##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal year ended: December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from  to
 Commission
File Number: 000-50373
 Horne International, Inc.
  Delaware
    
    90-0182158(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)2677 Prosperity Avenue, Suite 300,Fairfax, Virginia
    
    22031(Address of principal executive offices)
    
    (Zip Code)
 703-641-1100
 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
  SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
  o þ
 o þ
 þ o
 þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE.




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TABLE OF CONTENTS
 Forward-Looking Statements
    
    
    1PART I  FINANCIAL INFORMATIONItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    5Item 1B.
    
    Unresolved Staff Comments
    
    
    7Item 2.
    
    Properties
    
    
    8Item 3.
    
    Legal Proceedings
    
    
    8Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    8Item 5.
    
    Market for the
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    8Item 6.
    
    Selected Financial Data
    
    
    9Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 7A.
    
    Quantitative and Qualitative
Disclosures about Market Risk
    
    
    18Item 8.
    
    Financial Statements and Supplementary Data
    
    
    18Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    47Item 9A.
    
    Controls and Procedures
    
    
    47Item 9B.
    
    Other Information
    
    
    47Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    47Item 11.
    
    Executive Compensation
    
    
    50Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    56Item 13.
    
    Certain Relationships and Related Transactions
    
    
    57Item 14.
    
    Principal Accountant Fees and Services
    
    
    58Item 15.
    
    Exhibits and Financial Statements Schedules
    
    
    58
 i




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FORWARD-LOOKING STATEMENTS
  Item 1. Business.
      Business Segments
  1




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##### 



Security Solutions
     Repair and Overhaul
   Services
   2




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##### 



Discontinued Operations
  Backlog
  Funded Backlog (all dollars in thousands)
 2007
    
    2008
    
    2009+Security Solutions
    
    $
    979
    
    
    $
    
    
    
    $
    Repair and Overhaul
    
    
    
    
    
    
    
    
    
    
    Services
    
    
    5,920
    
    
    
    
    
    
    
    Total Funded Backlog
    
    $
    6,899
    
    
    $
    
    
    
    $
    
   Government Contracts
  Material Government Contract Provisions
  3




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##### 




    
    terminate existing contracts for convenience, which affords the U.S. government the
right to terminate the contract in whole or in part anytime it wants for any reason or
no reason, as well as for default;
    
    reduce or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
    
    cancel multi-year contracts and related orders, if funds for contract performance
for any subsequent year become unavailable;
    
    claim rights in products and systems produced by its contractor;
    
    adjust contract costs and fees on the basis of audits completed by its agencies;
    
    suspend or debar a contractor from doing business with the U.S. government; and
    
    control or prohibit the export of products.
  Environmental Matters
  Available Information
 www.sec.gov.
 4




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##### 



Item 1A. Risk Factors.
  Increased corporate overhead structure combined with a reduced operating base may impact our
ability to operate.
   Continued losses in our Security Solutions segment may require the Company to consider strategic
alternatives.
  Continued poor financial performance may require the Company to seek alternative financing.
  We may not receive the full amount of our contract awards.
  Increased raw material prices may adversely affect contract profitability.
  5




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##### 



Our quarterly operating results may fluctuate significantly as a result of factors outside of our
control, which could cause the market price of our common stock to decline.
  
    
    Fluctuations in revenue earned on contracts;
    
    Commencement, completion, or termination of contracts during any particular quarter;
    
    Variable purchasing patterns under GSA schedule contracts and agency-specific indefinite
delivery/indefinite quantity contracts;
    
    Provision of services under a share-in-savings or performance-based contract;
    
    Additions and departures of key personnel;
    
    Strategic decisions by us or our competitors, such as acquisitions, divestitures,
spin-offs, joint ventures, strategic investments, or changes in business strategy;
    
    Contract mix, the extent of use of subcontractors, and the level of third-party hardware
and software purchases for customers;
    
    Changes in presidential administrations and senior federal government officials that
affect the timing of procurements; and
    
    Changes in policy or budgetary measures that adversely affect government contracts in
general.
  We depend on contracts with U.S. federal government agencies or with prime contractors of such
agencies for substantially all of our revenue, and if our relationships with these agencies were
harmed, our business could be threatened.
  Our failure to comply with complex procurement laws and regulations could cause us to lose business
and subject us to a variety of penalties.
  
    
    The Federal Acquisition Regulation, and agency regulations analogous or supplemental to
the Federal Acquisition Regulation, which comprehensively regulate the formation,
administration, and performance of government contracts, including provisions relating to
the avoidance of conflicts of interest and intra-organizational
conflicts of interest;
    
    The Truth in Negotiations Act, which requires certification and disclosure of all cost
and pricing data in connection with some contract negotiations;
 6




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##### 




    
    The Procurement Integrity Act, which requires evaluation of ethical conflicts
surrounding procurement activity and establishing certain employment restrictions for
individuals who participate in the procurement process;
    
    The Cost Accounting Standards, which impose accounting requirements that govern our
right and method to reimbursement under some cost-based government contracts;
    
    Laws, regulations, and executive orders restricting the use and dissemination of
information classified for national security purposes and the exportation of specified
products, technologies, and technical data;
    
    Laws surrounding lobbying activities a corporation may engage in to support corporate interests; and
    
    Compliance with anti-trust laws.
 Unfavorable government audit results could force the Company to adjust previously reported
operating results and could subject us to a variety of penalties and sanctions.
    Item 1B. Unresolved Staff Comments.
  7




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##### 



Item 2. Properties.
  Segment
    
    Location
    
    Leased/Owned
    
    UsageSecurity Solutions
    
    Ft. Walton Beach, FL
    
    Owned
    
    ManufacturingFt. Walton Beach, FL
    
    Leased
    
    ManufacturingRepair and Overhaul
    
    Port Canaveral, FL
    
    Leased
    
    Fabrication
    Item 3. Legal Proceedings.
  Item 4. Submission of Matters to a Vote of Security Holders.
  PART II
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
 (a) Market Performance of Common Stock, Stockholders of Record and Dividends on Common Stock.
 High
    
    Low2005First Quarter
    
    $
    2.60
    
    
    $
    1.44Second Quarter
    
    $
    2.37
    
    
    $
    1.00Third Quarter
    
    $
    1.63
    
    
    $
    0.91Fourth Quarter
    
    $
    1.17
    
    
    $
    0.572006First Quarter
    
    $
    1.22
    
    
    $
    0.65Second Quarter
    
    $
    1.15
    
    
    $
    0.68Third Quarter
    
    $
    0.93
    
    
    $
    0.42Fourth Quarter
    
    $
    0.60
    
    
    $
    0.33
 8




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##### 



2004 Non-Statutory Stock Option Plan
  Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan
  Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan
   Item 6.
Selected Financial Data (all dollars in $000s except per share data).
 2006
    
    2005
    
    2004
    
    2003
    
    2002Revenue
    
    $
    28,256
    
    
    $
    33,156
    
    
    $
    11,134
    
    
    $
    13,330
    
    
    $
    12,261Net
Operating Income (loss) from Continuing
Operations
    
    
    (6,354
    )
    
    
    (5,227
    )
    
    
    (40,618
    )
    
    
    381
    
    
    
    (79
    )Per share of Common
Stock-basic & diluted
    
    
    (0.15
    )
    
    
    (0.12
    )
    
    
    (1.21
    )
    
    
    0.02
    
    
    
    (0.00
    )Net Income (loss)
    
    
    (8,594
    )
    
    
    (3,986
    )
    
    
    (40,307
    )
    
    
    206
    
    
    
    (611
    )Per share of Common
Stock-basic & diluted
    
    
    (0.20
    )
    
    
    (0.09
    )
    
    
    (1.20
    )
    
    
    0.01
    
    
    
    (0.03
    )Total Assets
    
    
    30,064
    
    
    
    49,404
    
    
    
    31,212
    
    
    
    4,634
    
    
    
    5,128Long-term Debt
    
    
    1,994
    
    
    
    2,096
    
    
    
    
    
    
    
    2,456
    
    
    
    2,006Shareholder Equity
    
    
    24,517
    
    
    
    35,097
    
    
    
    28,621
    
    
    
    (889
    )
    
    
    (1,176
    )EBITDA less stock option expense
    
    
    (6,706
    )
    
    
    (1,885
    )
    
    
    (38,878
    )
    
    
    732
    
    
    
    (158
    )Adjusted EBITDA
    
    $
    (4,012
    )
    
    $
    (2,536
    )
    
    $
    (38,878
    )
    
    $
    732
    
    
    $
    340
  9




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##### 



EBITDA Reconciliation
 2006
    
    2005
    
    2004
    
    2003
    
    2002Net Income (loss)
    
    $
    (8,594
    )
    
    $
    (3,986
    )
    
    $
    (40,307
    )
    
    $
    206
    
    
    $
    (611
    )Depreciation/Amortization
    
    
    1,813
    
    
    
    464
    
    
    
    176
    
    
    
    139
    
    
    
    149Interest expense (income)
    
    
    (125
    )
    
    
    176
    
    
    
    (125
    )
    
    
    295
    
    
    
    304Tax expense (benefit)
    
    
    26
    
    
    
    62
    
    
    
    (21
    )
    
    
    92
    
    
    
    Options issued to Employees/directors
    
    
    174
    
    
    
    1,399
    
    
    
    1,399
    
    
    
    
    
    
    
    EBITDA less stock optioin expense
    
    
    (6,706
    )
    
    
    (1,885
    )
    
    
    (38,878
    )
    
    
    732
    
    
    
    (158
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Loss(gain) from discontinued operations
    
    
    2,694
    
    
    
    (651
    )
    
    
    
    
    
    
    
    
    
    
    407Adjusted EBITDA
    
    $
    (4,012
    )
    
    $
    (2,536
    )
    
    $
    (38,878
    )
    
    $
    732
    
    
    $
    340
 Quarterly Financial Data
 2006
 Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    12,746
    
    
    $
    6,233
    
    
    $
    4,789
    
    
    $
    4,488Gross Profit
    
    
    1,502
    
    
    
    910
    
    
    
    544
    
    
    
    796Net Income
    
    
    (507
    )
    
    
    (4,562
    )
    
    
    (1,532
    )
    
    
    (1,994
    )Basic & diluted earnings per share
    
    $
    (0.01
    )
    
    $
    (0.10
    )
    
    $
    (0.04
    )
    
    $
    (0.05
    )
 2005
 Q1
    
    Q2
    
    Q3
    
    Q4Revenue
    
    $
    1,762
    
    
    $
    6,899
    
    
    $
    9,055
    
    
    $
    15,440Gross Profit
    
    
    362
    
    
    
    802
    
    
    
    919
    
    
    
    1,600Net Income
    
    
    (1,745
    )
    
    
    (1,058
    )
    
    
    (57
    )
    
    
    (1,126
    )Basic & diluted earnings per share
    
    $
    (0.04
    )
    
    $
    (0.03
    )
    
    $
    (0.00
    )
    
    $
    (0.03
    )
 10




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##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
   Executive-Level Overview
  Critical Accounting Estimates
   Revenue Recognition
   11




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##### 



Allowance for Bad Debts
  Net Operating Loss Carry-Forwards
  Goodwill
   12




---



##### 



Recent Accounting Pronouncements
      Overall Results of Operations
  13




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##### 



For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004Revenues
    
    $
    28,256
    
    
    
    100.0
    %
    
    $
    33,156
    
    
    
    100.0
    %
    
    $
    11,134
    
    
    
    100.0
    %Cost of Revenue
    
    
    24,504
    
    
    
    86.7
    %
    
    
    29,473
    
    
    
    88.9
    %
    
    
    11,188
    
    
    
    100.5
    %Gross Profit(Loss)
    
    
    3,752
    
    
    
    13.3
    %
    
    
    3,683
    
    
    
    11.1
    %
    
    
    (54
    )
    
    
    -0.5
    %Operating Profit
    
    $
    (6,354
    )
    
    
    -22.5
    %
    
    $
    (5,227
    )
    
    
    -15.8
    %
    
    $
    (40,618
    )
    
    
    -364.8
    %
     Security Solutions
 For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004Revenues
    
    $
    3,886
    
    
    
    100.0
    %
    
    $
    4,502
    
    
    
    100.0
    %
    
    $
    9,656
    
    
    
    100.0
    %Cost of Revenue
    
    
    4,922
    
    
    
    126.7
    %
    
    
    5,488
    
    
    
    121.9
    %
    
    
    10,413
    
    
    
    107.8
    %Gross Loss
    
    
    (1,036
    )
    
    
    -26.7
    %
    
    
    (986
    )
    
    
    -21.9
    %
    
    
    (757
    )
    
    
    -7.8
    %Operating Loss
    
    $
    (1,848
    )
    
    
    -47.6
    %
    
    $
    (2,258
    )
    
    
    -50.2
    %
    
    $
    (2,490
    )
    
    
    -25.8
    %
   14




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##### 



Repair and Overhaul
 For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004Revenues
    
    $
    2,711
    
    
    
    100.0
    %
    
    $
    1,921
    
    
    
    100.0
    %
    
    
    
    
    
    
    N/ACost of Revenue
    
    
    1,745
    
    
    
    64.4
    %
    
    
    1,186
    
    
    
    61.7
    %
    
    
    
    
    
    
    N/AGross Profit
    
    
    966
    
    
    
    35.6
    %
    
    
    735
    
    
    
    38.3
    %
    
    
    
    
    
    
    N/AOperating Profit
    
    $
    443
    
    
    
    16.3
    %
    
    $
    345
    
    
    
    18.0
    %
    
    
    
    
    
    
    N/A
   Services
 For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004Revenues
    
    $
    21,659
    
    
    
    100.0
    %
    
    $
    26,733
    
    
    
    100.0
    %
    
    $
    1,478
    
    
    
    100.0
    %Cost of Revenue
    
    
    17,837
    
    
    
    82.4
    %
    
    
    22,799
    
    
    
    85.3
    %
    
    
    775
    
    
    
    52.4
    %Gross Profit
    
    
    3,822
    
    
    
    17.6
    %
    
    
    3,934
    
    
    
    14.7
    %
    
    
    703
    
    
    
    47.6
    %Operating Profit
    
    $
    1,291
    
    
    
    6.0
    %
    
    $
    1,656
    
    
    
    6.2
    %
    
    $
    678
    
    
    
    45.9
    %
   15




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##### 



Corporate Expenses
 For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004Selling, General & Administrative Expenses
    
    $
    6,240
    
    
    $
    4,970
    
    
    $
    38,806
  Discontinued Operations
 For the Year ended December 31,
(all dollars in 000s)
 2006
    
    2005
    
    2004(Loss) earnings from discontinued operations
    
    $
    (2,694
    )
    
    $
    651
    
    
    
    
  Backlog by Segment
  Funded Backlog (all dollars in thousands)
 2007
    
    2008
    
    2009+Security Solutions
    
    $
    979
    
    
    $
    
    
    
    $
    Repair and Overhaul
    
    
    
    
    
    
    
    
    
    
    Services
    
    
    5,920
    
    
    
    
    
    
    
    Total Funded Backlog
    
    $
    6,899
    
    
    $
    
    
    
    $
    
   16




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##### 



Liquidity and Capital Resources
      Contractual Obligations
  2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Operating Leases
    
    $
    506
    
    
    $
    566
    
    
    $
    505
    
    
    $
    518
    
    
    $
    349
    
    
    $
    Capital Leases
    
    
    24
    
    
    
    26
    
    
    
    28
    
    
    
    15
    
    
    
    
    
    
    
    Debt Service
    
    
    44
    
    
    
    48
    
    
    
    53
    
    
    
    57
    
    
    
    62
    
    
    
    1,637Total Lease Commitments
    
    $
    574
    
    
    $
    640
    
    
    $
    586
    
    
    $
    590
    
    
    $
    411
    
    
    $
    1,637
  17




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##### 



Off-Balance Sheet Arrangements
  Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
 Interest Rate Risk
   Foreign Exchange Risk
   Item 8. Financial Statements and Supplementary Data.
  Financial Statements
 Reports of Independent Registered Public Accounting Firms
    
    
    [19]Consolidated Balance Sheets: December 31, 2006 and 2005
    
    
    [21]Consolidated Statements of Operations and Comprehensive Income
(Loss): Years ended December 31, 2006, 2005, and 2004
    
    
    [22]Consolidated
Statements of Stockholders Equity: Years ended December 31, 2006, 2005, and 2004
    
    
    [23]Consolidated Statements of Cash Flows: Years ended December 31,
2006, 2005, and 2004
    
    
    [24]Notes to Consolidated Financial Statements
    
    
    [25]
 18




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##### 



19




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##### 



/s/ TEDDER, JAMES, WORDEN & ASSOCIATES, P.A.
    20




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##### 



December
    
    
    December31, 2006
    
    
    31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,465
    
    
    $
    1,813Receivables, net
    
    
    5,170
    
    
    
    11,638Inventories
    
    
    156
    
    
    
    258Prepaid expenses & Other current assets
    
    
    333
    
    
    
    387Current assets of discontinued operations (Note 3)
    
    
    
    
    
    
    11,585Total current assets
    
    
    10,124
    
    
    
    25,681Property and equipment, net
    
    
    5,737
    
    
    
    5,030Goodwill
    
    
    3,529
    
    
    
    15,222Other intangibles, net
    
    
    9,007
    
    
    
    Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    1,356
    
    
    
    81Other assets of discontinued operations (Note 3)
    
    
    
    
    
    
    3,079TOTAL ASSETS
    
    $
    30,064
    
    
    
    49,404LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    717
    
    
    $
    5,847Accrued expenses
    
    
    2,517
    
    
    
    1,900Deferred revenues
    
    
    319
    
    
    
    376Income taxes payable
    
    
    
    
    
    
    156Current portion of longterm debt
    
    
    68
    
    
    
    78Current liabilities of discontinued operations (Note 3)
    
    
    
    
    
    
    3,365Total current liabilities
    
    
    3,621
    
    
    
    11,722Longterm liabilities:Long term debt, less current portion
    
    
    1,926
    
    
    
    2,018Noncurrent liabilities of discontinued operations (Note 3)
    
    
    
    
    
    
    464TOTAL LIABILITIES
    
    
    5,547
    
    
    
    14,204Commitments and contingencies (Note 18)Minority interest of discontinued operations (Note 3)
    
    
    
    
    
    
    103Stockholders equity:Preferred stock, $0.0001 par value; 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 80,000,000 shares authorized,
41,272,200 and 44,072,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paidin capital
    
    
    78,371
    
    
    
    79,866Accumulated deficit
    
    
    (53,858
    )
    
    
    (45,264
    )Accumulated other comprehensive income
    
    
    
    
    
    
    491Total stockholders equity
    
    
    24,517
    
    
    
    35,097TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    30,064
    
    
    
    49,404
  21




---



##### 



Twelve months endedDecember 31,2006
    
    
    2005
    
    
    2004RevenueServices
    
    $
    23,527
    
    
    $
    28,105
    
    
    $
    8,439Products
    
    
    4,729
    
    
    
    5,051
    
    
    
    2,695Total
    
    
    28,256
    
    
    
    33,156
    
    
    
    11,134Cost of RevenueServices
    
    
    19,261
    
    
    
    24,140
    
    
    
    7,967Products
    
    
    5,243
    
    
    
    5,333
    
    
    
    3,221Total
    
    
    24,504
    
    
    
    29,473
    
    
    
    11,188Gross ProfitServices
    
    
    4,266
    
    
    
    3,965
    
    
    
    472Products
    
    
    (514
    )
    
    
    (282
    )
    
    
    (526
    )Total
    
    
    3,752
    
    
    
    3,683
    
    
    
    (54
    )Operating Expense
    
    
    10,106
    
    
    
    8,910
    
    
    
    40,564Net
operating loss from continuing operations
    
    
    (6,354
    )
    
    
    (5,227
    )
    
    
    (40,618
    )Non-operating income, net
    
    
    480
    
    
    
    652
    
    
    
    290Loss before income taxes
    
    
    (5,874
    )
    
    
    (4,575
    )
    
    
    (40,328
    )Income tax benefit(expense)
    
    
    (26
    )
    
    
    (62
    )
    
    
    21Loss from
continuing operations
    
    
    (5,900
    )
    
    
    (4,637
    )
    
    
    (40,307
    )(Loss)Gain from discontinued operations (Note 3)
    
    
    (2,694
    )
    
    
    651
    
    
    
    0Net Loss
    
    $
    (8,594
    )
    
    $
    (3,986
    )
    
    $
    (40,307
    )Weighted average common shares outstanding:Basic and diluted
    
    
    42,814,118
    
    
    
    42,250,363
    
    
    
    33,616,188Loss per share:Basic and diluted before discontinued operations
    
    $
    (0.14
    )
    
    $
    (0.11
    )
    
    $
    (1.20
    )Basic and diluted from discontinued operations
    
    $
    (0.06
    )
    
    $
    0.02
    
    
    $
    0.00Total basic and diluted loss per share
    
    $
    (0.20
    )
    
    $
    (0.09
    )
    
    $
    (1.20
    )Net Loss
    
    
    (8,594
    )
    
    
    (3,986
    )
    
    
    (40,307
    )Foreign currency translation adjustments
    
    
    0
    
    
    
    491
    
    
    
    0Unrealized gain on available for sale securities
    
    
    0
    
    
    
    (1
    )
    
    
    1Total comprehensive loss
    
    $
    (8,594
    )
    
    $
    (3,496
    )
    
    $
    (40,306
    )
  22




---



##### 



AccumulatedOtherComprehensiveCommon Stock
    
    
    
    
    
    Treasury
    
    Accumulated
    
    IncomeShares
    
    Amount
    
    APIC
    
    Stock
    
    Deficit
    
    (Loss)
    
    TotalBalance at January 1, 2004
    
    
    18,851,000
    
    
    
    1
    
    
    $
    79
    
    
    $
    
    
    
    $
    (971
    )
    
    $
    
    
    
    $
    (891
    )Stock options issued for consulting services
    
    
    
    
    
    
    
    
    
    
    32,945
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,945Exercise of stock options
    
    
    20,078,300
    
    
    
    2
    
    
    
    35,281
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,283Stock options issued to employees
    
    
    
    
    
    
    
    
    
    
    1,399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,399Stock options issued for consulting services
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Exercise of stock options
    
    
    40,000
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Unrealized gain on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,307
    )
    
    
    
    
    
    
    (40,307
    )Balance at December 31, 2004
    
    
    38,969,300
    
    
    
    3
    
    
    
    69,895
    
    
    
    
    
    
    
    (41,278
    )
    
    
    1
    
    
    $
    28,621Stock options issued for consulting services
    
    
    
    
    
    
    
    
    
    
    1,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,400Exercise of stock options
    
    
    2,900
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Issuance of common stock
for acquisition of Horne Engineering
    
    
    5,100,000
    
    
    
    1
    
    
    
    8,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,568Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    491
    
    
    
    491Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,986
    )
    
    
    
    
    
    
    (3,986
    )Balance as of December 31, 2005
    
    
    44,072,200
    
    
    
    4
    
    
    
    79,866
    
    
    
    
    
    
    
    (45,264
    )
    
    
    491
    
    
    
    35,097Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,594
    )
    
    
    
    
    
    
    (8,594
    )Stock options issued to employees and directors
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174Foreign currency translation M&M disposition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (491
    )
    
    
    (491
    )M&M sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,494
    )
    
    
    
    
    
    
    
    
    
    
    (1,494
    )Augenbaum settlement
    
    
    
    
    
    
    
    
    
    
    705
    
    
    
    (880
    )
    
    
    
    
    
    
    
    
    
    
    (175
    )Treasury Stock retirement
    
    
    (2,800,000
    )
    
    
    
    
    
    
    (2,374
    )
    
    
    2,374
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2006
    
    
    41,272,200
    
    
    
    4
    
    
    $
    78,371
    
    
    $
    
    
    
    $
    (53,858
    )
    
    $
    
    
    
    $
    24,517
  23




---



##### 



2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (5,900
    )
    
    $
    (4,637
    )
    
    $
    (40,307
    )Adjustments to reconcile net loss to net
cash used in operating activitiesStock
Options issued to employees
    
    
    174
    
    
    
    1,399
    
    
    
    1,399Stock Options issued to a related party for consulting services
    
    
    
    
    
    
    
    
    
    
    32,945Stock Options issued to service providers
    
    
    
    
    
    
    
    
    
    
    125Investor relations expenses paid by a related party
    
    
    
    
    
    
    
    
    
    
    2,763Depreciation/Amortization
    
    
    1,813
    
    
    
    464
    
    
    
    176Deferred income taxes
    
    
    
    
    
    
    148
    
    
    
    11Legal settlement costs not included in net income
    
    
    (175
    )Loss on disposal of equipment
    
    
    (5
    )
    
    
    (5
    )
    
    
    45Realized gain on the sale of bonds
    
    
    
    
    
    
    (1
    )
    
    
    12Decrease (increase) in balance sheet itemsReceivables
    
    
    7,367
    
    
    
    (4,379
    )
    
    
    (1,032
    )Inventory
    
    
    103
    
    
    
    (133
    )
    
    
    43Prepaid Expenses
    
    
    54
    
    
    
    622
    
    
    
    (831
    )Accounts Payable
    
    
    (5,129
    )
    
    
    4,418
    
    
    
    (246
    )Accrued Expenses
    
    
    (357
    )
    
    
    (587
    )
    
    
    (51
    )Provision for contract losses
    
    
    
    
    
    
    (148
    )
    
    
    148Deferred Revenue
    
    
    (58
    )
    
    
    (291
    )
    
    
    192Other balance sheet changes
    
    
    (523
    )
    
    
    (1,166
    )
    
    
    (87
    )Net cash used in continuing operations
    
    
    (2,636
    )
    
    
    (4,296
    )
    
    
    (4,695
    )Cash flows from investing activitiesPurchases of available for sale investments, net
    
    
    
    
    
    
    
    
    
    
    (22,807
    )Maturities of available for sale investments, net
    
    
    
    
    
    
    18,795
    
    
    
    4,000Acquisitions, net of cash received
    
    
    
    
    
    
    (12,276
    )
    
    
    Cash received from sale of subsidiary
    
    
    6,190
    
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (546
    )
    
    
    (574
    )
    
    
    (497
    )Proceeds from the sale of equipment
    
    
    16
    
    
    
    75
    
    
    
    Net cash provided by(used in) investing activities
    
    
    5,660
    
    
    
    6,020
    
    
    
    (19,304
    )Cash flows from financing activitiesRepayment of debt, net
    
    
    (102
    )
    
    
    195
    
    
    
    (2,782
    )Net repayments on lines of credit
    
    
    
    
    
    
    (1,828
    )
    
    
    Advances and accrued interest from related parties, net
    
    
    
    
    
    
    (278
    )
    
    
    (68
    )Proceeds for the exercise of stock options
    
    
    
    
    
    
    4
    
    
    
    31,819Net cash (used in)provided by financing activities
    
    
    (102
    )
    
    
    (1,907
    )
    
    
    28,969Cash flows (used in) provided by discontinued operations (Note 3)
Operating
    
    
    (270
    )
    
    
    (4,559
    )
    
    
    Investing
    
    
    
    
    
    
    512
    
    
    
    Financing
    
    
    
    
    
    
    376
    
    
    
    Net increase(decrease) in cash and cash equivalents
    
    
    2,652
    
    
    
    (3,854
    )
    
    
    4,970Cash and cash equivalents at beginning of period
    
    
    1,813
    
    
    
    5,667
    
    
    
    697Cash and cash equivalents at end of period
    
    $
    4,465
    
    
    $
    1,813
    
    
    $
    5,667
  24




---



##### 



1. ORGANIZATION AND NATURE OF BUSINESS
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Financial Statement Presentation
  Revenue Recognition
     25




---



##### 



Use of Estimates
  Cash Equivalents
  Fair Value of Financial Instruments
  Significant Customers and Credit Risks
  Year Ended December 31,2006
    
    2005
    
    2004Customer A
    
    
    24.8
    %
    
    
    45.8
    %
    
    
    *Customer B
    
    
    *
    
    
    
    *
    
    
    
    60.1
    %
 
 *
    
    Less than 10% of consolidated revenue as of the end of each period.  Concentration of Credit Risk
  Year Ended December 31,2006
    
    2005
    
    2004Customer A
    
    
    *
    
    
    
    44.5
    %
    
    
    *Customer B
    
    
    *
    
    
    
    *
    
    
    
    60.0
    %
 
 *
    
    Less than 10% of consolidated accounts receivable and unbilled services as of the end of each
period. 26




---



##### 



Inventories
  Property & Equipment
  Goodwill
   Impairment of Long-Lived Assets
  Income Taxes
  27




---



##### 



Research and Development Costs
  Earnings (Loss) Per Share
   Foreign Currency Translation
  Stock Based Compensation
 
 Recent Accounting Pronouncements
   28




---



##### 



3. ACQUISITIONS & DISPOSITIONS
 M&M Engineering Limited
   
 29




---



##### 



Discontinued Operations
 2006
    
    2005Revenue
    
    $
    3,019
    
    
    $
    20,542Pre-tax(Loss)gain from operations of disposed M&M unit
    
    $
    (862
    )
    
    $
    1,012Loss on sale of M&M
    
    
    (2,133
    )
    
    
    Tax benefit(expense)
    
    
    295
    
    
    
    (262
    )Minority interest gain(loss) from disposed M&M unit
    
    
    6
    
    
    
    (99
    )Total (loss)gain from discontinued operations
    
    $
    (2,694
    )
    
    $
    651
  2005AssetsCash
    
    $
    5,839Accounts Receivable
    
    
    5,321Other current assets
    
    
    425Current assets from discontinued operations
    
    $
    11,585Property and equipment, net
    
    $
    2,567Investment in joint ventures
    
    
    435Other non current assets
    
    
    77Other assets from discontinued operations
    
    $
    3,079LiabilitiesAccounts payable
    
    $
    2,579Accrued expenses
    
    
    106Deferred tax liability
    
    
    426Current portion of long-term debt
    
    
    254Current liabilities from discontinued operations
    
    $
    3,365Long term debt, less current portion
    
    $
    464Non-current liabilities from discontinued operations
    
    $
    464
 Coast Engine and Equipment Company, Inc.
  30




---



##### 



Horne Engineering Services, Inc.
    31




---



##### 



Pro Forma Results (Unaudited)
  Twelve months endedDecember 31,(Dollars in thousands except per share data)2005
    
    2004Revenue
    
    $
    56,185
    
    
    $
    38,565Net loss
    
    
    (4,476
    )
    
    
    (39,127
    )Loss per share  Basic & Diluted
    
    $
    (0.11
    )
    
    $
    (1.16
    )
  32




---



##### 



Purchase Price Allocation
  CEECO
    

Horne
EngineeringAssets AcquiredCash
    
    
    40
    
    
    
    Accounts Receivable
    
    
    117
    
    
    
    4,081Inventory
    
    
    29
    
    
    
    Property, Plant and Equipment
    
    
    65
    
    
    
    372Investments in joint ventures
    
    
    
    
    
    
    311Other
    
    
    28
    
    
    
    198279
    
    
    
    4,962Liabilities AssumedDebt
    
    
    (27
    )
    
    
    (1,835
    )Accounts Payable and accruals
    
    
    (28
    )
    
    
    (2,641
    )Deferred Taxes
    
    
    
    
    
    
    (221
    )(55
    )
    
    
    (4,697
    )Goodwill
    
    
    455
    
    
    
    3,074Intangibles
    
    
    
    
    
    
    10,211Total consideration
    
    
    679
    
    
    
    13,550
  4. RECEIVABLES (000s)
  December
    
    
    DecemberAccounts Receivable
    
    31, 2006
    
    
    31, 2005Billed
    
    $
    3,779
    
    
    $
    9,538Unbilled
    
    
    1,197
    
    
    
    1,871Holdbacks
    
    
    194
    
    
    
    184Other
    
    
    
    
    
    
    45Total
    
    $
    5,170
    
    
    $
    11,638
  33




---



##### 



5. INVENTORIES (000s)
  December
    
    
    DecemberInventory
    
    31, 2006
    
    
    31, 2005Raw materials, net of reserve
    
    $
    100
    
    
    $
    41Work in Process
    
    
    56
    
    
    
    217Finished Goods
    
    
    
    
    
    
    Total Inventory
    
    $
    156
    
    
    $
    258
 6. PROPERTY AND EQUIPMENT (000s)
 December
    
    
    DecemberProperty & Equipment
    
    31, 2006
    
    
    31, 2005Land
    
    $
    575
    
    
    $
    575Buildings and Improvements
    
    
    4,270
    
    
    
    3,516Furniture & fixtures
    
    
    256
    
    
    
    51Manufacturing Equipment
    
    
    1,283
    
    
    
    1,077Tools & Equipment
    
    
    354
    
    
    
    314Office Equipment
    
    
    644
    
    
    
    463Vehicles
    
    
    303
    
    
    
    136Investment Property
    
    
    221
    
    
    
    221Total
    
    
    7,906
    
    
    
    6,353Accumulated Depreciation
    
    
    (2,169
    )
    
    
    (1,323
    )Property & Equipment, net
    
    $
    5,737
    
    
    $
    5,030
 7. GOODWILL AND OTHER INTANGIBLES (000s)
  Intangible
    
    Value
    
    Useful LifeCustomer Relationships
    
    $
    4,849
    
    
    15 yearsTrademarks
    
    
    3,365
    
    
    IndefiniteNon-Compete/Employment Agreements
    
    
    1,091
    
    
    5 yearsOrder Backlog
    
    
    906
    
    
    5 years
   34




---



##### 



Intangible Amortization
    
    2007
    
    2008
    
    2009
    
    2010Customer Relationships
    
    $
    323
    
    
    $
    323
    
    
    $
    323
    
    
    $
    323Non-Compete/Employment Agreements
    
    
    218
    
    
    
    218
    
    
    
    218
    
    
    
    218Order Backlog
    
    
    181
    
    
    
    181
    
    
    
    181
    
    
    
    181Total
    
    $
    722
    
    
    $
    722
    
    
    $
    722
    
    
    $
    722
 8. ACCRUED EXPENSES (000s)
 December
    
    
    DecemberAccrued Expenses
    
    31, 2006
    
    
    31, 2005Salaries & payroll related items
    
    $
    535
    
    
    $
    673Accrued leave
    
    
    381
    
    
    
    365Property & sales tax
    
    
    38
    
    
    
    65Professional Fees
    
    
    464
    
    
    
    453Deferred Rent
    
    
    683
    
    
    
    120Other
    
    
    416
    
    
    
    224Total Accrued Liabilities
    
    $
    2,517
    
    
    $
    1,900
 9. BORROWINGS AND LINES OF CREDIT
  Bank of America Facility
   2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Capital Leases
    
    $
    24
    
    
    $
    26
    
    
    $
    28
    
    
    $
    15
    
    
    $
    
    
    
    $
    Mortgage Payable
    
    
    44
    
    
    
    48
    
    
    
    53
    
    
    
    57
    
    
    
    62
    
    
    
    1,637Total Debt
Commitments
    
    $
    68
    
    
    $
    74
    
    
    $
    81
    
    
    $
    72
    
    
    $
    62
    
    
    $
    1,637
 35




---



##### 



10. STOCKHOLDERS EQUITY
    11. RELATED PARTY TRANSACTIONS
 Transactions related to BG Capital Group Limited, Endeavor Group, LLC and Related Stockholders
      36




---



##### 



Transactions with the President of the Company
  Transactions related to the spouse of a former President of the Company
  Transactions related to Coast Engine and Equipment Company
    2007
    
    $
    81,4922008
    
    $
    81,4922009
    
    $
    27,164
 37




---



##### 



Transactions with Directors of the Company
   12. EMPLOYEE BENEFIT PLAN
  13. STOCK OPTION PLAN
      38




---



##### 



39




---



##### 



WeightedNumber of shares
    
    Option Price
    Average PriceOptions Outstanding 1/1/2004
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    24,243,250
    
    
    
    1.40 - 1.95
    
    
    
    1.76Exercised
    
    
    (20,118,300
    )
    
    
    1.65 - 1.95
    
    
    
    1.74Cancelled
    
    
    
    
    
    
    Outstanding 12/31/2004
    
    
    4,124,950
    
    
    
    1.40 - 1.95
    
    
    
    1.83Granted
    
    
    4,215,750
    
    
    
    1.28 - 2.50
    
    
    
    2.19Exercised
    
    
    (2,900
    )
    
    
    1.40
    
    
    
    1.40Cancelled
    
    
    (2,500,000
    )
    
    
    2.50
    
    
    
    2.50Outstanding 12/31/2005
    
    
    5,837,800
    
    
    
    1.28 - 1.95
    
    
    
    1.80Granted
    
    
    1,759,704
    
    
    
    0.50 - 1.55
    
    
    
    1.44Exercised
    
    
    Cancelled
    
    
    (4,493,028
    )
    
    
    1.28 - 1.95
    
    
    
    1.86Options Outstanding 12/31/2006
    
    
    3,104,476
  Options Exercisable & OutstandingExercise
    
    Shares
    
    Shares
    
    Weighted AveragePrice
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs)0.50
    
    
    75,000
    
    
    
    25,000
    
    
    
    9.60.80
    
    
    150,000
    
    
    
    
    
    
    
    2.51.28
    
    
    4,500
    
    
    
    4,500
    
    
    
    1.51.40
    
    
    448,450
    
    
    
    448,450
    
    
    
    0.91.55
    
    
    1,081,526
    
    
    
    1,081,526
    
    
    
    1.11.65
    
    
    1,343,000
    
    
    
    1,343,000
    
    
    
    0.81.95
    
    
    2,000
    
    
    
    2,000
    
    
    
    1.33,104,476
    
    
    
    2,904,476
  40




---



##### 



14. INCOME TAXES
  Year Ended December 312006
    
    2005
    
    2004CurrentFederal
    
    $
    26
    
    
    $
    
    
    
    $
    (33
    )State
    
    
    
    
    
    
    62
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    Total Current
    
    
    26
    
    
    
    62
    
    
    
    (33
    )DeferredFederal
    
    
    
    
    
    
    
    
    
    
    12Foreign
    
    
    
    
    
    
    
    
    
    
    Total Deferred
    
    
    
    
    
    
    
    
    
    
    12Total Tax Provision(Benefit)
    
    $
    26
    
    
    $
    62
    
    
    $
    (21
    )
  2006
    
    2005
    
    2004Statutory Federal Income
Tax Rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State Taxes (Net of
Federal Benefit)
    
    
    3.8
    %
    
    
    4.0
    %
    
    
    3.6
    %Change in Tax Rates
    
    
    
    
    
    
    0.4
    %
    
    
    Permanent Difference
    
    
    -1.7
    %
    
    
    -0.1
    %
    
    
    -30.8
    %Valuation Allowance
    
    
    -32.2
    %
    
    
    -42.3
    %
    
    
    -6.7
    %Other
    
    
    -4.3
    %
    
    
    2.6
    %
    
    
    -0.1
    %Effective Tax Rate
    
    
    -0.4
    %
    
    
    -1.4
    %
    
    
    0.0
    %
  2006
    
    2005Accrued Expenses
    
    $
    175
    
    
    $
    151Depreciation
    
    
    20
    
    
    
    (157
    )Amortization of Intangibles
    
    
    (3,406
    )
    
    
    (22
    )Allowance for Doubtful Accounts
    
    
    203
    
    
    
    222Stock Compensation
    
    
    653
    
    
    
    531NOL Carryforwards
    
    
    16,776
    
    
    
    4,245Other, Net
    
    
    (15
    )
    
    
    56Valuation Allowance
    
    
    (14,405
    )
    
    
    (5,026
    )Net Deferred Tax Asset/(Liability)
    
    $
    
    
    
    $
    
  41




---



##### 



15. NON-OPERATING INCOME (EXPENSE) (000s)
 2006
    
    2005
    
    2004IncomeBuilding Rent
    
    $
    228
    
    
    $
    228
    
    
    $
    206Interest
    
    
    101
    
    
    
    349
    
    
    
    290Equity Investments
    
    
    361
    
    
    
    298
    
    
    
    ExpenseInterest
    
    
    (226
    )
    
    
    (173
    )
    
    
    (165
    )Other
    
    
    16
    
    
    
    (50
    )
    
    
    (41
    )Total non-operating income (expense)
    
    $
    480
    
    
    $
    652
    
    
    $
    290
 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (000S)
 Supplemental disclosure of cash flow information:
    
    2006
    
    2005
    
    2004Cash paid for interest
    
    $
    224
    
    
    $
    191
    
    
    $
    181Cash paid for taxes
    
    $
    156
    
    
    $
    184
    
    
    $
    Leasehold improvements provided by lessor
    
    $
    723
    
    
    
    
    
    
    
    Issuance of debt for fixed asset acquisitions
    
    $
    
    
    
    $
    2,102
    
    
    $
    Reduction in due to related party in lieu of cash payment for
exercise of stock options
    
    $
    
    
    
    $
    
    
    
    $
    3,530Unrealized (loss)gain on available for sale securities
    
    $
    
    
    
    $
    (1
    )
    
    $
    1
   17. SEGMENT INFORMATION
   42




---



##### 






2006
    
    2005
    
    2004Security SolutionsTotal revenue
    
    $
    3,886
    
    
    $
    4,502
    
    
    $
    9,656Gross loss
    
    
    (1,036
    )
    
    
    (986
    )
    
    
    (757
    )Operating loss
    
    
    (2,552
    )
    
    
    (2,258
    )
    
    
    (2,490
    )Repair and OverhaulTotal revenue
    
    
    2,711
    
    
    
    1,921
    
    
    
    Gross profit
    
    
    966
    
    
    
    735
    
    
    
    Operating profit
    
    
    403
    
    
    
    345
    
    
    
    ServicesTotal revenue
    
    
    21,659
    
    
    
    26,733
    
    
    
    1,478Gross profit
    
    
    3,822
    
    
    
    3,934
    
    
    
    703Operating loss(profit)
    
    
    (673
    )
    
    
    1,656
    
    
    
    678Corporate CostsTotal revenue
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (3,532
    )
    
    
    (4,970
    )
    
    
    (38,806
    )TotalTotal revenue
    
    
    28,256
    
    
    
    33,156
    
    
    
    11,134Gross profit(loss)
    
    
    3,752
    
    
    
    3,683
    
    
    
    (54
    )Operating loss
    
    
    (6,354
    )
    
    
    (5,227
    )
    
    
    (40,618
    )Non-Operating income
    
    
    480
    
    
    
    652
    
    
    
    290Net Loss before tax
    
    $
    (5,874
    )
    
    $
    (4,575
    )
    
    $
    (40,328
    )
  Identifiable Assets (000s)
    
    Fixed Asset Additions
    
    Depreciation ExpenseDecember 31,
    
    
    
    
    
    12 months ended
    
    12 months ended2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005
    
    2004Security Solutions
    
    $
    6,293
    
    
    $
    6,624
    
    
    $
    86
    
    
    $
    2,676
    
    
    $
    355
    
    
    $
    313
    
    
    $
    176Repair and Overhaul
    
    
    1,042
    
    
    
    773
    
    
    
    37
    
    
    
    141
    
    
    
    58
    
    
    
    49
    
    
    
    Services
    
    
    10,007
    
    
    
    9,571
    
    
    
    124
    
    
    
    14
    
    
    
    106
    
    
    
    100
    
    
    
    Corporate
    
    
    12,722
    
    
    
    32,436
    
    
    
    1,031
    
    
    
    15
    
    
    
    90
    
    
    
    2
    
    
    
    Total Assets
    
    $
    30,064
    
    
    $
    49,404
    
    
    $
    1,278
    
    
    $
    2,846
    
    
    $
    608
    
    
    $
    464
    
    
    $
    176
  43




---



##### 






Repair &Overhaul
    
    Services
    
    TotalBalance at January 1, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Purchase of Ceeco
    
    
    62
    
    
    
    
    
    
    
    62Purchase of Horne Engineering
    
    
    
    
    
    
    13,285
    
    
    
    13,285CEECO earn-out
    
    
    200
    
    
    
    
    
    
    
    200Balance at December 31, 2005
    
    
    262
    
    
    
    13,285
    
    
    
    13,547Reclass intangibles out of goodwill
    
    
    
    
    
    
    (10,211
    )
    
    
    (10,211
    )CEECO earn-out
    
    
    200
    
    
    
    
    
    
    
    200Acquisition tax adjustment
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Balance at December 31, 2006
    
    $
    455
    
    
    $
    3,074
    
    
    $
    3,529
 18. COMMITMENTS AND CONTINGENCIES
 Operating Leases
  Minimum CommitmentsType
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012+Facilities/Office space
    
    $
    447
    
    
    $
    538
    
    
    $
    487
    
    
    $
    514
    
    
    $
    349
    
    
    $
    Office equipment
    
    
    58
    
    
    
    27
    
    
    
    18
    
    
    
    5
    
    
    
    
    
    
    
    Operating Leases
    
    $
    505
    
    
    $
    565
    
    
    $
    505
    
    
    $
    519
    
    
    $
    349
    
    
    $
    
 Lessor
   2007
    
    $
    228,9672008
    
    $
    171,726Total
    
    $
    400,693
 44




---



##### 



Legal Matters
 Munitions Assembly Conveyor (MAC) Lawsuit
   Garrison Lawsuit
   Plum Island Claim
  19. INVESTMENTS IN JOINT VENTURES
  45




---



##### 



20. SUBSEQUENT EVENTS
  46




---



##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  Item 9A. Controls and Procedures.
 (a) Evaluation of Disclosure Controls and Procedures
 (b) Changes in Internal Control Over Financial Reporting.
 Item 9B.
Other Information.
  PART III
 Item 10. Directors and Executive Officers of the Registrant.
  Name
    
    Age
    
    PositionDarryl K. Horne
    
    
    46
    
    
    President, Chief Executive Officer and ChairmanMichael M. Megless
    
    
    60
    
    
    Executive Vice President, Chief Financial
Officer, and DirectorFrancis X. Ryan
    
    
    55
    
    
    DirectorKelvin D. Armstrong
    
    
    65
    
    
    DirectorKarl Heer
    
    
    57
    
    
    DirectorL Kenneth Johnson
    
    
    60
    
    
    DirectorJohn A. Moore
    
    
    54
    
    
    DirectorHerman F. Hewitt, Jr
    
    
    43
    
    
    Vice PresidentPaige E. Shannon
    
    
    40
    
    
    Secretary, General Counsel
 BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
 Darryl
K. Horne
 47




---



##### 



Michael M. Megless
 Francis X. Ryan
 Kelvin D. Armstrong
 Karl Heer
 L. Kenneth Johnson
 48




---



##### 



John A. Moore, Jr.
 Paige E. Shannon
 Herman F. Hewitt, Jr.
  CODE OF ETHICS
 
 49




---



##### 



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
  AUDIT COMMITTEE AND FINANCIAL EXPERT
  Item 11. Executive Compensation.
 Compensation Discussion and Analysis:
  Executive Compensation Policy and General Philosophy
   50




---



##### 



Components of Executive Compensation for 2006
  Base Salaries
    Performance and Incentive Cash Bonuses
  Equity Compensation
  51




---



##### 



Employee Benefits
  Severance Benefits
  Perquisites and Other Benefits
  Board of Directors Report on Compensation Discussion and Analysis
  52




---



##### 



Summary Compensation Table
 Principal
    
    
    
    
    
    Base
    
    Option
    
    All Other
    
    TotalName
    
    Position
    
    Year
    
    Salary
    
    Awards
    
    Compensation
    
    CompensationDarryl K. Horne
    
    Chief Executive Officer
    
    
    2006
    
    
    $
    375,000
    
    
    
    
    
    
    $
    39,225
    (1)
    
    $
    414,225Michael M. Megless
    
    Chief Financial Officer
    
    
    2006
    
    
    $
    260,000
    
    
    $
    35,897
    
    
    $
    16,640
    (2)
    
    $
    312,537Charles S. Mahan
    
    Chief Operating Officer
    
    
    2006
    
    
    $
    126,922
    
    
    
    
    
    
    $
    27,143
    (3)
    
    $
    154,065Paige E. Shannon
    
    General Counsel
    
    
    2006
    
    
    $
    140,000
    
    
    
    
    
    
    $
    
    
    
    $
    140,000
 
 (1)
    
    Mr. Hornes all other compensation includes $26,505 for automobile and related expenses, $4,820 for club
dues, and $7,900 for life insurance premiums paid by the Company to benefit Mr. Horne.(2)
    
    Mr. Megless all other compensation includes $8,005 for automobile and related expenses, $1,135 for club dues,
and $7,500 of club initiation fees(3)
    
    Mr. Mahans all other compensation includes $5,210 for automobile and related expenses, $10,782, for housing,
$6,042 for travel and related expenses, and $4,676 for per diems and miscellaneous expenses. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
  53




---



##### 



54




---



##### 



Compensation Committee Interlocks and Insider Participation in Compensation Decisions:
  Outstanding Equity Awards at Fiscal Year End
 Number of Securities
    
    Equity Incentive Plan Awards
    
    Option
    
    OptionUnderlying Unexercised Options
    
    Number of Securities Underlying
    
    Exercise
    
    ExpirationName
    
    at December 31, 2006
    
    Unexercised Unearned Options
    
    Price
    
    DateExercisable
    
    UnexercisableDarryl K. Horne
    
    
    
    
    
    
    Michael M. Megless
    
    
    326,353
    
    
    
    
    
    
    
    
    
    
    $
    1.55
    
    
    
    1/22/2008Charles S. Mahan
    
    
    
    
    
    
    Paige E. Shannon
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 1.
    
    The options issued to Michael Megless are not in the money. The option price is $1.55 and
all options were issued on January 26, 2006.2.
    
    There were no shares acquired by any of the above named individuals. Grants of Plan Based Awards in 2006
 Named Executive
    
    Grant
    
    Option
    
    ExerciseOfficer
    
    Date
    
    Awards
    
    PriceDarryl K. Horne
    
    
    N/A
    
    
    
    
    
    
    $
    Michael M. Megless
    
    
    1/23/2006
    
    
    
    326,353
    
    
    $
    1.55Paige E. Shannon
    
    
    N/A
    
    
    
    
    
    
    $
    Charles S. Mahan
    
    
    N/A
    
    
    
    
    
    
    $
    
 55




---



##### 



Director Compensation
 Fees Earned
    
    Option
    
    Option
    
    All Other
    
    TotalName
    
    or Paid in Cash
    
    Awards
    
    Value
    
    Compensation
    
    CompensationKelvin D. Armstrong
    
    $
    44,000
    
    
    
    30,000
    
    
    $
    1,454
    
    
    $
    
    
    
    $
    45,454Karl Heer
    
    $
    40,000
    
    
    
    30,000
    
    
    $
    1,454
    
    
    $
    
    
    
    $
    41,454L. Kenneth Johnson
    
    $
    20,000
    
    
    
    30,000
    
    
    $
    1,454
    
    
    $
    
    
    
    $
    21,454John A. Moore
    
    $
    27,000
    
    
    
    30,000
    
    
    $
    1,454
    
    
    $
    
    
    
    $
    28,454Francis X. Ryan
    
    $
    58,000
    
    
    
    30,000
    
    
    $
    1,454
    
    
    $
    
    
    
    $
    59,454
 
 1.
    
    Directors who are also employees of the Company do not receive any additional
compensation for their service on the Board of Directors.2.
    
    Total number of options held by each Director is disclosed Item 12 Security
Ownership of Certain Beneficial Owners and Management. The total expense
recorded for the 150,000 directors stock options issued in 2006 is $7,271.  Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
  Name and Address
    
    Number of Shares
    
    Percentageof Beneficial Owner (1)
    
    Beneficially Owned (2)
    
    of ClassDarryl K. Horne
    
    
    4,877,007
    
    
    
    11.7
    %Michael M. Megless
    
    
    336,846
    a
    
    
    *Kelvin D. Armstrong
    
    
    494,000
    b
    
    
    1.2
    %Karl Heer
    
    
    480,000
    b
    
    
    1.1
    %L. Kenneth Johnson
    
    
    30,000
    c
    
    
    *John A. Moore
    
    
    50,000
    c
    
    
    *Francis X. Ryan
    
    
    30,000
    c
    
    
    *Charles S. Mahan (3)
    
    
    
    
    
    
    *Paige E Shannon
    
    
    
    
    
    
    *Total Directors and Executive Officers
    
    
    6,297,853
    
    
    
    14.6
    %Trevor Foster (4)
    
    
    2,800,000
    
    
    
    6.7
    %P.O. Box 450
Hickman CA 95323
 
 *
    
    Less than 1% of the outstanding common stock. 56




---



##### 



(1)
    
    Except as otherwise noted, the address for each person listed in this table is c/o Horne
International, Inc., Suite 300, Fairfax, Virginia 22031.(2)
    
    Beneficial ownership of shares is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes any shares over which a person exercises sole
or shared voting or investment power. The number of shares beneficially owned by a person
includes shares of common stock that the person had the right to acquire pursuant to options
exercisable within 60 days of March 15, 2006. Shares issuable pursuant to options are deemed
outstanding for calculating the percentage ownership of the person holding the options but are
not deemed outstanding for the purposes of calculating the percentage ownership of any other
person.(3)
    
    Charles S. Mahan resigned as COO effective January 15, 2007.(4)
    
    Information is based solely upon a Schedule 13G/A filed by Trevor Foster on February
2, 2007.(a)
    
    Includes 326,353 shares of common stock issuable pursuant to options.(b)
    
    Includes 480,000 shares of common stock issuable pursuant to options.(c)
    
    Includes 30,000 shares of common stock issuable pursuant to options. (b) Equity Compensation Plans.
 Number of securities remainingNumber of securities to be
    
    
    
    
    
    available for future issuanceissued upon exercise of
    
    Weighted-average exercise
    
    under equity compensationoutstanding options,
    
    price of outstanding options,
    
    plans (excluding securitieswarrants and rights
    
    warrants and rights
    
    reflected in column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    0
    (1)
    
    $
    0
    
    
    
    1,000,000Equity compensation
plans not approved by
security holders
    
    
    3,104,476
    (2)
    
    $
    1.51
    
    
    
    5,777,264Total
    
    
    3,104,476
    
    
    
    
    
    
    
    6,777,264
 
 (1)
    
    Represents stock options issued pursuant to the Companys 2004 Non-Statutory Stock Option Plan.(2)
    
    Represents stock options issued pursuant to the Companys Amended and Restated Number 1 2004
Non-Statutory Stock Option Plan and the Companys Amended and Restated Number 2 2004
Non-Statutory Stock Option Plan.  Item 13. Certain Relationships and Related-Transactions.
  57




---



##### 



Item 14.
Principal Accountant Fees and Services.
 Fees Paid to the Independent Auditors
  2006
    
    
    2005Audit Fees
    
    $
    219,230
    
    
    $
    265,000Audit-Related Fees
    
    $
    70,000
    
    
    $
    Tax Fees
    
    $
    
    
    
    $
    6,000All Other Fees
    
    $
    1,193
    
    
    $
    Total
    
    $
    290,423
    
    
    $
    271,000
    Item 15. Exhibits and Financial Statements Schedules.
 (a)
    (1)
    
    The financial statements included in Item 8 hereof are incorporated herein by reference and
filed as part of this report.(2)
    
    All financial statement schedules are omitted because they are either not applicable, or
because the required information is shown in the consolidated financial statements or notes
thereto.(3)
    
    Exhibits: The response to this section of Item 15 is included in the Exhibit Index of
this report and is incorporated herein by reference.
 58




---



##### 



SIGNATURES
  SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.Date:
March 30, 2007
    
    By:
    
    /s/ Darryl K. HorneName:
    
    Darryl K. HorneTitle:
    
    Chief Executive Officer and President
  SIGNATURE
    
    TITLE
    
    DATE/s/ Darryl K. Horne
    
    Chief Executive Officer, Principal
Executive Officer and Director
    
    March 30, 2007/s/ Michael M. Megless
    
    Chief Financial Officer, Principal
Financial and Accounting Officer and Director
    
    March 30, 2007/s/ Francis X. Ryan
    
    Director
    
    March 30, 2007/s/ Kelvin D. Armstrong
    
    Director
    
    March 30, 2007/s/ Karl Heer
    
    Director
    
    March 30, 2007/s/ John A. Moore
    
    Director
    
    March 30, 2007/s/ L. Kenneth Johnson
    
    Director
    
    March 30, 2007
 59




---



##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger among Silva Bay
International, Inc., SSS Acquisition Company and
Spectrum Sciences & Software, Inc., dated April 2,
2003 (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on August 11,
2003).2.2
    
    Stock Purchase and Sale Agreement, dated as of
January 28, 2005, by and among Spectrum Sciences &
Software Holdings Corp., Coast Engine and Equipment
Co., Inc., Louis T. Rogers and Marilyn G. Rogers
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on March 3, 2005).2.5
    
    Agreement and Plan of Merger, dated as of April 14,
2005, by and among Spectrum Sciences & Software
Holdings Corp., Horne Acquisition LLC, Horne
Engineering Services, Inc., Darryl K. Horne, Charlene
M. Horne and Michael M. Megless (previously filed on
Form 8-K, filed with the Securities and Exchange
Commission on May 17, 2005).2.6
    
    Amendment and Waiver Agreement, dated as of May 11,
2005, by and among Spectrum Sciences & Software
Holdings Corp., Horne Acquisition LLC, Horne
Engineering Services, Inc., Darryl K. Horne, Charlene
M. Horne and Michael M. Megless (previously filed on
Form 8-K, filed with the Securities and Exchange
Commission on May 17, 2005).2.7
    
    Stock Purchase Agreement by and between Spectrum
Sciences & Software Holdings Corp. and 53341
Newfoundland and Labrador Ltd. dated June 21, 2006
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on June 26, 2006).2.8
    
    Retraction Agreement by and between Spectrum Sciences
& Software Holdings Corp. and M&M Engineering, Ltd.
dated June 21, 2006 (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
June 26, 2006).3.1
    
    Certificate of Incorporation, filed August 28, 1998
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).3.2
    
    Certificate of Renewal and Revival, filed March 24,
2003 (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).
 60




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##### 



ExhibitNumber
    
    Description3.3
    
    Certificate of Amendment of Certificate of
Incorporation, filed April 8, 2003 (previously filed
in registration statement on Form 10-SB File No.
1-31710, filed with the Securities and Exchange
Commission on June 10, 2003).3.4
    
    Certificate of Merger filed with the Delaware
Secretary of State (previously filed in registration
statement on Form 10-SB File No. 1-31710, filed with
the Securities and Exchange Commission on June 10,
2003).3.5
    
    Articles of Merger filed with the Florida Secretary
of State (previously filed in registration statement
on Form 10-SB File No. 1-31710, filed with the
Securities and Exchange Commission on June 10, 2003).3.6
    
    Amended and Restated Bylaws of Spectrum Sciences &
Software Holdings Corp., as amended (previously filed
on Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2005).3.7
    
    Amendment to Amended and Restated Bylaws of Spectrum Sciences &
Software Holdings Corp., as amended (previously filed
on Form 8-K, filed with the Securities and Exchange
Commission on May 2, 2006).3.8
    
    Amended Articles of Incorporation of Horne
International, Inc. (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
September 6, 2006).4.1
    
    Specimen Certificate of Common Stock (previously
filed in registration statement on Form 10-SB File
No. 1-31710, filed with the Securities and Exchange
Commission on June 10, 2003).4.2
    
    Registration Rights Agreement, dated as of May 11,
2005, by and among Spectrum Sciences & Software
Holdings Corp., Darryl K. Horne, Charlene M. Horne
and Michael M. Megless (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
May 17, 2005).4.4
    
    Revolving Note, dated March 2, 2006, by and among
Spectrum Sciences & Software Holdings Corp., Horne
Engineering Services, LLC and Bank of America, N.A.
(previously filed on Form 10K, filed with the
Securities and Exchange Commission on March 30,
2006).10.3
    
    Revolving Line of Credit Loan Agreement and Security
Agreement, dated March 2, 2006, by and among Spectrum
Sciences & Software Holdings Corp., Horne Engineering
Services, LLC and Bank of America, N.A. (previously
filed on Form 10K, filed with the Securities and
Exchange Commission on March 30, 2006).
 61




---



##### 



ExhibitNumber
    
    Description10.4
    
    First Amendment to the Revolving Line of Credit Loan
Agreement and Security Agreement dated November 30,
2006 (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on December 8,
2006).10.5*
    
    Employment Agreement, dated as of May 11, 2005, by
and between Spectrum Sciences & Software Holdings
Corp. and Darryl K. Horne (previously filed on Form
8-K, filed with the Securities and Exchange
Commission on March 17, 2005).10.6*
    
    First Amendment to Employment Agreement, dated as of
May 23, 2005, by and between Spectrum Sciences &
Software Holdings Corp. and Darryl K. Horne
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on May 27, 2005).10.7*
    
    Employment Agreement, dated as of May 11, 2005, by
and between Spectrum Sciences & Software Holdings
Corp. and Michael M. Megless (previously filed on
Form 8-K, filed with the Securities and Exchange
Commission on March 17, 2005).10.8*
    
    First Amendment to Employment Agreement, dated as of
May 23, 2005, by and between Spectrum Sciences &
Software Holdings Corp. and Michael M. Megless
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on May 27, 2005).10.9*
    
    2004 Non-Statutory Stock Option Plan, dated March 11,
2004 (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on March 12,
2004).10.10*
    
    Amended and Restated Number 1 2004 Non-Statutory
Stock Option Plan, dated April 16, 2004 (previously
filed on Form S-8, filed with the Securities and
Exchange Commission on April 21, 2004).10.11*
    
    Amended and Restated Number 2 2004 Non-Statutory
Stock Option Plan, dated November 15, 2004
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on November 19,
2004).10.12*
    
    Form of Stock Option Agreement between Spectrum
Sciences & Software Holdings Corp. and each of Kelvin
D. Armstrong, Karl Heer, William H. Ham, Jr. and
Nancy C. Gontarek, dated November 15, 2004
(previously filed on Form 8-K, filed with the
Securities and Exchange Commission on November 19,
2004).10.13*
    
    Form of Stock Option Agreement between Spectrum
Sciences & Software Holdings Corp. and each of Kelvin
D. Armstrong, Karl Heer, William H. Ham, Jr. and
Nancy C. Gontarek, dated January 12, 2005 (previously
filed on Form 8-K, filed with the Securities and
Exchange Commission on January 19, 2005).10.14*
    
    Form of Stock Option Agreement between Spectrum
Sciences & Software Holdings Corp. and each of Kelvin
D. Armstrong, Karl Heer and William H. Ham, Jr.,
dated February 14, 2005 (previously filed on Form
8-K, filed with the Securities and Exchange
Commission on February 18, 2005).
 62




---



##### 



ExhibitNumber
    
    Description10.17*
    
    Stock Option Agreement between Spectrum Sciences &
Software Holdings Corp. and Michael M. Megless,
dated January 23, 2006 (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
January 27, 2006).10.18
    
    Settlement and Standstill Agreement, dated November
17, 2005, by and among Robert Genovese, BG Capital
Group Ltd. and Spectrum Sciences & Software Holdings
Corp. (previously filed on Form 10-K, filed with the
Securities and Exchange Commission on March 30,
2006).14
    
    Code of Ethics (previously filed on Form 10-KSB,
filed with the Securities and Exchange Commission on
April 14, 2004).16
    
    Letter of Tedder, James, Worden & Associates, P.A. to
the Securities and Exchange Commission dated April
17, 2006 (previously filed on Form 8-K, filed with
the Securities and Exchange Commission on April 17,
2006).21
    
    List of Subsidiaries (filed herewith).23.1
    
    Accountants Consent, Grant
Thornton LLP (filed herewith).23.2
    
    Accountants Consent, Tedder, James, Worden &
Associates, P.A. (filed herewith).31.1
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).31.2
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).32.2
    
    Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 *
    
    Indicates management contract or compensatory arrangement. 63