provision for income taxes
                                                                          
                                                                          
                                                                          (68
                                                                          )
                                                                          
                                                                          
                                                                          (642
                                                                          )
                                                                          
                                                                          
                                                                          (275
                                                                          )
                                                                          
                                                                          
                                                                          (4,503
                                                                          )Income
      tax expense
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (1
                                                                          )
                                                                          
                                                                          
                                                                          (4
                                                                          )
                                                                          
                                                                          
                                                                          (1
                                                                          )Income(Loss)
      before discontinued operations
                                                                          
                                                                          
                                                                          (68
                                                                          )
                                                                          
                                                                          
                                                                          (643
                                                                          )
                                                                          
                                                                          
                                                                          (279
                                                                          )
                                                                          
                                                                          
                                                                          (4,504
                                                                          )Income(Loss)
      from discontinued operations
                                                                          
                                                                          
                                                                          (55
                                                                          )
                                                                          
                                                                          
                                                                          (38
                                                                          )
                                                                          
                                                                          
                                                                          (125
                                                                          )
                                                                          
                                                                          
                                                                          (1,439
                                                                          )Net
      Income(Loss)
                                                                          
                                                                          $
                                                                          (123
                                                                          )
                                                                          
                                                                          $
                                                                          (681
                                                                          )
                                                                          
                                                                          $
                                                                          (404
                                                                          )
                                                                          
                                                                          $
                                                                          (5,943
                                                                          )Weighted
      average common shares outstanding:Basic
      and diluted
                                                                          
                                                                          
                                                                          42,687,324
                                                                          
                                                                          
                                                                          
                                                                          42,687,324
                                                                          
                                                                          
                                                                          
                                                                          42,687,324
                                                                          
                                                                          
                                                                          
                                                                          42,406,326Basic
      and diluted earnings per shareLoss
      from continuing operations
                                                                          
                                                                          
                                                                          (0.00
                                                                          )
                                                                          
                                                                          
                                                                          (0.02
                                                                          )
                                                                          
                                                                          
                                                                          (0.01
                                                                          )
                                                                          
                                                                          
                                                                          (0.11
                                                                          )Loss
      from discontinued operations
                                                                          
                                                                          
                                                                          (0.00
                                                                          )
                                                                          
                                                                          
                                                                          (0.00
                                                                          )
                                                                          
                                                                          
                                                                          (0.00
                                                                          )
                                                                          
                                                                          
                                                                          (0.03
                                                                          )Net
      Income(Loss)
                                                                          
                                                                          $
                                                                          (0.00
                                                                          )
                                                                          
                                                                          $
                                                                          (0.02
                                                                          )
                                                                          
                                                                          
                                                                          (0.01
                                                                          )
                                                                          
                                                                          $
                                                                          (0.14
                                                                          )




See
accompanying notes to consolidated financial statements.


3


HORNE
INTERNATIONAL, INC.


Consolidated
Statement of Stockholders’ Deficit (Unaudited)


(Dollars
shown in 000’s except share amounts)





CommonStock
                      
                      
                      
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      APIC
                      
                      
                      Deficit
                      
                      
                      TotalBalance
      as of December 28, 2008
                      
                      
                      42,687,324
                      
                      
                      $
                      4
                      
                      
                      $
                      78,772
                      
                      
                      $
                      (79,114
                      )
                      
                      $
                      (338
                      )Net
      Loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (404
                      )
                      
                      $
                      (404
                      )Share
      price guarantee settlement
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (131
                      )
                      
                      
                      
                      
                      
                      $
                      (131
                      )Equity
      activities related to 91 Hill property transfer
                      
                      
                      
                      
                      
                      
                      $
                      371
                      
                      
                      
                      
                      
                      
                      $
                      371Option
      Issuances
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      15
                      
                      
                      
                      
                      
                      
                      $
                      15Balance
      as of September 27, 2009
                      
                      
                      42,687,324
                      
                      
                      $
                      4
                      
                      
                      $
                      79,027
                      
                      
                      $
                      (79,518
                      )
                      
                      $
                      (487
                      )




See
accompanying notes to the consolidated financial statements.




4


HORNE
INTERNATIONAL, INC.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(Dollars
shown in 000’s)





September
      27,
                                
                                
                                September
      28,2009
                                
                                
                                2008Net
      loss
                                
                                $
                                (404
                                )
                                
                                $
                                (5,943
                                )Adjustments
      to reconcile net loss to netCash
      used in operating activitiesStock
      option issuances
                                
                                
                                15
                                
                                
                                
                                43Depreciation/Amortization
                                
                                
                                44
                                
                                
                                
                                143Writedown
      of investments to fair value
                                
                                
                                (10
                                )
                                
                                
                                169Gain
      on disposal of equipment
                                
                                
                                -
                                
                                
                                
                                (3
                                )Non-Cash
      impact of debt forgiveness for 91 hill property
                                
                                
                                121
                                
                                
                                
                                -Cash
      provided by discontinued operations
                                
                                
                                132
                                
                                
                                
                                1,827Net
      loss from discontinued operations
                                
                                
                                4
                                
                                
                                
                                -Decrease
      (increase) in balance sheet itemsReceivables
                                
                                
                                658
                                
                                
                                
                                250Prepaid
      Expenses
                                
                                
                                11
                                
                                
                                
                                1,305Accounts
      Payable
                                
                                
                                (33
                                )
                                
                                
                                65Accrued
      Expenses
                                
                                
                                38
                                
                                
                                
                                (104
                                )Deferred
      Revenue
                                
                                
                                (41
                                )
                                
                                
                                106Other
      balance sheet changes
                                
                                
                                2
                                
                                
                                
                                0Net
      cash provided by(used in) continuing operations
                                
                                
                                536
                                
                                
                                
                                (2,142
                                )Cash
      flows from investing activitiesCash
      settlement of share price guarantee
                                
                                
                                (100
                                )
                                
                                
                                (90
                                )Proceeds
      from joint ventures under the equity method
                                
                                
                                71
                                
                                
                                
                                -Cash
      invested in potential acquisition
                                
                                
                                -
                                
                                
                                
                                (521
                                )Purchase
      of property and equipment
                                
                                
                                -
                                
                                
                                
                                (109
                                )Proceeds
      from the sale of equipment
                                
                                
                                -
                                
                                
                                
                                22Net
      cash (used in) investing activities
                                
                                
                                (29
                                )
                                
                                
                                (698
                                )Cash
      flows from financing activitiesNet
      cash (repayments)borrowings
                                
                                
                                (421
                                )
                                
                                
                                2,320Net
      cash (used in)provided by financing activities
                                
                                
                                (421
                                )
                                
                                
                                2,320Net
      increase(decrease) in cash and cash equivalents
                                
                                
                                86
                                
                                
                                
                                (520
                                )Cash
      and cash equivalents at beginning of period
                                
                                
                                22
                                
                                
                                
                                577Cash
      and cash equivalents at end of period
                                
                                $
                                108
                                
                                
                                $
                                57




See
accompanying notes to the consolidated financial statements.


5


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




1.        BASIS
OF PRESENTATION




The
accompanying unaudited consolidated financial statements for the three and nine
month periods ended September 27, 2009 and September 28, 2008 have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission for Form 10-Q and Rule
10-01 of Regulation S-X.  Accordingly, they do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements.  In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
accruals, considered necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows as of and for the
periods presented.   The Company consistently applied the
accounting policies described in the Company’s 2008 Annual Report on form 10-K
in preparing these unaudited financial statements.  These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company’s 2008 Annual Report on Form 10-K.




The
results of operations for the three and nine month periods ended September 27,
2009 are not necessarily indicative of the results that may be expected for the
year.  These interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and related footnotes
included in the Company’s Annual Report on Form 10-K for the year ended December
28, 2008.




2.        SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES




Organization
and Nature of Business




Horne
International, Inc. (the “Company” or “We”, “Us”, “Our” or similar terms) is a
technology and technical engineering solutions company focused on three primary
target markets — security, energy, and the environment. The Company’s service
areas encompass program engineering, technology, environment, safety &
health, acquisition services, public outreach, and business process
engineering.




The
Company is headquartered in Fairfax, Virginia, and has one operating subsidiary:
Horne Engineering Services, LLC.     The Company
decided to cease operations of its Spectrum Sciences and Software, Inc. and
Coast Engine & Equipment Co. subsidiaries in the first quarter of
2008.  As a result, the Company operates in a single
segment—services.




Revenue
Recognition




The
Company’s principal method of revenue recognition is cost plus on reimbursable
time-and-materials contracts and milestones on fixed price deliverable contracts
and commission based contracts.




Income
Taxes




The
Company accounts for income taxes utilizing the asset and liability
method.  This approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carry forwards.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enacted date.  Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.




The
Company currently has a net operating loss carry forward of approximately $55
million at September 27, 2009.  The Company has not recorded this
federal tax benefit in the accompanying consolidated financial statements, due
to the possibility that the net operating loss carry forward may not be
utilized, for various reasons, including the potential that we might not have
sufficient profits to use the carry forward or the carry forward may be limited
as a result of changes in our equity ownership.  The Company adopted
ASC 740-10-25 (formerly FIN 48 “Accounting for Uncertainty in Income Taxes: An
Interpretation of FASB Statement 109” in 2007) and has determined that there are
currently no uncertain tax provisions, thus the adoption of FIN 48 had no impact
on the Company’s consolidated financial statements.


6


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




Loss
Per Share




Basic
Earnings Per Share (EPS) is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the reporting
period.  Diluted EPS is computed in a manner consistent with that of
basic EPS while giving effect to the impact of common stock equivalents if the
impact is not anti-dilutive.  The Company’s common stock equivalents
consist of employee, director, and consultant stock options to purchase common
stock.  Common stock equivalents of 2,331,000 and 331,000 were not
included in the computation of diluted EPS for the nine month period ended
September 27, 2009, and three and nine month periods September 28, 2008, as the
inclusion of these common stock equivalents would be anti-dilutive due to the
Company’s net loss position and including such shares would reduce the net loss
per share in those periods.




Impairment
of Long-Lived Assets




We assess
the impairment of long-lived assets on an ongoing basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
based upon an estimate of future discounted cash flows. Factors we consider that
could trigger an impairment review include the following: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and (iii) significant negative
industry or economic trends.  When we determine that the carrying
value of any long-lived asset may not be recoverable based upon the existence of
one or more of the above indicators of impairment, we measure impairment based
on the difference between an asset’s carrying value and an estimate of fair
value, which may be determined based upon quotes or a projected discounted cash
flow, using a discount rate determined by our management to be commensurate with
our cost of capital and the risk inherent in our current business model, and
other measures of fair value.




Recent
Accounting Pronouncements




In
December 2008, the FASB, “Employers’ Disclosures about Postretirement
Benefit Plan Assets” (ASC 715.20.65-2).  ASC 715.20.65-2 requires
additional disclosures for plan assets of defined benefit pension or other
postretirement plans. The required disclosures include a description of our
investment policies and strategies, the fair value of each major category of
plan assets, the inputs and valuation techniques used to measure the fair value
of plan assets, the effect of fair value measurements using significant
unobservable inputs on changes in plan assets, and the significant
concentrations of risk within plan assets. ASC 715.20.65-2 does not change the
accounting treatment for postretirement benefits plans and the Company does not
anticipate any impact from the adoption of this pronouncement due to the lack of
any plans that fall within the guidance.





In
April 2009, the FASB issued ASC 820.10.65-4 Fair Value Measurements and
Disclosure  “Determining Fair Value When Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (ASC 820.10.65-4)was  issued in
April, 2009 by FASB. ASC 820.10.65-4 provides guidance on how to determine the
fair value of assets and liabilities when the volume and level of activity for
the asset/liability has significantly decreased.  ASC 820.10.65-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly. In addition, ASC 820.10.65-4 requires disclosure in interim and
annual periods of the inputs and valuation techniques used to measure fair value
and a discussion of changes in valuation techniques. ASC 820.10.65-4 is
effective for us beginning in the second quarter of fiscal year 2009. The
adoption of ASC 820.10.65-4 is not expected to have a significant impact on our
consolidated financial statements.





In
April 2009, the FASB issued ASC 320.10.65-1, “Recognition and Presentation
of Other-Than-Temporary Impairment” (ASC 320.10.65-1). ASC 320.10.65-1 amends
the requirements for the recognition and measurement of other-than-temporary
impairments for debt securities by modifying the pre-existing “intent and
ability” indicator. Under ASC 320.10.65-1, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than
not that the security will be required to be sold before recovery, or the
security is not expected to recover the entire amortized cost basis of the
security. Additionally, ASC 320.10.65-1 changes the presentation of an
other-than-temporary impairment in the income statement for those impairments
involving credit losses. The credit loss component will be recognized in
earnings and the remainder of the impairment will be recorded in other
comprehensive income. ASC 320.10.65-1 is effective for us beginning in the
second quarter of fiscal year 2009. Upon implementation at the beginning of the
second quarter of 2009,ASC 320.10.65-1 is not expected to have a significant
impact on our consolidated financial statements.


7





HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)





In
April 2009, the FASB issued ASC 825.10.65-1, “Interim Disclosure about Fair
Value of Financial Instruments” (ASC 825.10.65-1). ASC 825.10.65.1 requires
interim disclosures regarding the fair values of financial instruments that are
within the scope of FAS 107, “Disclosures about the Fair Value of Financial
Instruments.” Additionally, ASC 825.10.65-1 requires disclosure of the methods
and significant assumptions used to estimate the fair value of financial
instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. ASC 825.10.65-1 does not change the
accounting treatment for these financial instruments and is not expected to have
a significant impact on our consolidated financial statements.




In June
2009, ASC 105.10 , The FASB
Accounting Standards Codification and Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement No. 162, was issued. The
FASB Accounting Standards
CodificationTM(Codification) will become the source of authoritative U.S. generally
accepted accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. On the effective date
of  ASC 105.10, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become
nonauthoritative.




ASC
105.10 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Following ASC 105.10 , the Board
will not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates. SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles,which became effective on November 13, 2008,
identified the sources of accounting principles and the framework for selecting
the principles used in preparing the financial statements that are presented in
conformity with GAAP. SFAS 162 arranged these sources of GAAP in a hierarchy for
users to apply accordingly. Once the Codification is in effect, all of its
content will carry the same level of authority, effectively superseding SFAS
162. In other words, the GAAP hierarchy will be modified to include only two
levels of GAAP: authoritative and nonauthoritative. As a result, ASC 105.10
replaces SFAS 162 to indicate this change to the GAAP hierarchy. ASC 105.10 is
not expected to have a significant impact on our financial
reporting.




In June
2009, ASC 810.10, Amendments
to FASB Interpretation No. 46(R), was issued. The objective of ASC
810.10 is to amend certain requirements of ASC 860 (revised December
2003), Consolidation of
Variable Interest Entities,or ASC 860 to improve financial
reporting by enterprises involved with variable interest entities and to provide
more relevant and reliable information to users of financial statements. ASC 810
carries forward the scope of ASC 860, with the addition of entities previously
considered qualifying special-purpose entities, as the concept of these entities
was eliminated in ASC 860, Accounting for Transfers of
Financial Assets.ASC 810.10 nullifies FASB Staff Position ASC 860, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. The principal objectives of these new disclosures are
to provide financial statement users with an understanding of:




a.
            The
      significant judgments and assumptions made by an enterprise in determining
      whether it must consolidate a variable interest entity and/or disclose
      information about its involvement in a variable interest
      entity;




b.
            The
      nature of restrictions on a consolidated variable interest entity’s assets
      and on the settlement of its liabilities reported by an enterprise in its
      statement of financial position, including the carrying amounts of such
      assets and liabilities;




c.
            The
      nature of, and changes in, the risks associated with an enterprise’s
      involvement with the variable interest entity;
  and




d.
            How
      an enterprise’s involvement with the variable interest entity affects the
      enterprise’s financial position, financial performance and cash
      flows.




8


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




ASC 810
is effective as of the beginning of each reporting entity’s first annual
reporting period that begins after




In June
2009, Staff Accounting Bulletin (SAB) 112 was issued. SAB 112 amends or rescinds
portions of the interpretive guidance included in the Staff Accounting Bulletin
Series in order to make the relevant interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. Specifically, the staff is updating the Series in order to bring
existing guidance into conformity with recent pronouncements by the FASB,
namely, ASC 860 (revised 2007), Business Combinations, or
ASC 805, and ASC 810.10, Noncontrolling Interests in
Consolidated Financial Statements.




In May
2009, ASC 855.10, Subsequent
Events, was issued. The objective of  ASC 855.10 is to
establish principles and requirements for subsequent events. In particular,
ASC.10 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements. In
addition, it establishes the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements. Furthermore, ASC 855.10 states the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. ASC 855.10 should be applied to the accounting for and disclosure of
subsequent events not addressed in other applicable GAAP. An entity should
recognize in the financial statements the effects of all subsequent events that
provide additional evidence about conditions that existed at the date of the
balance sheet, including the estimates inherent in the process of preparing
financial statements. An entity should not recognize subsequent events that
provide evidence about conditions that did not exist at the date of the balance
sheet but arose after the balance sheet date but before financial statements are
issued or are available to be issued. An entity should disclose the date through
which subsequent events have been evaluated, as well as whether that date is the
date the financial statements were issued or the date the financial statements
were available to be issued. Some nonrecognized subsequent events may be of such
a nature that they must be disclosed to keep the financial statements from being
misleading. For such events, an entity should disclose the nature of the event
and an estimate of its financial effect, or a statement that such an estimate
cannot be made. ASC 855.10 is effective for interim or annual financial periods
ending after June 15, 2009 and should be applied prospectively. The
provisions of ASC 855.10 need not be applied to immaterial items. The
adoption of this pronouncement did not  have a material effect on the
Company’s financial position or results of operations.




3.        RECEIVABLES




Receivables
primarily comprise amounts due to the Company for work performed on contracts
directly related to commercial and government customers.  The Company
has a nominal bad debt reserve as most of our contracts are with governmental
entities.




September
                                        
                                        
                                        DecemberAccounts
      Receivable
                                        
                                        27, 2009
                                        
                                        
                                        28, 2008Billed
      AR
                                        
                                        $
                                        589
                                        
                                        
                                        $
                                        1,277Unbilled
      AR
                                        
                                        
                                        89
                                        
                                        
                                        
                                        60Holdbacks
                                        
                                        
                                        48
                                        
                                        
                                        
                                        48Bad
      Debt Reserve
                                        
                                        
                                        (1
                                        )
                                        
                                        
                                        (1
                                        )Other
                                        
                                        
                                        1
                                        
                                        
                                        
                                        -Total
      AR
                                        
                                        $
                                        726
                                        
                                        
                                        $
                                        1,384





Unbilled
receivables represent recoverable costs and estimated earnings consisting
principally of contract revenues that have been recognized for accounting
purposes but are not yet billable to the customer based upon the respective
contract terms.


9


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




4.        PROPERTY
AND EQUIPMENT




September
                                
                                
                                DecemberProperty
      & Equipment
                                
                                27,
      2009
                                
                                
                                28, 2008Buildings
      & Improvements
                                
                                $
                                5
                                
                                
                                $
                                5Furniture
      & Fixtures
                                
                                
                                11
                                
                                
                                
                                11Office
      Equipment
                                
                                
                                292
                                
                                
                                
                                292Vehicles
                                
                                
                                38
                                
                                
                                
                                38Total
                                
                                $
                                346
                                
                                
                                $
                                346Accumulated
      Depreciation
                                
                                
                                (259
                                )
                                
                                
                                (214
                                )Property
      & Equipment, net
                                
                                $
                                87
                                
                                
                                $
                                132




5.        BORROWINGS





Darryl Horne
Notes





On March
4, 2009, the Company entered into a loan transaction with Darryl K. Horne, the
Company’s President and Chief Executive Officer, under which the Company
borrowed $100,000 at 8% interest.  The note was due by June 1, 2009
with interest due at loan repayment.  The note is secured by certain
receivables of the Company.  This note which was revised on April 22,
2009 to extend the loan until June 30, 2009 and change the interest rate to 8.5%
remains outstanding. As of September 27, 2009, there is $100,000 outstanding
under this note.





During
2008, the Company entered into three separate loan transactions with Mr.
Horne.  The first loan permitted the Company to borrow up to $525,000
at 8%.  As of September 27, 2009, the Company has borrowed $275,000
under this line.  The interest is payable quarterly beginning July 1,
2008 with principal payable upon demand.  The note is unsecured and is
not convertible into any Company securities.  As of September 27,
2009, the quarterly interest is accrued but unpaid.  As part of the
transfer of the 91Hill Avenue property in August 2009, as described in Note 6
,the Company retired $250,000 of this debt from Darryl K. Horne.





In July
2008, the Company entered into a second loan transaction with Mr. Horne,
for a working capital loan to the Company.  The terms of the loan
provided that the Company is able to borrow $500,000 at 8% interest, with such
interest payable quarterly beginning in October 2008.  There are no
amounts outstanding under this loan as of September 27, 2009.  This
loan was settled in the 91 Hill Avenue transfer as described in Note
6.





On August
6, 2008, the Company entered into a receivables financing agreement with
Mr.  Horne.  Under the terms of the agreement, Mr. Horne
agreed to finance specific accounts receivable under a line of credit for up to
$790,000 at an interest rate of 8.5%.  The Company paid this loan and
the related interest in full during the first quarter of 2009.





Evan Auld-Susott Mortgage
Note




On April
10, 2008, the Company entered into a binding term sheet with Evan Auld-Susott as
agent for The Susott FLP for the provision to the Company of a revolving line of
credit.   Evan Auld-Susott is a member of the Company's Board of
Directors.  Under the line of credit, the Company was able to borrow
$1,000,000 at 12.5% interest upon the Company's certification to the lenders
that the Company has fully exhausted all funds available to the Company pursuant
to the $500,000 working capital loan from Darryl K. Horne, described
above.  Interest on the line of credit was payable quarterly beginning in
October 2008 with principal payable in full at the earlier of (a) twelve (12)
months from the line of credit closing date or (b) the sale of the Company’s
property located in Fort Walton Beach, FL formerly used by SSSI subsidiary ( the
SSSI Property). The maturity date of the line of credit was extended for an
additional six (6) months under certain conditions, including the payment by the
Company of a fee equal to the greater of (i) $2,500 and (ii) one-half percent of
the outstanding principal balance.  The lender had a first deed of
trust on the SSSI Property, which is senior in priority and superior to the
second deed of trust in favor of Darryl K. Horne with respect to this working
capital loan described above.  The loan is not convertible into any Company
securities.  The terms of the line of credit were approved by the
Company's Board of Directors, including each disinterested
director.  The Company closed on this line in July 2008.  As
of August 7, 2009, the line was settled in full in connection with the transfer
of the 91 Hill Avenue property.  See further discussion in Note
6.


10


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)





On
November 12, 2008, the Company entered into a short-term borrowing agreement
with Evan Auld-Susott as agent for The Susott FLP.  Under this
agreement, the Company borrowed $70,000 at 8.5% interest.  This note
is secured by certain receivables of the Company and was not convertible into
any Company securities.  The Company paid this note and interest in
full during the first quarter of 2009.





John Krobath
Notes





On March
18, 2009, the Company entered into a short-term borrowing arrangement with John
Krobath, the Company’s former Chief Financial Officer, under which the Company
borrowed $25,000 at 8.5% interest.  The loan is secured by certain
receivables of the Company and is not convertible into any Company
securities.    This note was revised on April 22, 2009 to
increase the amount of the to $45,000.00 and to extend the loan until July 31,
2009.  This loan was paid in full in May 2009.





On
October 1, 2008, the Company entered into a short-term borrowing arrangement
with John Krobath under which the Company borrowed $43,000 at 8.5%
interest.  This loan was not convertible into any Company securities
but was secured by some of the Company’s real property in Ft. Walton Beach,
Florida.  This loan and related interest were paid in full during the
first quarter of 2009.




6.        91
HILL AVENUE TRANSFER





On August
6, 2009, Horne International, Inc. entered into an Agreement to Transfer
Property with Darryl K. Horne and The Susott Family Limited Partnership and 91
Hill Avenue, LLC.  The Agreement provided for transfer the real
property located at 91 Hill Avenue, Fort Walton Beach, Florida to 91 Hill
Avenue, LLC an entity controlled by Darryl K. Horne and the Susott Family
Limited Partnership.  In connection with the with the
transaction,  the Company will also issue to 91 Hill Avenue, LLC stock
options to purchase 2,000,000 shares of company common stock with a price of the
greater of $0.10 or $0.25 less than the reported price of the common stock one
day prior to the exercise of the options.  These stock options were
valued at $311,000 using the Black Scholes
model.  These  stock options vest on December 31,
2009.  As consideration for the transfer of the real property and the
aforementioned stock options, Darryl K. Horne and the Susott Family Limited
Partnership each forgave certain secured and unsecured debt owed to each of them
by the Company.  Darryl K. Horne forgave both secured and unsecured
debt owed to him by the Company in the amount of $750,000.00.  The
Susott Family Limited Partnership will forgive secured debt owed to it by the
Company in the amount of $1,000,000.  This transaction and the
resulting transfer of property were consummated on August 7, 2009.





This
transaction resulted in a charge to Additional Paid in Capital of
$371,000.




7.        STOCK
TRANSACTIONS




Under the
terms of the CEECO acquisition agreement from 2005, the 913,242 shares of stock
that were issued to Lou and Marilyn Rogers in March 2008 were subject to a share
price guarantee.  Those shares were issued at $0.219 per share. The
average share price, calculated as the ten-day average closing share price
centered on February 28, 2009, was $.0755.  As a result the Company
recorded a payable to the Rogers of $131,050 and reduced additional paid in
capital by that same amount.  A payable of $38,550 is outstanding at
September 27, 2009.


11


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




8.        STOCK-BASED
COMPENSATION




The
Company has a stock option plan available to compensate employees and directors
as deemed appropriate by senior management.  During the first nine
months of 2009, the Company granted no new stock options to employees or
directors.  The only options issued were in connection with the 91
Hill Avenue  property sale described in Note 6 above..





The table
below summarizes our stock option activity during the nine months ended
September 27, 2009.





Number of shares
                
                
                Option Price
                
                
                Weighted Average PriceOptions
      Outstanding 12/30/2008
                
                
                445,000Granted
                
                
                2,000,000
                
                
                
                0.10Cancelled
                
                
                (114,000
                )
                
                
                0.20
      - 0.40
                
                
                
                0.38Options
      Outstanding 9/27/2009
                
                
                2,331,000





The
following table summarizes information about the Company’s outstanding stock
options at September 27, 2009.





Options Exercisable & OutstandingExercise
                          
                          Shares
                          
                          
                          Shares
                          
                          
                          Weighted AveragePrice
                          
                          Outstanding
                          
                          
                          Exercisable
                          
                          
                          Remaining Life (yrs)0.10
                          
                          
                          2,000,000
                          
                          
                          
                          -
                          
                          
                          
                          3.00.20
                          
                          
                          70,000
                          
                          
                          
                          70,000
                          
                          
                          
                          1.00.35
                          
                          
                          70,000
                          
                          
                          
                          30,000
                          
                          
                          
                          3.00.40
                          
                          
                          6,000
                          
                          
                          
                          6,000
                          
                          
                          
                          1.00.50
                          
                          
                          75,000
                          
                          
                          
                          70,000
                          
                          
                          
                          6.50.80
                          
                          
                          110,000
                          
                          
                          
                          100,000
                          
                          
                          
                          0.12,331,000
                          
                          
                          
                          276,000





Total
      options available to issue
                        
                        
                        30,000,000Total
      options outstanding or exercised
                        
                        
                        22,566,200Total
      options Remaining
                        
                        
                        7,433,800




9.   DISCONTINUED
OPERATIONS




The
Company made the strategic decision to close the operations of its Spectrum
Sciences and Software, Inc. subsidiary and Coast Engine & Equipment Co.
subsidiary in early 2008.  Accordingly, the operating results of these
two entities are included in discontinued operations for all periods
presented.





The
Company continued to lease some of its real property in Ft. Walton Beach,
Florida, while marketing it for sale.  During 2009 and 2008, the
Company was the lessor in an operating lease of office space.  The
lessee is the United States government, which rented space in the Company’s
office building.  The operating lease was renewed in September
2008.  The lease is a four-year lease with lessee having the ability
to exit the lease with a minimum of three months notice.  The transfer
of the 91 Hill Avenue property in August 2009 ended the Company’s role in this
leasing arrangement.





The
assets of discontinued operations are primarily the land and buildings located
in Ft. Walton Beach, Florida, formerly used by SSSI.  During 2008, the
Company conducted a review of its asset values and determined that two of its
real property assets had book values in excess of the fair market
value.  Accordingly, the Company wrote down the value of these assets
to their market value.  The amount of the write-down was
$455,000.


12


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)





The
liabilities of the discontinued operations primarily consist of a mortgage on
the real property of approximately $1.8 million.  This mortgage has an
adjustable interest that reprices annually at the U.S. federal funds rate plus
4% subject to certain interest rate floors and ceilings as specified in the
agreement.  The interest rate in effect at September 27, 2009 and
December 28, 2008 were both 7.0%.




Legal
Matters




Our
outstanding legal proceedings are described in Note 16 to our consolidated
financial statements in our Annual Report on Form 10-K for the year ended
December 28, 2008.  There have been no material developments regarding
any of our outstanding legal proceedings during the first nine months of 2009
and through the filing date of this report except as noted below.





B-Stand
Lawsuit


On April
8, 2009, the Company reached a settlement agreement with the U.S. Air Force
regarding the Company’s pending B-Stand litigation through the alternative
disputes resolution process.  The U.S. Air Force agreed to pay
$122,500 in full settlement of all outstanding claims related to this
matter.   The Company received this payment in the third quarter
of 2009.




10. 
SUBSEQUENT EVENTS





Management  has
assessed subsequent events through November 12, 2009 and determined that no
material subsequent events have occurred that require disclosure.




ITEM  2.      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




The
following discussion provides information which management believes is relevant
to an assessment and an understanding of the Company’s operations and financial
condition.  This discussion should be read in conjunction with the
attached unaudited consolidated financial statements and accompanying notes as
well as our annual report on Form 10-K for the fiscal year ended December 28,
2008.





FORWARD-LOOKING
STATEMENTS




The
matters discussed in our Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995.  These statements involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, activity levels, performance or achievements to be materially different
from any future results, activity levels, performance or achievements expressed
or implied by such forward-looking statements.  In some cases, you can
identify these statements by forward-looking words such as “could” “expect”
“estimate” “may” “potential” “will” and “would” or similar words.  You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position, or state other forward-looking
information.  We believe it is important to communicate our future
expectations to our investors.  However, there may be events in the
future that we are not able to predict or control accurately.  The
factors listed in the section captioned “Risk Factors,” contained in our Annual
Report of Form 10-K for the fiscal year ended December 28, 2008, as well as any
cautionary language in the Form 10-Q, provide examples of risks, uncertainties,
and events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, activity levels, performance or
achievements.  You should not place undue reliance on these
forward-looking statements, which apply only as of the date of the Form
10-Q.  Subsequent events and developments may cause our views to
change.  However, while we may elect to update the forward-looking
statements at some point in the future, we specifically disclaim any obligation
to do so.


13


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




DESCRIPTION
OF THE COMPANY




The
Company provides a variety services through its wholly-owned subsidiary Horne
Engineering Services. The Company focuses on providing program engineering,
occupational safety and health, environmental sciences, acquisition and
procurement, business process engineering, and public outreach.  Our
primary customer in this segment is the U.S. Government, with specific focus
within the Departments of Homeland Security and  Defense.




CRITICAL
ACCOUNTING POLICIES




Management’s
Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The preparation of these financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and determine whether contingent assets and
liabilities, if any, are disclosed in the financial statements.  On an
ongoing basis, we evaluate our estimates and assumptions, including those
related to long-term contracts, product returns, bad debts, inventories, fixed
asset lives, income taxes, environmental matters, litigation, and other
contingencies.  We base our estimates and assumptions on historical
experience and on various factors that are believed to be reasonable under the
circumstances, including current and expected economic conditions, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources.  Actual results may differ materially from our estimates
under different assumptions or conditions.




We
believe that the following critical accounting policies, among others, require
us to make significant estimates and judgments in the preparation of our
financial statements:




Revenue
Recognition




The
Company’s principal method of revenue recognition is cost plus on reimbursable
time-and-materials contracts and milestones on fixed price deliverable contracts
and commission based contracts.




Net
Operating Loss Carryforwards




We have
not recognized the benefit in our financial statements with respect to
approximately $55,000,000 net operating loss carryforward for federal income tax
purposes as of September 27, 2009.  This benefit was not recognized
due to the possibility that the net operating loss carryforward would not be
utilized, for various reasons, including the potential that we might not have
sufficient profits to use the carryforward or the carryforward may be limited as
a result of changes in our equity ownership.  We intend to use this
carryforward to offset our future taxable income. If we were to use any of this
net operating loss carryforward to reduce our future taxable income and the
Internal Revenue Service were to then successfully assert that our carryforward
is subject to limitation as a result of capital transactions occurring in 2002
or otherwise, we may be liable for back taxes, interest, and, possibly,
penalties prospectively.




Impairment
of Long-Lived Assets




We assess
the impairment of long-lived assets on an ongoing basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
based upon an estimate of future discounted cash flows. Factors we consider that
could trigger an impairment review include the following: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and (iii) significant negative
industry or economic trends.  When we determine that the carrying
value of any long-lived asset may not be recoverable based upon the existence of
one or more of the above indicators of impairment, we measure impairment based
on the difference between an asset’s carrying value and an estimate of fair
value, which may be determined based upon quotes or a projected discounted cash
flow, using a discount rate determined by our management to be commensurate with
our cost of capital and the risk inherent in our current business model, and
other measures of fair value.


14


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)






Off-
Balance Sheet Risk




The
Company currently has no off- balance sheet arrangements.




COMPARISON
OF THREE MONTHS ENDED SEPTEMBER 27, 2009 AND SEPTEMBER 28, 2008




The
following discussion and analysis should be read in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of the Company appearing elsewhere in this report.




Consolidated
Overview




Three
      months ended September,2009
                  
                  
                  2008Total
      revenue
                  
                  $
                  1,007
                  
                  
                  
                  100.0
                  %
                  
                  $
                  1,093
                  
                  
                  
                  100.0
                  %Gross
      (Loss)Profit
                  
                  
                  293
                  
                  
                  
                  29.1
                  %
                  
                  
                  87
                  
                  
                  
                  8.0
                  %Operating
      loss
                  
                  
                  (65
                  )
                  
                  
                  -6.6
                  %
                  
                  
                  (589
                  )
                  
                  
                  -53.9
                  %





Revenue
for the quarter ended September 27, 2009 was flat on a year-over-year basis, as
compared to the quarter ended September 28, 2008, with lower revenue from our
SBINet and real estate services work offset by the addition our Afghanistan
contract.  Gross margin increased from the 2008 period due to the
absence of losses on the real estate services contract in 2008 combined with
higher profit on our REO contract and the addition of the profitable Afghanistan
work.  Our operating loss decreased in the third quarter of 2009 due
primarily to absence of moving costs incurred in the third quarter of 2008,
lower overhead and administrative costs, and better staff utilization
rates.





Revenue
for the fourth quarter of 2009 is expected to be consistent with the third
quarter of 2009 with our gross profit margin is expected to remain essentially
the same. We expect our operating loss for the fourth quarter of 2009 to be
consistent with the third quarter of 2009.




Services
Segment




Three
      months ended September,Services
                    
                    2009
                    
                    
                    2008Operating
      gain
                    
                    
                    263
                    
                    
                    
                    26.1
                    %
                    
                    
                    15
                    
                    
                    
                    1.4
                    %





The
operating gain improvement in the third quarter of 2009 as compared with the
third quarter of 2008 is primarily due to improved gross margins with
improvement in utilization of direct staff adding to the also
contributing.




Corporate
Expenses




Three
      months ended September,2009
                                          
                                          
                                          2008Operating
      loss
                                          
                                          $
                                          (328
                                          )
                                          
                                          
                                          
                                          $
                                          (603
                                          )





Corporate
expenses decreased due to the absence of move related expenses in 2008 coupled
with reduced executive staff.




Discontinued
Operations




Discontinued
operations cost for 2009 reflects the on-going costs associated with the
properties maintained by Spectrum Sciences & software Inc. in Ft. Walton
Beach Florida.  The 2008 costs include the property costs as well as a
write-down of those assets to fair market value of $455.


15




HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




COMPARISON
OF NINE MONTHS ENDED SEPTEMBER 27, 2009 AND SEPTEMBER 28, 2008




The
following discussion and analysis should be read in conjunction with the
unaudited financial statements (and notes thereto) and other financial
information of the Company appearing elsewhere in this report.




NINE
MONTHS ENDED SEPTEMBER 27, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 28,
2008




Consolidated
Overview




Nine months ended September,2009
                  
                  
                  2008Total
      revenue
                  
                  $
                  3,230
                  
                  
                  
                  100.0
                  %
                  
                  $
                  3,315
                  
                  
                  
                  100.0
                  %Gross
      Profit
                  
                  
                  985
                  
                  
                  
                  30.5
                  %
                  
                  
                  (54
                  )
                  
                  
                  -1.6
                  %Operating
      loss
                  
                  
                  (209
                  )
                  
                  
                  -6.5
                  %
                  
                  
                  (4,345
                  )
                  
                  
                  -131.1
                  %




Revenue
for the nine months ended September 27, 2009 was flat compared with the same
period in 2009 as the increased revenue from the new Afghanistan contract offset
the revenue decrease from the terminated real estate services
contract.  Gross margin improved in the real estate services contract
that lost over $500 in the first nine months of 2008, showed a profit due of
approximately $350 in 2009 as the contract was collecting residual revenue with
no cost during 2009.





Our
operating loss decreased significantly in the first nine months of 2009 due
primarily to reduced severance costs as a result of the termination of a prior
CFO in 2008, decreased costs attributable to the relocation of office space, the
absence of the Amata related transaction costs in 2008, reduced staffing,
improved gross margins, lower Board of Director fees, and reduced facility
costs.




Services
Segment




Nine months ended September,2009
                      
                      
                      2008ServicesTotal
      revenue
                      
                      $
                      3,230
                      
                      
                      
                      100.0
                      %
                      
                      $
                      3,315
                      
                      
                      
                      100.0
                      %Gross
      Profit
                      
                      
                      985
                      
                      
                      
                      30.5
                      %
                      
                      
                      (54
                      )
                      
                      
                      -1.6
                      %Operating
      gain
                      
                      $
                      890
                      
                      
                      
                      27.6
                      %
                      
                      $
                      (631
                      )
                      
                      
                      -19.0
                      %




Revenue
for the nine months ended September 27, 2009 was flat compared with the same
period in 2009 as the increased revenue from the new Afghanistan contract offset
the revenue decrease from the terminated real estate services
contract.  Gross margin improved in the real estate services contract
which lost over $500 in the first nine months of 2008, showed a profit due of
approximately $350 in 2009 as a result of the collection of residual revenue
with no cost during 2009.





The
operating gain improved significantly due to improvements in gross margins,
reduced personnel costs and the absence of severance costs in 2009.




Corporate
Expenses




Nine months ended September,2009
                    
                    
                    2008Operating
      loss
                    
                    $
                    (1,099
                    )
                    
                    $
                    (3,858
                    )




Corporate
expenses decreased for the nine months ended September 27, 2009, compared with
the nine months ended September 28, 2008, due to the absence of Amata related
write-offs of $1,318, office lease termination costs of $400, decreased
intangible amortization of $360 and reduced operating costs from staff
reductions and lower space costs.


16


HORNE
INTERNATIONAL, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)




Other
Income




Other
income for the first nine months of 2009 is comprised of proceeds from the
Weskem joint venture of 10k.  This activity compares to a loss from
the Weskem write-down in 2008.




Liquidity
and Capital Resources




Cash and
cash equivalents totaled approximately $108 at September 27,
2009.  Our cash position is relatively unchanged since year end with
the decrease in receivables allowing the Company to pay down debt during the
year.





As
discussed in our 2008 Form 10-K, the Company has substantial liquidity
challenges.  While we continue to work towards profitability, there is
significant uncertainty that the Company will have sufficient cash flow to
sustain its operations.





The
Company continues to pursue additional funding sources in the event that funds
from operations and affiliate financing are not sufficient to provide for our
operations.  These funding sources would primarily be in the form of
bank credit lines.  Given our past financial performance, the costs
and fees associated with funding sources may be more expensive than the Company
has historically paid.  The Company cannot determine if the funds
available from operations will be sufficient for any acquisitions or facility
expansions that may be undertaken during the year.  Should the Company
make any acquisitions or expansions, other sources of financing may be
required.


17




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




In
addition to the risks inherent in our operations, we are exposed to financial,
market, political and economic risks.  The following discussion
provides additional detail regarding our exposure to interest rates and foreign
exchange rates.




Interest
Rate Risk




The
Company has an adjustable rate mortgage on its Ft. Walton Beach
properties.  The adjustable rate mortgage is subject to floors and
ceilings as stipulated in the mortgage note.  We have not historically
mitigated our exposure to fluctuations in interest rates by entering into
interest rate hedge agreements, nor do we have any plans to do so in the
immediate future.




As of
September 27, 2009, cash and cash equivalents were approximately
$108,000.  The Company only had investments in money market interest
bearing accounts.   Accordingly, we believe that a 10% adverse
change in the average interest rate on our money market cash investments would
have had no material effect on future earnings or cash flows.




Foreign
Exchange Risk




The
Company is no longer exposed to foreign currency risks.




ITEM
      4.
            CONTROLS
      AND PROCEDURES




Our
management, with the participation of our Chief Executive Officer
and  Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of September 27, 2009.  Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission
rules and forms and that such information is accumulated and communicated to our
management including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding disclosure.




No change
in the Company’s internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended September 27, 2009, that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.


18




PART
II - OTHER
INFORMATION




ITEM 1.
            LEGAL
      PROCEEDINGS




Our outstanding legal proceedings are described
in Note 16 to our consolidated financial statements in our Annual Report on Form
10-K for the year ended December 28, 2008.  There have been no
material developments regarding any of our outstanding legal proceedings during
the six months of 2009 and through the filing date of this report except as
noted below.





B-Stand
Lawsuit


On April
8, 2009, the Company reached a settlement agreement with the U.S. Air Force
regarding the Company’s pending B-Stand litigation through the alternative
disputes resolution process.  The U.S. Air Force agreed to pay
$122,500 in full settlement of all outstanding claims related to this
matter.   The Company received this payment in the third quarter
of 2009.




Item
1A. Risk Factors.





We are
subject to several risk factors that could have a direct and material impact on
the operations of the Company and the market price of our common
stock.  Those risk factors are disclosed in our 2008 Form
10-K.





ITEM
      6.
            EXHIBITS





2.1  Stock
Purchase and Sale Agreement, dated as of January 28, 2005, by and among Spectrum
Sciences & Software Holdings Corp., Coast Engine and Equipment Co., Inc,
Louis T. Rogers and Marilyn G. Rogers (previously filed on Form 8-K, filed with
the Securities and Exchange Commission on March 3, 2005)





2.2  Agreement
and Plan of Merger, dated as of April 14, 2005, by and among Spectrum Sciences
& Software Holdings Corp., Horne Acquisition, LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne, and Michael M. Megless
(previously filed on Form 8-K, filed with the Securities and Exchange Commission
on May 17, 2005)





3.1  Certificate
of Incorporation, filed August 28, 1998 (previously filed in registration
statement on Form 10SB12B File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003)





3.2  Certificate
of Renewal and Revival, filed March 24, 2003 (previously filed in registration
statement on Form 10SB12B File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003)





3.3  Certificate
of Amendment of Certificate of Incorporation, filed April 8, 2003 (previously
filed in registration statement on Form 10SB12B File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003)





3.4
Certificate of Merger filed with the Delaware Secretary of State (previously
filed in registration statement on Form 10SB12B File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003)





3.5  Articles
of Merger filed with the Florida Secretary of State (previously filed in
registration statement on Form 10SB12B File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003)


19




3.6  Amended
Articles of Incorporation of Horne International, Inc. (previously filed on Form
8-K, filed with the Securities and Exchange Commission on September 6,
2006)





3.7  Amended
and Restated Bylaws of Spectrum Sciences & Software Holdings Corp., as
amended (previously filed on Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2005)





3.8  Amendment
to the Amended and Restated Bylaws of Spectrum Sciences & Software Holdings
Corp., as amended (previously filed on Form 8-K, filed with the Securities and
Exchange Commission on May 2, 2006)





4.1
Specimen Certificate of Common Stock (previously filed on Form 10SB12B File No.
1-31710, filed with the Securities and Exchange Commission on June 10,
2003)





4.2  Registration
Rights Agreement, dated as of May 11, 2005, by and between Spectrum Sciences
& Software Holdings Corp., Darryl K. Horne, Charlene M. Horne and Michael M.
Megless (previously filed on Form 8-K, filed with the Securities and Exchange
Commission on May 17, 2005)





10.1*  Employment
Agreement, dated as of May 11, 2005, by and between Spectrum Sciences &
Software Holdings Corp. and Darryl K. Horne (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on May 17, 2005)





10.2*  First
Amendment to Employment Agreement, dated as of May 23, 2005, by and between
Spectrum Sciences & Software Holdings Corp. and Darryl K. Horne (previously
filed on Form 8-K, filed with the Securities and Exchange Commission on May 27,
2005)





10.3*  2004
Non-Statutory Stock Option Plan dated March 11, 2004 (previously filed on Form
8-K, filed with the Securities and Exchange Commission on March 12,
2004)





10.4*  Amended
and Restated Number 1 2004 Non-Statutory Stock Option Plan, dated April 16, 2004
(previously filed on Form 8-K, filed with the Securities and Exchange Commission
on April 21, 2004)





10.5*  Amended
and Restated Number 2 2004 Non-Statutory Stock Option Plan, dated November 15,
2004 (previously filed on Form 8-K, filed with the Securities and Exchange
Commission on November 19, 2004)





10.6  Demand Promissory
Note, dated as of March 19, 2008, by Horne International, Inc. to Darryl K.
Horne (previously filed on Form 8-K/A, filed with the Securities and Exchange
Commission on March 31, 2008) previously filed with the SEC .





10.7  Demand
Promissory Note, dated as of April 1, 2008, by Horne International, Inc. to
Darryl K. Horne (previously filed on Form 8-K/A, filed with the Securities
and Exchange Commission on April 3, 2008) previously filed with the
SEC.





10.8  Commercial
mortgage note, dated as of June 13, 2008, for $500,000 by and between Horne
International, Inc. and Darryl K. Horne previously filed with the SEC on
November 16, 2008.





10.9  Commercial
mortgage note, dated as of June 13, 2008, for $1,000,000, by and among Horne
International, Inc., and Evan Auld-Susott, as agent for the Susott Family
Limited Partnership.





10.10  Agreement
to Transfer Property, dated as of July 31, 2009, by and between Horne
International, Inc. , Darryl K. Horne and The Susott Family Limited Partnership
filed herewith.





31.1  Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes –Oxley Act of
2002 (filed herewith)





31.2  Certification
of Interim Principal Financial and Accounting Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)


20





32.1  Certification
of the  Chief Executive Officer and the Interim Principal Financial
and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)





*
Indicates management contract or compensatory arrangement.




21




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 11th day of
September, 2009.




HORNE
INTERNATIONAL, INC.





By:
                      /s/ Darryl
      K. HorneDarryl
      K. HornePresident
      and Chief Executive OfficerBy:
                      /s/ Paige
      E. ShannonPaige
      E. ShannonChief
      Financial Officer


22