##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended March 31, 2007 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file Number 1-08964
 Halifax Corporation
  Virginia
    
    54-0829246(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)5250 Cherokee Avenue, Alexandria, VA
    
    22312(Address of principal executive offices)
    
    (Zip Code)
 (703) 658-2400
  Title of each class
    
    Name of each exchange on which registeredCommon Stock ($.24 par value)
    
    American Stock Exchange
 None
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   Class
    
    Outstanding at June 25,2007Common Stock$0.24 par value
    
    3,175,206




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##### 








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##### 



pagePART 1Item 1.
    
    Business
    
    
    1Item 1A
    
    Risk Factors
    
    
    5Item 1B
    
    Unresolved Staff Comments
    
    
    11Item 2.
    
    Properties
    
    
    11Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    16Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    31Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    51Item 9A.
    
    Controls and Procedures
    
    
    51Item 9B.
    
    Other Information
    
    
    51PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    52Item 11.
    
    Executive Compensation
    
    
    52Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    52Item 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    
    53Item 14.
    
    Principal Accounting Fees and Services
    
    
    53PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    54Signatures
    
    
    57




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##### 



PART I
 Forward- Looking Statements
    Item 1. Business
 Our Business
   1




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##### 




    
    High Availability Maintenance Services- 7 days a week, 24 hours a day, 365 days a year,
multi-vendor support for nationwide customers with demanding service level requirements
    
    Technology Deployment and Integration Services- nationwide deployment and integration
support services.
  High Availability Maintenance Services
    Technology Deployment and Integration Services
    
    
    Reduce our clients total cost of ownership;
    
    Improve service levels and response times;
    
    Reduce the administrative costs for procurement;
    
    Increase user productivity through decreased downtime;
    
    Amortize costs across thousands of users;
    
    Focus IT staff on core responsibilities;
    
    Eliminate the time and expense of storage, sale, and disposal of surplus equipment;
    
    Simplify accounting with one report, one invoice, and one charge per user; and
    
    Create a single source of accountability for all PC desktop hardware, software, and services.
 2




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##### 



Types of Customers
  Years Ended March 31,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005State/Municipal Government
    
    $
    8,349
    
    
    
    17
    %
    
    $
    10,705
    
    
    
    19
    %
    
    $
    9,663
    
    
    
    20
    %Commercial
    
    
    41,260
    
    
    
    81
    %
    
    
    43,383
    
    
    
    80
    %
    
    
    37,851
    
    
    
    78
    %Federal Government
    
    
    1,086
    
    
    
    2
    %
    
    
    823
    
    
    
    1
    %
    
    
    912
    
    
    
    2
    %Total
    
    $
    50,695
    
    
    
    100
    %
    
    $
    54,911
    
    
    
    100
    %
    
    $
    48,426
    
    
    
    100
    %
  Types of Contracts
     
    
    Alexandria, Virginia;
    
    Harrisburg, Pennsylvania;
    
    Richmond, Virginia;
    
    Trenton, New Jersey;
    
    Charleston, South Carolina;
    
    Seattle, Washington; and
    
    Ft. Worth, Texas.
 Accounts Receivable
  3




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##### 



Backlog
  Sales and Marketing
   Competition
   Personnel
  4




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##### 



Executive Officers of the Registrant
      Item 1A Risk Factors
 Investing in our common stock involves risks. You should carefully consider all of the information
contained in this Annual Report on Form 10-K and, in particular, the risks described below.
Additional risks and uncertainties not presently known to us or those we currently deem immaterial
may impair our business operations in the future. If any of the following risks actually occur,
our business, financial condition or results of operations could be materially harmed and you may
lose part or all of your investment.
 We experienced losses from continuing operations in fiscal 2007 and 2006, and continued losses may
negatively impact our financial position and value of our common stock.
  5




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##### 



Our revenues are derived from a few major customers, the loss of any of which could cause our
results of operations to be adversely affected.
  If we experience a decline in cash flow or are unable to maintain compliance with the covenants
contained in our revolving credit facility, our ability to operate could be adversely affected.
  We operate in a highly competitive market. If we are unable to offer competitive products and
services, our business may be adversely affected.
    6




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##### 



Our revenues and results of operations may vary period to period, which may cause the common stock
price to fluctuate.
  
    
    changes in economic conditions;
    
    disruptions or downturns in general economic activity resulting from terrorist
activity and armed conflict;
    
    competitive pricing pressure;
    
    lengthening sales cycles;
    
    obsolescence of technology;
    
    increases in prices of components used to support our enterprise maintenance solutions;
    
    loss of material contracts; and
    
    the success of our business strategy in providing improved operating results.
      If we are unable to generate sufficient revenues, we may have to further down size.
  7




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##### 



If we are unable to retain and attract highly qualified personnel to fulfill our contract
obligations, our business may be harmed.
  We are subject to risks related to fluctuations in interest rates.
  We incur significant costs in connection with the start-up of new contracts before receiving
related revenues, which could result in cash shortfalls and fluctuations in quarterly results from
period to period.
  
    
    could increase our vulnerability to general adverse economic and industry
conditions;
    
    will require us to dedicate a substantial portion of our cash flow from
operations to service payments on our indebtedness; reducing the availability of
our cash flow to fund future capital expenditures, working capital, execution of
our growth strategy, research and development costs and other general corporate
requirements;
    
    could limit our flexibility in planning for, or reacting to, changes in our
business and industry, which may place us at a competitive disadvantage compared
with competitors; and
    
    could limit our ability to borrow additional funds, even when necessary to
maintain adequate liquidity.
  Some of our contracts contain fixed-price provisions that could result in decreased profits if we
fail to accurately estimate our costs.
  8




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##### 



If we are unable to effectively and efficiently manage our costs, our results of operations may be
adversely affected.
  
    
    our ability to complete these on-going efforts,
    
    our ability to generate the level of savings we expect and/or that are necessary to
enable us to effectively compete,
    
    decrease in employee personnel,
    
    ability to generate sufficient revenue and or reduce operating expenses to offset the
contribution that was generated from the secure network services business which was sold
on June 30, 2005, and
    
    the performance of other parties under arrangements on which we rely to support parts
or components.
 If we fail to maintain an effective system of internal controls over financial reporting, we may
not be able to accurately report our financial results or prevent fraud. As a result, current and
potential stockholders and customers could lose confidence in our financial reporting, which could
harm our business, the trading price of our stock and our ability to retain our current customers
or obtain new customers.
  If we make future acquisitions of companies, technology and other assets that involve numerous
risks such as difficulty integrating acquired companies, technologies and assets or generating an
acceptable return on our investments.
  
    
    difficulties in integrating the operations, technologies, products and personnel of
the acquired companies;
    
    diversion of managements attention from normal daily operations of our business;
    
    difficulties in entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market positions;
    
    initial dependence on unfamiliar supply chains or relatively small supply partners;
    
    insufficient revenues to offset increased expenses associated with acquisitions; and
    
    the potential loss of key employees of the acquired companies.
 9




---



##### 




    
    issue common stock or preferred stock or assume stock option plans that would dilute
current shareholders percentage ownership;
    
    use cash, which may result in a reduction of our liquidity;
    
    assume liabilities;
    
    record goodwill and other intangible assets that would be subject to impairment
testing and potential periodic impairment charges;
    
    incur amortization expenses related to certain intangible assets;
    
    incur large and immediate write-offs; and
    
    become subject to litigation.
    We do not expect to pay dividends on our common stock.
  Shareholders of our common stock may face a lack of liquidity.
   10




---



##### 



Provisions in our corporate charter documents could delay or prevent a change in control.
  Item 1B. Unresolved Staff Comments
  Item 2. Properties
   Item 3. Legal Proceedings
   11




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
  12




---



##### 



PART II
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    Fiscal Year 2007
    
    Fiscal Year 2006Fiscal Quarter
    
    High
    
    Low
    
    High
    
    LowApril - June
    
    $
    3.25
    
    
    $
    2.39
    
    
    $
    4.39
    
    
    $
    3.60July - Sept.
    
    
    3.00
    
    
    
    2.30
    
    
    
    4.31
    
    
    
    3.40Oct. - Dec.
    
    
    3.05
    
    
    
    2.25
    
    
    
    3.85
    
    
    
    2.95Jan. - March
    
    
    3.30
    
    
    
    2.50
    
    
    
    3.50
    
    
    
    2.90
    13




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##### 



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
   3/02
    
    
    3/03
    
    
    3/04
    
    
    3/05
    
    
    3/06
    
    
    3/07Halifax Corporation
    
    
    100.00
    
    
    
    78.95
    
    
    
    115.00
    
    
    
    109.74
    
    
    
    80.26
    
    
    
    80.26S & P 500
    
    
    100.00
    
    
    
    75.24
    
    
    
    101.66
    
    
    
    108.47
    
    
    
    121.19
    
    
    
    135.52S & P Information Technology
    
    
    100.00
    
    
    
    67.34
    
    
    
    97.01
    
    
    
    94.60
    
    
    
    107.39
    
    
    
    110.72
 The stock price performance included in this graph is not necessarily indicative of
future stock price performance.
 14




---



##### 



Item 6. Selected Financial Data
  Years Ended March 31,(Amounts in thousands, except share data)
    
    2007(1)(2)
    
    
    2006(1)
    
    
    2005(1)(3)
    
    
    2004(2)(3)
    
    
    2003(1)Revenues
    
    $
    50,695
    
    
    $
    54,911
    
    
    $
    48,426
    
    
    $
    40,056
    
    
    $
    38,974(Loss) income from
continuing operations
    
    
    (2,790
    )
    
    
    (1,276
    )
    
    
    (2,789
    )
    
    
    3,493
    
    
    
    (122
    )Discontinued operations
    
    
    
    
    
    
    310
    
    
    
    1,378
    
    
    
    735
    
    
    
    770Gain on sale of discontinued operations
    
    
    
    
    
    
    2,502
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    (2,790
    )
    
    $
    1,536
    
    
    $
    (1,411
    )
    
    $
    4,228
    
    
    $
    648Income(loss) per common share  basicContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    $
    (.92
    )
    
    $
    1.32
    
    
    $
    (.05
    )Discontinued operations
    
    
    
    
    
    
    .09
    
    
    
    .46
    
    
    
    .28
    
    
    
    .35Gain on sale of discontinued operations
    
    
    
    
    
    
    .79
    
    
    
    
    
    
    
    
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )
    
    $
    1.60
    
    
    $
    .30Income (loss) per common share  dilutedContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    $
    (.92
    )
    
    $
    1.27
    
    
    $
    (.05
    )Discontinued operations
    
    
    
    
    
    
    .09
    
    
    
    .46
    
    
    
    .27
    
    
    
    .35Gain on sale of discontinued operations
    
    
    
    
    
    
    .79
    
    
    
    
    
    
    
    
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )
    
    $
    1.54
    
    
    $
    .30Weighted average number of shares
outstandingBasic
    
    
    3,175,206
    
    
    
    3,173,795
    
    
    
    3,043,465
    
    
    
    2,638,345
    
    
    
    2,175,781Diluted
    
    
    3,179,586
    
    
    
    3,188,082
    
    
    
    3,094,922
    
    
    
    2,787,656
    
    
    
    2,212,360Dividends per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Total assets
    
    $
    23,837
    
    
    $
    27,409
    
    
    $
    33,750
    
    
    $
    26,491
    
    
    $
    17,981Long-term obligations
    
    $
    1,279
    
    
    $
    8,263
    
    
    $
    12,144
    
    
    $
    9,983
    
    
    $
    10,138
 
 (1)
    
    No effect is given to dilutive securities for loss periods.(2)
    
    See Note 11 to the consolidated financial statements for discussion of deferred tax benefit
and expense.(3)
    
    We completed the acquisitions during fiscal years ended 2005 and 2004, which affect the
comparability of selected financial data, which occurred on September 30, 2004, and the Microserv,
Inc. acquisition, which occurred on August 29, 2003. 15




---



##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
          16




---



##### 



Consolidated Results of Operations
 
 17




---



##### 



(Amounts in thousands except share data)
    
    Years Ended March 31,Results of Operations
    
    2007
    
    
    2006
    
    
    Change
    
    
    %
    
    
    2006
    
    
    2005
    
    
    Change
    
    
    %Revenues
    
    $
    50,695
    
    
    $
    54,911
    
    
    
    (4,216
    )
    
    
    -8
    %
    
    $
    54,911
    
    
    $
    48,426
    
    
    $
    6,485
    
    
    
    13
    %Costs of services
    
    
    46,268
    
    
    
    51,211
    
    
    
    (4,943
    )
    
    
    -10
    %
    
    
    51,211
    
    
    
    46,530
    
    
    
    4,681
    
    
    
    10
    %Percent of revenues
    
    
    91
    %
    
    
    93
    %
    
    
    
    
    
    
    
    
    
    
    93
    %
    
    
    96
    %Gross Margin
    
    
    4,427
    
    
    
    3,700
    
    
    
    727
    
    
    
    20
    %
    
    
    3,700
    
    
    
    1,896
    
    
    
    1,804
    
    
    
    95
    %Percent of revenues
    
    
    9
    %
    
    
    7
    %
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    4
    %Selling
    
    
    1,041
    
    
    
    1,411
    
    
    
    (370
    )
    
    
    -26
    %
    
    
    1,411
    
    
    
    1,771
    
    
    
    (360
    )
    
    
    -20
    %Percent of revenues
    
    
    2
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    4
    %General and administrative
    
    
    3,386
    
    
    
    3,621
    
    
    
    (235
    )
    
    
    -6
    %
    
    
    3,621
    
    
    
    3,725
    
    
    
    (104
    )
    
    
    -3
    %Percent of revenues
    
    
    7
    %
    
    
    7
    %
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    8
    %Abandonment of lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179
    
    
    
    (179
    )
    
    
    N/MLoss on terminated contracts
    
    
    
    
    
    
    144
    
    
    
    (144
    )
    
    
    N/M
    
    
    
    144
    
    
    
    
    
    
    
    144
    
    
    
    N/MTotal operating expenses
    
    
    4,427
    
    
    
    5,176
    
    
    
    (605
    )
    
    
    -12
    %
    
    
    5,176
    
    
    
    5,675
    
    
    
    (499
    )
    
    
    -9
    %Percent of Revenues
    
    
    9
    %
    
    
    9
    %
    
    
    
    
    
    
    
    
    
    
    9
    %
    
    
    12
    %Operating income (loss)
    
    
    
    
    
    
    (1,476
    )
    
    
    1,476
    
    
    
    100
    %
    
    
    (1,476
    )
    
    
    (3,779
    )
    
    
    2,303
    
    
    
    60
    %Percent of revenues
    
    
    0
    %
    
    
    -3
    %
    
    
    
    
    
    
    
    
    
    
    -3
    %
    
    
    -8
    %Interest expense
    
    
    673
    
    
    
    583
    
    
    
    90
    
    
    
    15
    %
    
    
    583
    
    
    
    663
    
    
    
    (80
    )
    
    
    -12
    %Other income
    
    
    (32
    )
    
    
    (6
    )
    
    
    (26
    )
    
    
    N/M
    
    
    
    (6
    )
    
    
    
    
    
    
    6
    
    
    
    Loss before taxes
    
    
    (641
    )
    
    
    (2,053
    )
    
    
    1,412
    
    
    
    -69
    %
    
    
    (2,053
    )
    
    
    (4,442
    )
    
    
    (2,389
    )
    
    
    19
    %Income tax expense (benefit)
    
    
    2,149
    
    
    
    (777
    )
    
    
    676
    
    
    
    87
    %
    
    
    (777
    )
    
    
    (1,653
    )
    
    
    876
    
    
    
    -53
    %Loss from continuing operations
    
    
    (2,790
    )
    
    
    (1,276
    )
    
    
    736
    
    
    
    58
    %
    
    
    (1,276
    )
    
    
    (2,789
    )
    
    
    1,513
    
    
    
    54
    %Income from discontinued operations
net of taxes
    
    
    
    
    
    
    310
    
    
    
    (310
    )
    
    
    N/M
    
    
    
    310
    
    
    
    1,378
    
    
    
    (1,068
    )
    
    
    -78
    %Gain on sale of discontinued
operations  net of taxes
    
    
    
    
    
    
    2,502
    
    
    
    (2,502
    )
    
    
    N/M
    
    
    
    2,502
    
    
    
    
    
    
    
    2,502
    
    
    
    N/MNet (loss) income
    
    $
    (2,790
    )
    
    $
    1,536
    
    
    
    (2,076
    )
    
    
    -135
    %
    
    $
    1,536
    
    
    $
    (1,411
    )
    
    $
    2,947
    
    
    
    208
    %Earnings (loss) per share  basicContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    
    
    
    
    
    
    
    
    $
    (.40
    )
    
    $
    (.92
    )Discontinued operations
    
    
    
    
    
    
    .09
    
    
    
    
    
    
    
    
    
    
    
    .09
    
    
    
    .46Gain on sale of discontinued
Operations
    
    
    
    
    
    
    .79
    
    
    
    
    
    
    
    
    
    
    
    .79
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    
    
    
    
    
    
    
    
    $
    .48
    
    
    $
    (.46
    )Earnings (loss) per share  dilutedContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    
    
    
    
    
    
    
    
    $
    (.40
    )
    
    $
    (.92
    )Discontinued operations
    
    
    
    
    
    
    .09
    
    
    
    
    
    
    
    
    
    
    
    .09
    
    
    
    .46Gain on sale of discontinued
Operations
    
    
    
    
    
    
    .79
    
    
    
    
    
    
    
    
    
    
    
    .79
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    
    
    
    
    
    
    
    
    $
    .48
    
    
    $
    (.46
    )
  18




---



##### 



Revenues
   March 31,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %
    
    
    2006
    
    
    2005
    
    
    Change
    
    
    %Revenues:Services
    
    $
    48,172
    
    
    $
    51,533
    
    
    
    (3,361
    )
    
    
    -7
    %
    
    $
    51,533
    
    
    $
    45,718
    
    
    $
    5,815
    
    
    
    11
    %Product held for resale
    
    
    2,523
    
    
    
    3,378
    
    
    
    (855
    )
    
    
    -25
    %
    
    
    3,378
    
    
    
    2,708
    
    
    
    670
    
    
    
    25
    %Total revenues
    
    $
    50,695
    
    
    $
    54,911
    
    
    
    (4,216
    )
    
    
    -8
    %
    
    $
    54,911
    
    
    $
    48,426
    
    
    $
    6,485
    
    
    
    13
    %
   Operating costs and expenses
     19




---



##### 



March 31,(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %
    
    
    2006
    
    
    2005
    
    
    Change
    
    
    %Services delivery and
support
    
    $
    38,445
    
    
    $
    42,913
    
    
    $
    (4,468
    )
    
    
    -10
    %
    
    $
    42,913
    
    
    $
    38,767
    
    
    $
    4,146
    
    
    
    11
    %Product held for resale
    
    
    2,309
    
    
    
    3,126
    
    
    
    (817
    )
    
    
    -26
    %
    
    
    3,126
    
    
    
    2,494
    
    
    
    632
    
    
    
    25
    %Total direct costs
    
    
    40,754
    
    
    
    46,039
    
    
    
    (5,285
    )
    
    
    -11
    %
    
    
    46,039
    
    
    
    41,261
    
    
    
    4,778
    
    
    
    12
    %Indirect costs
    
    
    5,514
    
    
    
    5,172
    
    
    
    342
    
    
    
    7
    %
    
    
    5,172
    
    
    
    5,269
    
    
    
    (97
    )
    
    
    -2
    %Operating costs and
expenses
    
    $
    46,268
    
    
    $
    51,211
    
    
    $
    (5,604
    )
    
    
    -11
    %
    
    $
    51,211
    
    
    $
    46,530
    
    
    $
    4,681
    
    
    
    10
    %
       20




---



##### 



Gross Margin
   Selling and Marketing Expenses
  General and Administrative Expenses
    Severance Costs and Abandonment of Lease
   Operating Income (Loss)
  21




---



##### 



Interest Expense
   Income Tax Expense (Benefit)
 
   Income from Discontinued Operations
  Gain on Sale of Discontinued Operations
 
  Net (Loss) Income
   22




---



##### 



Depreciation and Amortization
  Sale of Secure Network Services Business
    Liquidity and Capital Resources
      23




---



##### 



Liquidity and Capital Resources (Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Cash balance at March 31
    
    $
    1,078
    
    
    $
    400
    
    
    $
    1,264Working capital at March 31
    
    $
    1,271
    
    
    $
    9,674
    
    
    $
    11,685Net cash provided by (used in) operating activities
    
    $
    419
    
    
    $
    (8,138
    )
    
    $
    687Net cash provided by (used in) investment activities
    
    $
    (525
    )
    
    $
    11,751
    
    
    $
    (1,671
    )Net cash provided by (used in) financing activities
    
    $
    784
    
    
    $
    (4,477
    )
    
    $
    1,818
     24




---



##### 



25




---



##### 



(Amounts in thousands)
 Bank
    
    
    Other
    
    
    Consulting
    
    
    OperatingDebt(1)
    
    
    Debt (2)(3)
    
    
    Commitment(4)
    
    
    Leases
    
    
    TotalLess than 1 year
    
    $
    7,880
    
    
    $
    31
    
    
    $
    50
    
    
    $
    916
    
    
    $
    8,8771 to 3 years
    
    
    
    
    
    
    1,120
    
    
    
    50
    
    
    
    663
    
    
    
    1,8333to 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387
    
    
    
    387More than 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,880
    
    
    $
    1,151
    
    
    $
    100
    
    
    $
    1,966
    
    
    $
    11,097
 
 (1)
    
    Included in our bank debt at March 31, 2007 is our bank line of credit of $6,880 and, in
addition, we have an auxiliary line of credit totaling $1.0 million, the maturity of which was
extended to December 31, 2007.(2)
    
    At March 31, 2007, affiliates (See Note 14 to the consolidated financial statements), held in
the aggregate $500,000, and $500,000 face amount of our 8% subordinated notes dated November 2,
1998 and November 5, 1998, respectively. These notes are subordinate to our revolving credit
agreement and we cannot make principal or interest payments on such notes without the consent of
Provident Bank.(3)
    
    We are obligated under a capitalized lease for phone equipment with a term of sixty months. The
note carries interest of 8%. The balance of the note on March 31, 2007 was $151,000.(4)
    
    We have a consulting advisory service commitment with a former Chief Executive Officer of the
Company. From April 1, 1999 through March 31, 2009, we are to pay the former Chief Executive
Officer $50,000 per year for consulting services. Off Balance Sheet Arrangements
  26




---



##### 



Application of Critical Accounting Policies
  Revenue Recognition
    Inventory Valuation Reserves
  27




---



##### 



Allowance for Doubtful Accounts
  Goodwill and Other Intangible Assets
    Property and Equipment
  Income Taxes and Valuation Allowance
  28




---



##### 



Results of Operations and Forward Looking Statements
  Recent Accounting Pronouncements
    Item 7A. Quantitative and Qualitative Disclosures about Market Risk
   29




---



##### 



Long-term debt (including current maturities)
    
    Total Debt(Amounts in thousands)Revolving credit agreement at the PRIME rate plus .25%, due
June 30, 2008. The interest rate is currently 8.5%.
    
    $
    6,880Auxiliary line of credit (Interest rate of 8.5%) due December 31, 2007
    
    
    1,000Total variable rate debt
    
    
    7,8808% subordinated notes from affiliate due July 1, 2009.
    
    
    1,000Equipment under a capitalized lease, 8% interest, 60 month term
    
    
    151Total fixed rate debt
    
    
    1,151Total debt
    
    $
    9,031
   30




---



##### 



Report of Independent Registered Public Accounting Firm
 
     
 31




---



##### 



HALIFAX CORPORATION   FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005
 (Amounts in thousands except share and per share data)
    
    2007
    
    
    2006
    
    
    2005Revenues
    
    $
    50,695
    
    
    $
    54,911
    
    
    $
    48,426Operating costs and expenses
    
    
    46,268
    
    
    
    51,211
    
    
    
    46,530Gross margin
    
    
    4,427
    
    
    
    3,700
    
    
    
    1,896Selling and Marketing
    
    
    1,041
    
    
    
    1,411
    
    
    
    1,771General and administrative
    
    
    3,386
    
    
    
    3,621
    
    
    
    3,725Abandonment of lease
    
    
    
    
    
    
    
    
    
    
    179Severance costs
    
    
    
    
    
    
    144
    
    
    
    Operating income (loss)
    
    
    
    
    
    
    (1,476
    )
    
    
    (3,779
    )Interest expense
    
    
    673
    
    
    
    583
    
    
    
    663Other income
    
    
    (32
    )
    
    
    (6
    )
    
    
    Loss before income taxes
    
    
    (641
    )
    
    
    (2,053
    )
    
    
    (4,442
    )Income tax expense (benefit)
    
    
    2,149
    
    
    
    (777
    )
    
    
    (1,653
    )Loss from continuing operations
    
    
    (2,790
    )
    
    
    (1,276
    )
    
    
    (2,789
    )Income from discontinued operations (net of taxes of $163,
$863, respectively)
    
    
    
    
    
    
    310
    
    
    
    1,378Gain on sale of discontinued operations (net of tax of $3,609)
    
    
    
    
    
    
    2,502
    
    
    
    Net (loss) income
    
    $
    (2,790
    )
    
    $
    1,536
    
    
    $
    (1,411
    )Earnings (loss) per share  basicContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    $
    (.92
    )Discontinued operations
    
    
    .
    
    
    
    .09
    
    
    
    .46Gain on sale of discontinued operations
    
    
    
    
    
    
    .79
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )Earnings (loss) per share  dilutedContinuing operations
    
    $
    (.88
    )
    
    $
    (.40
    )
    
    $
    (.92
    )Discontinued operations
    
    
    .
    
    
    
    .09
    
    
    
    .46Gain on sale of discontinued operations
    
    
    
    
    
    
    .79
    
    
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )Weighted average number of common shares outstanding  Basic
    
    
    3,175,206
    
    
    
    3,173,795
    
    
    
    3,043,465Weighted average number of common shares outstanding  diluted
    
    
    3,179,588
    
    
    
    3,188,082
    
    
    
    3,094,922
 
 *
    
    No effect is given to dilutive securities for loss periods.  32




---



##### 



HALIFAX CORPORATION  CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 AND 2006
 March 31,(Amounts in thousands except share and per share data)
    
    2007
    
    
    2006ASSETSCURRENT ASSETSCash
    
    $
    1,078
    
    
    $
    400Restricted cash
    
    
    673
    
    
    
    625Trade accounts receivable, net
    
    
    11,345
    
    
    
    11,415Inventory, net
    
    
    4,946
    
    
    
    6,363Prepaid expenses and other current assets
    
    
    584
    
    
    
    722Deferred tax asset
    
    
    
    
    
    
    1,332TOTAL CURRENT ASSETS
    
    
    18,626
    
    
    
    20,857PROPERTY AND EQUIPMENT, net
    
    
    1,225
    
    
    
    1,381GOODWILL
    
    
    2,918
    
    
    
    2,918OTHER INTANGIBLE ASSETS, net
    
    
    947
    
    
    
    1,295OTHER ASSETS
    
    
    121
    
    
    
    130DEFERRED TAX ASSET
    
    
    
    
    
    
    828TOTAL ASSETS
    
    $
    23,837
    
    
    $
    27,409LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    3,251
    
    
    $
    3,975Accrued expenses
    
    
    3,124
    
    
    
    3,160Deferred maintenance revenues
    
    
    3,058
    
    
    
    3,515Current portion of long-term debt
    
    
    31
    
    
    
    34Notes payable
    
    
    
    
    
    
    168Bank Debt
    
    
    6,880
    
    
    
    Auxiliary line of credit
    
    
    1,000
    
    
    
    Income taxes payable
    
    
    11
    
    
    
    331TOTAL CURRENT LIABILITIES
    
    
    17,355
    
    
    
    11,183LONG-TERM BANK DEBT
    
    
    
    
    
    
    6,891SUBORDINATED DEBT  AFFILIATE
    
    
    1,000
    
    
    
    1,000OTHER LONG-TERM DEBT
    
    
    120
    
    
    
    154DEFERRED INCOME
    
    
    159
    
    
    
    218TOTAL LIABILITIES
    
    
    18,634
    
    
    
    19,446COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYPreferred stock, no par value Authorized 1,500,000, Issued 0 shares
    
    
    
    
    
    
    Common stock, $.24 par value Authorized - 6,000,000 shares Issued  3,431,890 in 2007 and 2006
Outstanding   3,175,206 in 2007 and 2006
    
    
    828
    
    
    
    828Additional paid-in capital
    
    
    9,047
    
    
    
    9,017Accumulated deficit
    
    
    (4,460
    )
    
    
    (1,670
    )Less treasury stock at cost  256,684 shares in 2007 and 2006
    
    
    (212
    )
    
    
    (212
    )TOTAL STOCKHOLDERS EQUITY
    
    
    5,203
    
    
    
    7,963TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    23,837
    
    
    $
    27,409
 See notes to consolidated financial statements
 33




---



##### 



HALIFAX CORPORATION   FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005
 (Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (2,790
    )
    
    $
    1,536
    
    
    $
    (1,411
    )Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:Gain on sale of discontinued operations
    
    
    
    
    
    
    (2,502
    )
    
    
    Income from discontinued operations
    
    
    
    
    
    
    (310
    )
    
    
    (1,378
    )Depreciation and amortization
    
    
    981
    
    
    
    1,081
    
    
    
    1,159Deferred income taxes
    
    
    2,160
    
    
    
    (1,305
    )
    
    
    (1,704
    )Equity based compensation
    
    
    30
    
    
    
    
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    70
    
    
    
    (1,789
    )
    
    
    (1,628
    )Inventory
    
    
    1,417
    
    
    
    (763
    )
    
    
    439Prepaid expenses and other current assets
    
    
    138
    
    
    
    (235
    )
    
    
    128Other assets
    
    
    9
    
    
    
    11
    
    
    
    14Accounts payable, accrued expenses and
other current liabilities
    
    
    (760
    )
    
    
    (1,977
    )
    
    
    2,194Deferred maintenance revenues
    
    
    (457
    )
    
    
    (261
    )
    
    
    227Deferred income
    
    
    (59
    )
    
    
    (60
    )
    
    
    (59
    )Income taxes payable
    
    
    (320
    )
    
    
    331
    
    
    
    Net cash provided (used in) by continuing operations
    
    
    419
    
    
    
    (6,243
    )
    
    
    (2,019
    )Net cash (used in) provided by discontinued operations
    
    
    
    
    
    
    (1,895
    )
    
    
    2,706Net cash flow provided by (used in) operating activities
    
    
    419
    
    
    
    (8,138
    )
    
    
    687Cash flows from investing activities:Purchase of property and equipment
    
    
    (477
    )
    
    
    (402
    )
    
    
    (833
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    13,057
    
    
    
    Restricted cash
    
    
    (48
    )
    
    
    (625
    )
    
    
    Payment for acquisitions (net of cash acquired)
    
    
    
    
    
    
    (330
    )
    
    
    (824
    )Net cash (used in) provided by investing activities by
continuing operations
    
    
    (525
    )
    
    
    11,700
    
    
    
    (1,657
    )Net cash flow provided by (used in) discontinued
operations
    
    
    
    
    
    
    51
    
    
    
    (14
    )Net cash flow (used in) provided by investing activities
    
    
    (525
    )
    
    
    11,751
    
    
    
    (1,671
    )Cash flows from financing activities:Proceeds from debt borrowings
    
    
    36,198
    
    
    
    38,975
    
    
    
    33,195Repayments of debt
    
    
    (36,209
    )
    
    
    (41,547
    )
    
    
    (31,461
    )Advance on auxiliary line of credit
    
    
    1,000
    
    
    
    
    
    
    
    Retirement of subordinated debt- affiliate
    
    
    
    
    
    
    (1,400
    )
    
    
    Repayments of other debt
    
    
    (37
    )
    
    
    (18
    )
    
    
    Retirement of acquisition debt
    
    
    (168
    )
    
    
    (494
    )
    
    
    Proceeds from sale of stock upon exercise of stock options
    
    
    
    
    
    
    7
    
    
    
    84Net cash (used in) provided by financing activities
    
    
    784
    
    
    
    (4,477
    )
    
    
    1,818Net increase (decrease) in cash
    
    
    678
    
    
    
    (864
    )
    
    
    834Cash at beginning of year
    
    
    400
    
    
    
    1,264
    
    
    
    430Cash at end of year
    
    $
    1,078
    
    
    $
    400
    
    
    $
    1,264
 
 See notes to consolidated financial statements
 34




---



##### 



HALIFAX CORPORATION   FOR THE YEARS ENDED MARCH 31, 2007, 2006, AND 2005
 AdditionalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Treasury StockShares
    
    
    Par Value
    
    
    Capital
    
    
    Deficit
    
    
    Shares
    
    
    Cost
    
    
    TotalMarch 31, 2004
    
    
    3,167,096
    
    
    $
    764
    
    
    $
    7,962
    
    
    $
    (1,795
    )
    
    
    256,684
    
    
    $
    (212
    )
    
    $
    6,719Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,411
    )
    
    
    
    
    
    
    
    
    
    
    (1,411
    )Issuance of Common
Stock
    
    
    260,544
    
    
    
    63
    
    
    
    1,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,112March 31, 2005
    
    
    3,427,640
    
    
    
    827
    
    
    
    9,011
    
    
    
    (3,206
    )
    
    
    256,684
    
    
    
    (212
    )
    
    
    6,420Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,536
    
    
    
    
    
    
    
    
    
    
    
    1,536Issuance of Common
Stock
    
    
    4,250
    
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7March 31, 2006
    
    
    3,431,890
    
    
    
    828
    
    
    
    9,017
    
    
    
    (1,670
    )
    
    
    256,684
    
    
    
    (212
    )
    
    
    7,963Equity based
compensation
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,790
    )
    
    
    
    
    
    
    
    
    
    
    (2,790
    )March 31, 2007
    
    
    3,431,890
    
    
    $
    828
    
    
    $
    9,047
    
    
    $
    (4,460
    )
    
    
    256,684
    
    
    $
    (212
    )
    
    $
    5,203
 See notes to consolidated financial statements
 35




---



##### 



HALIFAX CORPORATION   FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005
  Business Activity
 Principles of Consolidation
 Use of Estimates
 Accounts Receivable
  Inventory
 Property and Equipment
 Machinery and equipment
    
    3-10 yearsFurniture and fixtures
    
    5 yearsBuilding improvements
    
    5-10 yearsVehicles
    
    4 years
  36




---



##### 



Goodwill and Intangible Assets
 Deferred Maintenance Revenues
 Revenue Recognition
 Income Taxes
 Stock-Based Compensation Share Based Payment. Accounting for Stock Issued to Employees
   37




---



##### 



(Amounts in thousands except share data)
    
    2006
    
    
    2005Net income (loss) (as reported)
    
    $
    1,536
    
    
    $
    (1,411
    )Deduct: stock-based compensation expense
determined under the fair value method,
net of tax
    
    
    (45
    )
    
    
    (106
    )Proforma net income (loss)
    
    $
    1,491
    
    
    $
    (1,517
    )Earnings (loss) per common share (as reported):Basic
    
    $
    .48
    
    
    $
    (.46
    )Diluted
    
    $
    .48
    
    
    $
    (.46
    )Proforma earnings (loss) per common share:Basic
    
    $
    .47
    
    
    $
    (.50
    )Diluted
    
    $
    .47
    
    
    $
    (.50
    )
 Earnings Per Common Share
 Concentration of Risk
 Recent Pronouncements
    38




---



##### 



Trade accounts receivable consist of:
    
    March 31,(Amounts in thousands)
    
    2007
    
    
    2006Amounts billed
    
    $
    10,832
    
    
    $
    11,079Amounts unbilled
    
    
    730
    
    
    
    501Total
    
    
    11,562
    
    
    
    11,580Allowance for doubtful accounts
    
    
    (217
    )
    
    
    (165
    )Total
    
    $
    11,345
    
    
    $
    11,415
  Property and equipment consists of:
    
    March 31,
    
    
    Estimated(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    Useful LivesMachinery and equipment
    
    $
    3,196
    
    
    $
    2,746
    
    
    3-10 yearsFurniture and fixtures
    
    
    235
    
    
    
    210
    
    
    5 yearsBuilding improvements
    
    
    315
    
    
    
    315
    
    
    5-10 yearsVehicles
    
    
    162
    
    
    
    160
    
    
    4 yearsTotal
    
    
    3,908
    
    
    
    3,431Accumulated depreciation
    
    
    (2,683
    )
    
    
    (2,050
    )Total
    
    $
    1,225
    
    
    $
    1,381
       39




---



##### 



2007
    
    
    2006EstimatedAmortizationperiod
    
    
    Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    Net(Amounts in thousands):
    
    (in months)
    
    
    Assets
    
    
    Amortization
    
    
    Assets
    
    
    Assets
    
    
    Amortization
    
    
    AssetsClient master contracts
    
    
    60-90
    
    
    $
    1,675
    
    
    $
    (738
    )
    
    $
    937
    
    
    $
    1,675
    
    
    $
    (440
    )
    
    $
    1,235Backlog
    
    
    48
    
    
    
    96
    
    
    
    (86
    )
    
    
    10
    
    
    
    96
    
    
    
    (62
    )
    
    
    34Subcontractor provider
network
    
    
    36
    
    
    
    64
    
    
    
    (64
    )
    
    
    
    
    
    
    64
    
    
    
    (64
    )
    
    
    Non compete
    
    
    24-36
    
    
    
    109
    
    
    
    (109
    )
    
    
    
    
    
    
    109
    
    
    
    (83
    )
    
    
    26$
    1,944
    
    
    $
    (997
    )
    
    $
    947
    
    
    $
    1,944
    
    
    $
    (649
    )
    
    $
    1,295
   Fiscal Year ended March 31,(Amounts in thousands):2008
    
    $
    3032009
    
    
    2942010
    
    
    2232011
    
    
    932012
    
    
    34Total
    
    $
    947
   40




---



##### 



March 31,(Amounts in thousands)Bank debt consists of:
    
    2007
    
    
    2006Revolving credit agreement dated July 6, 2006 maturing June 30, 2008 with a maximum
borrowing limit of $10.0 million. Amounts available under this agreement are determined by
applying stated percentages to the Companys eligible receivables and inventory. At March
31, 2007 and 2006, $5.1 million, respectively, was available to the Company under the terms
of the agreement. The facility bears interest at the banks prime rate plus 3/4%. The
interest rate at March 31, 2007 and 2006 was 8.5% and 7.75%, respectively.
    
    $
    6,880
    
    
    $
    6,891Auxiliary line of credit (The interest rate was 8.5%) The maturity date is December 31, 2007
    
    
    1,000
    
    
    
    Total bank debt
    
    $
    7,880
    
    
    $
    6,891Subordinated note with an affiliate (see Note 13) dated November 2, 1998. Principal due on
July 1, 2009. Interest accrues annually at 8%.
    
    
    500
    
    
    
    500Subordinated note with an affiliate (see Note 13) dated November 5, 1998. Principal due on
July 1, 2009. Interest accrues annually at 8%.
    
    
    500
    
    
    
    500Subtotal  debt affiliated parties
    
    
    1,000
    
    
    
    1,0006% notes issued to former AlphaNational shareholders due March 31, 2006 (see Note 4) The
notes were paid in full on April 17, 2006.
    
    
    
    
    
    
    168Equipment under a capitalized lease, 8% interest, 60 month term
    
    
    151
    
    
    
    185Other debt, interest rates 0.0% to 1.9%, terms ranging from 36 to 48 months.
    
    
    
    
    
    
    3Total debt
    
    
    9,031
    
    
    
    8,247Less current maturities
    
    
    7,911
    
    
    
    202Total long-term debt
    
    $
    1,120
    
    
    $
    8,045
   (Amounts in thousands)Year endedMarch 31,
    
    Total2008
    
    $
    7,9112009
    
    
    372010
    
    
    1,0492011
    
    
    34Total
    
    $
    9,031
 41




---



##### 



March 31,(Amounts in thousands)
    
    2007
    
    
    2006Accrued lease payments
    
    $
    1,241
    
    
    $
    825Accrued vacation
    
    
    320
    
    
    
    735Accrued payroll
    
    
    421
    
    
    
    465Payroll taxes accrued and withheld
    
    
    493
    
    
    
    466Interest
    
    
    195
    
    
    
    115Other accrued expenses
    
    
    454
    
    
    
    554$
    3,124
    
    
    $
    3,160
       42




---



##### 



WeightedAverageNumber of
    
    
    Exercise Price2005 Plan
    
    Shares
    
    
    Per ShareOutstanding March 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    27,800
    
    
    
    3.40Outstanding at March 31, 2006
    
    
    27,800
    
    
    
    3.40Granted
    
    
    69,500
    
    
    
    3.00Outstanding at March 31, 2007
    
    
    97,300
    
    
    $
    3.11
 WeightedAverageNumber of
    
    
    Exercise Price1994 Plan and 1997 Plan
    
    Shares
    
    
    Per ShareOutstanding at March 31, 2004
    
    
    417,917
    
    
    
    5.07Granted
    
    
    96,800
    
    
    
    4.56Exercised
    
    
    (21,500
    )
    
    
    3.48Forfeited/Expired
    
    
    (32,500
    )
    
    
    3.77Outstanding at March 31, 2005
    
    
    460,217
    
    
    
    5.13Exercised
    
    
    (4,250
    )
    
    
    2.60Forfeited/Expired
    
    
    (50,050
    )
    
    
    5.02Outstanding at March 31, 2006
    
    
    405,917
    
    
    
    5.16Forfeited/Expired
    
    
    (6,500
    )
    
    
    4.78Outstanding at March 31, 2007
    
    
    399,417
    
    
    $
    5.17
  Options OutstandingWeighted Average
    
    Options Outstanding
    
    
    
    
    
    
    Options ExercisableRange of
    
    
    Options
    
    
    Remaining
    
    Weighted Average
    
    
    Options
    
    
    Weighted AverageExercise Prices
    
    
    Outstanding
    
    
    Contractual Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise price$
    3.40
    
    
    
    27,800
    
    
    9 years
    
    $
    3.40
    
    
    
    27,800
    
    
    $
    3.403.00
    
    
    
    69,500
    
    
    10 years
    
    
    3.00
    
    
    
    0
    
    
    
    $
    3.00-3.40
    
    
    
    97,300
    
    
    
    
    $
    3.11
    
    
    
    27,800
    
    
    $
    3.40
 43




---



##### 



Options OutstandingWeighted Average
    
    Options Outstanding
    
    
    
    
    
    
    Options ExercisableRange of
    
    
    Options
    
    
    Remaining
    
    Weighted Average
    
    
    Options
    
    
    Weighted AverageExercise Prices
    
    
    Outstanding
    
    
    Contractual Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise price$
    10.25
    
    
    
    24,250
    
    
    .50 years
    
    $
    10.25
    
    
    
    24,250
    
    
    $
    10.257.03
    
    
    
    10,500
    
    
    1.50 years
    
    
    7.03
    
    
    
    10,500
    
    
    
    7.035.57-7.56
    
    
    
    77,000
    
    
    2.80 years
    
    
    6.23
    
    
    
    77,000
    
    
    
    6.235.38-7.06
    
    
    
    64,500
    
    
    3.25 years
    
    
    5.81
    
    
    
    64,500
    
    
    
    5.811.80-4.05
    
    
    
    76,000
    
    
    4.66 years
    
    
    3.49
    
    
    
    76,000
    
    
    
    3.493.10-5.00
    
    
    
    48,167
    
    
    5.70 years
    
    
    3.49
    
    
    
    48,167
    
    
    
    3.494.11-5.70
    
    
    
    18,000
    
    
    6.31years
    
    
    4.55
    
    
    
    14,242
    
    
    
    4.274.45-5.02
    
    
    
    81,000
    
    
    7.00 years
    
    
    4.58
    
    
    
    78,688
    
    
    
    4.59$
    1.80-$10.25
    
    
    
    399,417
    
    
    
    
    $
    5.17
    
    
    
    393,346
    
    
    $
    5.17
         (Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Current expense:Federal
    
    $
    
    
    
    $
    133
    
    
    $
    State
    
    
    10
    
    
    
    395
    
    
    
    51Total current:
    
    
    10
    
    
    
    528
    
    
    
    51Deferred expense:Federal
    
    
    1,926
    
    
    
    (1,065
    )
    
    
    (1,394
    )State
    
    
    213
    
    
    
    (240
    )
    
    
    (310
    )Total deferred:
    
    
    2,139
    
    
    
    (1,305
    )
    
    
    (1,704
    )Income tax expense (benefit)
    
    $
    2,149
    
    
    $
    (777
    )
    
    $
    (1,653
    )
 44




---



##### 



(Amounts in thousands)
    
    2007
    
    
    2006Deferred tax assets:Accounts receivable reserves
    
    $
    84
    
    
    $
    63Inventory reserve
    
    
    478
    
    
    
    318Inventory capitalization
    
    
    86
    
    
    
    100Depreciation/amortization
    
    
    112
    
    
    
    76Accrued compensation/vacation and other
    
    
    181
    
    
    
    385Abandonment of space
    
    
    26
    
    
    
    44AMT credit carryforwards
    
    
    219
    
    
    
    227Net operating loss carryforward
    
    
    1,003
    
    
    
    863Deferred gain on building sale
    
    
    61
    
    
    
    842,250
    
    
    
    2,160Deferred tax liabilities:
    
    
    
    
    
    
    2,250
    
    
    
    2,160Valuation allowance
    
    
    (2,250
    )
    
    
    Net deferred tax asset
    
    $
    
    
    
    $
    2,160
      2007
    
    
    2006
    
    
    2005(Benefit) provision for income taxes
    
    
    (34.0
    )%
    
    
    (34.0
    )%
    
    
    (34.0
    )%(Reduction) increase in taxes resulting from:State taxes, net of federal benefit
    
    
    (6.7
    )
    
    
    (4.1
    )
    
    
    (7.1
    )Permanent items
    
    
    22.9
    
    
    
    26.3
    
    
    
    3.9Other
    
    
    2.0
    
    
    
    (3.0
    )
    
    
    Change in valuation allowance for deferred tax assets
    
    
    351.0
    
    
    
    
    
    
    
    Total
    
    
    335.2
    %
    
    
    (14.8
    )%
    
    
    (37.2
    )%
 45




---



##### 



(Amounts in thousands)
    
    2006
    
    2005Revenue
    
    $
    3,045
    
    
    $
    13,580Income before taxes
    
    $
    473
    
    
    $
    2,240Net income
    
    $
    310
    
    
    $
    1,378
   (Amounts in thousands)Year ending March 31,2008
    
    $
    1,0802009
    
    
    7732010
    
    
    387Total minimum lease payments
    
    $
    2,240
        46




---



##### 



(Amounts in thousands)
    
    2007
    
    
    2006
    
    
    2005Interest
    
    $
    637
    
    
    $
    586
    
    
    $
    644Income taxes
    
    $
    320
    
    
    $
    395
    
    
    $
    Disclosure of non-cash financing activities:Purchase of equipment pursuant to a capital lease
    
    $
    
    
    
    $
    186
    
    
    $
    5% notes payable to former AlphaNational shareholders
    
    $
    168
    
    
    $
    
    
    
    $
    Common stock issued for the purchase of AlphaNational
    
    $
    
    
    
    $
    
    
    
    $
    1,028
 47




---



##### 



Years Ended March 31,(Amounts in thousands except share data)
    
    2007
    
    
    2006
    
    
    2005Numerator for earnings per share:Net income as reported  Basic and Diluted
    
    $
    (2,790
    )
    
    $
    1,536
    
    
    $
    (1,411
    )Denominator:Denominator for basic earnings per share-Weighted-average shares outstanding
    
    
    3,175,206
    
    
    
    3,173,795
    
    
    
    3,043,465Effect of dilutive securities:Employee stock options
    
    
    4,380
    
    
    
    14,287
    
    
    
    42,243Non qualified stock options
    
    
    
    
    
    
    
    
    
    
    564Warrants
    
    
    
    
    
    
    
    
    
    
    8,650Dilutive potential common sharesDenominator for diluted earnings per
share  adjusted weighted-average
shares and assumed conversions
    
    
    3,179,586
    
    
    
    3,188,082
    
    
    
    3,094,922Earnings per share  Basic:
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )Earnings per share  Diluted
    
    $
    (.88
    )
    
    $
    .48
    
    
    $
    (.46
    )
     48




---



##### 



( Amounts in thousands except share data)
 June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,2006
    
    
    2006
    
    
    2006
    
    
    2007 (1) (2)Revenues
    
    $
    12,746
    
    
    $
    12,369
    
    
    $
    12,603
    
    
    $
    12,977Gross Margin
    
    
    1,476
    
    
    
    1,325
    
    
    
    1,401
    
    
    
    225Net income (loss)
    
    $
    84
    
    
    $
    22
    
    
    $
    51
    
    
    $
    (2,947
    )Basic earnings per share
    
    $
    .03
    
    
    $
    .01
    
    
    $
    .02
    
    
    $
    (.93
    )Diluted earning per share
    
    $
    .03
    
    
    $
    .01
    
    
    $
    .02
    
    
    $
    (.93
    )
 June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2005
    
    
    2005
    
    
    2006Revenues
    
    $
    14,679
    
    
    $
    13,958
    
    
    $
    13,390
    
    
    $
    12,884Gross Margin
    
    
    1,182
    
    
    
    1,094
    
    
    
    314
    
    
    
    1,110Loss from continuing operations
    
    
    (234
    )
    
    
    (172
    )
    
    
    (783
    )
    
    
    (87
    )Income from discontinued operations
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    2,182
    
    
    
    320Net income ( loss)
    
    $
    76
    
    
    $
    (172
    )
    
    $
    1,399
    
    
    $
    233Basic earnings per share
Continuing operations
    
    $
    (.07
    )
    
    $
    (.05
    )
    
    $
    (.25
    )
    
    $
    (.03
    )Discontinued operations
    
    
    .09
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    .69
    
    
    
    .10$
    .02
    
    
    $
    (.05
    )
    
    $
    .44
    
    
    $
    .07Diluted earning per share
Continuing operations
    
    $
    (.07
    )
    
    $
    (.05
    )
    
    $
    (.25
    )
    
    $
    (.03
    )Discontinued operations
    
    
    .09
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    .69
    
    
    
    .10$
    .02
    
    
    $
    (.05
    )
    
    $
    .44
    
    
    $
    .07
 
 (1)
    
    During the quarter ended March 31, 2007, the Company recorded a $500,000 charge to increase its
reserve for obsolete inventory.(2)
    
    Based upon its managements evaluation of its current deferred tax asset and its historical
losses from continuing operations for the past three years, the Company determined that it was
necessary to record a valuation allowance equal to 100% of the value of its deferred tax asset of
$2.2 million during its fourth quarter of fiscal year ended March 31, 2007. 49




---



##### 



Schedule II, Valuation and Qualifying Accounts
  Balance at
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    
    
    
    
    end ofof year
    
    Additions
    
    Deductions
    
    YearYear Ended
March 31, 2005Allowance for doubtful
Accounts
    
    $
    148,000
    
    
    $
    179,000
    
    
    $
    29,000
    
    
    $
    298,000Allowance for inventory
Obsolescence
    
    $
    952,000
    
    
    $
    1,044,000
    
    
    $
    280,000
    
    
    $
    1,716,000Year Ended
March 31, 2006Allowance for doubtful
Accounts
    
    $
    298,000
    
    
    $
    86,000
    
    
    $
    219,000
    
    
    $
    165,000Allowance for inventory
Obsolescence
    
    $
    1,716,000
    
    
    $
    318,000
    
    
    $
    1,207,000
    
    
    $
    827,000Year Ended
March 31, 2007Allowance for doubtful
Accounts
    
    $
    165,000
    
    
    $
    145,000
    
    
    $
    93,000
    
    
    $
    217,000Allowance for inventory
    
    $
    827,000
    
    
    $
    960,000
    
    
    $
    547,000
    
    
    $
    1,240,000
 50




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  Item 9A. Controls and Procedures
 Evaluation of the Companys Disclosure Controls and Procedures and Internal Control and Financial
reporting
 Limitations on the Effectiveness of Controls
 Conclusions
  Item 9B. Other Information
  51




---



##### 



PART III
 Item 10. Directors, Executive Officers and Corporate Governance
   Code of Conduct and Ethics
  Item 11. Executive Compensation
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  Equity Compensation Plans
  (c)Number of securities(a)
    
    (b)
    
    remaining available forNumber of securities to
    
    Weighted-average
    
    future issuance underbe issued upon exercise of
    
    exercise price of
    
    equity compensation planoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security holders
(1)
    
    
    399,417
    
    
    $
    5.17
    
    
    
    162,700Equity compensation
plans not approved
by security holders
(2)
    
    
    50,000
    
    
    
    3.19
    
    
    
    Total
    
    
    449,417
    
    
    $
    4.94
    
    
    
    162,700
 
 (1)
    
    The Company has three equity compensation plans, the 1994 Key Employee Stock Option Plan, the
1997 Non-Employee Directors Stock Option Plan and 2005 Stock Option and Stock Incentive Plan.The 2005 Stock Option and Stock Incentive Plan has a maximum of 260,000 shares of Common
Stock that are available for issuance. As of March 31, 2007, there were options to purchase
97,300 shares of common stock outstanding and 0 shares of Common Stock issued pursuant to
restricted stock awards. 52




---



##### 



The 1994 Key Employee Stock Option Plan has a maximum of 400,000 shares of Common Stock
available for issuance. As of March 31, 2007, there were options to purchase 202,200 shares
of the Companys Common Stock outstanding. No additional options may be granted under the
1994 Key Employee Stock Option Plan. The Non-Employee Directors Stock Option Plan has a
maximum of 100,000 options available for issuance. As of March 31, 2007, there were options
to purchase 99,917 shares of the Companys Common Stock outstanding. No additional options
may be granted under the Non-Employee Directors Stock Option Plan.(2)
    
    On August 29, 2003, the Company issued warrants to purchase 50,000 shares of Common Stock at
an exercise price of $3.19 per share to its investment advisors. Item 13. Certain Relationships and Related Transactions and Director Independence
  Item 14. Principal Accounting Fees and Services
  53




---



##### 



PART IV
 Item 15. Exhibits, Financial Statement Schedules
  1.
    
    Consolidated Financial Statements
 o
    
    Independent Auditors Reporto
    
    Consolidated Statements of Operations for the years ended March 31, 2007, 2006, and 2005o
    
    Consolidated Balance Sheets as of March 31, 2007 and 2006o
    
    Consolidated Statements of Cash Flows for the years ended March 31, 2007, 2006, and 2005o
    
    Consolidated Statements of Changes in Stockholders Equity for the years ended March 31, 2007, 2006 and 2005o
    
    Notes to Consolidated Financial Statements
 2.
    
    Financial Statement Schedule
 o
    
    Schedule II, Valuation and Qualifying Accounts
  3.
    
    Exhibits2.1
    
    Agreement and Plan of Merger, dated August 29, 2003 for the Acquisition of Microserv, Inc. by
Halifax Corporation. (Incorporated by reference to Exhibit 99.1 to Form 8-K dated September
12, 2003.)2.2
    
    Agreement and Plan of Merger dated September 30, 2004 by and among AlphaNational
Technology Services, Inc., Halifax Corporation, Halifax-AlphaNational Acquisition, Inc., et
al. (Schedules and exhibits are omitted pursuant to Regulation S-K, Item 601(b)(2); The
Company agrees to furnish supplementally a copy of such schedules and/or exhibits to the
Securities and Exchange Commission upon request.) (Incorporated by reference from Exhibit 2.1
to Form 8-K dated September 30, 2004.)2.3
    
    Asset Purchase Agreement by and among Halifax Corporation, Indus Acquisition, LLC and Indus
Corporation dated as of June 30, 2005. (Schedules and exhibits are omitted pursuant to
Regulation S-K, Item 601(b)(2); Halifax agrees to furnish supplementally a copy of such
schedules and/or exhibits to the Securities and Exchange Commission upon request).
(Incorporated by reference to Exhibit 2.4 to form 10-K for the year ended March 31, 2005.)3.1
    
    Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to Form
10-K for the year ended March 31, 1995.)3.2
    
    By-laws, as amended (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended
March 31, 2004.)3.3
    
    Articles of Amendment to Articles of Incorporation. (Incorporated by reference to Exhibit
3.3 to Form 10-K for the year ended March 31, 2000.)4.1
    
    Research Industries Incorporated Promissory Note dated November 2, 1998. (Incorporated by
reference to Exhibit 4.13 to Form 10-K for the year ended March 31, 2002.)4.2
    
    Research Industries Incorporated Promissory Note dated November 5, 1998. (Incorporated by
reference to Exhibit 4.13 to Form 10-K for the year ended March 31, 2002.)
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4.3
    
    Form of 5% note issued to Microserv Shareholders (Incorporated by Reference to Exhibit 99.6
to Form 8-K dated August 29, 2003.)10.1
    
    1994 Key Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the
year ended March 31, 1995).10.2
    
    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.)10.3
    
    Charles L. McNew Executive Severance Agreement, dated March 31, 2001. (Incorporated by
reference to Exhibit 10.8 to Form 10-K for the year ended March 31, 2001.)10.4
    
    Severance Agreement of Joseph Sciacca, dated May 10, 2000. (Incorporated by reference to
Exhibit 10.9 to Form 10-Q for the quarter ended September 30, 2001.)10.5
    
    Charles L. McNew Executive Severance Agreement dated
March 31, 2003.10.6
    
    Non-Employee Director Stock Option Plan dated September 19, 1997. (Incorporated by reference
to Exhibit 10.13 to Form 10-K for the year ended March 31, 2002.)10.7
    
    Severance Agreement of Hugh Foley, dated January 17, 2003. (Incorporated by reference to
Exhibit 10.14 to Form 10-K for the year ended March 31, 2003.)10.8
    
    Registration Rights and First Offer Agreement dated August 29, 2003. (Incorporated by reference to
Exhibit 99.2 to Form 8-K dated August 29, 2003.)
10.8 Employee Severance and Restricted Covenant Agreement with Jonathan Scott, dated August 29, 2003.
(Incorporated by reference to Exhibit 99.4 to Form 8-K dated August 29, 2003.)
10.9 Voting Agreement, dated August 29, 2003 between Microserv, Inc. and certain shareholders of Halifax
Corporation. (Incorporated by reference to Exhibit 99.5 to Form 8-K dated August 29, 2003.)10.9
    
    Employee Severance and Restricted Covenant Agreement with Jonathan Scott, dated August 29, 2003.
(Incorporated by reference to Exhibit 99.4 to Form 8-K dated August 29, 2003.)10.10
    
    Voting Agreement, dated August 29, 2003 between Microserv, Inc. and certain shareholders of Halifax
Corporation. (Incorporated by reference to Exhibit 99.5 to Form 8-K dated August 29, 2003.)10.11
    
    Amended and Restated Banking Agreement by and between the Company, Halifax Engineering,
Inc., Microserv LLC, and Halifax AlphaNational Acquisition, Inc and Provident Bank dated
November 8, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q for quarter ended
September 30, 2004.)10.12
    
    Registration Rights Agreement among the Company and L. L. Whiteside, Charles A. Harper,
Morris Horn and Dan Lane dated September 30, 2004. (Incorporated by reference to Exhibit 10.2
to Form 10-Q for quarter ended September 30, 2004.)10.13
    
    Employee Severance and Restrictive Covenant Agreement between the Company and L.L. Whiteside
dated September 30, 2004. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for quarter
ended September 30, 2004.)10.14
    
    Summary Term Sheet of Director Fees and Officer Compensation
(Incorporated by reference to the 2007 Proxy.)10.15
    
    2005 Stock Option and Stock Incentive Plan. (Incorporated by reference to Appendix A to the
definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission
on July 29, 2005.)10.16
    
    Modification to Contract VA-844 between the Commonwealth of Virginia and Halifax
Corporation. (Incorporated by reference to Exhibit 10.18 to Form 10-Q for the Quarter ended
September 30, 2005.)10.17
    
    Solutions Engagement Agreement between International Business Machines Corporation and
Halifax Corporation dated as of March 18, 2002. (Incorporated by reference to Exhibit 10 to
the form 10-Q for the quarter ended December 31, 2005.10.18
    
    Second Amended and Restated Loan and Security Agreement dated as of the 29th day of June,
2005, by and between Halifax Corporation, Halifax Engineering, Inc., Microserv LLC and Halifax
AlphaNational Acquisition, Inc. and Provident Bank and related documents. (Incorporated by reference to
Exhibit 4.9 to Form 10-K for the year ended March 31, 2005.)
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##### 



10.18
    
    Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998
and November 5, 2005 held by Nancy M. Scurlock. (Incorporated by reference to Exhibit 4.10 to
Form 10-K for the year ended March 31, 2005.)10.19
    
    Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998
and November 5, 2005 held by The Arch C. Scurlock Childrens Trust, dated December 9, 2003.
(Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended March 31, 2005.)10.20
    
    Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998
and November 5, 2005 held by Nancy M. Scurlock, dated June 29, 2007. (Incorporated by
reference to Exhibit 10.4 to Form 8-K, dated July 3, 2007)10.21
    
    Amendment to 8% Promissory Notes dated October 8, 1998, October 13, 1998, November 2, 1998
and November 5, 2005 held by The Arch C. Scurlock Childrens Trust, dated June 29, 2007.
(Incorporated by reference to Exhibit 10.3 to Form 8-K, dated July 3, 2007)10.22
    
    Third Amended and Restated Loan and Security Agreement dated as of 6th day of
July, 2006 by and between Halifax Corporation, Halifax Engineering, Inc., Microserv LLC and
Halifax AlphaNational Acquisition, Inc. and Provident Bank and related documents.
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for quarter ended June 30, 2006)10.23
    
    Fourth Amended and Restated Loan and Security Agreement dated as of 29th day of
June, 2006 by and between Halifax Corporation, Halifax Engineering, Inc., Microserv LLC and
Halifax AlphaNational Acquisition, Inc. and Provident Bank and related documents.
(Incorporated by reference to Exhibit 10.1 to Form 8-K, dated July 3, 2007)21.1
    
    Subsidiaries of the registrant.23
    
    Independent Registered Public Accounting Firm Consent23.1
    
    Independent Registered Public Accounting Firm Consent23.2
    
    Independent Registered Public Accounting Firm Consent31.1
    
    Certification of Charles L. McNew, Principal Executive Officer, of Halifax Corporation dated
July 6, 2007.31.2
    
    Certification of Joseph Sciacca, Principal Financial Officer, of Halifax Corporation dated July 6, 2007.32.1
    
    Certificate of Charles L. McNew, Principal Executive Officer, of Halifax Corporation dated
July 6, 2007. pursuant to 18US.C. Section 1350.32.2
    
    Certificate of Joseph Sciacca, Principal Financial Officer, of Halifax Corporation dated
July 6, 2007.
pursuant to 18 U.S.C. Section 1350.
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##### 



SIGNATURES
  HALIFAX CORPORATIONBy
    
    /s/  Charles L. McNewCharles L. McNewPresident and Chief Executive Officer
    
    Date: 7/6/07
  Signature
    
    Title
    
    Date/s/ Charles L. McNew

Charles L. McNew
    
    President and Chief
Executive Officer and Director,
(Principal Executive Officer)
    
    7/6/07/s/ Joseph Sciacca
Joseph Sciacca
    
    Vice President, Finance, and
Chief Financial Officer,
(Principal Financial
Accounting Officer)
    
    7/6/07/s/ John H. Grover

John H. Grover
    
    Chairman of the
Board of Directors
    
    7/6/07/s/ Thomas L. Hewitt

Thomas L. Hewitt
    
    Director
    
    7/6/07/s/ John M. Toups

John M. Toups
    
    Director
    
    7/6/07/s/ Daniel R. Young

Daniel R. Young
    
    Director
    
    7/6/07/s/ Arch C. Scurlock, Jr.

Arch C. Scurlock, Jr.
    
    Director
    
    7/6/07/s/ Gerald F. Ryles

Gerald F. Ryles
    
    Director
    
    7/6/07
 57