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

Form 10-K

(Mark One)

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

Commission file Number 1-08964

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

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

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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TABLE OF CONTENTS

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

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PART I

Item 1. Business

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

Our primary technology offices include locations in:



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

Our Companys major initiatives consist of the following:



| |  | Enterprise Maintenance Solutions
|- |  | --------------------------------

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

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



| |  | Seat Management / IT Solutions
|- |  | ------------------------------

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

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

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



| |  |  | Reduce clients total cost of ownership                                                      
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | Improve service levels and response times                                                    
|
| |  |  | Reduce the administrative costs for procurement                                              
|
| |  |  | Increase user productivity through decreased downtime                                        
|
| |  |  | Amortize costs across thousands of users                                                     
|
| |  |  | Focus IT staff on core responsibilities                                                      
|
| |  |  | Eliminate the time and expense of storage, sale, and disposal of surplus equipment           
|
| |  |  | Simplify accounting with one report, one invoice, and one charge per user                    
|
| |  |  | Create a single source of accountability for all PC desktop hardware, software, and services.

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

Network Security

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

eBusiness/eGovernment

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

Technical Enterprise Staffing

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

Hardware and Software Products

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

Federal Government Communications Services

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

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

Cabling Infrastructure Services

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

Voice Telecommunication

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

Complete Project Support

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



| |  |  | Site Survey and installation plans              
| | - |  | ------------------------------------------------
|
| |  |  | Engineering integration plans and specifications
|
| |  |  | On-site engineering                             
|
| |  |  | Installation and testing                        
|
| |  |  | Drawings and documentation                      
|
| |  |  | Training and maintenance                        
|
| |  |  | Logistics support                               

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

Forward Looking Statements

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

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

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HISTORY

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

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

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

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

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

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

Embezzlement Matter

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

Concentration of Risk

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

Federal Government Contracts

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

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

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

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

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

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

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

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

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

Commercial and State/Municipal Government Contracts

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

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

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

Type of Contracts

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

Accounts Receivable

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

Backlog

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

Marketing

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

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

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Competition

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

Personnel

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

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

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

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

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

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

Item 2. Properties

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

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

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Item 3. Legal Proceedings

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

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

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

None

PART II

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

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

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

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

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

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

Recent Sales of Unregistered Securities.

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

10



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

Item 6. Selected Financial Data

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

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

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

Consolidated Results of Operations

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

11



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

N/M = not meaningful

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

Revenues

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

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

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

Cost of Services

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

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

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

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

Marketing, General and Administrative

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

13



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Depreciation and Amortization

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

Operating Income

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

Interest Expense

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

Non-Operational items

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

Income Taxes

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

Net Income

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

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

Revenue

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

Cost of Services

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

14



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##### 



Gross Margins

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

General and Administrative Expenses

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

Operating Income

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

Interest and Other Income or Expense

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

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

Embezzlement Recovery

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

Income Taxes

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

Discontinued Operations

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

Net Income (Loss) from Continuing Operations

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

Net Income

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

15



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Liquidity and Capital Resources

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

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

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

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

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

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

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

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

16



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

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

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

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

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

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

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

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

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

17



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

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

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

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

Application of Critical Accounting Policies

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

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

18



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

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

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

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

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

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

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

19



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

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

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

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

20



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Item 8. Financial Statements and Supplementary Data

INDEPENDENT AUDITORS REPORT

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

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

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

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

Deloitte & Touche LLP

McLean, VA
May 27, 2002

21



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

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

See notes to consolidated financial statements

22



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##### 



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

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

See notes to consolidated financial statements

23



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##### 



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

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

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

24



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##### 



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

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

See notes to consolidated financial statements.

25



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##### 



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

1.        SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY

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

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

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

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

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

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

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

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

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

26



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##### 



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

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

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

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

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

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

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

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

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

27



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

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

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

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

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

28



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##### 



2.     EMBEZZLEMENT MATTER

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

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

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

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

3.     ACCOUNTS RECEIVABLE

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

4.     PROPERTY AND EQUIPMENT

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

29



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##### 



5.     GOODWILL AND
INTANGIBLE ASSETS

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

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

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

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

30



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##### 



6.     LONG-TERM DEBT

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

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

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

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

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

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

|      |  |   |        | 
|----- |  | - | ------ | 
|2004  |  | $ | 11,295 | 
|      |  |   |        | 
|Total |  | $ | 11,295 | 
|      |  |   |        | 

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

7.     ACCRUED EXPENSES

Accrued expenses consist primarily of the following:

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

8.     STOCKBASED COMPENSATION

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

32



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##### 



A summary of options activity is as follows:

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

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

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

33



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

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

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

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

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

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

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

34



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

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

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

9.     EMPLOYEE 401(K) RETIREMENT PLAN

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

10.     EMPLOYEE STOCK PURCHASE PLAN

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

11.     INCOME TAXES

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

35



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##### 



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

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

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

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

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

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

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

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

36



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##### 



12.     LEASING ACTIVITY

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

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

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

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

13.     RELATED PARTY TRANSACTIONS

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

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

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

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

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

37



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##### 



14.     COMMITMENTS AND CONTINGENCIES

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

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

15.     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

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

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

38



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16.     EARNINGS PER SHARE

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

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

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

39



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##### 



17.     DISCONTINUED OPERATIONS

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

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

At the Closing the Company sold to Buyer, all of the capital stock of its
wholly-owned subsidiary, Halifax Technical Services, Inc. for a purchase price
of $5.6 million.


Summary operating results of the Discontinued Operations are as follows: (In
thousands)

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

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

18.     SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS

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

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

40



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##### 



19.     UNAUDITED QUARTERLY RESULTS OF OPERATIONS:

(In thousands except for per share data)

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

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

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

41



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##### 



Halifax Corporation

Schedule II, Valuation and Qualifying Accounts

March 31, 2002

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

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

None

42



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##### 



PART III

Item 10. Directors and Executive Officers of the Registrant

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

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

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

Equity Compensation Plan Information

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

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

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

43



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##### 



Item 13. Certain Relationships and Related Transactions

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

44



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##### 



SIGNATURES

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

HALIFAX CORPORATION

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

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

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

45



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##### 



PART IV

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

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

1.     Consolidated Financial Statements



| |  |  | Independent Auditors Reports                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000                               
|
| |  |  | Consolidated Balance Sheets as of March 31, 2002 and 2001                                                             
|
| |  |  | Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000                               
|
| |  |  | Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended March 31, 2002, 2001 and 2000
|
| |  |  | Notes to Consolidated Financial Statements                                                                            

2.     Financial Statement Schedule



| |  |  | Schedule II, Valuation and Qualifying Accounts
| | - |  | ----------------------------------------------

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

(b)  Reports on Form 8-K

None

(c)  Exhibits

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

46



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##### 



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

47



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##### 



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

48