##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended:September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-50373
 HORNE INTERNATIONAL, INC.
  Delaware
    
    90-0182158(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2677 Prosperity Avenue, Suite 300, 
Fairfax, Virginia
    
    22031(Address of principal executive offices)
    
    (Zip Code)
 703-641-1100
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations and Comprehensive Loss for the three- and nine-month
periods ended September 30, 2006 and September 30, 2005
    
    
    4Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006
and September 30, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 6. Exhibits
    
    
    25
 2




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##### 



September
    
    
    December30, 2006
    
    
    31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,963
    
    
    $
    1,813Receivables
    
    
    7,278
    
    
    
    11,638Inventories
    
    
    207
    
    
    
    258Prepaid expenses & Other current assets
    
    
    774
    
    
    
    387Current assets of Discontinued Operations
    
    
    
    
    
    
    11,585Total current assets
    
    
    12,222
    
    
    
    25,681Property and equipment, net
    
    
    4,784
    
    
    
    5,030Goodwill
    
    
    3,386
    
    
    
    15,222Other intangibles
    
    
    9,188
    
    
    
    Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    1,427
    
    
    
    81Other assets of discontinued operations
    
    
    
    
    
    
    3,079TOTAL ASSETS
    
    $
    31,318
    
    
    
    49,404LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    807
    
    
    $
    6,281Accrued expenses
    
    
    1,598
    
    
    
    1,466Deferred revenues
    
    
    408
    
    
    
    376Income taxes payable
    
    
    
    
    
    
    156Current portion of long-term debt
    
    
    78
    
    
    
    78Current liabilities of discontinued operations
    
    
    
    
    
    
    3,365Total current liabilities
    
    
    2,891
    
    
    
    11,722Long-term liabilities:Long term debt, less current portion
    
    
    1,965
    
    
    
    2,018Non-current liabilities of discontinued operations
    
    
    
    
    
    
    464TOTAL LIABILITIES
    
    
    4,856
    
    
    
    14,204Commitments and contingencies (Note 13)Minority interest of discontinued operations
    
    
    
    
    
    
    103Stockholders equity:Preferred stock, $0.0001 par value; 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 80,000,000 shares authorized,
41,272,200 and 44,072,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    78,323
    
    
    
    79,866Accumulated deficit
    
    
    (51,865
    )
    
    
    (45,264
    )Accumulated other comprehensive income
    
    
    
    
    
    
    491Total stockholders equity
    
    
    26,462
    
    
    
    35,097TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    31,318
    
    
    
    49,404
  3




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##### 



Three months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesServices
    
    $
    3,721
    
    
    $
    7,931
    
    
    $
    19,939
    
    
    $
    14,086Products
    
    
    1,068
    
    
    
    1,125
    
    
    
    3,829
    
    
    
    3,631Total
    
    
    4,789
    
    
    
    9,056
    
    
    
    23,768
    
    
    
    17,717Cost of revenuesServices
    
    
    2,953
    
    
    
    6,418
    
    
    
    16,795
    
    
    
    11,411Products
    
    
    1,293
    
    
    
    1,373
    
    
    
    4,017
    
    
    
    3,881Total
    
    
    4,246
    
    
    
    7,791
    
    
    
    20,812
    
    
    
    15,292Gross profitServices
    
    
    768
    
    
    
    1,513
    
    
    
    3,144
    
    
    
    2,675Products
    
    
    (225
    )
    
    
    (248
    )
    
    
    (188
    )
    
    
    (250
    )Total
    
    
    543
    
    
    
    1,265
    
    
    
    2,956
    
    
    
    2,425Operating expenses
    
    
    2,374
    
    
    
    1,871
    
    
    
    7,213
    
    
    
    6,115Loss from operations
    
    
    (1,831
    )
    
    
    (606
    )
    
    
    (4,257
    )
    
    
    (3,690
    )Total non-operating income, net
    
    
    310
    
    
    
    59
    
    
    
    347
    
    
    
    240Loss before provision for income taxes
    
    
    (1,521
    )
    
    
    (547
    )
    
    
    (3,910
    )
    
    
    (3,450
    )Income tax benefit (expense)
    
    
    (11
    )
    
    
    7
    
    
    
    (9
    )
    
    
    (80
    )Loss before discontinued operations
    
    
    (1,532
    )
    
    
    (540
    )
    
    
    (3,919
    )
    
    
    (3,530
    )Gain(Loss) from discontinued operations
    
    
    0
    
    
    
    483
    
    
    
    (2,682
    )
    
    
    671Net Loss
    
    $
    (1,532
    )
    
    $
    (57
    )
    
    $
    (6,601
    )
    
    $
    (2,859
    )Weighted average common shares outstanding:Basic and diluted
    
    
    41,880,896
    
    
    
    44,072,200
    
    
    
    43,333,738
    
    
    
    41,634,154Basic and diluted earnings per shareLoss from continuing operations
    
    
    (0.04
    )
    
    
    (0.01
    )
    
    
    (0.09
    )
    
    
    (0.08
    )Income(loss) from discontinued operations
    
    
    0.00
    
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.02Net loss
    
    $
    (0.04
    )
    
    $
    (0.00
    )
    
    
    (0.15
    )
    
    $
    (0.07
    )Net Loss
    
    
    (1,532
    )
    
    
    (57
    )
    
    
    (6,601
    )
    
    
    (2,859
    )Total comprehensive loss
    
    $
    (1,532
    )
    
    $
    (57
    )
    
    $
    (6,601
    )
    
    $
    (2,859
    )
  4




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##### 



AccumulatedOtherComprehensiveCommon Stock
    
    
    
    
    
    Treasury
    
    Accumulated
    
    IncomeShares
    
    Amount
    
    APIC
    
    Stock
    
    Deficit
    
    (Loss)
    
    TotalBalance as of December 31, 2005
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    79,866
    
    
    $
    
    
    
    $
    (45,264
    )
    
    $
    491
    
    
    $
    35,097Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,601
    )
    
    
    
    
    
    $
    (6,601
    )Option Issuances
    
    
    
    
    
    
    
    
    
    $
    126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    126Foreign currency translation M&M disposition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (491
    )
    
    $
    (491
    )M&M sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,494
    )
    
    
    
    
    
    
    
    
    
    $
    (1,494
    )Augenbaum settlement
    
    
    
    
    
    
    
    
    
    $
    705
    
    
    $
    (880
    )
    
    
    
    
    
    
    
    
    
    $
    (175
    )Treasury Stock retirement
    
    
    (2,800,000
    )
    
    $
    
    
    
    $
    (2,374
    )
    
    $
    2,374
    
    
    
    
    
    
    
    
    
    
    $
    Balance as of September 30, 2006
    
    
    41,272,200
    
    
    $
    4
    
    
    $
    78,323
    
    
    $
    
    
    
    $
    (51,865
    )
    
    $
    
    
    
    $
    26,462
  5




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##### 



For the nine months endedSeptember 30,2006
    
    
    2005Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (3,919
    )
    
    $
    (3,530
    )Adjustments to reconcile net loss to netCash used in operating activities
Stock option issued to employees
    
    
    126
    
    
    
    1,399Depreciation
    
    
    1,449
    
    
    
    312Legal settlement costs not included in net income
    
    
    (175
    )Loss on disposal of equipment
    
    
    4
    
    
    
    16Realized gain on the sale of bonds
    
    
    
    
    
    
    (1
    )Decrease (increase) in balance sheet itemsReceivables
    
    
    5,258
    
    
    
    158Accounts payable
    
    
    (5,477
    )
    
    
    846Provision for contract losses
    
    
    
    
    
    
    256Other balance sheet changes
    
    
    (807
    )
    
    
    (891
    )Net cash used in continuing operations
    
    
    (3,541
    )
    
    
    (1,435
    )Cash flows from investing activitiesMaturities of available for sale investments, net
    
    
    
    
    
    
    18,795Acquisitions, net of cash received
    
    
    
    
    
    
    (12,412
    )Cash received from sale of subsidiary
    
    
    6,202
    
    
    
    Purchase of property and equipment
    
    
    (199
    )
    
    
    (580
    )Proceeds from the sale of equipment
    
    
    10
    
    
    
    74Investments in joint ventures,net
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    6,013
    
    
    
    5,877Cash flows from financing activitiesRepayment of debt, net
    
    
    (53
    )
    
    
    (184
    )Net repayments on lines of credit
    
    
    
    
    
    
    (1,526
    )Advances and accrued interest from related parties, net
    
    
    
    
    
    
    64Proceeds for the exercise of stock options
    
    
    
    
    
    
    4Net cash used in financing activities
    
    
    (53
    )
    
    
    (1,642
    )Cash flows (used in) provided by discontinued operationsOperating
    
    
    (269
    )
    
    
    (741
    )Investing
    
    
    
    
    
    
    (500
    )Financing
    
    
    
    
    
    
    415Net increase in cash and cash equivalents
    
    
    2,150
    
    
    
    1,974Cash and cash equivalents at beginning of period
    
    
    1,813
    
    
    
    5,667Cash and cash equivalents at end of period
    
    $
    3,963
    
    
    $
    7,641
     6




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##### 



Horne International, Inc.
 1. BASIS OF PRESENTATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
   Revenue Recognition
    7




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##### 



Inventory Valuation
  Income Taxes
   Loss Per Share
   Impairment of Long-Lived Assets
  8




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##### 



Foreign Currency Translation
  Recently Issued Accounting Standards
     3. DISPOSITIONS
  
  9




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##### 



4. REVENUE AND COST OF REVENUE
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Services RevenueSecurity Solutions
    
    
    74
    
    
    
    82
    
    
    
    222
    
    
    
    228Repair and Overhaul
    
    
    250
    
    
    
    379
    
    
    
    1,090
    
    
    
    850Engineering Services
    
    
    3,163
    
    
    
    4,028
    
    
    
    9,784
    
    
    
    7,282Procurement ServicesAcquisition Services
    
    
    133
    
    
    
    405
    
    
    
    2,254
    
    
    
    405Material Procurement
    
    
    101
    
    
    
    3,037
    
    
    
    6,589
    
    
    
    5,321Total
    
    
    3,721
    
    
    
    7,931
    
    
    
    19,939
    
    
    
    14,086Products RevenueSecurity Solutions
    
    
    1,068
    
    
    
    1,125
    
    
    
    3,147
    
    
    
    3,631Repair and Overhaul
    
    
    
    
    
    
    
    
    
    
    682
    
    
    
    Total
    
    
    1,068
    
    
    
    1,125
    
    
    
    3,829
    
    
    
    3,631Cost of Services RevenueSecurity Solutions
    
    
    68
    
    
    
    70
    
    
    
    210
    
    
    
    306Repair and Overhaul
    
    
    180
    
    
    
    281
    
    
    
    908
    
    
    
    573Engineering Services
    
    
    2,519
    
    
    
    2,996
    
    
    
    8,130
    
    
    
    5,273Procurement ServicesAcquisition Services
    
    
    102
    
    
    
    244
    
    
    
    1,486
    
    
    
    244Material Procurement
    
    
    84
    
    
    
    2,827
    
    
    
    6,061
    
    
    
    5,015Total
    
    
    2,953
    
    
    
    6,418
    
    
    
    16,795
    
    
    
    11,411Cost of Products RevenueSecurity Solutions
    
    
    1,293
    
    
    
    1,373
    
    
    
    3,749
    
    
    
    3,881Repair and Overhaul
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    Total
    
    
    1,293
    
    
    
    1,373
    
    
    
    4,017
    
    
    
    3,881
 5. RECEIVABLES (000s)
  September
    
    December30, 2006
    
    31, 2005Accounts ReceivableBilled AR
    
    
    3,292
    
    
    
    9,538Unbilled AR
    
    
    2,873
    
    
    
    1,871Holdbacks
    
    
    181
    
    
    
    184Other
    
    
    932
    
    
    
    45Total AR
    
    
    7,278
    
    
    
    11,638
 10




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##### 



6. INVENTORIES (000s)
  September
    
    December30, 2006
    
    31, 2005InventoryRaw materials, net of reserve
    
    
    71
    
    
    
    41Work in Process
    
    
    136
    
    
    
    217Finished Goods
    
    
    
    
    
    
    Total Inventory
    
    
    207
    
    
    
    258
 7. PROPERTY AND EQUIPMENT (000s)
 September
    
    December30, 2006
    
    31, 2005Property & EquipmentLand
    
    
    575
    
    
    
    575Buildings and Improvements
    
    
    3,520
    
    
    
    3,516Furniture & Fixtures
    
    
    66
    
    
    
    51Manufacturing Equipment
    
    
    1,155
    
    
    
    1,077Tools & Equipment
    
    
    339
    
    
    
    314Office Equipment
    
    
    589
    
    
    
    463Vehicles
    
    
    270
    
    
    
    136Investment Property
    
    
    221
    
    
    
    221Total
    
    
    6,735
    
    
    
    6,353Accumulated Depreciation
    
    
    (1,951
    )
    
    
    (1,323
    )Property & Equipment, net
    
    
    4,784
    
    
    
    5,030
 8. GOODWILL AND OTHER INTANGIBLES (000s)
  Value
    
    Useful LifeIntangibleCustomer Relationships
    
    $
    4,849
    
    
    15 yearsTrademarks
    
    
    3,365
    
    
    IndefiniteNon-Compete/Employment Agreements
    
    
    1,091
    
    
    5 yearsOrder Backlog
    
    
    906.3
    
    
    5 years
    Q42006
    
    2007
    
    2008
    
    2009
    
    2010Intangible AmortizationCustomer Relationships
    
    
    81
    
    
    
    323
    
    
    
    323
    
    
    
    323
    
    
    
    323Non-Compete/Employment Agreements
    
    
    55
    
    
    
    218
    
    
    
    218
    
    
    
    218
    
    
    
    218Order Backlog
    
    
    45
    
    
    
    181
    
    
    
    181
    
    
    
    181
    
    
    
    181Total
    
    
    181
    
    
    
    722
    
    
    
    722
    
    
    
    722
    
    
    
    722
 11




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##### 



9. BORROWINGS AND LINES OF CREDIT
   Bank of America Facility
  10. RELATED-PARTY TRANSACTIONS
 Transactions related to Coast Engine and Equipment Company
  11. STOCK-BASED COMPENSATION
     12




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##### 



Number of Shares
    
    Option PriceOutstanding 12/31/2005
    
    
    5,837,800
    
    
    
    1.28  1.95Granted
    
    
    1,316,230
    
    
    
    0.50  1.55Exercised
    
    
    Cancelled
    
    
    (49,814
    )
    
    
    1.28  1.65Outstanding 9/30/2006
    
    
    7,104,216
    
    
    
    0.50  1.95
  Options Exercisable & OutstandingShares
    
    Shares
    
    Weighted AverageExercise Price
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs0.50
    
    
    60,000
    
    
    
    20,000
    
    
    
    9.80.80
    
    
    150,000
    
    
    
    0
    
    
    
    2.81.28
    
    
    9,500
    
    
    
    9,500
    
    
    
    1.71.40
    
    
    573,950
    
    
    
    573,950
    
    
    
    1.21.55
    
    
    1,084,066
    
    
    
    994,066
    
    
    
    1.51.65
    
    
    2,903,000
    
    
    
    2,903,000
    
    
    
    0.91.95
    
    
    2,323,700
    
    
    
    2,323,700
    
    
    
    0.77,104,216
    
    
    
    6,824,216
 12. SEGMENT INFORMATION (000s)
    13




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##### 



Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Security SolutionsTotal revenue
    
    $
    1,142
    
    
    $
    1,207
    
    
    $
    3,369
    
    
    $
    3,859Operating loss
    
    
    (446
    )
    
    
    (554
    )
    
    
    (1,207
    )
    
    
    (1,350
    )Repair and OverhaulTotal revenue
    
    
    251
    
    
    
    379
    
    
    
    1,772
    
    
    
    850Operating (loss)income
    
    
    (68
    )
    
    
    47
    
    
    
    220
    
    
    
    133Engineering ConsultingTotal revenue
    
    
    3,162
    
    
    
    4,028
    
    
    
    9,784
    
    
    
    7,282Operating income
    
    
    95
    
    
    
    329
    
    
    
    250
    
    
    
    751Procurement ServicesTotal revenue
    
    
    234
    
    
    
    3,442
    
    
    
    8,843
    
    
    
    5,726Operating income
    
    
    (92
    )
    
    
    258
    
    
    
    971
    
    
    
    319HeadquartersTotal revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (1,320
    )
    
    
    (686
    )
    
    
    (4,491
    )
    
    
    (3,543
    )TotalTotal revenue
    
    $
    4,789
    
    
    $
    9,056
    
    
    $
    23,768
    
    
    $
    17,717Operating loss
    
    $
    (1,831
    )
    
    $
    (606
    )
    
    $
    (4,257
    )
    
    $
    (3,690
    )
 13. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  14. STOCKHOLDERS EQUITY
    14




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##### 



Horne International, Inc.
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
   DESCRIPTION OF THE COMPANY
     15




---



##### 



CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
     Net Operating Loss Carry-Forwards
  16




---



##### 



Impairment of Long-Lived Assets
  Off-Balance-Sheet Risk
  COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2006, AND SEPTEMBER 30, 2005
  Consolidated Overview (000s)
 For the quarter ended September 30,2006
    
    2005Revenue
    
    
    4,789
    
    
    
    100.0
    %
    
    
    9,056
    
    
    
    100.0
    %Cost of Revenue
    
    
    4,246
    
    
    
    88.7
    %
    
    
    7,791
    
    
    
    86.0
    %Gross profit
    
    
    543
    
    
    
    11.3
    %
    
    
    1,265
    
    
    
    14.0
    %Operating loss
    
    
    (1,831
    )
    
    
    -38.2
    %
    
    
    (606
    )
    
    
    -6.7
    %
   Security Solutions (000s)
  For the quarter ended September 30,2006
    
    2005Revenue
    
    
    1,142
    
    
    
    100.0
    %
    
    
    1,207
    
    
    
    100.0
    %Cost of Revenue
    
    
    1,361
    
    
    
    119.2
    %
    
    
    1,443
    
    
    
    119.6
    %Gross loss
    
    
    (219
    )
    
    
    -19.2
    %
    
    
    (237
    )
    
    
    -19.6
    %Operating loss
    
    
    (446
    )
    
    
    -39.1
    %
    
    
    (554
    )
    
    
    -45.9
    %
  17




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##### 



Repair and Overhaul Segment (000s)
 For the quarter ended September 30,2006
    
    2005Revenue
    
    
    250
    
    
    
    100.0
    %
    
    
    379
    
    
    
    100.0
    %Cost of Revenue
    
    
    180
    
    
    
    72.0
    %
    
    
    281
    
    
    
    74.1
    %Gross profit
    
    
    70
    
    
    
    28.0
    %
    
    
    98
    
    
    
    25.9
    %Operating (loss)profit
    
    
    (68
    )
    
    
    -27.2
    %
    
    
    47
    
    
    
    12.4
    %
  Engineering Services Segment (000s)
  For the quarter ended September 30,2006
    
    2005Revenue
    
    
    3,162
    
    
    
    100.0
    %
    
    
    4,028
    
    
    
    100.0
    %Cost of Revenue
    
    
    2,519
    
    
    
    79.7
    %
    
    
    2,996
    
    
    
    73.5
    %Gross profit
    
    
    643
    
    
    
    20.3
    %
    
    
    1,032
    
    
    
    26.5
    %Operating profit
    
    
    95
    
    
    
    3.0
    %
    
    
    329
    
    
    
    8.3
    %
  Procurement Services Segment (000s)
  For the quarter ended September 30,2006
    
    2005Revenue
    
    
    234
    
    
    
    100.0
    %
    
    
    3,442
    
    
    
    100.0
    %Cost of Revenue
    
    
    186
    
    
    
    79.5
    %
    
    
    3,071
    
    
    
    89.2
    %Gross profit
    
    
    48
    
    
    
    20.5
    %
    
    
    371
    
    
    
    10.8
    %Operating (loss)profit
    
    
    (92
    )
    
    
    -39.3
    %
    
    
    258
    
    
    
    7.5
    %
  Corporate Operating Expenses (000s)
 For the quarter ended September 30,2006
    
    
    2005
    
    
    IncreaseSelling, General & Administrative
    
    $
    1,320
    
    
    $
    686
    
    
    
    92.4
    %
 18




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##### 



COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2006, AND SEPTEMBER 30, 2005
  Consolidated Overview (000s)
 For the nine months ended September 30,2006
    
    2005Revenue
    
    
    23,768
    
    
    
    100.0
    %
    
    
    17,717
    
    
    
    100.0
    %Cost of Revenue
    
    
    20,812
    
    
    
    87.6
    %
    
    
    15,292
    
    
    
    86.3
    %Gross profit
    
    
    2,956
    
    
    
    12.4
    %
    
    
    2,425
    
    
    
    13.7
    %Operating profit
    
    
    (4,257
    )
    
    
    -17.9
    %
    
    
    (3,690
    )
    
    
    -20.8
    %
   Security Solutions (000s)
  For the nine months ended September 30,2006
    
    2005Revenue
    
    
    3,368
    
    
    
    100.0
    %
    
    
    3,859
    
    
    
    100.0
    %Cost of Revenue
    
    
    3,959
    
    
    
    117.5
    %
    
    
    4,187
    
    
    
    108.5
    %Gross profit
    
    
    (591
    )
    
    
    -17.5
    %
    
    
    (328
    )
    
    
    -8.5
    %Operating profit
    
    
    (761
    )
    
    
    -22.6
    %
    
    
    (1,350
    )
    
    
    -35.0
    %
   19




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##### 



Repair and Overhaul Segment (000s)
  For the nine months ended September 30,2006
    
    2005Revenue
    
    
    1,772
    
    
    
    100.0
    %
    
    
    850
    
    
    
    100.0
    %Cost of Revenue
    
    
    1,176
    
    
    
    66.4
    %
    
    
    573
    
    
    
    67.4
    %Gross profit
    
    
    596
    
    
    
    33.6
    %
    
    
    277
    
    
    
    32.6
    %Operating profit
    
    
    220
    
    
    
    12.4
    %
    
    
    133
    
    
    
    15.6
    %
  Engineering Services Segment (000s)
  For the nine months ended September 30,2006
    
    2005Revenue
    
    
    9,784
    
    
    
    100.0
    %
    
    
    7,283
    
    
    
    100.0
    %Cost of Revenue
    
    
    8,130
    
    
    
    83.1
    %
    
    
    5,274
    
    
    
    72.4
    %Gross profit
    
    
    1,654
    
    
    
    16.9
    %
    
    
    2,009
    
    
    
    27.6
    %Operating profit
    
    
    250
    
    
    
    2.6
    %
    
    
    751
    
    
    
    10.3
    %
   Procurement Services Segment (000s)
  For the nine months ended September 30,2006
    
    2005Revenue
    
    
    8,843
    
    
    
    100.0
    %
    
    
    5,726
    
    
    
    100.0
    %Cost of Revenue
    
    
    7,547
    
    
    
    85.3
    %
    
    
    5,259
    
    
    
    91.8
    %Gross profit
    
    
    1,296
    
    
    
    14.7
    %
    
    
    467
    
    
    
    8.2
    %Operating profit
    
    
    971
    
    
    
    11.0
    %
    
    
    319
    
    
    
    5.6
    %
  20




---



##### 



Corporate Operating Expenses (000s)
 For the nine months ended September 30,2006
    
    
    2005
    
    
    IncreaseSelling, General & Administrative
    
    $
    4,491
    
    
    $
    3,543
    
    
    
    27
    %
  Liquidity and Capital Resources
    Contractual Obligations and Commitments (000s)
  Total
    
    2006
    
    2007-2009
    
    2010-2012
    
    2013+Operating Leases
    
    
    2,214
    
    
    
    89
    
    
    
    1,607
    
    
    
    518
    
    
    
    Capital Leases
    
    
    138
    
    
    
    35
    
    
    
    92
    
    
    
    11
    
    
    
    Mortgages Payable
    
    
    1,905
    
    
    
    43
    
    
    
    140
    
    
    
    150
    
    
    
    1,572Total
    
    
    4,258
    
    
    
    167
    
    
    
    1,839
    
    
    
    680
    
    
    
    1,572
 21




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Foreign Exchange Risk
   ITEM 4. CONTROLS AND PROCEDURES
   22




---



##### 



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  Item 1A. Risk Factors.
  Increased corporate overhead structure combined with a reduced operating base may impact the
ability of the Company to operate at a profit.
   We may not receive the full amount of our contract awards.
  Increased raw material prices may adversely affect contract profitability.
  Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our common stock to decline.
  
    
    Fluctuations in revenue earned on contracts;
    
    Commencement, completion, or termination of contracts during any particular quarter;
    
    Variable purchasing patterns under GSA schedule contracts and agency-specific indefinite
delivery/indefinite quantity contracts;
    
    Provision of services under a share-in-savings or performance-based contract;
 23




---



##### 




    
    Additions and departures of key personnel;
 
    
    Strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments, or changes in business strategy;
    
    Contract mix, the extent of use of subcontractors, and the level of third-party hardware
and software purchases for customers;
    
    Changes in presidential administrations and senior federal government officials that affect the timing of procurements;
    
    Changes in policy or budgetary measures that adversely affect government contracts in general;
    
    The seasonality of our business; and
    
    Our Procurement Services revenue varies significantly from
quarter-to-quarter and year-to-year based on the volume of material procurements we perform.
  Our business commitments require our employees to travel to potentially dangerous places, which may
result in injury to our employees.
  Unfavorable government audit results could force the Company to adjust previously reported
operating results and could subject us to a variety of penalties and sanctions.
    Item 4. Submission of Matters to a Vote of Securities Holders
  24




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##### 



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger among Silva Bay International, Inc., SSS Acquisition Company and
Spectrum Sciences & Software, Inc., dated April 2, 2003 (previously filed in registration statement
on Form 10-SB File No. 1-31710, filed with the Securities and Exchange Commission on August 11,
2003).2.2
    
    Stock Purchase and Sale Agreement, dated as of January 28, 2005, by and among the Company, 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).2.3
    
    Share Purchase Agreement, dated as of February 1, 2005, by and among the Company, EnerNorth
Industries Inc. and M&M Engineering Limited (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on February 7, 2005).2.4
    
    Letter Agreement, dated as of February 2, 2005, by and between the Company and EnerNorth Industries
Inc. (previously filed on Form 8-K, filed with the Securities and Exchange Commission on February
7, 2005).2.5
    
    Agreement and Plan of Merger, dated as of April 14, 2005, by and among the Company, 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
March 17, 2005).2.6
    
    Amendment and Waiver Agreement, dated as of May 11, 2005, by and among the Company, 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
March 17, 2005).2.7
    
    Stock Purchase Agreement by and among the Company, the sole stockholder of M&M
Engineering Ltd., and 53341 Newfoundland and Labrador Limited, dated June 21, 2006, (Previously
filed on Form 8-K, filed with the Securities and Exchange Commission on June 26, 2006).3.1
    
    Certificate of Incorporation, filed August 28, 1998 (previously filed in registration statement on
Form 10-SB 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 10-SB 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 10-SB File No. 1-31710, filed with the Securities and Exchange
Commission on June 10, 2003).3.4
    
    Certificate of Amendment to Certificate of Incorporation, filed August 31, 2006 (previously filed
on Form 8-K, filed with the Securities and Exchange Commission on September 6, 2006)3.5
    
    Certificate of Merger filed with the Delaware Secretary of State (previously filed in registration
statement on Form 10-SB File No. 1-31710, filed with the Securities and Exchange Commission on June
10, 2003).3.6
    
    Articles of Merger filed with the Florida Secretary of State (previously filed in registration
statement on Form 10-SB File No. 1-31710, filed with the Securities and Exchange Commission on June
10, 2003).3.7
    
    Amended and Restated Bylaws of the Company, dated March 24, 2003, as amended by First Amendment
thereto, dated May 11, 2005 and Second Amendment thereto, dated October 4, 2005 (previously filed
on Form 10-Q, filed with the Securities and Exchange Commission on November 14, 2005).3.8
    
    Third Amendment, dated April 28, 2006, to the Amended and Restated Bylaws of the Company
(previously filed on Form 8-K, filed with the Securities and Exchange Commission on April 11,
2006).4.1
    
    Specimen Certificate of Common Stock (previously filed in registration statement on Form 10-SB 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 among the Company, 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).
 25




---



##### 



ExhibitNumber
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 26




---



##### 



SIGNATURES
  Horne International, Inc.
 By:
    /s/ Darryl K. HorneDarryl K. HornePresident and Chief Executive OfficerBy:
    /s/ Michael M. MeglessMichael M. MeglessChief Financial Officer 27