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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-K (Mark One) (X)
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended March 31, 2004(  )
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission file Number 1-08964 Halifax Corporation  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)
    
    (zip code)
 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 registeredCommon Stock ($.24 par value)
    
    American Stock Exchange
 Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  (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. (   ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). (   )Yes (X )No The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of September 30, 2003 was $8,207,585
computed based on the closing price for that date. Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date. Class
    
    Outstanding at June 10, 2004Common Stock
$0.24 par value
    
    
    2,915,412
 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement of the registrant for the
registrants 2004 Annual Meeting of Shareholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrants fiscal year end of March 31, 2004, are
incorporated by reference into Part III.




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TABLE OF CONTENTS pagePART 1Item 1. Business
    
    
    1Item 2. Properties
    
    
    8Item 3. Legal Proceedings
    
    
    8Item 4. Submission of Matters to a Vote of Security Holders
    
    
    9Item 4A.
Executive Officers of the Registrant
    
    
    9PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    10Item 6. Selected Financial Data
    
    
    11Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operation
    
    
    11Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    25Report of Independent Registered Public Accounting Firm
    
    
    25Consolidated statements of operations for the years ended March 31, 2004, 2003 and 2002
    
    
    26Consolidated balance sheets as of March 31, 2004 and 2003
    
    
    27Consolidated
statements of cash flows for the years ended March 31, 2004, 2003 and 2002
    
    
    28Consolidated statements of changes in stockholders deficit for the years ended
March 31, 2004, 2003 and 2002
    
    
    29Notes to consolidated financial statements
    
    
    30Schedule II, Valuation and Qualifying Accounts
    
    
    47Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    48Item 9A. Controls and Procedures
    
    
    48PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    49Item 11. Executive Compensation
    
    
    49Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    49Item 13. Certain Relationships and Related Transactions
    
    
    50Item 14. Principal Accountant Fees and Services
    
    
    50PART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    51Signatures
    
    
    54




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PART I 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 events over which we have
little or no control. Forward-looking statements may be identified by words
including anticipate, believe, estimate, expect and similar
expressions. We caution readers that forward-looking statements, including
without limitation, those relating to future business prospects, revenues,
working capital, liquidity, and income, are subject to certain risks and
uncertainties that could 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 in a single group of customers, 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, loss of continued favorable banking relations, the
availability of capital to finance operations and planned growth, weakened
economic conditions, acts of terrorism, 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, we undertake no obligation to correct or update a forward-looking
statement should we later become aware that it is not likely to be achieved.
If we were to update or correct a forward-looking statement, investors and
others should not conclude that we will make additional updates or corrections
thereafter. The discussion and analysis that follows provides information that management
believes is relevant to an assessment and understanding of Halifax
Corporations consolidated results of operations. 
 Item 1. Business Halifax Corporation (Halifax or the Company, we, our, or us),
headquartered in Alexandria, Virginia provides a comprehensive range of
enterprise maintenance services and solutions to a broad base of commercial and
governmental clients throughout the United States. We provide 24x7x365
technology solutions that can meet stringent enterprise service requirements. Our primary offices include locations in:  
    
    Alexandria, Virginia,  
    
    Harrisburg, Pennsylvania,  
    
    Richmond, Virginia,  
    
    Trenton, New Jersey,  
    
    Charleston, South Carolina,  
    
    Frederick, Maryland,  
    
    Baltimore, Maryland, and  
    
    Seattle, Washington. For more than 36 years, we have been known for quality and reliability in
service delivery to our customers. We are a nation-wide high-availability multi-vendor maintenance service
provider for enterprises, including businesses, global service providers,
governmental agencies and other organizations. Our principal products are high availability hardware maintenance services,
technology deployment and integration services, and secure network program
services. 1




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Our intent is to expand our customer base of private sector clients through our
existing global service provider partners, seek new global service provider
partners, win additional contracts for secure network services in government
and intelligence markets, and enhance the technology we use to deliver
cost-effective service to our growing customer base. Our ability to
grow our revenues base will be impacted by our ability to grow revenues with
our partners and by continued competition within the industry. Our strategy is to build our position as an innovative leader in the
high-potential enterprise maintenance solutions marketplace. We have three key
business focuses:  
    
    High Availability Maintenance Services24x7, multi-vendor support for nationwide customers with demanding service level requirements  
    
    Technology Deployment and Integration ServicesNationwide deployment and integration support services  
    
    Secure Network SolutionsSecure communication network installation and support provided by cleared
personnel principally for DOD and the intelligence community  
    
    High Availability Maintenance Services We provide our clients with a comprehensive high availability enterprise
maintenance solution through a single point of contact. Our service offerings
include high availability enterprise maintenance services customized to
specific customer needs for 7x24x365 day (7 days per week, 24 hours per day,
365 days per year) support on a nationwide basis, life cycle management of
client desktop environment and equipment, moves and changes, and providing
personnel with security clearances to support certain governmental agencies.
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 customized solution that meets all of our customers
enterprise maintenance requirements while reducing their costs. We provide our maintenance services to over 25,000 locations and more than
350,000 units of equipment through a wide variety of custom designed programs.
A 7x24x365 dispatch center, a state-of-the-art depot repair facility, inventory
warehouses and a technical support staff supports the enterprise maintenance
clients. Halifax is an authorized service provider for many major
manufacturers, including IBM, Compaq, Dell, Gateway, Hewlett Packard and
Lexmark. Halifax works closely with each client to develop and implement the service
program needed to achieve its business objectives. We draw from a wide range
of services expertise and established corporate technology base to deliver
customized, results-driven enterprise maintenance solutions.  
    
    Technology Deployment and Integration Services We provide technology deployment and integration services through several of
our alliance partners and certain direct customers. At present, our principal
service offering is seat management, which 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 associated services
from the client to us. 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. 2




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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 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
    
    Create a single source of accountability for all PC desktop hardware, software, and services  
    
    Secure Network Solutions We serve the needs of various sectors of the Federal government related to
communication services in voice, data, and video primarily for secure
environments. We provide installation, engineering, maintenance and logistics
support for our clients projects. Our principal customers include the U.S.
Department of Defense and U.S. Army and the intelligence community. Orders are
typically placed with us using multi-task support contracts. We also provide
these services on a subcontract basis to several system integrators for the
federal marketplace. Our highly trained communications professionals are experienced in the
installation of local area networks and wide area networks. Most of these
communications professionals have current/active security clearances with major
federal agencies. We believe this advantage gives us the ability to install
secure or non-secure networks in sensitive areas of the government without the
standard delays other companies may incur. Risk Factors Halifax serves its customer base by providing high availability enterprise
maintenance services, consulting, integration, networking, and installation
services. This industry has been characterized by rapid technological advances
that have resulted in frequent introductions 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 loss of a major customer, the ability to
recruit, train and retain personnel integral to 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
revenues growth necessary to provide profitable operating margins in various
operations. Operating results may also be negatively affected due to costs
associated with starting a major contract. Many costs associated with starting
a new contract, such as hiring additional personnel, training, travel and
logistics are expensed as incurred and may also significantly impact cash flow
during the startup period and my cause fluctuations in quarterly results from
period to period. Risks Related to Revenues and Expenses Our quarterly and annual revenues and operating results may vary significantly
in the future due to a number of factors, which could cause our stock price to
fluctuate. Factors that may affect our quarterly and annual results include
but are not limited to:  
    
    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 and components used to support our enterprise maintenance solutions; and  
    
    loss of material contracts. Unfavorable economic conditions have adversely affected our operating results
and led to a decline in our growth rates. Although general operation
conditions appear to be improving, we are unable to predict when spending for
our services will improve, if at all. 3




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Many of our services are sold as part of a larger technology outsourcing
solution. In the past, we have experienced historical growth in our business
as we have assumed responsibility for maintaining our customers IT
infrastructure. The demand for these services has been adversely affected by
the effects of a weakened economy in recent periods with many businesses
focusing on cost containment strategies and eliminating or curtailing
maintenance. We depend on recurring long-term contracts for services from a limited number
of large original equipment manufacturers or OEMs, partners and end users. Our
agreements with our OEMs are in the form of master service agreements and are
typically cancelable, non-exclusive and have no minimum purchase requirements. Risks Related to Reliance on a Small Group of Large Customers We have a number of significant customers. Our largest customer accounted for
14%, 15% and 16% of the our revenues for the fiscal years ended March 31, 2004,
2003 and 2002, respectively. Through the aggregation of multiple contracts,
our largest customer during fiscal year 2004 was IBM Global Services. Our five
largest customers collectively accounted for 56%, 57% and 42% of revenues for
the fiscal years ended March 31, 2004, 2003 and 2002, respectively. We
anticipate that these customer concentrations will continue for the foreseeable
future, although the companies which constitute our largest customers may
change. Revenues from services rendered to the United States government and
the relative percentages of such revenues to revenues from continuing
operations for the fiscal years ended March 31, 2004, 2003 and 2002 were $ 11.0
million (22%), $12.1 million (24%), and $8.5 million (17%), respectively. The
loss of any of these customers may cause results of operations to vary
materially from those anticipated. Risks Related to Growth/Acquisition Strategy As part of our strategy, we expect to continue to pursue opportunities to buy
other businesses that would complement our current service offerings, expand
the breadth of our markets, enhance our technical capabilities, or that may
otherwise offer growth opportunities. In the event of any future acquisitions
we could:  
    
    issue stock or assume stock option plans that would dilute our current stockholders percentage ownership;  
    
    use cash, which may result in a reduction of our liquidity;  
    
    incur debt; or  
    
    assume liabilities. These acquisitions can also involve numerous risks, including:  
    
    problems combining the purchased operations, technologies and personnel;  
    
    unanticipated costs;  
    
    diversion of managements attention from our core business;  
    
    adverse effect on existing business;  
    
    potential loss of key employees;  
    
    record goodwill and non-amortizable intangible assets that may be subject to annual valuations to determine
possible impairment;  
    
    incur amortization expense related to certain intangible assets;  
    
    incur large and immediate write-offs; and  
    
    become subject to litigation. Mergers and acquisitions of companies in our industry and related industries
are inherently risky, and no assurance can be given that our acquisition
strategy will be successful and will not materially adversely affect our
business, operating results, or financial condition. Failure to manage and
successfully integrate acquisitions we make could harm our business and
operating results in a material way. Even when an acquired company has already
developed and marketed products or services, there can be no assurance that
product enhancements will be made in a timely fashion or that preacquisition
due diligence will have identified all possible issues that might arise with
respect to such products or services. 4




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Risk
Related to Loss of Contracts As discussed above, the loss of contracts may have a material effect on
revenues, cost of operations, earnings and cash flow. Factors beyond our
control, including political, state budget issues, price and other factors may
have an impact on our ability to successfully retain contracts. In spite of providing excellent performance over the last ten years, our
contract with the Commonwealth of Pennsylvania was subjected to a competitive
bid which we did not win. Our current contract, valued at approximately $4.0
million annually, will expire on June 30, 2004. We have undertaken actions to
eliminate the impact on earnings resulting from the loss of this contract. Risk Related to Capital Resources We believe our cash flow from operations and borrowings available under our
revolving credit agreement are sufficient to finance our operations. However,
the loss of a significant contract, adverse economic conditions or other
adverse circumstances may cause our capital resources to change dramatically.
Operating results may also be negatively affected due to costs associated with
starting a major contract. Many costs associated with starting a new contract,
such as hiring additional personnel, training, travel and logistics are
expensed as incurred and may also significantly impact cash flow during the
startup period. Although we believe our relationship with our bank is
satisfactory, there are no assurances that additional funds, if needed, to help
fund start-up costs related to a major new contract will be forthcoming. Our
plan for growth includes intensified marketing efforts, an expanding national
sales program, strategic alliances and 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. Risk Related to Competition We have numerous competitors in our marketplace. Some competitors are large
diversified firms having substantially greater financial resources and a larger
technical staff than ours, including, in some cases, the manufacturers of the
systems being supported and others are small companies within a regional market
or market niche. Customer in-house capabilities can also create competition in
that they perform certain services which might otherwise be performed by us.
It is not possible to predict the extent of competition which our present or
future activities will encounter because of changing competitive conditions,
customer requirements, technological developments and other
factors. Our operating results may be adversely affected because of pricing
pressures brought about by competition, proprietary technology that we are
unable to support, or other factors beyond our control. Risk Related to Employee and Management Retention Our most important resource is our employees. We believe our employee relations
are excellent. Although many of our personnel are highly specialized, we have
not experienced material difficulties obtaining the personnel required to
perform under our contracts and generally do not bid on contracts where
difficulty may be encountered in providing these necessary services. However,
due to the increased activity for various Homeland Security efforts, we may
experience a shortage of personnel with the required security clearances in the
future which may negatively impact our revenues. We have employees of a labor
union on one of our government contracts. As of March 31, 2004, we believe our
relations with the union are excellent. Management believes that the future
growth and success will depend, in part, upon our continued ability to retain
and attract highly qualified personnel. Recent Developments On May 31, 2000, we sold our operational outsourcing division which was
non-core to our long-term growth strategy. The operational outsourcing
division provided complete facility management and maintenance outsourcing
capabilities to assist institutional, government and commercial clients in
outsourcing facility operations. On August 29, 2003, we completed the acquisition of Microserv, Inc., a hardware
maintenance company located in Seattle, Washington. The acquisition expanded
our geographic base and strengthened our nationwide service delivery
capabilities, as well as added a number of prestigious customers. 5




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We were incorporated in 1967 under the laws of the Commonwealth of Virginia.
We maintain our principal executive offices at Halifax Office Park, 5250
Cherokee Avenue, Alexandria, Virginia 22312. Our telephone number is (703)
750-2202, and our website is www.hxcorp.com. We make available free of charge
on www.hxcorp.com our annual report on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The information on the website listed above is not and
should not be considered part of this Form 10-K and is not incorporated by
reference in this document. This website is and is only intended to be an
inactive textual reference. The following table reflects the distribution of revenues by type of customer
(see Managements Discussion and Analysis of Financial Condition and Results
of Operations for further discussion): Years Ended March 31,(Amounts in thousands)
    
    2004
    
    
    
    
    
    2003
    
    
    
    
    
    2002State/Local
    
    
    16,626
    
    
    
    34
    %
    
    $
    17,326
    
    
    
    34
    %
    
    $
    22,728
    
    
    
    46
    %Commercial
    
    
    21,812
    
    
    
    44
    %
    
    
    20,965
    
    
    
    42
    %
    
    
    18,082
    
    
    
    37
    %Federal Government
    
    
    11,099
    
    
    
    22
    %
    
    
    12,127
    
    
    
    24
    %
    
    
    8,541
    
    
    
    17
    %Total
    
    $
    49,537
    
    
    
    100
    %
    
    $
    50,418
    
    
    
    100
    %
    
    $
    49,351
    
    
    
    100
    %
 Commercial and State/Municipal Contracts We continue to work towards expanding our commercial and state/municipal
government business. Commercial revenues are being pursued by targeting
non-federal and IT outsourcing opportunities. State/municipal government
contracts may increase as a result of privatization opportunities. Federal Government Contracts A portion of our revenues have historically been derived from contracts and
subcontracts with the Federal government. In fiscal years 2004, 2003 and 2002,
we received revenues from 10, 10 and 15 government contracts, respectively,
which accounted for approximately 22%, 24% and 17%, respectively, of our total
revenues. 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. Government contracts are
subject to a bidding process, which is subject to competitive market pressures
and time delays, and are not necessarily awarded on the basis of the lowest
price. We perform services under time-and-material, fixed unit-price contracts,
subcontracts, indefinite delivery/indefinite quantity (IDIQ), and general
services administration (GSA) schedule contracts. When we are selected under a
GSA schedule, to provide products or services, revenues is recognized upon
delivery of the product or services. For time-and-material contracts and IDIQ
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 unit-price contracts, the government pays us an agreed-upon price per
unit for services rendered. Under fixed unit-price contracts and
time-and-material contracts, we bear any risk of increased or unexpected costs
that may reduce its profits or cause us 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. A portion of our sales to the government are made
indirectly as a subcontractor to another government contractor, referred to as
the prime contractor, who has the direct 6




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relationship with the government. We also team with prime contractors to bid
on competitive government opportunities for which we hope to serve as a
subcontractor. If prime contractors lose existing business on which we serve
as a subcontractor, or fail to win the competitive bids on which we team with
them, our government business would be hurt. 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 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 many other matters. We have not
experienced any material difficulties 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 business ethics and our associated Company
procedures, and a hotline 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 or 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
revenues reimbursement. As a result of increased federal funding for various Homeland Security
efforts, we expect to increase government contracts as a percentage of revenues
in the future. Type of Contracts For the three years ended March 31, 2004, 2003 and 2002, 90%, 97%, and 97%
respectively, of our revenues received were from fixed unit-price revenues
contracts. Accounts Receivable Trade accounts receivable at March 31, 2004 and 2003 represented 35% and 47% of
total assets, respectively. Accounts receivable are comprised of billed and
unbilled receivables. Billed receivables represent invoices presented to the
customer. Unbilled receivables represent revenues earned with future payments
due from the customer for which invoices will not be presented until a later
period. Backlog Our funded backlog for services as of March 31, 2004, 2003 and 2002 was $47.9
million, $50.6 million and $73.0 million, respectively. Of the $47.9 million
of backlog at March 31, 2004, approximately 50% is expected to 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 Our direct sales and marketing organization is focused on delivering additional
services and solutions to our targeted markets and current client base. Our
marketing efforts have focused on increasing brand awareness, enhancing bid and
proposal capabilities, producing targeted sales aids, identifying high
potential sales leads, and engaging in other public relations activities. 7




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Halifax delivers services and solutions through a variety of distribution
channels. We have developed strong partnership alliances with certain global
services providers, OEMs and system integrators. We have also developed
several direct relationships with commercial federal and state government
customers. Competition We have numerous competitors in our marketplace. Some competitors are large
diversified firms having substantially greater financial resources and a larger
technical staff than ours, including, in some cases, the manufacturers of the
systems being supported and others are small companies within a regional market
or market niche. Customer in-house capabilities can also create competition in
that they perform certain services which might otherwise be performed by us.
It is not possible to predict the extent of competition which our present or
future activities 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, pricing, responsiveness
and the ability to perform within estimated time and expense guidelines. We believe we are most competitive where the customer is geographically
dispersed throughout the U.S. and demands high service attainment levels. Personnel On March 31, 2004, we had 438 employees, of whom 8 were part-time and 3 were
temporary employees. Because of the nature of our services, many employees are
professional or technical personnel with high levels of training and skills,
including engineers, skilled technicians and mechanics. We believe our
employee relations are excellent. Although many of our personnel are highly
specialized, we have not experienced material difficulties obtaining the
personnel required to perform under our contracts and generally do not bid on
contracts where difficulty may be encountered in providing these necessary
services. However, due to the increased activity for various Homeland Security
efforts, we may experience a shortage of personnel with the required security
clearances in the future which may negatively impact our revenues. On one of
our government contracts our employees are members of a union. As of March 31,
2004, we believe our relations with the union are excellent. Management
believes that the future growth and success will depend, in part, upon our
continued ability to retain and attract highly qualified personnel. 
 Item 2.Properties We have obligations under 17 short-term facility leases associated with our
operations. The total rent expense under existing leases were $782 thousand,
$632 thousand and $677 thousand for the years ended March 31, 2004, 2003 and
2002, respectively. See Note 12 to the Consolidated Financial Statements. Our
executive offices are located in Alexandria, VA; with additional locations in
Harrisburg, PA; Richmond, VA; Trenton, NJ; Charleston, SC; Frederick, MD;
Baltimore, MD; and Seattle, WA. 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 our headquarters building. 
 Item 3.Legal Proceedings On January 9, 2001, the Securities and Exchange Commission (SEC) issued a
formal order directing a private investigation of the Company and unnamed
individuals concerning trading activity in our 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 us that the inquiry was confidential and should not be
construed as an indication by the SEC 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, we
were advised that the investigation of our undertaken by the Staff of the SEC
was terminated and no enforcement action was recommended by the SEC. 8




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##### 



There are no material pending legal proceedings to which we are a party. From
time to time, we are engaged in ordinary routine litigation incidental to our
business to which Halifax is a party. While we cannot predict the
ultimate outcome of these routine
litigation matters, it is managements opinion that the resolution of these
matters should not have a material effect on our financial position or results
of operations. 
 Item 4.Submission of Matters to a Vote of Security Holders None 
 Item 4-A.Executive Officers of the Registrant The key executive officers of the Company are: Charles L. McNew, age fifty-two is our President and Chief Executive Officer.
Mr. McNew has held this position since May 2000. Mr. McNew became our director
in 2000. He served as our acting President and Chief Executive Officer from
April 2000 to May 2000 and prior to that was our Executive Vice president and
Chief Financial Officer from July 1999 until April 2000. Prior to joining the
Company, from July 1994 through July 1999, Mr. McNew was Chief Financial
Officer and later Chief Operating Officer of NumereX Corporation, a public
Company which develops and markets communications and information products and
services. Joseph Sciacca, age fifty-one, is our Vice President of Finance and Chief
Financial Officer. Mr. Sciacca has been 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. Hugh Foley, age fifty-two, is our Vice President of Operations. As Vice
President of Operations, a position held since April 2002, Mr. Foley manages
the service delivery operations for Halifaxs seat management program, staff
augmentation services, as well as IT professional services and product
offerings. Mr. Foley joined Halifax in November 1998, initially to manage and
implement the Virginia Department of Transportation / Virginia Retirement
Systems seat management contract. Prior to joining Halifax, Mr. Foley spent 16
years in the computer service industry in various sales, operations and
financial management positions with Sorbus, Bell Atlantic Business Systems, and
DecisionOne. James L. Sherwood, IV, age sixty-two, is our Vice President of Contracts and
Administration. Mr. Sherwood has held his current position since 1986. He
previously served as Vice President of our Facilities Services Division. He has
been employed by our Company and its subsidiaries since 1978. Jonathan L. Scott, age forty-six, is our Senior Vice President of Sales and
Marketing. Mr. Scott has held this position since the acquisition of Microserv
in August 2003 for when he served as President and Chief Executive Officer from
January 2001 to August 2003 and Executive Vice President from November 1998 to
December 2000. Prior to this, Mr. Scott was a principal of New Venture
Associates, a firm providing strategic advisory services to early stage venture
funded technology companies, which he founded, from July 1996 to October 1998.
Prior to that he served in executive and sales and marketing management
positions in the software industry. 9




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##### 



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 10, 2004, there were approximately 213 holders of record of our common
stock as reported by our companys transfer agent and approximately 529
beneficial holders. 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 2004
    
    Fiscal Year 2003Fiscal Quarter
    
    High
    
    Low
    
    High
    
    LowApril - June
    
    $
    4.49
    
    
    
    2.91
    
    
    $
    4.30
    
    
    
    3.45July - Sept.
    
    
    6.25
    
    
    
    3.60
    
    
    
    5.58
    
    
    
    3.50Oct. - Dec.
    
    
    5.80
    
    
    
    4.76
    
    
    
    6.50
    
    
    
    4.99Jan. - March
    
    
    5.20
    
    
    
    3.95
    
    
    
    6.20
    
    
    
    2.75
 On June 10, 2004, the closing price of our common stock on the American Stock
Exchange was $4.45. We did not declare a cash dividend in either fiscal year 2004 or 2003, and
there is no assurance we will do so in future periods. Our revolving credit
loan agreement prohibits the payment of dividends and limits payment of
principal or interest on our subordinated debt without a waiver from the bank.
As a Virginia corporation, we may not declare and pay dividends on capital
stock, if after giving effect to a dividend our total assets would be less than
the sum of our total liabilities or we would not be able to pay our debts when
due in the usual course of business. We currently expect to retain our future
earnings, for use in the operation and expansion of our business and do not
anticipate paying any cash dividend in the future. On July 23, 2003, in a private placement we issued 291,971 shares of common
stock at $4.11 per share and warrants to purchase 58,394 additional shares of
common stock at an exercise price of $4.93 per share. The securities issued
were not been registered under the Securities Act of 1933 or any applicable
state securities laws and were issued pursuant to an exemption from registration
to Rule 506 of Regulation D of the rules and regulations of the SEC. On August 29, 2003, in conjunction with the acquisition of Microserv, Inc. we
issued 422,078 shares of restricted common stock valued at $4.23 per share.
These shares were discounted approximately 14% from the market price of $4.92
due to certain trading restrictions. The securities issued were not registered
under the Securities Act of 1933 or any applicable state securities
laws and
were issued pursuant to an exemption from registration to Rule 506 of
Regulation D of the rules and regulations of the SEC. On August 29, 2003, we issued warrants to
purchase 50,000 shares of common stock at an exercise price of $3.19 per share
to our investment advisors. The warrants were issued pursuant to an exemption
from the registration pursuant to Rule 506 of Regulation D of the
rules and regulations of the SEC. During fiscal year 2004, we extended options to purchase 15,000 shares of
common stock from the 1994 Key Employee Stock Options to two former employees
as non-qualified options. The exercise price of the options was $2.60 per
share for 5,000 options to purchase common stock and $7.56 per share for 10,000
options to purchase common stock. The securities issued were not registered
under the Securities Act of 1933 or any applicable state securities
laws. See Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters for disclosure regarding our equity compensation
plans. 10




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##### 



Item 6.Selected Financial Data The following table includes selected financial data adjusted for discontinued
operations in 2001 and 2000 of Halifax. Our Companys selected consolidated
financial information set forth below 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. Years Ended March 31,(Amounts in thousands, except share data)
    
    2004(1)
    
    2003
    
    2002
    
    2001
    
    2000Revenues  continuing operations
    
    $
    49,537
    
    
    $
    50,418
    
    
    $
    49,351
    
    
    $
    51,720
    
    
    $
    53,530Income (loss) from
continuing operations
    
    
    4,228
    
    
    
    648
    
    
    
    302
    
    
    
    (840
    )
    
    
    1,385Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244
    
    
    
    928Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694
    
    
    
    Net income (loss)
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302
    
    
    $
    1,098
    
    
    $
    2,313Income (loss) per common share  basiccontinuing operations
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14
    
    
    $
    (.42
    )
    
    $
    .70Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .12
    
    
    
    .47Gain on sale on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .84
    
    
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14
    
    
    $
    .54
    
    
    $
    1.17Income (loss) per common share  dilutedContinuing operations
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14
    
    
    $
    (.42
    )
    
    $
    .69Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .12
    
    
    
    .46Gain on sale on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .84
    
    
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14
    
    
    $
    .54
    
    
    $
    1.15Weighted average number of
shares outstandingBasic
    
    
    2,638,345
    
    
    
    2,175,781
    
    
    
    2,100,321
    
    
    
    2,022,811
    
    
    
    1,984,014Diluted
    
    
    2,787,656
    
    
    
    2,212,360
    
    
    
    2,106,478
    
    
    
    2,022,811
    
    
    
    1,999,811Dividends per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Assets
    
    $
    26,491
    
    
    $
    17,981
    
    
    $
    20,845
    
    
    $
    18,827
    
    
    $
    27,808Long-term obligations
    
    $
    9,983
    
    
    $
    10,138
    
    
    $
    11,295
    
    
    $
    6,886
    
    
    $
    12,793
  (1)
    
    See Note 11 to the consolidated financial statements for discussion on
deferred tax benefit. 
 Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview  Halifax is a nationwide high availability multi-vendor
enterprise maintenance service provider for enterprises, including
businesses, global service providers, governmental agencies, and other
organizations. Halifax has
undertaken significant changes to its business in recent years. After selling
the operational outsourcing division in 2001, we began the shift of our
business to a predominantly services model. In August 2003, we completed the
acquisition of Microserv, Inc, which significantly expanded our geographic
base, strengthened our nationwide service delivery capabilities, bolstered
management depth, and added several prestigious customers.  We offer a growing list of services to businesses, and governmental agencies.
Our services are customized to meet the customers needs ranging from 7x24x365
service, providing personnel with required security clearances for certain
governmental programs, project management services, depot repair and roll out
services. We believe the flexibility offered to our customers enables us to
tailor a solution to obtain maximum efficiencies within their budgeting
constraints. 11




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##### 



In July 2003, we completed a private placement in the amount of
$1.2 million, which strengthened our financial position. In August 2003, we completed the acquisition of Microserv, Inc, which
significantly expanded our geographic base, strengthened our nationwide service
delivery capabilities, bolstered management depth, and added several
prestigious customers. At March 31, 2004, we recorded a deferred tax asset of $3.9 million. Based
upon our historical taxable income over the past three years and estimates of
future profitability, management concluded that future income will more than
likely be sufficient to realize our deferred tax assets. The recording of this
tax benefit had a significant positive effect on the results of operations and
balance sheet. The industry in which we operate has experienced unfavorable economic
conditions and competitive challenges. Our 2004 operating results reflect the
impact of this challenging environment. We continue to see significant price
competition and customer demand for higher service attainment levels. In
addition, we continue to see significant pressure in the market for state and
local government contracts as a result of budget issues, political pressure and
other factors beyond our control. As experienced with the recent loss of our
contract with the Commonwealth of Pennsylvania, longevity and quality of
service may have little influence in the decision making process. Services revenues included monthly recurring fixed unit-price contracts as well
as time-and-material contracts. Amounts billed in advance of the services
period are recorded as unearned revenues and recognized when earned. The revenues and related expenses associated with product sales are recognized
when the products are delivered and accepted by the customer. Revenues related to the fixed-price service agreements are recognized ratably
over the lives of the agreements. Invoices billed in advance are recognized as
revenues when earned. Amounts billed in advance of the services period are
recorded as unearned revenues and recognized when earned. Losses on contracts,
if any, are recognized in the period in which the losses become determinable. Our future operating results may be affected by a number of factors including
uncertainties relative to national economic conditions and terrorism,
especially as they affect interest rates, industry factors and our ability to
successfully increase our sales of services and effectively manage expenses. We plan 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. Due to the intense competition in our industry we must continue to expand our
service offerings and persist in cost reduction efforts. We also have to
leverage technology to gain efficiencies in our back office. We have also
concentrated on, and will continue to concentrate on cost reduction,
particularly within costs of services, selling, marketing and general and
administrative expenses. For fiscal 2005, our priorities include:  
    
    expanding our customer base of private sector clients through our existing global service provider partners;  
    
    seeking new global service provider partners;  
    
    winning additional contracts for secure network services in government and intelligence matters; and  
    
    enhancing the technology we use to deliver cost-effective services to our growing customer base. 12




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##### 



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, 2004, 2003 and 2002
and financial condition as of March 31, 2004 and 2003. We operate as a single
business segment, whereby we provide high availability maintenance services,
technology deployment and integration, and secure network solutions for
commercial and government clients. Years Ended March 31,(Amounts
in thousands, except share data)Results of Operations
    
    2004
    
    2003
    
    Change
    
    %
    
    2003
    
    2002
    
    Change
    
    %Revenues
    
    $
    49,537
    
    
    $
    50,418
    
    
    $
    (881
    )
    
    
    (2
    %)
    
    $
    50,418
    
    
    $
    49,351
    
    
    $
    1,067
    
    
    
    2
    %Cost of services
    
    
    43,609
    
    
    
    44,200
    
    
    
    (591
    )
    
    
    (1
    %)
    
    
    44,200
    
    
    
    43,527
    
    
    
    673
    
    
    
    2
    %Percent of revenues
    
    
    88
    %
    
    
    88
    %
    
    
    
    
    
    
    
    
    
    
    88
    %
    
    
    88
    %Gross Margin
    
    
    5,928
    
    
    
    6,218
    
    
    
    (290
    )
    
    
    (5
    %)
    
    
    6,218
    
    
    
    5,824
    
    
    
    394
    
    
    
    7
    %Percent of revenues
    
    
    12
    %
    
    
    12
    %
    
    
    
    
    
    
    
    
    
    
    12
    %
    
    
    12
    %Selling
    
    
    1,254
    
    
    
    1,102
    
    
    
    152
    
    
    
    14
    %
    
    
    1,102
    
    
    
    999
    
    
    
    103
    
    
    
    10
    %Percent of revenues
    
    
    3
    %
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    2
    %
    
    
    2
    %Marketing
    
    
    534
    
    
    
    652
    
    
    
    (118
    )
    
    
    (18
    %)
    
    
    652
    
    
    
    619
    
    
    
    33
    
    
    
    5
    %Percent of revenues
    
    
    1
    %
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    1
    %General and administrative
    
    
    3,086
    
    
    
    3,127
    
    
    
    (41
    )
    
    
    (1
    %)
    
    
    3,127
    
    
    
    3,219
    
    
    
    (92
    )
    
    
    (3
    %)Percent of revenues
    
    
    6
    %
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    6
    %
    
    
    7
    %Total selling, marketing and general
administrative
    
    
    4,874
    
    
    
    4,881
    
    
    
    (7
    )
    
    
    N/M
    
    
    
    4,881
    
    
    
    4,837
    
    
    
    44
    
    
    
    1
    %Percent of Revenues
    
    
    10
    %
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    10
    %
    
    
    10
    %Operating income
    
    
    1,054
    
    
    
    1,337
    
    
    
    (283
    )
    
    
    (21
    %)
    
    
    1,337
    
    
    
    987
    
    
    
    350
    
    
    
    35
    %Percent of revenues
    
    
    2
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    2
    %Interest expense
    
    
    591
    
    
    
    649
    
    
    
    (58
    )
    
    
    (9
    %)
    
    
    649
    
    
    
    634
    
    
    
    15
    
    
    
    2
    %Other income
    
    
    15
    
    
    
    20
    
    
    
    (5
    )
    
    
    N/M
    
    
    
    20
    
    
    
    9
    
    
    
    11
    
    
    
    N/MIncome before taxes
    
    
    478
    
    
    
    708
    
    
    
    (230
    )
    
    
    (32
    %)
    
    
    708
    
    
    
    362
    
    
    
    346
    
    
    
    96
    %Income tax (benefit) expense
    
    
    (3,750
    )
    
    
    60
    
    
    
    3,810
    
    
    
    N/M
    
    
    
    60
    
    
    
    60
    
    
    
    
    
    
    
    N/MNet Income
    
    
    4,228
    
    
    
    648
    
    
    $
    3,580
    
    
    
    552
    %
    
    
    648
    
    
    
    302
    
    
    $
    346
    
    
    
    115
    %Earnings per share  basic
    
    $
    1.60
    
    
    $
    .30
    
    
    
    
    
    
    
    
    
    
    $
    .30
    
    
    $
    .14Earnings per share  diluted
    
    $
    1.54
    
    
    $
    .30
    
    
    
    
    
    
    
    
    
    
    $
    .30
    
    
    $
    .14
 N/M = not meaningful 13




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##### 



Revenues Revenues are generated from the sale of high availability enterprise
maintenance services, technology deployment and secure network services
(consisting of professional services, seat management and deployment services,
and product sales and secure network services). Services revenues include
monthly recurring fixed unit-price contracts as well as time-and-material
contracts. Amounts billed in advance of the services period are recorded as
unearned revenues and recognized when earned. The revenues and related
expenses associated with product sales are recognized when the products are
delivered and accepted by the customer. March 31,(Amounts in thousands)
    
    2004
    
    %
    
    2003
    
    %
    
    2002
    
    %Revenues:Services
    
    $
    43,990
    
    
    
    88.8
    %
    
    $
    45,394
    
    
    
    90.0
    %
    
    $
    40,013
    
    
    
    81.1
    %Product held for resale
    
    
    5,547
    
    
    
    11.2
    %
    
    
    5,024
    
    
    
    10.0
    %
    
    
    9,338
    
    
    
    18.9
    %Total revenues
    
    $
    49,537
    
    
    
    100.0
    %
    
    $
    50,418
    
    
    
    100.0
    %
    
    $
    49,351
    
    
    
    100.0
    %
 For fiscal year 2004 revenues decreased 2%, or $881 thousand, compared to
fiscal year 2003. During fiscal year 2004, we experienced an increase in our
high availability maintenance services and technology deployment activities,
however this was offset by a decrease in our secure network offering. The
decline in secure network services was a result of non-recurring services in
2003 that did not materialize in 2004. Product held for resale also increased
by $500 thousand during fiscal year 2004 to $5.5 million compared to $5.0
million in 2003. The Microserv Acquisition completed in August 2003 added several marquee
accounts to our enterprise maintenance services. However, these gains were
negatively affected by pricing concessions and certain lost contracts. For fiscal year 2003 revenues increased 2%, or $1.0 million, to $50.4 million
compared to 2002. The change in revenues was largely the result of a change in
the sales mix of our business from a value added reseller to a services
company. During fiscal year 2003 services revenues increased $5.3 million, or
13%, compared with fiscal 2002. A significant portion of this increase in
services revenues for 2003 was attributable to a $1.9 million non-recurring
contract. This was offset by decline in sales of product held for resale which
was $5.0 million in fiscal 2003 compared to $9.3 million in 2002, a 46%
decrease. The decrease in product sales was principally the result of
managements intentional de-emphasis of this low margin line of business. In fiscal year 2005, we expect our services revenues to increase while our
product sales revenues will decline due to on-going price competition. We
expect the product trends to continue downward with many of the new products
being offered at lower prices and with significantly lower margins. The
components of revenues for fiscal year 2004, 2003 and 2002 were: Cost of Services Included within cost of services are direct costs, including fringe benefits,
product and part costs, and other costs. A large part of our service costs are support costs and expenses that include
direct labor and infrastructure costs to support our service offerings. As we
continue to expand our source offerings, we anticipate that the direct costs to
support these service offerings will continue to increase in fiscal year 2005. On long-term fixed unit-price contracts part costs vary depending upon the call
volume received from customers during the period. Many of these costs are
volume driven and as volumes increase, these costs as a percentage of revenues
increase, generating a negative impact to profit margins. 14




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##### 



The variable component of these costs is product and part cost. Product is
broken into two categories: parts and equipment to support our service base
and product held for resale. Part cost is highly variable and is dependent on
several factors. On long-term fixed unit-price contracts, parts and
peripherals are consumed on service calls. For installation services and seat
management services, product may consist of hardware, software, cabling and
other materials that are components of the service performed. Product held for
resale consists of hardware and software. Cost of services consists of the following components: March 31,(Amounts in thousands)
    
    2004
    
    2003
    
    2002Services delivery and support
    
    $
    33,989
    
    
    $
    36,198
    
    
    $
    31,552Product held for resale
    
    
    5,151
    
    
    
    4,445
    
    
    
    8,022Total direct costs
    
    
    39,140
    
    
    
    40,643
    
    
    
    39,574Indirect costs
    
    
    4,469
    
    
    
    3,557
    
    
    
    3,953Cost of services
    
    $
    43,609
    
    
    $
    44,200
    
    
    $
    43,527
 During fiscal year 2004 our cost of services delivery and support decreased by
$2.2 million from $36.1 million during 2003 to $33.9 million. The decrease in
the cost of services delivery and support was primarily related to reduced
costs associated with the non-recurring revenues in our secured network
services in 2003. Additional cost reductions were achieved through the
integration of Microserv and continued cost containment efforts. During fiscal year 2003, the services delivery and support component of cost of
services increased $4.6 million, or 13%, during fiscal year 2003 compared to
2002. The increase in service costs was attributable to the expansion of our
services to seven days a week, 24 hours a day and costs incurred for a one-time
non-recurring contract. During fiscal year 2004, we continued to see erosion in gross margins on
product held for resale due to the competitively priced product market. The
cost of product held for resale increased $705 thousand to $5.1 million due to
increased revenue compared to fiscal year 2003 and the resulting gross margin
on product held for resale was $397 thousand, or 5% in fiscal year 2004
compared to the cost of product held for resale of $4.5 million and the
resulting gross margin on product held for resale of 11% in fiscal year 2003. In fiscal year 2003, there was a decrease in the cost of product held for
resale of 45% compared to 2002, primarily as a result of decreased product
sales. Total direct cost during fiscal year 2004 when compared to fiscal year 2003
decreased $1.5 million, or 3.7%, from 2003 to 2004 as result of the decrease in
services delivery and support offset by the increases in costs related to
product held for resale. Total direct cost for fiscal year ended 2003
increased $1.0 million from fiscal year 2002 due to increases in service
delivery and support costs as we expanded our service delivery capabilities
offset by reduced costs of product held for resale due to reduced hardware
revenues. Indirect costs increased $900 thousand from $3.5 million in fiscal year 2003 to
$4.4 million for 2004, a 26% increase.
The increase in indirect costs was attributable to several factors: the
integration of Microserv with associated payroll and occupancy costs, and
increases in travel, telecommunications and business insurance. In addition,
we experienced a significant increase in recruiting fees as we increased
personnel with required security clearances by 400% in our secured networks
group. During the fiscal year 2003, indirect cost decreased 10%, or $396 thousand,
compared to March 31, 2002. The decrease was largely due to overall cost
containment, including reducing occupancy cost, consolidation of administrative
functions, reduced staffing and higher utilization of our workforce. 15




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Gross Margin Our fiscal year 2004 gross
margin reflected the economic and competitive
challenges we faced. As a percent of revenues, the gross margin percent was 12%
for fiscal years 2004, 2003 and 2002, respectively. However, gross margins
decreased $290 thousand, or 5%, from fiscal year 2004 as compared to 2003,
primarily as a result of reduced revenues discussed above. As a result of the favorable changes in the mix of our business and continued
emphasis on higher margin long-term services contracts, we experienced
improvement in our gross margin of $394 thousand, or 7%, in fiscal year 2003
from $5.8 million in fiscal year 2002. We must continue to grow, persist in our cost reduction efforts and deploy
technology to gain operating efficiencies in order to remain competitive. Selling Expenses Selling expenses consist primarily of salaries, commissions, travel costs and
related expenses for personnel engaged in sales. For fiscal 2004, selling expense increased $152 thousand to $1.3 million from
$1.1 million in the prior year, which was an increase of 14%. During fiscal
year 2003, selling expense increased 10% or $103 thousand when compared to
2002. The primary reasons for the increase in 2004 and 2003 in selling expense
were commissions related to new business and increased travel. Marketing Expense We created the marketing group in fiscal year 2002 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
channel, which has resulted in growth in higher margin service revenues. Marketing expense decreased from $652 thousand in fiscal year 2004 to $534
thousand in 2003, an 18% decrease, as a result of various cost containment
actions and curtailment of marketing programs. In fiscal year 2003, marketing
expense increased $33 thousand, or 5%, from $619 thousand in 2002 to $652
thousand in 2003. This increase in 2003 was attributable to increased
promotional efforts and traveling during 2003. General and Administrative General and administrative expenses consist of primarily salaries and related
expenses for corporate executives, finance, human resources, and investor
relations, as well as professional fees, corporate legal expenses, other
corporate expenses, information technology, and facilities expense. General and administrative expense decreased $41 thousand, or 1%, in fiscal
year 2004 compared to 2003. This decrease was a result of cost control
efforts, including employment actions such as postponing salary increases, and
in certain cases, reducing wage rates for administrative staff. During fiscal year 2003, general and administrative expense decreased $92
thousand, or 3%, compared to 2002. The decrease in general and administrative
expense from fiscal year 2002 was attributable to decreased professional fees,
consulting services, and decreases in business insurance due to general market
conditions. In spite of vigorous cost containment efforts, various factors, such as changes
in insurance markets, related costs associated with new Securities and Exchange
Commission rules and the American Stock Exchange regulations compliance
mandates may increase general and administrative expenses and may have a
negative impact on fiscal year 2005. The individual components of selling, marketing and general and administrative
costs have changed from year to year but in total have remained relatively flat
for fiscal years 2004, 2003 and 2002, respectively. 16




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Operating Income Operating income was $1.0 million for fiscal year 2004 compared to $1.3 million
last year, a decrease of 21% or $283 thousand. The factors discussed above,
the economy and competitive challenges are the primary reasons for the decrease
in operating income for fiscal year 2004. Operating income improved from $987 thousand in fiscal year 2002 to $1.3
million in fiscal year 2003. The improvement in fiscal year 2003 was a result
of the change in the revenues mix to higher margin revenues, and the positive
effect of cost containment initiatives. Interest Expense Interest expense decreased 9% from $649 thousand to $591 thousand during fiscal
year 2004 due to slightly lower monthly borrowing activities compared to fiscal
year 2003 and lower interest rates. During fiscal year 2003 compared to 2002,
interest expense increased from $634 thousand, or 2%, in fiscal year 2002 to
$649 thousand in fiscal year 2003, due to increased borrowings. Income Taxes During the year ended
March 31, 2004, we recorded a non-recurring income tax benefit of
$3.75 million. We believe that it is appropriate to record the deferred tax
asset based upon our estimates of future profitability, as well as past
performance. The tax benefit consists of the realization of the tax benefits
for timing differences for financial reporting and income tax purposes. The
components of the tax benefit are primarily the net operating loss
carryforward, allowances for doubtful accounts, inventory obsolesence reserves
and depreciation and amortization expense. Note 11 to the consolidated
financial statements contains an analysis of our deferred tax assets and the
full reversal of our deferred tax asset valuation allowance. During years ended March 31, 2003 and 2002, respectively, we recorded
provisions from income taxes of $60 thousand. The Company had previously
provided a 100% valuation allowance of approximately $3.4 million and $3.8
million for those years. Net Income As a result of income from operations of $478 thousand and the non-recurring
income tax benefit of $3.75 million, net income increased from $648 thousand in
fiscal year 2003 to $4.2 million in fiscal year 2004. Earnings per share were
$1.60, basic, and $1.54, diluted for the year ended March 31, 2004 compared to
$.30, basic and diluted, for the fiscal year 2003. Net earnings for fiscal
year ended March 31, 2002 was $302 thousand or $.14 per share, basic and
diluted. Depreciation and Amortization Depreciation and amortization was $762 thousand, $657 thousand and $907
thousand for the fiscal years ended March 31, 2004, 2003 and 2002,
respectively. During fiscal year 2004, depreciation and amortization
increased $105 thousand of which $77 thousand was the amortization of
intangible assets as a result of the Microserv acquisition and $28 thousand of
increased depreciation as a result of upgrading our information systems and
technology. In 2005 we will continue our investment in technology which will
increase our operating efficiency. For the year ended March 31, 2003, the
decrease in depreciation and amortization was due to the implementation of
Statement of Financial Accounting Standard No. 142 Goodwill and Other
Intangible Assets which required that goodwill no longer be amortized against
earnings, but instead be reviewed periodically for impairment. In addition,
there were reductions in depreciation expense due to an increase in fully
depreciated assets and a decrease in capital expenditures for fiscal years
ended March 31, 2003 and 2002, respectively. We continue to focus the majority
of our capital spending on technology enhancements that will increase operating
efficiencies. 17




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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 and terrorism,
especially as they affect interest rates, industry factors and our ability to
successfully increase our sales of services 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 also plan continue to emphasize
operating efficiencies through cost containment strategies, reengineering
efforts and improved service delivery techniques. Halifax serves its customer base by providing high availability enterprise
maintenance services, consulting, integration, networking, and installation
services. This industry has been characterized by rapid technological advances
that have resulted in frequent introductions of new products, product
enhancements and aggressive pricing practices, which also impact pricing of
service activities. Our operating results could be adversely affected by
industry-wide pricing pressures, the loss of a major customer, the ability to
recruit, train and retain personnel integral to 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
revenues growth necessary to provide profitable operating margins in various
operations. Operating results may also be negatively affected due to costs
associated with starting a major contract. Many costs associated with starting
a new contract, such as hiring additional personnel, training, travel and
logistics are expensed as incurred and may also significantly impact cash flow
during the startup period. Although we believe our relationship with our bank
is satisfactory, there are no assurances that additional funds, if needed, to
help fund start-up costs related to a major new contract will be forthcoming.
Our plan for growth includes intensified marketing efforts, an expanding
national sales program, strategic alliances and 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 (Amounts in thousands)
    
    2004
    
    2003
    
    2002Cash balance at March 31
    
    $
    430
    
    
    $
    568
    
    
    $
    111Working capital at March 31
    
    $
    7,653
    
    
    $
    5,092
    
    
    $
    5,443Net cash provided by (used in) operating activities
    
    $
    (110
    )
    
    $
    2,355
    
    
    $
    (3,553
    )Net cash (used in) investment activities
    
    $
    (1,088
    )
    
    $
    (346
    )
    
    $
    (344
    )Net cash (used in) provided by financing activities
    
    $
    1,060
    
    
    $
    (1,552
    )
    
    $
    3,777
 At March 31, 2004, we had working capital of $7.6 million and a current ratio
of 1.78. The increase in working capital was attributable to net earnings and
the reduction of the valuation allowance on our deferred tax asset. A summary of future minimum lease payments is set forth below and in Note 12 to
the consolidated financial statements. Capital expenditures in fiscal year
2004 were $672 thousand and in fiscal year 2003 were $346 thousand. We
anticipate fiscal year 2005 technology requirements to result in capital
expenditures totaling approximately $600 thousand. Our Company continues to
sublease a portion of its headquarters building which reduces its rent expense
by approximately $400 thousand annually. On March 6, 2002, we entered into a new revolving credit agreement with an $8.0
million maximum amount of available credit. On August 11, 2003 the loan maximum
on the revolving credit agreement was increased to $9.0 million. The form of
the loan was extended and now has a maturity date of July 6, 2005. All other
terms and conditions remain the same. The loan bears interest at the banks
prime rate plus 3/4%. Advances under the revolving credit agreement are
collateralized by a first priority security interest in all of our assets as
defined in the revolving credit agreement. The amount available to be borrowed
under the revolving credit agreement is determined by applying stated
percentages to the eligible receivables. The revolving credit agreement
contains a subjective acceleration clause whereby the lender may demand payment
under certain circumstances as defined in the agreement. We were in compliance
with all of the covenants on our revolving credit agreement at March 31, 2004.
The agreement contains covenants typical of arrangements of this type as well
as a covenant that requires 18




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##### 



that the shareholders deficit not increase above $1.4 million. At March 31, 2004, our
shareholders equity was $6.7 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 from the resale of product to more of
services orientation, as
well as reduced cost achieved through containment measures including reducing
occupancy cost, consolidating of administrative functions, reducing staffing
and higher utilization of our workforce. Although we expect to remain in
compliance with the financial covenant related to shareholders deficit, no
assurance can be given. Should shareholders deficit rise above $1.4 million,
we would attempt to work with the bank to arrive at a mutually acceptable
resolution. At June 10, 2004, $7.7 million was outstanding under the revolving
credit agreement. If our customer base were to remain constant, we expect to have approximately
$2.5 million available on our revolving credit agreement through the next
twelve months. If we were to obtain a significant new contract or contract
modifications, our borrowing availability may be less since we are generally
required to invest significant initial startup funds which are subsequently
billed to customers. At March 31, 2004 and 2003, $1.8 million and $2.3 million, respectively, was
available to the Company under the terms of the revolving credit agreement. The revolving credit agreement prohibits the payment of dividends or
distributions as well as limits the payment of principal or interest on
subordinated debt, and is not paid until we obtain a waiver from the lender. On August 29, 2003, we acquired 100% of the stock in Microserv, Inc.
(Microserv) for approximately $3.3 million. The consideration was cash of $360
thousand, 5% notes payable of $494 thousand, and 442,078 shares of restricted
common stock valued at $4.23, or $1.87 million. The 5% notes mature on
February 1, 2005. The shares were discounted approximately 14% from the quoted
market value of $4.92 per share due to various trading restrictions. Our subordinated debt agreements with the Estate of Arch C. Scurlock or the
Estate, formerly Research Industries, Incorporated, an affiliate, totaled $2.4
million at March 31, 2004 and $4.0 million at March 31, 2003. Principal
repayment and interest payable on the subordinated debt agreements have been
extended to July 6, 2005. Pursuant to the debt agreements, the Estate holds
$400 thousand face amount of our 7% convertible subordinated debt dated January
27, 1998 and $690 thousand, $310 thousand, $500 thousand and $500 thousand face
amounts of our 8% promissory notes. During fiscal year 2004, in conjunction with the private placement of $1.2
million and following receipt of a waiver from the bank we made a principal repayment of
$1.2 million on the 7% convertible subordinated debt and an additional $400
thousand payment on the 7% subordinated debt in September 2003. In addition,
we made payments totaling $300 thousand for interest accrued on the subordinate
debt. At March 31, 2004, interest payable to the Estate was $140 thousand. During the fiscal year ended March 31, 2003, the bank approved, and we made
payments of $225 thousand for accrued interest. Our Company believes that funds generated from operations, bank borrowings, and
investing activities should be sufficient to meet its current operating cash
requirements through the next twelve months, although there can be no
assurances that all the aforementioned sources of cash can be realized. Our future capital requirements will depend on many factors, including revenue
growth, acquisition activity and expansion of our service offerings. 19




---



##### 



The following are our contractual obligations associated with lease
commitments, debt obligations and consulting commitments. (Amounts in thousands)Year ended
    
    Bank Line of
    
    Other
    
    Vehicle
    
    Consulting
    
    OperatingMarch 31,
    
    Credit
    
    Debt(1)(2)
    
    Loans(3)
    
    Commitment(4)
    
    Leases
    
    Total2005
    
    $
    
    
    
    $
    
    
    
    $
    29
    
    
    $
    50
    
    
    $
    615
    
    
    $
    6942006
    
    
    7,227
    
    
    
    2,894
    
    
    
    15
    
    
    
    50
    
    
    
    820
    
    
    
    11,0062007
    
    
    
    
    
    
    
    

    
    
    4
    
    
    
    50
    
    
    
    681
    
    
    
    7352008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    566
    
    
    
    6162009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    492
    
    
    
    542Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    233Total
    
    $
    7,227
    
    
    $
    2,894
    
    
    $
    48
    
    
    $
    250
    
    
    $
    3,407
    
    
    $
    13,826
 (1) An affiliate (See Note 13 to the consolidated financial statements), holds
$400 thousand face amount of our 7% convertible subordinated debt dated January
27, 1998 and $690 thousand, $310 thousand, $500 thousand, and $500 thousand
face amount of our subordinated notes dated October 8, 1998, October 13, 1998,
November 2, 1998 and November 5, 1998, respectively. These notes are each
subordinate to our revolving credit agreement and cannot be paid without the
consent of the bank. The balance of our subordinated notes at March 31, 2004
was $2.4 million. (2) In conjunction with the acquisition of Microserv, we issued $494 thousand
notes to the former Microserv shareholders. The notes bear interest at 5% and
mature on February 1, 2005. (3) We have three notes with an automobile manufacturer. Two notes have terms
of 36 months and one note has a term of 48 months. The balances and respective
interest rates on the notes at March 31, 2004 were $20 thousand, $15 thousand,
and $13 thousand with interest rates of 1.9%, 0.0% and 0.0%, respectively. (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 thousand per year for
consulting services. Off Balance Sheet Arrangements In conjunction with a
government contract, we act as a conduit in a financing transaction
on behalf of a thrid party.
We routinely transfer 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. The off-balance sheet transactions had no impact on our liquidity
or capital resources. We are not aware of any event, demand or uncertainty
that would likely terminate the agreement or have an adverse affect on our
operations. Application of Critical Accounting Policies The Companys financial statements are prepared in accordance with accounting
principles that are generally accepted in the United States. The methods,
estimates, and judgments we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements as they affect the updated amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The
Securities 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 20




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##### 



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: revenue recognition, inventory valuation reserves,
allowances for doubtful accounts, which impact cost of sales and gross margin,
the assessment of recoverability of goodwill and other intangible assets, which
impact write-offs of goodwill and intangibles, depreciation of property and
equipment, income taxes and legal contingencies. We discuss these policies
further below, as well as the estimates and managements judgments involved.
We also have other key accounting policies, such as policies for revenue
recognition, including unbilled accounts receivable and deferred revenues, as
well as policies governing the estimate of the useful life of our property and
equipment. We base our estimates on historical experience and assumptions that
we believe to be reasonable under the circumstances, to make judgments about
the carrying value of assets and liabilities not readily apparent from other
sources. We believe that the estimates and judgments generally required by
these policies are not as difficult or subjective and are less likely to have a
material impact on our reported results of operations for a given period. Revenue Recognition We recognize service revenues based on contracted fees earned, net of credits
and adjustments, as the service is performed. Revenues from long-term fixed
unit-price contracts are 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. Revenues from time-and-material
professional service contracts are recognized as services are delivered.
Certain seat management contracts include the delivery and installation of new
equipment combined with multi-year service agreements. Revenues related to the
delivery and installation of equipment under these and certain other contracts
are recognized upon the completion of both the delivery and installation.
Invoices billed in advance are recognized as revenues 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
revenues 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. Provision for loss contracts, if any, are recognized in the period in which
they become determinable. Historically, we have had few loss contracts. At
March 31, 2004, we had no loss contracts. Our gross margin should benefit from
revenues 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. Inventory Valuation Reserves We write down inventory and record obsolescence reserves for estimated excess
and obsolete inventory equal to the cost of inventory and the estimated fair
value based upon anticipated future usage, prior demand, equipment use, current
and anticipated contracts and market conditions. Although we strive to ensure
the accuracy of our forecast for inventory usage, a significant unanticipated
change in technology could have a significant impact on the value of our
inventory and our reported value. If actual demand is less than anticipated,
or if our prior usage to support our contracts and anticipated future demand
changes, 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 ranged from 12% to 20% of inventory.
The annual charge for fiscal year 2005 is projected to be approximately $225
thousand, or 3.0% to 5.0% of inventory. A 1% change in estimate would have an
impact on earnings of approximately $67 thousand. Accounts Receivable 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 21




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##### 



requires us to anticipate the economic viability of our customers and requires
a degree of judgment. Our estimate of bad debt expense is approximately .01%
of revenues. A change in the estimate by 0.1% would have an impact on earnings
of approximately $50 thousand. Over the past three years bad debts expense
represented approximately .01% to 1.4% of revenues. Goodwill and Other Acquired Intangibles We have adopted SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill
and Other Intangible Assets. Accordingly we no longer amortize goodwill, but
will continue to amortize other acquisition related costs. During fiscal year
2003, amortization of acquisition related intangibles was $15 thousand, down
from $210 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 asset 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 fiscal years ended March 31,
2004. 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 there is no impairment and no further analysis
is necessary. If our revenues and cost forecasts are not achieved, we fail to
have continued profitability and market acceptance, or the market conditions in
the stock market cause the valuation to decline, we may incur charges for
impairment of goodwill. Property and Equipment We estimate the useful lives of property and equipment in order to determine
the amount of depreciation and amortization expense to be recorded during any
reporting period. The majority of our equipment is depreciated over three to
ten years. The estimated useful lives are based on historical experience with
similar assets as well as taking into account anticipated technological or
other changes. If technological changes were to occur more rapidly than
anticipated or in a different form than anticipated, the useful lives assigned
to these assets may need to be shortened, resulting in the recognition of
increased depreciation and amortization in future periods. We review for
impairment annually or when events or circumstances indicate that the carrying
amount may not be recoverable over the remaining lives of the assets. In
assessing impairments, we follow the provisions of SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets, utilizing cash flows which
take into account managements estimates of future operations. Income Taxes and Valuation Allowance Deferred income taxes are provided for the effect of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for income tax purposes. We
measure deferred tax assets and liabilities using enacted tax rates that, if
changed, would result in either an increase
or decrease in the provision for income taxes in the period of change. A
valuation allowance is recorded when it is
more likely than not that deferred tax assets will not be realized. In
assessing the likelihood of realization, management considers estimates of
future taxable income, the character of income needed to realize future tax
benefits, historical financial results adjusted for non-recurring items and all
other available evidence. Management believes that based on the weight of the
evidence, consistent past profitability and estimates of future profitability
that the valuation allowance established in prior years is no longer necessary.
Note 11 to the consolidated financial statements contains an analysis of our
deferred tax assets. Management will continue to monitor its historical
results when adjusted for non-recurring items, estimates of future
profitability and all other evidence to assess the realizability of its net
deferred tax assets based on evolving business conditions. Should management
determine it is more likely than not that some portion or all of the deferred
tax assets will not be realized, this would have a significant effect on net
income. 22




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##### 



Recent Accounting Pronouncements In April 2002, the Financial Accounting Standards Board, or FASB, issued SFAS
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 requires the
classification of gains and losses from extinguishments of debt as
extraordinary items only if they meet certain criteria for such classification
in APB No. 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. Any gain or loss on
extinguishments of debt classified as an extraordinary item in prior periods
that does not meet the criteria in Accounting Principles Board or APB No. 30
must be reclassified. These
provisions are effective for fiscal years beginning after May 15, 2002.
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. These lease provisions are effective for transactions occurring
after May 15, 2002. We adopted the provisions of SFAS No. 145 during the three
months ended June 30, 2003. At March 31, 2004, 2003 and 2002, we did not
record any after-tax extraordinary gains on the early extinguishment of debt. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of SFAS No. 150 are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of SFAS No. 150 are consistent with the FASBs proposal to revise
that definition to encompass certain obligations that a
reporting entity can or must settle by issuing its own equity shares, depending
on the nature of this relationship established between the holder and the
issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The adoption of SFAS
No. 150 did not have a material impact on our results of operations, financial
position or cash flows. In January 2003, the FASB issued Interpretation on No. 46 Consolidation of
Variable Interest Entities - an Interpretation of Accounting Research Bulletin
(ARB) No. 51. FIN 46 requires the primary beneficiary to consolidate a
variable interest entity (VIE) if it has a variable interest that will absorb a
majority of the entitys expected losses if they occur, receive a majority of
the entitys expected residual returns if they occur, or both. FIN 46 applies
immediately to VIEs created after January 31, 2003, and to VIEs in which the
entity obtains an interest after that date. For VIEs acquired before February
1, 2003, the effective date is April 1, 2003. The adoption of FIN 46 did not
have a material impact on the Companys results of operations, financial
position and cash flows. Our other 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, other factors that could cause actual results to differ materially
include but are not limited to 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 enterprise maintenance solutions 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 We are exposed to changes in interest rates, primarily as a result of bank debt
to finance our business. The floating interest rate 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. 23




---



##### 



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, 2004. 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. Total Debt
    
    Fair ValueLong-term debt (including current maturities)
    
    (Amounts in thousands)Revolving credit agreement at the PRIME
rate plus .75%, due July 6, 2005. Average interest rate of 5.0%.
    
    $
    7,227
    
    
    $
    7,2277% convertible subordinated note from affiliate due July 6, 2005.
    
    
    400
    
    
    
    4008% subordinated notes from affiliate due July 6, 2005.
    
    
    2,000
    
    
    
    2,0005% notes issued to former Microserv shareholders due February 1,
2005.
    
    
    494
    
    
    
    494Notes payable GMAC interest rate 0.0 to 1.9 due in 48 and 36 months.
    
    
    48
    
    
    
    48Total fixed debt
    
    
    2,942
    
    
    
    2,942Total debt
    
    $
    10,169
    
    
    $
    10,169
 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. 24




---



##### 



Item 8.Financial Statements and Supplementary Data 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 (the Company) as of March 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders equity
(deficit), and cash flows for each of the three years in the period ended March
31, 2004. Our audits also included the financial statement schedule listed in
the Table of Contents under Item 8. 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 standards of the Public Company
Accounting Oversight Board (United States). 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 provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 31, 2004 and
2003, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, 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. As discussed in Note 1 to the financial statements, effective April 1, 2002 the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Deloitte & Touche LLP McLean, VA
June 14, 2004 25




---



##### 



HALIFAX CORPORATION 
  FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
 2004
    
    2003
    
    2002Revenues
    
    $
    49,537
    
    
    $
    50,418
    
    
    $
    49,351Operating costs and expenses:Cost of services
    
    
    43,609
    
    
    
    44,200
    
    
    
    43,527Gross margin
    
    
    5,928
    
    
    
    6,218
    
    
    
    5,824Selling expense
    
    
    1,254
    
    
    
    1,102
    
    
    
    999Marketing expense
    
    
    534
    
    
    
    652
    
    
    
    619General and administrative
    
    
    3,086
    
    
    
    3,127
    
    
    
    3,219Operating income
    
    
    1,054
    
    
    
    1,337
    
    
    
    987Interest expense
    
    
    (591
    )
    
    
    (649
    )
    
    
    (634
    )Other income
    
    
    15
    
    
    
    20
    
    
    
    9Income before income taxes
    
    
    478
    
    
    
    708
    
    
    
    362Income tax (benefit) expense
    
    
    (3,750
    )
    
    
    60
    
    
    
    60Net income
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302Earnings per common share-basic
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14Earnings per common share-diluted
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14Weighted average number of
common shares
outstanding  basic
    
    
    2,638,345
    
    
    
    2,175,781
    
    
    
    2,100,321Weighted average number of
common shares
outstanding  diluted
    
    
    2,787,656
    
    
    
    2,212,360
    
    
    
    2,106,478
 See notes to consolidated financial statements 26




---



##### 



HALIFAX CORPORATION 
 CONSOLIDATED BALANCE
SHEETS AS OF MARCH 31, 2004 AND 2003
  March 31,2004
    
    2003ASSETSCURRENT ASSETSCash
    
    $
    430
    
    
    $
    568Trade accounts receivable, net
    
    
    9,364
    
    
    
    8,408Inventory, net
    
    
    5,845
    
    
    
    4,323Prepaid expenses and other current assets
    
    
    599
    
    
    
    267Deferred tax asset
    
    
    1,204
    
    
    
    TOTAL CURRENT ASSETS
    
    
    17,442
    
    
    
    13,566PROPERTY AND EQUIPMENT, net
    
    
    1,598
    
    
    
    1,307GOODWILL
    
    
    3,879
    
    
    
    2,962INTANGIBLE ASSETS, net
    
    
    727
    
    
    
    4OTHER ASSETS
    
    
    149
    
    
    
    142DEFERRED TAX ASSET
    
    
    2,696
    
    
    
    TOTAL ASSETS
    
    $
    26,491
    
    
    $
    17,981LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    3,024
    
    
    $
    1,543Accrued expenses
    
    
    3,699
    
    
    
    4,634Deferred maintenance revenues
    
    
    2,543
    
    
    
    2,268Current portion of long-term debt
    
    
    29
    
    
    
    29Notes payable
    
    
    494
    
    
    
    TOTAL CURRENT LIABILITIES
    
    
    9,789
    
    
    
    8,474LONG-TERM BANK DEBT
    
    
    7,227
    
    
    
    5,692OTHER LONG-TERM DEBT
    
    
    19
    
    
    
    49SUBORDINATED DEBT  AFFILIATE
    
    
    2,400
    
    
    
    4,000DEFERRED INCOME
    
    
    337
    
    
    
    397TOTAL LIABILITIES
    
    
    19,772
    
    
    
    18,612COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY (DEFICIT)Preferred stock, no par value authorized 1,500,000, issued 0 shares
    
    
    
    
    
    
    Common stock, $.24 par value:Authorized - 6,000,000 sharesIssued  3,176,096 in 2004 and 2,433,047 in 2003Outstanding -  2,910,412 in 2004 and 2,176,363 in 2003
    
    
    764
    
    
    
    588Additional paid-in capital
    
    
    7,962
    
    
    
    5,016Accumulated deficit
    
    
    (1,795
    )
    
    
    (6,023
    )Less treasury stock at cost  256,684 shares in 2004 and 2003
    
    
    (212
    )
    
    
    (212
    )TOTAL STOCKHOLDERS EQUITY (DEFICIT)
    
    
    6,719
    
    
    
    (631
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    26,491
    
    
    $
    17,981
 See notes to consolidated financial statements 27




---



##### 



HALIFAX CORPORATION 
  FOR THE YEARS ENDED
MARCH 31, 2004, 2003 AND 2002
 2004
    
    2003
    
    2002Cash flows from operating activities:Net earnings
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    762
    
    
    
    657
    
    
    
    907Deferred income tax
    
    
    (3,805
    )
    
    
    
    
    
    
    Common stock issued in lieu of interest
    
    
    
    
    
    
    
    
    
    
    331Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    (328
    )
    
    
    2,496
    
    
    
    (1,399
    )Decrease (increase) in inventory
    
    
    (353
    )
    
    
    185
    
    
    
    (1,619
    )Decrease (increase) in prepaid expenses and other
current assets
    
    
    (320
    )
    
    
    27
    
    
    
    318Decrease (increase) in other assets
    
    
    30
    
    
    
    302
    
    
    
    (1
    )(Increase) in accounts payable,
accrued expenses and other current liabilities
    
    
    (457
    )
    
    
    (1,997
    )
    
    
    (2,787
    )(Decrease) increase in deferred maintenance
revenues
    
    
    (66
    )
    
    
    97
    
    
    
    454Increase (decrease) in deferred income
    
    
    199
    
    
    
    (60
    )
    
    
    (59
    )Net cash provided by (used in) operating activities
    
    
    (110
    )
    
    
    2,355
    
    
    
    (3,553
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (672
    )
    
    
    (346
    )
    
    
    (344
    )Payment for acquisition or Microserv (net of cash
acquired)
    
    
    (416
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (1,088
    )
    
    
    (346
    )
    
    
    (344
    )Cash flows from financing activities:Proceeds from debt borrowings
    
    
    25,204
    
    
    
    19,234
    
    
    
    31,909Repayments of debt
    
    
    (23,699
    )
    
    
    (20,787
    )
    
    
    (28,132
    )Retirement of subordinated debt affiliate
    
    
    (1,600
    )
    
    
    
    
    
    
    Proceeds from private placement
    
    
    1,200
    
    
    
    
    
    
    
    Costs associated with private placement
    
    
    (45
    )
    
    
    
    
    
    
    Proceeds from sale of stock upon exercise of
stock options
    
    
    
    
    
    
    1
    
    
    
    Net cash (used in) provided by financing activities
    
    
    1,060
    
    
    
    (1,552
    )
    
    
    3,777Net increase (decrease) in cash
    
    
    (138
    )
    
    
    457
    
    
    
    (120
    )Cash at beginning of year
    
    
    568
    
    
    
    111
    
    
    
    231Cash at end of year
    
    $
    430
    
    
    $
    568
    
    
    $
    111
 See Note 15 for supplemental cash flow information. See notes to consolidated financial statements 28




---



##### 



HALIFAX CORPORATION 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) FOR THE YEARS ENDED
MARCH 31, 2004, 2003, AND 2002
 Common Stock
    
    Additional
    
    
    
    
    
    Treasury StockPaid-In
    
    AccumulatedShares
    
    Par Value
    
    Capital
    
    Deficit
    
    Shares
    
    Cost
    
    TotalMarch 31, 2001
    
    
    2,322,370
    
    
    $
    562
    
    
    $
    4,710
    
    
    $
    (6,973
    )
    
    
    256,684
    
    
    $
    (212
    )
    
    $
    (1,913
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    302Issuance of
Common Stock
    
    
    109,927
    
    
    
    26
    
    
    
    305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331March 31, 2002
    
    
    2,432,297
    
    
    
    588
    
    
    
    5,015
    
    
    
    (6,671
    )
    
    
    256,684
    
    
    
    (212
    )
    
    
    (1,280
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    
    
    
    
    648Exercise of
Stock Options
    
    
    750
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1March 31, 2003
    
    
    2,433,047
    
    
    
    588
    
    
    
    5,016
    
    
    
    (6,023
    )
    
    
    256,684
    
    
    
    (212
    )
    
    
    (631
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,228
    
    
    
    
    
    
    
    
    
    
    
    4,228Issuance of
Common Stock
    
    
    734,049
    
    
    
    176
    
    
    
    2,946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,122March 31, 2004
    
    
    3,167,096
    
    
    $
    764
    
    
    $
    7,962
    
    
    $
    (1,795
    )
    
    
    256,684
    
    
    $
    (212
    )
    
    $
    6,719
 See notes to consolidated financial statements 29




---



##### 



HALIFAX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002  1.
    
    SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY Business Activity  Halifax Corporation (the Company) provides enterprise
maintenance services and solutions for commercial and government activities.
These services include high availability maintenance solutions, technology
deployment and integration, secure network solutions 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. All significant intercompany transactions are eliminated in
consolidation. 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 revenues and expenses
during the period reported. Actual results could differ from those estimates.
Estimates are used when accounting for certain items such as allowances for
doubtful accounts, unbilled accounts receivable, depreciation and amortization,
taxes, inventory reserves, goodwill, and contingencies. Accounts Receivable  Receivables are 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 2.) 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 $952
thousand and $630 thousand at March 31, 2004 and 2003, 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 : Machinery and equipment
    
    3-10 yearsFurniture and fixtures
    
    5 yearsBuilding improvements
    
    5-10 yearsVehicles
    
    4 years
 The Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, (SFAS No. 144). SFAS No. 144
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 the fair
value of such asset. Based on its analysis, the Company believes that there
was no impairment of its long-lived assets at March 31, 2004 and 2003. 30




---



##### 



Goodwill and Intangible Assets  Goodwill is the excess of the purchase price
over the fair value of the net assets acquired in a business combination.
Beginning April 1, 2002, in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), goodwill
and indefinite-lived assets are no longer amortized, but instead tested for
impairment at least annually (see Note 5). Intangible assets that have finite
useful lives are amortized over their useful lives. Deferred Maintenance Revenues  Deferred maintenance revenues is derived from
contracts for which customers are billed or pay in advance of services to be
performed at a future date. Revenue Recognition  Service revenues are derived from contracts with various
federal and state agencies as well as from commercial enterprises. We recognize
service revenues based on contracted fees earned, net of credits and
adjustments as the service is performed. Revenues from long-term fixed unit
price contracts are 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. Revenues from time-and-material
professional service contracts are recognized as services are delivered.
Certain seat management contracts include the delivery and installation of new
equipment combined with multi-year service agreements. Revenues related to the
delivery and installation of equipment under these, and certain other contracts
are recognized upon the completion of both the delivery and installation.
Product sales were $5.5 million, $5.0 million and $9.3 million, with
corresponding direct cost of product of $5.1 million, $4.4 million and $8.0
million for the fiscal years ended March 31, 2004, 2003 and 2002, respectively.
Revenues related to the fixed-price service agreements are recognized ratably
over the life of the agreement. Invoices billed in advance are recognized as
revenues when earned. Losses on contracts, if any, are recognized in the
period in which they become determinable. Income Taxes  The provision for income taxes is the total of the current year
income taxes due or refundable and the change in deferred tax assets and
liabilities. The Company uses the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are recognized
for deductible temporary differences, along with net operating loss
carryforwards and credit carryforwards if it is more likely than not that the
tax benefits will be realized. To the extent a deferred tax asset cannot be
recognized under the preceding criteria, a valuation allowance must be
established. Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Comprehensive Income  For the fiscal years ended March 31, 2004, 2003 and
2002, 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 as amended by Statement of Financial
Standards No. 148 (SFAS 148), Accounting for Stock-based Compensation -
Transition of Disclosure. Accordingly, no compensation expense has been
recognized for our stock-based compensation plan. 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. 31




---



##### 



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 Accounting
for Stock-Based Compensation, had compensation cost been determined based on
the fair value of awards granted in fiscal years 2004, 2003 and 2002, the net
income attributable to common shareholders would have been as follows: Year Ending March 31,(Amounts in thousands except share data)
    
    2004
    
    2003
    
    2002Net income (as reported)
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302Deduct: stock-based compensation expense
determined under the fair value method,
net of tax
    
    
    (175
    )
    
    
    (250
    )
    
    
    (261
    )Proforma net income
    
    $
    4,053
    
    
    $
    398
    
    
    $
    41Earnings per common share (as reported):Basic
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14Diluted

    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14Proforma earnings per common share:Basic
    
    $
    1.54
    
    
    $
    .18
    
    
    $
    .02Diluted
    
    $
    1.45
    
    
    $
    .18
    
    
    $
    .02
 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 earnings per share is based on the weighted average number of shares
including adjustments to both net income and shares outstanding when dilutive,
including potential common shares from options and warrants to purchase common
stock using the treasury stock method and effect of the assumed conversion of
the Companys convertible subordinated debt to assume the conversion of
dilutive common stock equivalents. Reclassification  Certain reclassifications have been made in the fiscal years
2003 and 2002 financial statements to conform to the 2004 presentation. Concentration of Risk  The Company has a number of significant customers. The
Companys largest customer accounted for 14%, 15% and 16% of the Companys
revenues for the years ended March 31, 2004, 2003 and 2002, respectively. The
Companys five largest customers, collectively, accounted for 56%, 57% and 42%,
of revenues for the years ended March 31, 2004, 2003 and 2002, respectively.
The Company anticipates that significant customer concentrations will continue
for the foreseeable future, although the companies which constitute the
Companys largest customers may change. Revenues from services rendered to the United States Government and the
relative percentages of such revenues to revenues from continuing operations
for the fiscal years ended March 31, 2004, 2003 and 2002 were $11.0 million
(22%), $12.1 million (24%), $8.5 million (17%). Recent Pronouncements In April 2002, the FASB issued Statement of Financial Accounting Standard 145,
(SFAS No. 145) Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires the
classification of gains and losses from extinguishments of debt as
extraordinary items only if they meet certain criteria for such classification
in APB No. 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. Any gain or loss on
extinguishments of debt classified as an extraordinary item in prior periods
that does not meet the criteria in APB No. 30 must be reclassified. These
provisions are effective for fiscal years beginning after May 15, 2002.
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback
transactions. These lease provisions are effective 32




---



##### 



for transactions occurring after May 15, 2002. The Company adopted the
provisions of SFAS No. 145 during the three months ended June 30, 2003. At
March 31, 2004, 2003 and 2002, the Company did not record any after-tax
extraordinary gains on the early extinguishment of debt. In May 2003, the FASB issued Statement of Financial Accounting Standard 150,
(SFAS No. 150) Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions of
this statement are consistent with the FASBs proposal to revise that
definition to encompass certain obligations that a reporting entity can or must
settle by issuing its own equity shares, depending on the nature of this
relationship established between the holder and the issuer. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. The adoption of SFAS 150 did not have a
material impact on the Companys results of operations, financial position or
cash flows. In January 2003, the FASB issued Interpretation on No. 46 Consolidation of
Variable Interest Entities - an Interpretation of Accounting Research Bulletin
(ARB) No. 51. FIN 46 requires the primary beneficiary to consolidate a
variable interest entity (VIE) if it has a variable interest that will absorb a
majority of the entitys expected losses if they occur, receive a majority of
the entitys expected residual returns if they occur, or both. FIN 46 applies
immediately to VIEs created after January 31, 2003, and to VIEs in which the
entity obtains an interest after that date. For VIEs acquired before February
1, 2003, the effective date for the Company is April 1, 2003. The adoption of
FIN 46 did not have an impact on the Companys results of operations, financial
position and cash flows.  2.
    
    ACCOUNTS RECEIVABLE March 31,Trade accounts receivable consist of:(Amounts in thousands)
    
    2004
    
    2003Amounts billed
    
    $
    9,332
    
    
    $
    8,623Amounts unbilled
    
    
    180
    
    
    
    55Total
    
    
    9,512
    
    
    
    8,678Allowance for doubtful accounts
    
    
    (148
    )
    
    
    (270
    )Total
    
    $
    9,364
    
    
    $
    8,408
  3.
    
    PROPERTY AND EQUIPMENT March 31,
    
    EstimatedProperty and equipment consists of:(Amounts in thousands)
    
    2004
    
    2003
    
    Useful LivesMachinery and equipment
    
    $
    3,153
    
    
    $
    2,855
    
    
    3-10 yearsFurniture and fixtures
    
    
    423
    
    
    
    419
    
    
    5 yearsBuilding improvements
    
    
    637
    
    
    
    542
    
    
    5-10 yearsVehicles
    
    
    137
    
    
    
    135
    
    
    4 yearsTotal
    
    
    4,350
    
    
    
    3,951Accumulated depreciation
    
    
    (2,752
    )
    
    
    (2,644
    )Total
    
    $
    1,598
    
    
    $
    1,307
 For the years ended March 31, 2004, 2003 and 2002, depreciation expense was
$681 thousand, $567 thousand and $697 thousand, respectively. 33




---



##### 



4.
    
    ACQUISITION Microserv acquisition On August 29, 2003, the Company acquired 100% of the stock in Microserv, Inc.
(Microserv) for approximately $3.3 million. The consideration was cash of
$360 thousand, 5% notes payable of $494 thousand and 442,078 shares of our
stock valued at $4.23 per share, or $1.87 million. The shares were discounted
approximately 14% from the quoted market value of $4.92 per share due to
various trading restrictions and restrictions on transfer as such shares were
not registered. The primary reasons for the acquisition of Microserv were to expand our
geographic base and strengthen our service delivery capability. Microserv
also added a number of prestigious customers, added key management, and will
enhance our ability to grow our partnership arrangements with the global
service provider community. The results of Microserv have been included in
the consolidated financial statements from the date of the acquisition.
Microserv is a high availability enterprise maintenance company. The following is a summary of the estimated fair values of the assets acquired
and liabilities assumed as of the date of acquisition. (amounts in thousands) Current assets
    
    $
    2,294Property and equipment
    
    
    303Intangible assets
    
    
    804Goodwill
    
    
    916Other assets
    
    
    38Total assets acquired
    
    
    4,355Total liabilities assumed and restructuring
    
    
    1,016Purchase price
    
    $
    3,339
 Total intangible assets of $804 thousand will be amortized over their
weighted-average useful lives and include client contracts of $635 thousand
(eight years) and non competition agreements and other intangibles (two to
eight years). The total purchase price of $3.3 million includes $614 thousand of direct
acquisition costs related to investment banking, legal and accounting
services. Also, $124 thousand in restructuring costs were recorded as part of
the acquisition as a result of positions eliminated. The terms of the
contract provide for additional consideration of $250 thousand to be paid if
certain accounts of the acquired company exceed certain targeted levels, by
August 30, 2004. The Company issued 50,000
warrants to purchase common stock at $3.19 per share. The fair value of the
Companys warrants is estimated on the date of issuance using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 and EITF
96-18. Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services using the
following assumptions: fair market value of common stock $4.78, risk free rate
of return of .95%, no dividend yield, expected volatility of 43% and
weighted-average expected life of 4 years. The weighted average fair value of
the warrants calculated using the Black-Scholes option price model granted was
$2.32 for the warrants issued in conjunction with the Microserv acquisition.
The Black-Scholes value of the warrants issued totaled approximately $117
thousand. 34




---



##### 



The following unaudited pro-forma financial information presents results of
operations as if the acquisition had occurred at the beginning of the
respective periods. Year Ended
    
    Year Ended(Amounts in thousands except per share data)
    
    March 31, 2004
    
    March 31, 2003Revenues
    
    $
    51,537
    
    
    $
    60,443Net income
    
    
    4,317
    
    
    
    385Earnings per share:Basic
    
    $
    1.64
    
    
    $
    .13Diluted
    
    $
    1.57
    
    
    $
    .13
 These proforma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization expense as a
result of identifiable intangible assets arising from the acquisition,
increased interest expense, and charges in income taxes as a result of the
acquisition. The proforma results are not necessarily indicative either of
results of operations that actually would have resulted had the acquisition
been in effect at the beginning of the respective periods or of future
results.  5.
    
    GOODWILL AND INTANGIBLE ASSETS The Company adopted SFAS No. 142, effective April 1, 2002. As a result,
amortization of goodwill was discontinued. The following is a proforma
presentation of reported net income and earnings per share, adjusted for the
exclusion of goodwill amortization net of related income tax effect: Proforma ResultsMarch 31,(Amounts in thousands except share data)
    
    2004
    
    2003
    
    2002Reported net income
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302Goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    210Adjusted net income
    
    $
    4,228
    
    
    $
    648
    
    
    $
    512Basic earnings per share:Reported earnings per share  basic
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14Goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    .10Adjusted basic earnings per share
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .24Diluted earnings per share:Reported earnings per share  diluted
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14Goodwill amortization (net of tax)
    
    
    
    
    
    
    
    
    
    
    .10Adjusted diluted earnings per share
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .24
 35




---



##### 



Intangible assets as of March 31, EstimatedAmortization
    
    
    
    2004
    
    
    
    
    
    2003period
    
    Gross
    
    Accumulated
    
    Net
    
    Gross
    
    Accumulated
    
    Net(Amounts in thousands):
    
    (in months)
    
    Assets
    
    Amortization
    
    Assets
    
    Assets
    
    Amortization
    
    AssetsClient master contracts
    
    
    96
    
    
    
    635
    
    
    
    (46
    )
    
    
    589Backlog
    
    
    48
    
    
    
    96
    
    
    
    (14
    )
    
    
    82Subcontractor provider network
    
    
    36
    
    
    
    64
    
    
    
    (15
    )
    
    
    49Non compete
    
    
    24
    
    
    
    9
    
    
    
    (2
    )
    
    
    7Contract rights
    
    
    60
    
    
    
    149
    
    
    
    (149
    )
    
    
    
    
    
    
    149
    
    
    
    (145
    )
    
    
    4$
    953
    
    
    $
    (226
    )
    
    $
    727
    
    
    $
    149
    
    
    $
    (145
    )
    
    $
    4
 The amortizable assets are being amortized over estimated lives of 24 to 96
months. The weighted average estimated amortization period as of March 31, 2004 is 84
months. There were no intangible assets reclassified to goodwill upon the adoption of
SFAS 142. The Company considers itself to have a single reporting unit. The
Company performed its annual impairment test as of March 31, 2004 and 2003
and determined that based upon the implied fair value of the Company (which
includes factors such as, but not limited to, the Companys market
capitalization and control premium), there was no impairment of goodwill. For the fiscal year ended March 31, 2004 amortization of intangible assets was
$81 thousand. Amortization expense for intangible assets was $15 thousand for
the fiscal years ended March 31, 2003 and 2002, respectively. The Company
estimates aggregate future amortization expense for intangible assets
remaining as of March 31, 2004 as follows: Fiscal Year ended March 31,2005
    
    
    1322006
    
    
    1252007
    
    
    1062008
    
    
    762009
    
    
    72Thereafter
    
    
    216Total
    
    $
    727
 Actual amortization expense to be reported in future periods could differ from
these estimates as a result of new intangible asset acquisitions and other
relevant factors. 36




---



##### 



6.
    
    LONG-TERM DEBT March 31,(Amounts in thousands)2004
    
    2003Long-term debt consists of:Revolving credit agreement dated March 6, 2002 maturing July 6, 2005 with a
maximum borrowing limit of $9 million. Amounts available under this agreement
are determined by applying stated percentages to the Companys eligible
receivables and inventory. At March 31, 2004 and 2003, $1.8 million and $2.3
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, 2004 and 2003 was 5.00% and 5.50%, respectively. The
agreement contains a subjective acceleration clause whereby the lender may demand
payment on the agreement under certain circumstances as defined in the agreement.Total bank debt
    
    $
    7,227
    
    
    $
    5,6927% Convertible subordinated debenture with an affiliate (see Note 13) dated
January 27, 1998. Principal due in full on July 6, 2005. Interest payable
semiannually in arrears beginning
August 1, 1998. May be prepaid by the Company on any date after January 27,
2000. Convertible to common stock by note holder at any time at a conversion
price of $4.11 per common share.
    
    
    400
    
    
    
    2,000Subordinated note with an affiliate (see Note 13) dated October 8, 1998.
Principal due in full July 6, 2005, but may be prepaid by the Company at any
time without penalty. Interest accrues annually at 8%.
    
    
    690
    
    
    
    690Subordinated note with an affiliate (see Note 13) dated October 13, 1998.
Principal due in full July 6, 2005, but may be prepaid by the Company at any time
without penalty. Interest accrues annually at 8%.
    
    
    310
    
    
    
    310Subordinated note with an affiliate (see Note 13) dated November 2, 1998.
Principal due in full July 6, 2005, but may be prepaid by the Company at any time
without penalty. Interest accrues annually at 8%.
    
    
    500
    
    
    
    500Subordinated note with an affiliate (see Note 13) dated November 5, 1998.
Principal due in full July 6, 2005, but may be prepaid by the Company at any time
without penalty. Interest accrues annually at 8%.
    
    
    500
    
    
    
    500Subtotal  debt affiliated parties
    
    
    2,400
    
    
    
    4,0005% Notes issued to former Microserv shareholders due February 1, 2005 (see Note 4)
    
    
    494
    
    
    
    Other debt. Interest rates 0.0% to 1.9% due in 48 and 36 months.
    
    
    48
    
    
    
    78Total debt
    
    
    10,169
    
    
    
    9,770Less current maturities
    
    
    523
    
    
    
    29Total long-term debt
    
    $
    9,646
    
    
    $
    9,741
 The Company is in compliance with the covenant of its credit and security
agreement at March 31, 2004. The covenant requires that stockholders deficit
not increase above $1.4 million. 37




---



##### 



The following table sets forth the Companys contractual obligations,
aggregated by type of contractual obligation: Year ended
    
    Bank Line
    
    Microserv
    
    Subordinated
    
    Vehicle
    
    OperatingMarch 31,
    
    of Credit
    
    Shareholders
    
    Debt to Affiliate
    
    Loans
    
    Leases
    
    Total2005
    
    $
    
    
    
    $
    494
    
    
    $
    
    
    
    $
    29
    
    
    $
    615
    
    
    $
    1,1382006
    
    
    7,227
    
    
    
    
    
    
    
    2,400
    
    
    
    15
    
    
    
    820
    
    
    
    10,4622007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    681
    
    
    
    6852008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    566
    
    
    
    5662009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492
    
    
    
    492Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    233Total
    
    $
    7,227
    
    
    $
    494
    
    
    $
    2,400
    
    
    $
    48
    
    
    $
    3,407
    
    
    $
    13,576
 The carrying value of the revolving credit agreement approximates fair market
value at March 31, 2004. Because other subordinated debt of $400 thousand 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. As a requirement under certain contracts we are required to post performance
bonds. In order to secure the bonds aggregating $794 thousand, we have issued
letters of credit to the insurance carrier as collateral for these bonds. The
letters of credit expire on June 30, 2004 and will not be extended as
alternative arrangements are being finalized. The following table indicates
the amount of the obligations and current maturity. (Amounts in thousands)Contingent Liabilities and Commitments
    

    Expiration by periodLess thanTotal
    
    1 yearStandby letters of credit
    
    $
    794
    
    
    $
    794
  7.
    
    ACCRUED EXPENSES Accrued expenses consist of the following: March 31,(Amounts in thousands)
    
    2004
    
    2003Accrued lease payments
    
    $
    1,162
    
    
    $
    2,212Accrued contract costs
    
    
    
    
    
    
    438Accrued vacation
    
    
    804
    
    
    
    594Accrued payroll
    
    
    979
    
    
    
    688Payroll taxes accrued and withheld
    
    
    183
    
    
    
    141Other accrued expenses
    
    
    571
    
    
    
    561$
    3,699
    
    
    $
    4,634
 38




---



##### 



8. STOCKBASED COMPENSATION 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 280,000 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 400,000 shares. A summary of options activity is as follows: WeightedAverageNumber of
    
    Exercise PriceShares
    
    Per Share1994
PLANOutstanding at April 1, 2001
    
    
    289,850
    
    
    $
    5.60Granted
    
    
    112,500
    
    
    
    3.63Forfeited/Expired
    
    
    (104,850
    )
    
    
    5.46Outstanding at March 31, 2002
    
    
    297,500
    
    
    
    4.90Granted
    
    
    46,000
    
    
    
    3.34Exercised
    
    
    (750
    )
    
    
    2.60Forfeited/Expired
    
    
    (2,250
    )
    
    
    2.60Outstanding at March 31, 2003
    
    
    340,500
    
    
    
    4.71Granted
    
    
    25,000
    
    
    

5.70Forfeited/Expired
    
    
    (32,500
    )
    
    
    5.49Outstanding at March 31, 2004
    
    
    333,000
    
    
    $
    4.71
 The following table summarizes the information for options outstanding and
exercisable under the 1994 Plan at March 31, 2004. Options OutstandingWeighted Average
    
    Options Outstanding
    
    
    
    
    
    Options ExercisableRange of
    
    Options
    
    Remaining
    
    Weighted Average
    
    Options
    
    Weighted AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise price$  2.60-3.10
    
    
    47,750
    
    
    8 years
    
    $
    2.98
    
    
    
    6,250
    
    
    $
    6.563.55-5.00
    
    
    124,250
    
    
    8 years
    
    
    3.82
    
    
    
    61,500
    
    
    
    6.945.38-5.50
    
    
    64,000
    
    
    6 years
    
    
    5.47
    
    
    
    10,000
    
    
    
    5.505.70
    
    
    25,000
    
    
    10 years
    
    
    5.70
    
    
    
    
    
    
    
    5.75-7.56
    
    
    72,000
    
    
    6 years
    
    
    6.30
    
    
    
    72,000
    
    
    
    6.30$2.60-$7.56
    
    
    333,000
    
    
    
    
    
    
    $
    4.71
    
    
    
    149,750
    
    
    $
    6.52
 39




---



##### 



A summary of Non-Employee Directors Stock Option Plan activity is as follows: WeightedAverageNumber of
    
    Exercise PriceShares
    
    Per ShareOutstanding at April 1, 2002
    
    
    67,750
    
    
    $
    7.03Granted
    
    
    5,000
    
    
    
    5.00Cancelled
    
    
    (833
    )
    
    
    5.00Outstanding at March 31, 2003
    
    
    71,917
    
    
    
    6.91Granted
    
    
    13,000
    
    
    
    4.11Outstanding at March 31, 2004
    
    
    84,917
    
    
    $
    6.48Exercisable, March 31, 2004
    
    
    78,300
    
    
    $
    6.72
 The following table summarizes the information for options outstanding and
exercisable under the Non-Employee Directors Stock Option Plan at March 31,
2004. 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
    
    
    4 years
    
    $
    10.25
    
    
    
    24,250
    
    
    $
    10.257.03
    
    
    10,500
    
    
    5 years
    
    
    7.03
    
    
    
    10,500
    
    
    
    7.037.06
    
    
    12,000
    
    
    6 years
    
    
    7.06
    
    
    
    11,417
    
    
    
    7.065.69
    
    
    8,000
    
    
    7 years
    
    
    5.69
    
    
    
    8,000
    
    
    
    5.691.80
    
    
    13,000
    
    
    8 years
    
    
    1.80
    
    
    
    10,900
    
    
    
    1.805.00
    
    
    4,167
    
    
    9 years
    
    
    5.00
    
    
    
    4,167
    
    
    
    5.004.11
    
    
    13,000
    
    
    10 years
    
    
    4.11
    
    
    
    9,066
    
    
    
    4.11$1.80-10.25
    
    
    84,917
    
    
    
    
    
    
    $
    6.48
    
    
    
    78,300
    
    
    $
    6.72
 Stock-based incentive awards granted under the 1994 Employee Stock Option Plan
prior to March 31, 2001 were stock options with 5 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 90 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. 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 as amended by SFAS No. 148, using the following assumptions for the fiscal
years ended March 31, 2004, 2003 and 2002: risk-free interest rate of 0.95%,
3.73% and 5.10% respectively, dividend yield of 0%, 0% and 0% respectively,
volatility factor related to the expected market price of the 40




---



##### 



Companys common
stock of 43.3%, 43.3%, and 49.5%, 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 fiscal 2004, 2003 and 2002
were $1.48, $2.20 and $3.01, respectively. (For additional information see
Note 1 - Stock-Based Compensation.) 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, (2% beginning January 2004) and at the
Companys discretion, additional amounts based upon the profitability of the
Company. The Companys contributions were $102 thousand, $109 thousand and
$129 thousand for the years ended March 31, 2004, 2003 and 2002, 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 fiscal
years ended March 31, 2004. 11. INCOME TAXES The components of income tax (benefit) expense is as follows for the years
ended March 31: (Amounts in thousands)
    
    2004
    
    2003
    
    2002Current expense:Federal
    
    $
    14
    
    
    $
    18
    
    
    $
    4State
    
    
    136
    
    
    
    42
    
    
    
    56Total current:
    
    
    150
    
    
    
    60
    
    
    
    60Deferred expense:Federal
    
    
    (3,712
    )
    
    
    
    
    
    
    State
    
    
    (188
    )
    
    
    
    
    
    
    Total deferred:
    
    
    (3,900
    )
    
    
    
    
    
    
    Income tax (benefit) expense
    
    $
    (3,750
    )
    
    $
    60
    
    
    $
    60
 The components of the Companys deferred tax assets and liabilities consist of
the following at March 31: (Amounts in thousands)
    
    2004
    
    2003Deferred tax assets:Accounts receivable reserves
    
    $
    60
    
    
    $
    108Inventory reserve
    
    
    380
    
    
    
    260Inventory capitalization
    
    
    92
    
    
    
    Depreciation/amortization
    
    
    77
    
    
    
    Accrued compensation/vacation
    
    
    321
    
    
    
    238AMT credit carryforwards
    
    
    88
    
    
    
    60Net operating loss carryforward
    
    
    2,748
    
    
    
    3,038Deferred gain on building sale
    
    
    134
    
    
    
    1583,900
    
    
    
    3,862Deferred tax liabilities:Depreciation/amortization
    
    
    
    
    
    
    5073,900
    
    
    
    3,355Valuation allowance
    
    
    
    
    
    
    (3,355
    )Net deferred tax asset
    
    $
    3,900
    
    
    $
    
 41




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##### 



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. Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and the tax jurisdictions in which it
operates. The Company adjusts its valuation allowance from time to time based
on such evaluations. Based upon the Companys historical taxable income, when
adjusted for non-recurring items, net operating loss carryback potential and
estimates of future profitability, management concluded at March 31, 2004 that
future income will more than likely be sufficient to realize its deferred tax
assets. Accordingly, we reversed the offsetting valuation allowance in its
entirety based on the weight of the positive and negative evidence regarding
recoverability of the Companys deferred tax assets, which resulted in a $3.8
million tax benefit in the fiscal year ended March 31, 2004. Management
believes that based on the weight of the evidence, consistent past
profitability and estimates of future profitability that the valuation
allowance established in prior years is no longer necessary. The Company has
$8.1 million of net operating loss carryforwards, virtually all of which expire
in fiscal 2019. The differences between the provision for income taxes at the expected
statutory rate of 34% for continuing operations and those shown in the
consolidated statements of operations are as follows for the years ended March
31: 2004
    
    2003
    
    2002(Benefit) provision for income taxes
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    35.0
    %(Reduction) increase in taxes resulting from:State taxes, net of federal benefit
    
    
    6.2
    
    
    
    5.0
    
    
    
    9.2HTSI state taxes, net of federal benefit
    
    
    12.2
    
    
    
    0.0
    
    
    
    0.0Goodwill amortization
    
    
    0.0
    
    
    
    0.0
    
    
    
    18.9Permanent items
    
    
    9.1
    
    
    
    0.0
    
    
    
    5.4Other
    
    
    (1.1
    )
    
    
    (7.8
    )
    
    
    0.8Change in valuation allowance for deferred tax assets
    
    
    (845.0
    )
    
    
    (22.8
    )
    
    
    (52.7
    )Total
    
    
    (784.6
    )%
    
    
    8.4
    %
    
    
    16.6
    %
 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: (Amounts in thousands) Year ending March 31,2005
    
    $
    6152006
    
    
    8202007
    
    
    6812008
    
    
    5662009
    
    
    492Thereafter
    
    
    233Total minimum lease payments
    
    $
    3,407
 Deferred income of $337 thousand and $397 thousand at March 31, 2004 and 2003,
respectively, represents the deferred gain on the sale  lease-back of the
Companys office complex. The deferred income is being recognized as a
reduction of rent expense over the remaining life of the lease. Total rent expense under operating leases was $782 thousand, $632 thousand and
$677 thousand for the fiscal years ended March 31, 2004, 2003 and 2002,
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, 2004 are
$1.1 million. 42




---



##### 



13. RELATED PARTY TRANSACTIONS The Estate of Arch C. Scurlock, the owner of 784,422 shares, or 27% of the
Companys common stock, holds $400 thousand 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 $231 thousand for fiscal year 2004 and $300 thousand for each fiscal
year 2003 and 2002. (See Note 6). During the fiscal year ended March 31, 2004, the lender on our revolving credit
facility approved principal payments of $1.6 million to reduce the Companys 7%
convertible subordinated debt. After the payment, the outstanding principal
balance was $400 thousand. The bank also approved $300 thousand in payments
for accrued interest. During the fiscal year ended March 31, 2003 after
receiving waivers from the bank, we made payment to the Estate of Arch C.
Scurlock of $225 thousand for accrued interest. On January 2, 2002, we made a
payment of $100 thousand to the Estate for interest due. At March 31, 2004 and
2003, interest payable to the Estate was $140 thousand and $169 thousand,
respectively. On July 23, 2003, the Company completed a private placement of 291,971 shares
of its common stock, at $4.11 per share for a total of $1.2 million. The
purchasers included four members of the management team as well as certain
directors and one existing shareholder of the Company. The private placement
also involved the issuance of warrants to purchase 58,394 shares of common
stock at an exercise price of $4.93. The fair value of the warrants granted to the participants of the private
placement was estimated to be approximately $69 thousand using the
Black-Scholes option pricing model with the following assumptions: fair market
value of common stock of $4.11, no dividend yield, expected volatility of 43%,
weighted average expected life of four years and risk free rate of return of .95%.
The $69 thousand is reported as a reduction of the proceeds of the
issuance of the common stock. In conjunction with the acquisition of Microserv, the Company issued $494
thousand in notes to the former Microserv shareholders. Interest is payable at
the rate of 5% quarterly and in arrears. Interest payments were made to three
individuals, one of whom was a 5% shareholder/employee, one a director and one
who is an executive in the Company. (See Note 4). 14. COMMITMENTS AND CONTINGENCIES Costs incurred by the Company on the performance of United States Government
contracts are subject to audit by the Defense Contract Audit Agency. 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. 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. 43




---



##### 



15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid the following amounts for interest and income taxes
during the years ended March 31: (Amounts in thousands)
    
    2004
    
    2003
    
    2002Interest
    
    $
    611
    
    
    $
    649
    
    
    $
    634Income taxes
    
    $
    81
    
    
    $
    22
    
    
    $
    37Disclosure of non-cash financing activities:5% notes payable to former Microserv shareholders
    
    $
    494
    
    
    $
    
    
    
    $
    Common stock issued for the purchase of Microserv
    
    $
    1,871
    
    
    $
    
    
    
    $
    Fees to investment bankers
    
    $
    117
    
    
    $
    
    
    
    $
    Fair value of assets acquired
    
    $
    1,619
    
    
    $
    
    
    
    $
    Warrants issued in connection with private placement
    
    $
    69
    
    
    $
    
    
    
    $
    Common stock issued in lieu of interest payment
    
    $
    
    
    
    $
    
    
    
    $
    331
 44




---



##### 



16. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings
per share: (Amounts in thousands except share data) Years Ended March 31,2004
    
    2003
    
    2002Numerator for earnings per share:Net income as reported - Basic
    
    $
    4,228
    
    
    $
    648
    
    
    $
    302Interest on convertible subordinated
debt (net of tax)
    
    
    77
    
    
    
    
    
    
    
    Net Earnings - Dilutive
    
    $
    4,305
    
    
    $
    648
    
    
    $
    302Denominator:Denominator for basic earnings per share-
Weighted-average shares outstanding
    
    
    2,638,345
    
    
    
    2,175,781
    
    
    
    2,100,321Effect of dilutive securities:7% convertible debenture
    
    
    97,324
    
    
    
    
    
    
    
    Employee stock options
    
    
    43,226
    
    
    
    36,579
    
    
    
    6,157Non qualified stock options
    
    
    2,124
    
    
    
    
    
    
    
    Warrants
    
    
    6,637
    
    
    
    
    
    
    
    Dilutive potential common sharesDenominator for diluted earnings per
share  adjusted weighted-average
shares and assumed conversions
    
    
    2,787,656
    
    
    
    2,212,360
    
    
    
    2,106,478Earnings per share - Basic:
    
    $
    1.60
    
    
    $
    .30
    
    
    $
    .14Earnings per share - Diluted
    
    $
    1.54
    
    
    $
    .30
    
    
    $
    .14
 The computation of basic earnings per share is based on the weighted average
number of shares outstanding during the period. Diluted earnings 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. 17. 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. The Company has a number of significant customers. The Companys largest
customer accounted for 14%, 15% and 16% of the Companys revenues for the years
ended March 31, 2004, 2003 and 2002, respectively. The Companys five largest
customers, collectively, accounted for 56%, 57% and 42%, of revenues for the
years ended March 31, 2004, 2003 and 2002, respectively. The Company
anticipates that significant customer concentrations will continue for the
foreseeable future, although the companies which constitute the Companys
largest customers may change.
Revenues from services rendered to the United States Government and the
relative percentages of such revenues to revenues from continuing operations
for the fiscal years ended March 31, 2004, 2003 and 2002 were $ 11.0 million
(22%), $12.1 million (24%), $8.5 million (17%). 45




---



##### 



18. UNAUDITED QUARTERLY RESULTS OF OPERATIONS:  (Amounts in thousands except share data) June 30,
    
    September 30,
    
    December 31,
    
    March 31,2003
    
    2003
    
    2003
    
    2004(1)Revenues
    
    $
    10,676
    
    
    $
    12,461
    
    
    $
    13,380
    
    
    $
    13,020Gross Margin
    
    
    1,320
    
    
    
    1,496
    
    
    
    1,578
    
    
    
    1,534Net income
    
    $
    51
    
    
    $
    152
    
    
    $
    202
    
    
    $
    3,823Basic earnings per share
    
    $
    .02
    
    
    $
    .06
    
    
    $
    .07
    
    
    $
    1.31Diluted earning per share
    
    $
    .02
    
    
    $
    .06
    
    
    $
    .07
    
    
    $
    1.25
 June 30,
    
    September 30,
    
    December 31,
    
    March 31,2002
    
    2002
    
    2002
    
    2003Revenues
    
    $
    14,015
    
    
    $
    14,055
    
    
    $
    11,348
    
    
    $
    11,000Gross Margins
    
    
    1,545
    
    
    
    1,602
    
    
    
    1,566
    
    
    
    1,505Net income
    
    $
    143
    
    
    $
    190
    
    
    $
    151
    
    
    $
    164Basic earnings per share
    
    $
    .07
    
    
    $
    .09
    
    
    $
    .07
    
    
    $
    .07Diluted earning per share
    
    $
    .07
    
    
    $
    .09
    
    
    $
    .07
    
    
    $
    .07
  (1)
    
    See Note 11 to the consolidated financial statements for discussion on
deferred tax benefit. 46




---



##### 



Halifax Corporation 
 Schedule II, Valuation and Qualifying Accounts March 31, 2004 Balance at
    
    
    
    
    
    
    
    
    
    Balance atbeginning
    
    
    
    
    
    
    
    
    
    end ofof year
    
    Additions
    
    Deductions
    
    YearYear Ended March 31, 2002Allowance for doubtful
Accounts
    
    $
    319,000
    
    
    $
    300,000
    
    
    $
    329,000
    
    
    $
    290,000Allowance for inventory
Obsolescence
    
    $
    700,000
    
    
    $
    200,000
    
    
    $
    300,000
    
    
    $
    600,000Year Ended March 31, 2003Allowance for doubtful
Accounts
    
    $
    290,000
    
    
    $
    120,000
    
    
    $
    140,000
    
    
    $
    270,000Allowance for inventory
Obsolescence
    
    $
    600,000
    
    
    $
    165,000
    
    
    $
    135,000
    
    
    $
    630,000Year Ended March 31, 2004Allowance for doubtful
Accounts
    
    $
    270,000
    
    
    $
    84,000
    
    
    $
    206,000
    
    
    $
    148,000Allowance for inventory
Obsolescence
    
    $
    630,000
    
    
    $
    379,000
    
    
    $
    57,000
    
    
    $
    952,000
 47




---



##### 



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 
 Item 9A.Controls and Procedures The Company, under the supervision and with the participation of its
management, including its principal financial officer, evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures as of the end of the period covered by this report. Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Companys disclosure controls and procedures are effective
in reaching a reasonable level of assurance that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time period specified in the Securities and Exchange Commissions
rules and forms. There have been no changes in internal controls over financial reporting
(Internal Controls) during the quarter covered by this report that have
materially affected or which are reasonably likely to materially affect
Internal Controls. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitation in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. The
Company conducts periodic evaluations to enhance, where necessary its
procedures and controls. 48




---



##### 



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 is incorporated by reference certain information from our definitive proxy
statement, for our 2004 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 contained in Part 1, Item 4A Executive Officers of the Registrant of this
Form 10-K is hereby incorporated by reference in this Item 10. 
 Item 11.Executive Compensation The information required to be included in Item 11 of Part III of this
Form 10-K is incorporated by reference from our definitive proxy statements,
for our 2004 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 and Related Stockholders Matters Equity Compensation Plan Information The following table sets forth the information regarding equity compensation
plans, as of March 31, 2004. (c)Number of securities(a)
    
    (b)
    
    remaining available forNumber of securities to
    
    Weighted-average
    
    future issuance underbe issued upon exercise
    
    exercise price of
    
    equity compensation planof outstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security
holders(1)
    
    
    409,917
    
    
    $
    5.09
    
    
    
    72,533Equity compensation
plans not approved
by security
holders(2)
    
    
    123,393
    
    
    
    4.64
    
    
    
    533,310
    
    
    $
    4.99
    
    
    
    72,533
  (1)
    
    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, 2004, there were 17,550 options
previously exercised, 333,000 options issued, and 49,450 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, 2003 there were
76,917 options issued and 23,083 options available for grant.  (2)
    
    In conjunction with the private placement of $1.2 million completed on
July 23, 2003, the Company issued warrants to purchase 108,394 shares of
common stock at an exercise price of $4.93 per share, a 120% premium over
the closing price of $4.11.  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. 49




---



##### 



(2)
    
    During fiscal year 2004, the Company extended options to purchase 15,000 shares
common stock from the 1994 Key Employee Stock Options to two former
employees. These options are non-qualified options. The exercise price of the options was
$2.60 per share for 5,000 options to purchase common stock and $7.56 per
share for 10,000 options to purchase common stock. The information required to be included in Item 12 of Part III of this
Form 10-K is incorporated by reference from our definitive proxy statement for
our 2004 annual meeting of shareholders to be filed with the SEC not later than
120 days after the end of our fiscal year covered by this report. 
 Item 13.Certain Relationships and Related Transactions The information required to be included in Item 13 of Part III of this Form
10-K is incorporated by reference from our definitive proxy statement for our
2004 annual meeting of shareholders to be filed with the SEC not later than 120
days after the end of our fiscal year covered by this report. 
 Item 14.Principal Accountant Fees and Services The information required to be included in Item 14 of Part III of this Form
10-K is incorporated by reference from our definitive proxy statement for our
2004 annual meeting of shareholders to be filed with the SEC not later than 120
days after the end of our fiscal year covered by this report. 50




---



##### 



PART IV 
 Item 15.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, 2004, 2003 and 2002
    
    Consolidated Balance Sheets as of March 31, 2004 and 2003
    
    Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002
    
    Consolidated Statements of Changes in Stockholders Equity (Deficit) for the years ended March 31, 2004, 2003 and 2002
    
    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-KThe Company filed a current report on Form 8-K on April 17, 2004
announcing a new maintenance contract.The Company furnished a current report on Form 8-K on May 27, 2004 to
include its earnings Press Release dated May 27, 2004.(c)
    
    Exhibits1
    
    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.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.)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.) 51




---



##### 



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 Exhibit 4.6 to Form 10-K for the year ended
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
Exhibit 4.7 to Form 10-K for the year ended 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 for the quarter
end December 30, 2002.)4.10
    
    Business Loan between the Company and Southern Financial Bank March 6,
2002. (Incorporated by reference to Exhibit 4.10 to Form 10-K for the
year ended March 31, 2002.)4.11
    
    Research Industries Incorporated Promissory Note dated October 8, 1998.
(Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended
March 31, 2002.)4.12
    
    Research Industries Incorporated Promissory Note dated October 13, 1998.
(Incorporated by reference to Exhibit 4.12 to Form 10-K for the year ended
March 31, 2002.)4.13
    
    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.)4.14
    
    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.)4.15
    
    Research Industries Incorporated Promissory Note dated January 27, 1998.
(Incorporated by reference to Exhibit 4.15 to Form 10-K for the year ended
March 31, 2003.)4.16
    
    Amended Revolving Credit and Security Agreement dated August 20, 2003
(Incorporated by reference to Exhibit 99.1 to Form 8-K dated August 29,
2003.4.17
    
    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
    
    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.) 52




---



##### 



10.8
    
    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.)10.9
    
    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.)10.10
    
    Severance Agreement of Thomas Basile, dated March 15, 2001.
(Incorporated by reference to Exhibit 10.10 to Form 10-Q for the quarter
ended September 30, 2001.)10.11
    
    Severance Agreement of James Sherwood, dated November 9, 1999.
(Incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter
ended September 30, 2001.)10.12
    
    Severance Agreement of Jim L. May, dated March 15, 2001. (Incorporated
by reference to Exhibit 10.12 to Form 10-Q for the quarter ended September
30, 2001.)10.13
    
    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.)10.14
    
    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.)10.15
    
    Registration Rights and First Offer Agreement dated August 29, 2003. (Incorporated by reference to
Exhibit 99.2 to Form 8-K dated August 29, 2003.10.16
    
    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.)21
    
    Subsidiaries of the registrant.23.1
    
    Independent Auditors Consent31.1
    
    Certification of Charles L. McNew, Principal Executive Officer, of Halifax Corporation dated
June 14, 2004.31.2
    
    Certification of Joseph Sciacca, Principal Financial Officer, of Halifax Corporation dated June 14, 2004.32.1
    
    Certificate of Charles L. McNew, Principal Executive Officer, of Halifax
Corporation dated June 14, 2004 pursuant to 18US.C. Section 1350.32.2
    
    Certificate of Joseph Sciacca, Principal Financial Officer, of
Halifax Corporation dated June 14, 2004
pursuant to 18 U.S.C. Section 1350.99.1
    
    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.)99.2
    
    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.) 53




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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. McNewPresident and Chief Executive Officer
    
    Date: 6/14/04
 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
    
    President and Chief
Executive Officer and Director,
(Principal Executive Officer)
    
    6/14/04/s/Joseph Sciacca

Joseph Sciacca
    
    Vice President, Finance, and
Chief Financial Officer,
(Principal Financial
Accounting Officer)
    
    6/14/04/s/John H. Grover

John H. Grover
    
    Chairman of the
Board of Directors
    
    6/14/04/s/Thomas L. Hewitt

Thomas L. Hewitt
    
    Director
    
    6/14/04/s/John M. Toups

John M. Toups
    
    Director
    
    6/14/04/s/Daniel R. Young

Daniel R. Young
    
    Director
    
    6/14/04/s/Arch C. Scurlock, Jr.

Arch C. Scurlock, Jr.
    
    Director
    
    6/14/04/s/Gerald F. Ryles

Gerald F. Ryles
    
    Director
    
    6/14/04
 54