UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Amendment No. 1)

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal-year ended: December 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Horne International, Inc.

(Exact name of registrant as specified in its charter)

Delaware		90-0182158
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
2677 Prosperity Avenue, Suite 300,
Fairfax, Virginia		22031
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 703-641-1100

None.

Common Stock, par value $.0001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes      þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes      þ No

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. þ Yes      o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12-b2 of the Exchange Act. (Check one):

Large accelerated filer: o		Accelerated filer: o		Non-accelerated filer: o		Smaller reporting company: þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No þ

The aggregate market value of the common stock held by non-affiliates of the registrant as of the close of business on June 30, 2007, was approximately $15.5 million based on the closing sale price of the registrant’s common stock as reported on the Over the Counter Bulletin Board on that date.

As of March 31, 2008, there were 42,687,324 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE. None.

 

 

EXPLANATORY NOTE

This change is to correct the end date of the Company’s fiscal year as contained in the Report of Independent Registered Public Accounting Firm and related Auditor’s Consent and certain other typographical errors.

TABLE OF CONTENTS

Forward-Looking Statements			2
Item 1. Business			2
Item 1A. Risk Factors			6
Item 1B. Unresolved Staff Comments			9
Item 2. Properties			9
Item 3. Legal Proceedings			9
Item 4. Submission of Matters to a Vote of Security Holders			9
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			9
Item 6. Selected Financial Data			10
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			19
Item 8. Financial Statements and Supplementary Data			20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			45
Item 9A. Controls and Procedures			45
Item 9B. Other Information			46
Item 10. Directors and Executive Officers of the Registrant			46
Item 11. Executive Compensation			48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			54
Item 13. Certain Relationships and Related Transactions			55
Item 14. Principal Accountant Fees and Services			55
Item 15. Exhibits and Financial Statements Schedules			56

FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes,” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A. “Risk Factors.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances taking place after the date of this document.

Item 1. Business.

Horne International, Inc. (the “Company” or “We”, “Us”, “Our” or similar terms) is a premier technology and technical engineering solutions company focused on three primary target markets — security, energy, and the environment. The Company’s service areas encompass program engineering, technology, manufacturing, environment, safety & health, acquisition services, public outreach, and business process engineering.

The Company was incorporated as Silva Bay International, Inc., a Delaware corporation, in August 1998. In April 2003, the Company changed its name from Silva Bay to Spectrum Sciences & Software Holdings Corp. in conjunction with the acquisition of Spectrum Sciences & Software, Inc. (“SSSI”), a Florida corporation. The Company began trading on the Over the Counter (“OTC”) Bulletin Board market in December 2003. In August 2006, the Company changed its name from Spectrum Sciences & Software Holdings Corp. to Horne International, Inc.

The Company acquired three companies during 2005: M&M Engineering, Ltd. (“M&M”), Coast Engine and Equipment Company, Inc. (“CEECO”), and Horne Engineering Services, LLC (“Horne Engineering”). M&M was subsequently sold in June 2006. The Horne Engineering acquisition was a merger that resulted in the management of Horne Engineering assuming managerial control of the Company effective June 2005. More information related to these acquisitions and dispositions is included in Note 3 of our audited financial statements.

As a result of these acquisitions and dispositions, the nature of the Company’s business changed significantly, including our reportable segments. Prior to the 2005 acquisitions, the Company had three reportable segments: Management Services, Engineering and Information Technology, and Manufacturing. In 2005, these segments were consolidated into one segment, Security Solutions, and as a result of our 2005 acquisitions, we added Industrial and Offshore, Repair and Overhaul, Procurement Services, and Engineering Services. In the year ended December 31, 2006, we amended our reportable segments back to three due to the disposition of our M&M subsidiary (Industrial and Offshore) and to better reflect how we manage our businesses. We consolidated the Engineering and Procurement Services into the Services segment. These segments better reflect how we manage the business and allocate our resources. The Industrial and Offshore segment reported in 2005 related solely to the operations of M&M and is no longer reported as a result of the sale of M&M.

Prior to the sale of M&M, the Company operated in both the United States and Canada with some contract work being performed at customer sites in the Middle East. The sale of M&M concluded the Company’s Canadian operations.

Subsequent Events

During the first quarter of 2008, the Company made the decision to cease operations of SSSI and CEECO. CEECO’s operations will be completed during the first quarter of 2008 with SSSI completing operations in the second quarter of 2008.

On March 19, 2008, the Company entered into a note with Darryl K. Horne, Company’s President and Chief Executive Officer, under which the Company borrowed $260,000 at 8% interest. The interest is payable quarterly beginning in July 1, 2008 with principal payable upon demand. The note is unsecured and is not convertible into any Company securities.

On April 1, 2008, the Company entered into a note with Darryl K. Horne, Company’s President and Chief Executive Officer, under which the Company borrowed $240,000 at 8% interest. The interest is payable quarterly beginning in July 1, 2008 with principal payable upon demand. The note is unsecured and is not convertible into any Company securities.

On April 10, 2008, the Company entered into a binding term sheet with Darryl K. Horne, the Company’s President and Chief Executive Officer, for the provision by Mr. Horne of a working capital loan to the Company. The terms of the loan provide that the Company will be able to borrow $500,000 at 8% interest, with such interest payable quarterly beginning in July, 2008. Principal under the loan will be payable in full at the earlier of (a) twelve (12) months from the loan closing date and (b) the sale of the Company’s Ft Walton Beach, Florida commercial property formerly utilized for SSSI’s operations (the “SSSI Property”). The maturity date of the loan may be extended for an additional six (6) months under certain conditions, including the payment by the Company of a fee equal to one-half percent of the outstanding principal balance. Mr. Horne’s loan will be secured by a second deed of trust on the SSSI Property, which will be junior in priority and subordinate to a first deed of trust securing the Company’s obligations under the Revolving Line of Credit to Evan Auld-Susott, as agent, and Trevor Foster, described below. The loan will not be convertible into any Company securities. The terms of the loan were approved by the Company’s Board of Directors, including each disinterested director. The loan documentation will contain customary terms and conditions for financing of this type, and the Company expects to close on the loan in late April 2008.

On April 10, 2008, the Company entered into a binding term sheet with Evan Auld-Susott as agent for The Susott FLP and Trevor Foster, for the provision to the Company of a revolving line of credit. Evan Auld-Susott is the Company’s Director of Acquisitions and a member of the Company’s Board of Directors. Under the line of credit, the Company will be able borrow $1,000,000 at 12.5% interest upon the Company’s certification to the lenders that the Company has fully exhausted all funds available to the Company pursuant to the $500,000 working capital loan from Darryl K. Horne, described above. Interest on the line of credit will be payable quarterly beginning in July, 2008 with principal payable in full at the earlier of (a) twelve (12) months from the line of credit closing date or (b) the sale of the SSSI Property. The maturity date of the line of credit may be extended for an additional six (6) months under certain conditions, including the payment by the Company of a fee equal to the greater of (i) $2,500 and (ii) one-half percent of the outstanding principal balance. The lenders will have a first deed of trust on the SSSI Property, which will be senior in priority and superior to the second deed of trust in favor of Darryl K. Horne with respect to this working capital loan described above. The loan will not be convertible into any Company securities. The terms of the line of credit were approved by the Company’s Board of Directors, including each disinterested director. The line of credit documentation will contain customary terms and conditions for financing of this type, and the Company expects to close on the line of credit in late April 2008.

Business Segments

The Company comprises three distinct operating companies that each operate in their own reportable segments: Security Solutions (SSSI), Repair and Overhaul (CEECO), and Services (Horne Engineering). These segments are predominantly focused in the U.S. defense markets, although all segments also serve commercial customers. Financial information for each segment can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 17 to the audited financial statements in Item 8. The Company previously reported the Industrial and Offshore segment that was disposed of with the sale of M&M in June 2006.

Security Solutions

Our Security Solutions segment, which will cease operations in April 2008, specialized in the manufacturing of aircraft and munitions support equipment for the U.S. Department of Defense. The Security Solutions segment, which employs approximately 15 employees, is based out of and operates in Ft. Walton Beach, Florida. Most of the Company’s contracts in this segment are with the U.S. Department of Defense.

The segment’s manufacturing operations, with revenue of $2.6 million, accounted for approximately 97% of the segment’s revenues in 2007. The main products of the manufacturing group are U.S. Navy containers and launch tubes, missile shipment and storage containers, and aircraft maintenance stands for military aircraft.

The pricing of raw materials, primarily steel and aluminum, has directly affected the manufacturing unit. The increased price of these materials has negatively affected some of the longer-term manufacturing contracts. The group has worked to limit the impact of rising material prices by renegotiating contracts and including price-escalation clauses in new contracts.

The primary competitors for the manufacturing group are smaller manufacturing companies with the flexibility to support larger contracts. The market is fragmented, and the number of competitors on the manufacturing side has been decreasing. Competition is primarily based on product quality and service offerings combined with pricing. The ability to compete for defense contracts depends on a manufacturer’s ability to pass the first-article testing for new products and on its past performance on similar contracts.

Repair and Overhaul

The Repair and Overhaul segment, which ceased operating in the first quarter of 2008, provided services to the maritime industry, predominantly for on-board ship repair of HVAC and refrigeration systems, welding services, and custom flooring, insulation, and machinery installations. The group also performed extensive work replacing navigation towers destroyed by Hurricane Katrina. This unit was based out of Port Canaveral, Florida, and employed approximately 15 people.

The competitive environment of the segment is fairly limited, with the major competitor of the Company being Standard Marine. Many contract awards are issued with minimal competitive bidding; past performance is a key component of award decisions. The major clients of this segment were the U.S. Coast Guard, CEMEX, and the U.S. Navy.

Services

The Services segment focuses on providing program engineering, occupational safety and health, environmental sciences, acquisition and procurement, business process engineering, public outreach, and information technology services, including modeling and simulation, software development, GIS/geospatial products and services, and technology integration. Our primary customer in this segment is the U.S. Government, with specific focus within the Departments of Homeland Security, Defense, and Transportation. This is a service-based segment that relies on its people to maintain the reputation of the Company to expand operations and improve marketability. The Company has been successful in recruiting top-level candidates to staff open client-focused positions. The applicant pool for the required expertise appears to be sufficiently deep to meet our needs. This segment is primarily based out of our Fairfax, Virginia, headquarters and employs approximately 50 people.

The market addressed by the Services segment is a very large, competitive market with some of the largest businesses and institutions in the country competing in addition to numerous small and emerging businesses. Success is dependent on high performance, expert personnel, intimate knowledge of the organizations being served, and strong relationships with the clients and our private sector partners. This market sector is dependent on the federal budget cycle, federal expenditures, and related priorities.

The segment’s software group focuses primarily on modeling and simulation through both the Safe Range and Safe Borders tracking software. The group has developed the technology to simulate the effect and impact of various weapon systems based on the weapons’ “footprints,” which allows targeting simulation and analysis.

We have certain intellectual property rights with respect to our coding for the Safe Borders tracking software, including certain algorithms and processing procedures that are proprietary. The names “Safe Borders” and “Safe Range” (the modeling and simulation software we developed for weapon system range safety) are registered trade names of the Company.

Discontinued Operations

Discontinued operations includes the results of our M&M Engineering Ltd. subsidiary that was sold in June 2006 and represented our Industrial and Offshore segment. The results of SSSI and CEECO are included in operations as the decision to cease operations was not made until 2008.

Backlog

The Company is reporting two types of backlog: funded and unfunded. These classifications differ significantly in terms of their expected value to the Company and the expected realization of these amounts. The funded backlog, as shown in the table below, includes all contracts that have been awarded and funded by the client, in most cases a government entity. Funded contracts are subject to changes in work scope, delays in project startup, and cancellation by the client. The backlog figures shown below are as of March 31, 2008.

Funded Backlog (all dollars in thousands)

		2008				2009				2010+
Security Solutions		$	373			$	—			$	—
Repair and Overhaul			—				—				—
Services			5,312				—				—
Total Funded Backlog		$	5,685			$	—			$	—

The Company previously reported funded backlog of $6,899 at March 15, 2007, with Security Solutions having $979 and Services of $5,920.

The amount of unfunded backlog was approximately $72 million at March 31, 2008. The unfunded backlog comprises contract awards that, at present, have no funding or confirmed orders on which to rely. An example of this would be GSA schedule awards that are indefinite delivery/indefinite quantity awards. While these contracts have the potential to generate revenue, the amount, timing, and certainty of those revenues are unknown. As such, the amount of revenue recognized under these contracts may be significantly less than the amount of unfunded backlog disclosed above.

Government Contracts

Most of our business is conducted under contracts with or related to U.S. government entities. We are awarded government contracts either on a sole-source basis or through a competitive bidding process. Our U.S. government contract types include fixed-price contracts, cost reimbursable contracts (including cost-plus-fixed fee, cost-plus-award fee, and cost-plus-incentive fee), and time and materials contracts.

Material Government Contract Provisions

The funding of U.S. government programs is subject to Congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal-year basis, even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations.

All contracts with the U.S. government contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to do any of the following:

	•		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.

Generally, government contracts are subject to oversight audits by government representatives. Provisions in these contracts permit termination, in whole or in part, without prior notice, at the government’s convenience or upon contractor default under the contract. Compensation in the event of a termination, if any, is limited to work completed at the time of termination. In the event of termination for convenience, the contractor may receive a certain allowance for profit on the work performed.

Environmental Matters

Our operations may include the use and disposal of hazardous materials. The Company never takes title to any hazardous materials used in its operations. We are subject to various federal, state, and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, and the maintenance of a safe workplace. We believe that we are in substantial compliance with environmental laws and regulations and that we have no known liabilities under environmental requirements that would have a material adverse impact on our business, results of operations, or financial condition. Over the past three years, we have not incurred any material costs relating to environmental compliance.

Available Information

Our headquarters is located at 2677 Prosperity Avenue, Suite 300, Fairfax, VA 22031. Our website address is www.Horne.com. The information contained on our website is not incorporated by reference into this Annual Report. All reports we filed electronically with the Securities and Exchange Commission (SEC), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other information and amendments to those reports filed electronically (if applicable), are accessible at no cost on our website as soon as reasonably practicable after such reports have been filed or furnished to the SEC. These filings are also accessible on the SEC’s Web site at www.sec.gov. The public may read and copy any materials we filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information from the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Item 1A. Risk Factors.

We are subject to several risk factors that could have a direct and material impact on the operations of the Company and the market price of our common stock. These risk factors are described below.

We have experienced liquidity problems and may need to raise capital on terms unfavorable to our stockholders.

At December 30, 2007, we had a cash balance of $0.7 million and a net loss of $19.1 million. While we have recently secured financing and financing commitments from affiliates that we believe will provide sufficient capital to fund our ongoing operations in 2008 (see “Item 1 – Business – Subsequent Events,” above and Note 20 to our consolidated financial statements included in this Annual Report on Form 10-K), we may need to secure additional financing for our operations in the future. We continue to explore growth opportunities for our business, but we do not have complete control over the timing and awarding of future contracts as they are subject to economic, political, financial, competitive, regulatory, and other factors affecting the defense and security industries.

Our current financial condition combined with the security interests in certain of our assets provided in connection with our financing from affiliates, may make it difficult for us to raise capital. There is no assurance that we will be able to obtain any necessary financing to support our business on acceptable terms, or at all; and even if we can, we may do so on terms that are not favorable to our stockholders.

Increased corporate overhead structure combined with a reduced operating base may impact our ability to operate at a profit.

We have made a significant investment in our corporate structure to provide the organizational capabilities to expand our business both organically and through acquisitions. This investment has increased our on-going cost structure and may impair our ability to earn a net profit. This increase in organizational structure has occurred at the same time that we are disposing of two of our subsidiaries, thereby putting additional cost burdens on our remaining subsidiaries.

If we are unable to grow our business, we may incur significant operating losses. We are actively monitoring our cost structure to ensure that we are prudently incurring expenses and we are actively pursuing growth opportunities for our business.

We may not receive the full amount of our contract awards.

The Company receives many government contract awards that include both funded and unfunded amounts. While the Company believes that most contracts will become fully funded and executed, there are occasions where the final executed amount of the contract may be substantially less than the contract award. Congress often appropriates funds for our clients on an annual basis, even though our contracts may call for services over a number of years. As a result, Congress may elect not to fund a particular contract in future years. Additionally, the funded amounts on contracts may not be fully recognized as revenue if the priorities of the contract-issuing agencies change and funding is re-appropriated for other uses, the contract is terminated for convenience by the customer, or our inability to find qualified employees or subcontractors to complete the work.

Our tax loss carry-forward may be adversely impacted by factors outside of our control which could severely limit the value and amount of the tax loss carry-forward in future years.

As of December 30, 2007, we have approximately $49 million of net operating loss carry-forward available to offset future taxable income. The United States Internal Revenue Service has certain rules regarding stock ownership changes within a given three year period. While management is able to manage within these guidelines without triggering the limitations that limit a company’s ability to utilize net operating loss carry-forwards, management may not be able to control or influence outside parties’ activity with regard to our stock.

Our acquisition of Amata, Inc. may not be successful and that may adversely affect our results of operations and financial condition.

In January 2008, we entered into a stock purchase agreement to acquire Amata, Inc., a provider of state-of-the-art security systems for critical facilities and infrastructure. While we believe that acquisition of Amata will greatly expand our business and enhance our ability to market both in the government and private sector, completion of the acquisition is subject to a number of conditions, including the receipt of outstanding receivables from Amata’s primary customer, and consequently, we may not be able to complete the acquisition timely or at all.

There is no assurance that we will realize the anticipated benefits we anticipate from the Amata acquisition.

If we are unable to complete the Amata acquisition, our financial condition and results of operations may suffer. We have loaned Amata $750,000, through March 31, 2008, to fund its working capital needs pending closing of the acquisition, and these loans are secured on a subordinated basis. If Amata is unable to meet the conditions for closing of the acquisition, its ability to repay our loans would be substantially in doubt.

There is no assurance that if the Amata acquisition is consummated, we will be able to integrate the operations of Amata without encountering difficulties, including unanticipated costs, difficulty in retaining customers, and failure to retain key employees. Following the Amata acquisition, we may not realize the revenues net income or other benefits that we expect to achieve or that would justify the acquisition investment, and we may incur costs in excess of what we anticipate. In addition, Amata’s business is currently substantially dependent upon one project and delays in such or adverse events affecting the project could have an adverse effect on Amata’s business and operating results.

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.

Our revenue and operating results could vary significantly from quarter to quarter. In addition, we cannot predict with certainty our future revenue or results of operations. As a consequence, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include, without limitation, the following:

	•		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.

Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the startup and early stages of large contracts and may not receive corresponding payments or revenue in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and administration approval in a timely manner.

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.

We receive more than 90% of our revenue in any given year from contracts with U.S. federal government agencies or with prime contractors of such agencies. We believe that federal government contracts will continue to be the source of substantially all of our revenue for the foreseeable future. For this reason, any issue that compromises our relationship with agencies of the federal government or their prime contractors could cause serious harm to our business.

Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.

We must comply with laws and regulations relating to the formation, administration, and performance of federal government contracts, which affect how we do business with our government clients and may impose added costs on our business. Among the most significant regulations are the following:

	•		The Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulates 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;
	•		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.

A significant portion of our revenue comes from payments made by the U.S. government on prime contracts and subcontracts. The costs of these contracts are subject to audit by the Defense Contract Audit Agency (DCAA). Disallowance of these contract costs by the DCAA could adversely affect the Company’s financial statements. Management periodically reviews its estimates of allowable and unallowable costs based on the results of government audits and makes adjustments as necessary.

If the government discovers improper or illegal activities by the Company or its employees, the Company may be subject to civil and criminal penalties and administrative sanctions, including contract termination, forfeiture of profits, suspension of payments, fines, and suspension or disbarment from conducting future business with the government. In addition, the Company could suffer serious harm to its reputation if allegations of impropriety were made against it, whether or not true. The Company is not aware of any instances of improper or illegal activities of its employees.

Horne Engineering is the only subsidiary subject to incurred cost audits at this time. Horne Engineering is current on the DCAA audit through 2004 and has not had any significant audit findings in any recent DCAA audit.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

As of March 31, 2008, the Company’s headquarters were located in offices leased by the Company in Fairfax, Virginia. Information about the Company’s other operating facilities is set forth below:

Segment		Location		Leased/Owned		Usage
Security Solutions		Ft. Walton Beach, FL		Owned		Manufacturing
		Ft. Walton Beach, FL		Leased		Manufacturing
Repair and Overhaul		Port Canaveral, FL		Leased		Fabrication

The facilities for the Services segment include general office space that is provided by our clients.

We believe all properties that we currently occupy are suitable for their intended use. The Company is working to reduce its financial commitments related to properties at its Florida locations in accordance with the cessation of operations in those locations.

Item 3. Legal Proceedings.

Information regarding material legal proceedings involving the Company is included in Note 18 to the Company’s consolidated financial statements under the heading “Legal Matters” in Part II, Item 8 of this report, which is incorporated herein by reference.

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

No items were submitted for shareholder vote in 2007.

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. The common stock of the Company is listed on the OTC Bulletin Board electronic quotation system and trades under the symbol “HNIN.” The common stock was first traded on December 5, 2003, under the symbol “SPSC.” The symbol was changed in conjunction with the corporate name change in August 2006 and began trading under the current symbol on September 12, 2006. The following table sets forth the high and low bid prices for our common stock for each quarterly period beginning in 2006 as reported on the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

		High				Low
2006
First Quarter		$	1.22			$	0.65
Second Quarter		$	1.15			$	0.68
Third Quarter		$	0.93			$	0.42
Fourth Quarter		$	0.60			$	0.33
2007
First Quarter		$	0.60			$	0.36
Second Quarter		$	0.42			$	0.24
Third Quarter		$	0.50			$	0.32
Fourth Quarter		$	0.37			$	0.16

There were approximately 80 stockholders of record on March 31, 2008. A significant number of the outstanding shares are beneficially owned by individuals or entities registered in a street name. The Company believes there are approximately 6,200 beneficial owners of its common stock as of March 31, 2008.

The Company has never paid any cash dividends and has no current intention to pay a dividend in the foreseeable future.

2004 Non-Statutory Stock Option Plan

The Company’s 2004 Non-Statutory Stock Option Plan was adopted by the Board of Directors on March 11, 2004 and approved by the shareholders in March 2004. The plan was intended to advance the interests of the Company by inducing individuals, and eligible entities, and by encouraging and enabling eligible employees, non-employee directors, consultants and advisors to acquire proprietary interests in the Company, and by providing the participating employees, non-employee directors, consultants, and advisors with an additional incentive to promote the success of the Company. Under this plan, a maximum of 10,000,000 shares of the Company’s common stock, par value $.0001, were authorized for issue. Options issued under this plan would expire one year from the date of issuance.

Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 1, 2004, Non-Statutory Stock Option Plan was adopted by the Board of Directors on April 16, 2004. This restated plan took the same form as the 2004 Non-Statutory Stock Option Plan with the exception that the maximum number of options authorized under this plan was increased to 30,000,000.

Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 2, 2004, Non-Statutory Stock Option Plan was adopted by the Board of Directors on November 15, 2004. This restated plan took the same form as the earlier plans, except that it amended the expiration date on future stock options issued from one year to three years and likewise extended the expiration date of any options issued pursuant to such prior stock option plans. No additional options were authorized under this amended plan.

The amendments to the Stock Option Plan have not been approved by the shareholders.

Item 6. Selected Financial Data (all dollars in $000’s except per share data).

		2007				2006				2005				2004				2003
Revenue			17,676				28,256				53,698				11,134				13,330
(Loss)income from Continuing Operations			(19,143	)			(5,874	)			(4,492	)			(40,618	)			380
Per share of Common Stock-basic & diluted			(0.46	)			(0.14	)			(0.11	)			(1.21	)			0.02
Net (Loss)Income			(19,143	)			(8,594	)			(3,986	)			(40,307	)			206
Per share of Common Stock-basic & diluted			(0.46	)			(0.20	)			(0.09	)			(1.20	)			0.01
Total Assets			10,332				30,064				49,404				31,213				4,634
Long-term Debt including current portion			2,087				1,994				2,813				—				1,763
Shareholder Equity(Deficit)			5,620				24,517				35,097				28,623				(889	)
EBITDA less stock option expense			(17,901	)			(6,706	)			(2,098	)			(1,885	)			(38,878	)
Adjusted EBITDA			(5,907	)			(4,012	)			(2,536	)			(38,878	)			732

The financial information above is reflective of the operations since 2003. Prior to April 2003, the predecessor company Silva Bay International, Inc., was a non-reporting entity that had no financial activity. The above data include the results of the 2005 acquisitions of CEECO and Horne Engineering subsequent to their respective dates of acquisition. The above data exclude the results of M&M, which the Company acquired in 2005 and disposed of in 2006.

The Company uses certain measures of performance that are not required by, or presented in accordance with, generally accepted accounting principles (GAAP). These non-GAAP financial measures are EBITDA less stock option expense and Adjusted EBITDA. These measures should not be considered as an alternative to income from operations, net income, net income per share, or any other performance measure derived in accordance with GAAP.

EBITDA less stock option expense represents net income before interest, taxes, depreciation and amortization, and stock option expense for employees and directors. We use this measure to facilitate operating performance comparisons from period to period. We believe this measure facilitates company-to-company comparisons by backing out potential differences caused by variations in capital structures (affecting interest expense), taxation, and the age and book depreciation of facilities and equipment (affecting depreciation expense), which may vary from company to company. We also use this measure to evaluate and price potential acquisition candidates. We have excluded stock option expense to employees and directors due to the magnitude of the option awards in 2004 and 2005 that were a result of actions of a different Board of Directors and executive management. The compensation philosophy of that Board and management is no longer applicable to our Company, and we expect our stock option compensation expense, in the foreseeable future, to be significantly lower than the 2004 and 2005 levels.

In addition to EBITDA less stock option expense, we use a measure called Adjusted EBITDA, which we define as EBITDA less stock option expense excluding the effects of discontinued operations, cumulative effects of accounting changes, and other non-operating items that represent one-time events. Our management does not view these types of charges as indicative of the status of our operations and therefore believes that Adjusted EBITDA provides investors with a useful measure of our operating performance.

EBITDA Reconciliation
(numbers in thousands)

		2007				2006				2005				2004				2003
Net (Loss)Income			(19,143	)			(8,594	)			(3,986	)			(40,307	)			206
Depreciation/Amortization			1,333				1,813				464				176				139
Interest expense (income)			(137	)			(125	)			176				(125	)			295
Tax expense (benefit)			—				26				62				(21	)			92
Options issued to Employees/directors			46				174				1,399				1,399				—
EBITDA			(17,901	)			(6,706	)			(1,885	)			(38,878	)			732
Cumulative effect of accounting change			—				—				—				—				—
Write-off of intangibles			11,994
Loss(gain) from discontinued operations			—				2,694				(651	)			—				—
Adjusted EBITDA			(5,907	)			(4,012	)			(2,536	)			(38,878	)			732

Quarterly Financial Data
2007

		Q1				Q2				Q3				Q4
Revenue			2,998				9,748				2,343				2,587
Gross Profit			176				720				92				31
Net Loss			(1,969	)			(1,186	)			(2,083	)			(13,905	)
Basic & diluted loss per share			(0.04	)			(0.03	)			(0.05	)			(0.34	)

2006

		Q1				Q2				Q3				Q4
Revenue			12,746				6,233				4,789				4,488
Gross Profit			1,502				910				544				796
Net Loss			(507	)			(4,562	)			(1,532	)			(1,994	)
Basic & diluted loss per share			(0.01	)			(0.10	)			(0.04	)			(0.05	)

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

The financial and business analysis below provides information that the Company believes is relevant to an assessment and understanding of the Company’s consolidated financial position, results of operations, and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

The following discussion and certain other sections of this report contain statements reflecting the Company’s views about its future performance and constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict, and accordingly, the Company’s actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors may affect the Company’s performance. These factors include changes in general economic conditions and competitive market conditions; price pressures; relationships with key customers; and other factors discussed in Part I, Item 1A, “Risk Factors,” and the sections entitled “Executive-Level Overview” and “Critical Accounting Estimates” below. The Company undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise.

Executive-Level Overview

The Company provides a variety of goods and services through its wholly owned subsidiaries — SSSI, CEECO, and Horne Engineering. The provision of such goods and services is largely dependent on the amount of U.S. Government contracting in the areas of homeland security, environmental management, infrastructure reconstruction, and munitions management. Significant changes to the spending levels in these areas may have a direct impact on the operations of the Company.

The Company made the strategic decision to terminate the operations of SSSI and CEECO in the first quarter of 2008 due to continuing losses and to focus on its core business.

Basis of Presentation

The fiscal-year for Horne International, Inc. is the 52 or 53 weeks ending on the last Sunday in December. Fiscal 2007 and 2006 were 52-week fiscal-years. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated joint ventures were adjusted to fair market value upon the acquisition of Horne Engineering in 2005. The investments are now recorded under the cost method.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including those related to long-term contracts, product returns, bad debts, inventories, fixed asset lives, income taxes, environmental matters, litigation, and other contingencies. We base our estimates and assumptions on historical experience and on various factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates under different assumptions or conditions.

We believe that the following critical accounting estimates, among others, require us to make significant estimates and judgments in the preparation of our financial statements:

Revenue Recognition

The Company’s principal method of revenue recognition varies by segment. The Security Solutions segment uses percentage of completion, our Repair and Overhaul segment uses the completed contract method of revenue recognition, and our Service segment primarily uses cost plus on reimbursable time-and-materials contracts. The revenue on these contracts is recognized as costs are incurred. The Service segment does have a limited number of short-term fixed-price contracts where revenue is recognized as milestones are achieved. Although the Repair and Overhaul segment uses the completed contract method of revenue recognition, there is no material difference in the results of using completed contract versus percentage of completion due to the short-term nature of its contracts.

Security Solution’s revenue on fixed-price contracts is generally recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared with estimated total costs to complete the contract, which the Company believes is the best measure of progress toward completion. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses for our government contracts. These cost estimates are reviewed and, as necessary, revised on a contract-by-contract basis. If, as a result of this review, we determine that a loss on a contract is probable, then the full amount of estimated loss is charged to operations in the period it is determined that it is probable a loss will be realized from the full performance of the contract. Significant management judgments and estimates, including but not limited to the estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period.

Management believes the above methods and criteria are the best available measures of progress for such contracts. Because of the inherent uncertainties in estimating costs and revenues, it is reasonably possible that the estimates used will change in the future.

The Company, through its Services segment, performs equipment and material procurement contracts as a subcontractor. These contracts require the Company to acquire large dollar items for federal governmental entities through prime contractors. The Company has recognized revenue under these contracts on a gross basis when the goods are shipped to the end user. The Company uses the gross method of revenue recognition, as prescribed under EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” as the Company is the primary obligor in the transaction and is obligated to pay the supplier for work performed regardless of whether the customer accepts the work. The Company is responsible for the acceptability of the product and has the latitude and negotiability to determine both the suppliers and the price in the transaction. The customer has the right of return. Although the Company does not take title to the goods, the Company conducts all business under these contracts as a stand-alone entity using its own financial, staffing, and facility resources. The Company is compensated for the material purchases at a fixed fee percentage.

Allowance for Bad Debts

We evaluate our accounts receivable through a continuous process of assessing our portfolio on an individual and overall basis. The majority of our contracts are with United States Government entities and as such we have minimal risk of collectability. The few contracts we have with non-governmental entities we review on a contract-by-contract basis. During 2007, we recorded a $200,000 bad debt reserve on a specific contract in our Security Solutions segment on a contract where we executed as a subcontractor. We have filed suit related to this contract and the receivable is fully reserved at December 30, 2007.

Net Operating Loss Carry-Forwards

We have not recognized the benefit in our financial statements with respect to the approximately $49 million net operating loss carry-forwards for federal income tax purposes as of December 30, 2007. This benefit was not recognized due to the possibility that the net operating loss carry-forwards would not be utilized, for various reasons; including the potential that we might not have sufficient profits to use the carry-forward or that the carry-forwards may be limited as a result of changes in our equity ownership. We intend to use these carry-forwards to offset our future taxable income. If we were to use any of this net operating loss carry-forwards to reduce our future taxable income and the Internal Revenue Service were to then successfully assert that our carry-forwards are subject to limitation as a result of capital transactions, we may be liable for back taxes, interest, and, possibly, penalties.

Goodwill and Other Intangibles

The Company records the excess of purchase price over the fair value of net assets of acquired companies as goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not record amortization expense related to goodwill. In the fourth quarter of each year, or as an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, the Company completes a review of the market value of that investment and related goodwill.

Determining market values requires the Company to make significant estimates and assumptions. The Company’s judgments are based on historical experience, current market trends, consultations with external valuation specialists, and other information. While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, different assumptions could result in a different market value.

During the Company’s annual review of goodwill and other intangibles in the fourth quarter of 2007, we determined that due to our on-going operating losses and future projected operating losses, all intangible assets, including goodwill, should be written off. This write-off resulted in an $11.994 million charge to net income in the fourth quarter of 2007. See footnote 7 of the audited financial statements in Item 8 for additional information.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal-years beginning after November 15, 2007, thus it will start affecting the Company on December 31, 2007, the beginning of the Company’s 2008 fiscal-year. The Company is assessing the impact the adoption of SFAS No. 157 will have on the Company’s consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal-years beginning after November 15, 2007. We will adopt SFAS 159 on December 31, 2007 and have not yet determined the impact, if any, on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development (IPR&D) is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal-year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal-year 2009. As of December 30, 2007, we did not have any minority interests. The adoption of SFAS No. 160 will not impact our consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective for us beginning in the first quarter of fiscal-year 2008. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.

Overall Results of Operations

The results of operations do not include any activity for the Industrial and Offshore Segment that was terminated with the sale of M&M in June 2006.

		For the Year ended December,
		(all dollars in 000’s)
		2007								2006
Revenues			17,676				100.0	%			28,256				100.0	%
Cost of Revenue			16,657				94.2	%			24,504				86.7	%
Gross Profit			1,019				5.8	%			3,752				13.3	%
Operating Loss			(19,951	)			-112.9	%			(6,354	)			-22.5	%

Revenue declined in 2007, as compared with 2006, in all segments with decreases ranging from 30% to 48%. The largest dollar decrease was in our Services segment, $8,100 representing a 37.4% decrease over 2006 Services revenue. Specific details are provided in the individual segment sections.

Gross margin declined both in dollars and as a percentage of sales despite a slight improvement in Security Solutions, as the reduction in our high-margin acquisition support services revenue was combined with lower revenues in all segments. Lower segment revenues negatively impacted our utilization rates of direct staff which decreased our profitability.

Operating loss increased over 2006 mainly due to the write-off of the intangibles from our Horne Engineering and CEECO acquisitions. Based on our annual intangible impairment review during the fourth quarter of 2007, we determined that all of our intangibles and related goodwill for these two acquisitions needed to be expensed. This accounted for approximately $12.0 million of expense in 2007. The Company did not perform a formal interim intangible and goodwill analysis prior to the fourth quarter of 2007 as we were awaiting the results of several proposal efforts that could have had a significant impact on our forecasts, thereby impacting the intangible analysis. Once the outcome of those proposals was known, we were able to more accurately forecast our future operations. The remaining operating expenses were comparable with the prior year with staff reductions and office closings offset by severance and expenses associated with the office closings. We took steps in the fourth quarter of 2007 to further reduce our overhead expenses as we move into 2008. We expect that our operating loss will decrease in 2008 as we will not have the intangible write-offs that occurred in 2007.

Given the uncertainty of several contracts we are pursuing, the variability of our material procurement work, and the uncertainty of the timing of the Amata, Inc. acquisition, we are unable to give an accurate full-year 2008 forecast of our operating results as of the filing of this Annual Report.

Security Solutions

		For the Year ended December,
		(all dollars in 000’s)
		2007								2006
Revenues			2,703				100.0	%			3,886				100.0	%
Cost of Revenue			3,163				117.0	%			4,922				126.7	%
Gross Loss			(460	)			-17.0	%			(1,036	)			-26.7	%
Operating Loss			(1,566	)			-57.9	%			(1,848	)			-47.6	%

Revenue for the Security Solutions segment declined by $1.1 million, or 30.4% from 2006 primarily due to decreased revenue from container manufacturing ($420), Navy Tubes ($380), and maintenance stands ($315). We did have significant new work in 2007 from L3 and our target assemblies; however, these revenue increases were offset by decreases in MAC assembly and rocket module revenue.

Gross profit improved in 2007, as compared with 2006, but was still negative for the year. The main drivers of the negative gross profit were low staff utilization during the first half of 2007, first article costs for a potential new contract, and insufficient revenue levels to offset our fixed manufacturing costs.

Operating costs increased for the 2007 period as a result of a $200 bad debt expense related to a government contract under which we were a subcontractor. We have filed suit with regard to this contract.

Repair and Overhaul

		For the Year ended December,
		(all dollars in 000’s)
		2007								2006
Revenues			1,423				100.0	%			2,711				100.0	%
Cost of Revenue			1,177				82.7	%			1,745				64.4	%
Gross Profit			246				17.3	%			966				35.6	%
Operating (Loss)profit			(348	)			-24.5	%			443				16.3	%

Revenue decreased in the Repair and Overhaul segment in 2007 due to two large contracts that were completed in 2006 and not replicated in 2007. These contracts for navigation towers accounted for $485 of revenue in 2006. This segment suffered from fewer U.S. Coast Guard contracts for in-water repairs, which have customarily been a significant source of revenue. More ships were kept in service for longer periods of time and the ships that were repaired had a higher percentage of dry-docking than has been the historical average.

Gross profit declined both in dollars and as a percentage of revenue due to the absence of the higher margin tower work and a loss taken on one of our larger contracts. We incurred a $120 loss related to a specific contract.

Operating expenses increased slightly from 2006 primarily due to expanded insurance coverage.

Services

		For the Year ended December,
		(all dollars in 000’s)
		2007								2006
Revenues			13,550				100.0	%			21,659				100.0	%
Cost of Revenue			12,317				90.9	%			17,837				82.4	%
Gross Profit			1,233				9.1	%			3,822				17.6	%
Operating (Loss)profit			(607	)			-4.5	%			1,291				6.0	%

Revenue decreased in 2007 from 2006 mainly due to completion of our environmental sampling and chemical demilitarization contracts ($2.7 million), the completion of our acquisition support services contract ($2.3 million), and the termination of our large TSA contract ($2.1 million).

Gross margin decreased significantly in 2007 mainly due to the decreased revenue. Gross margin as a percentage of revenue also decreased mainly due to the absence of the higher-margin acquisition support revenue.

Operating profit decreased both in dollars and as a percentage of sales even though total operating expenses decreased from 2006. We were able to cut costs from our non-core locations and reduce operating staff accordingly, as we closed or consolidated those operations. We were able to reduce operating costs by $800 during 2007 as compared with 2006 but the decrease in gross profit was greater than our cost reductions. The $800K reduction is net of the $568 of intangible write down in Q4 2007.

Corporate Expenses

		2007				2006
Operating Loss			(17,430	)			(6,240	)

The increase in operating expenses is primarily due to the write-off of $11,400 of intangible assets related to the Horne Engineering and CEECO acquisitions. Increased personnel and severance related costs in 2007 were offset by reduced intangible amortization costs in 2006 of $482.

Discontinued Operations

(all numbers in 000’s)

		2007				2006
(Loss) earnings from discontinued operations		$	—			$	(2,694	)

The discontinued operations only include the results of our M&M subsidiary, formerly the Industrial and Offshore segment.

Backlog by Segment

The Company is reporting two types of backlog: funded and unfunded. These classifications differ significantly in terms of their expected value to the Company and the expected realization of these amounts. The funded backlog, as shown in the table below, includes all contracts that have been awarded and funded by the client, in most cases a government entity. Funded contracts are subject to changes in work scope, delays in project startup, and cancellation by the client. The backlog figures shown below are as of March 31, 2008.

Funded Backlog (all dollars in thousands)

		For the Year ended December,
		(all dollars in 000’s)
		2008				2009				2010+
Security Solutions		$	373			$	—			$	—
Repair and Overhaul			—				—				—
Services			5,312				—				—
Total Funded Backlog		$	5,685			$	—			$	—

The Company previously reported funded backlog of $6,899 at March 15, 2007, with Security Solutions having $979 and Services having $5,920.

The amount of unfunded backlog was approximately $72 million at March 31, 2008. The unfunded backlog comprises contract awards that, at present, have no funding or confirmed orders on which to rely. An example of this would be GSA schedule awards that are indefinite delivery/indefinite quantity awards. While these contracts have the potential to generate revenue, the amount, timing, and certainty of those revenues are unknown. As such, the amount of revenue recognized under these contracts may be significantly less than the amount of unfunded backlog disclosed above.

Liquidity and Capital Resources

Cash and cash equivalents totaled approximately $0.7 million at December 30, 2007. During 2007, operations consumed $3.8 million of cash primarily due to operating losses in all segments. Our receivables improved during the year as we have been able to reduce our unbilled accounts receivable balances and bring our receivables aging more current.

During 2006, the Company generated approximately $6.2 million in cash from the sale of M&M and the related release of the cash backed bonding funds. Operations consumed $2.6 million of cash primarily due to operating losses in Security Solutions. Our receivables improved during the year as we were able to reduce our unbilled accounts receivable balances and bring our receivables aging more current.

The Company’s working capital position at December 30, 2007, was $1.6 million, compared with $6.5 million at December 31, 2006. The decrease in working capital is primarily a result of the continued operating losses. Accounts receivable decreased due to better collections and decreased sales.

The Company had a line of credit with Bank of America that expired on April 30, 2007.

The Company anticipates that funds from operations will be sufficient to provide for our 2008 operations and purchases of plant and equipment. The Company has recently received loans from an affiliate in the amount of $500,000 and secured commitments from affiliates for $500,000 in working capital financing and an additional $1,000,000 in a revolving line of credit facility. Details of the terms of these loans and financing commitments are included in “Item 1 – Business - Subsequent Events” and Note 20 to our consolidated financial statements contained in this Annual Report on Form 10-K.

The Company is pursuing additional funding sources in the event that funds from operations and the affiliate financing referenced above are not sufficient to provide for our operations beyond 2008. These funding sources will primarily be in the form of bank credit lines. Given our past financial performance, the costs and fees associated with funding sources may be more expensive than the Company has historically paid. The Company can not determine if the funds available from operations will be sufficient for any acquisitions or facility expansions that may be undertaken during the year. Should the Company make any acquisitions or expansions, other sources of financing may be required.

Contractual Obligations (all numbers in thousands)

The Company has certain obligations and commitments to make future payments under contracts. At December 30, 2007, the aggregate contractual obligations and commitments are:

		2008				2009				2010				2011				2012				2013+
Operating Leases		$	613			$	504			$	527			$	362			$	—			$	—
Capital Leases			71				74				65				19				—				—
Mortgage Payable			47				51				56				61				68				1,575
Total Lease Commitments		$	731			$	629			$	648			$	442			$	68			$	1,575

The debt service figures shown above reflect the principal amount of our commitments.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

At December 30, 2007, the Company had no amounts outstanding under a revolving credit facility. We have not historically mitigated our exposure to fluctuations in interest rates by entering into interest rate hedge agreements, nor do we have any plans to do so in the immediate future.

Cash and cash equivalents, as of December 30, 2007, were approximately $0.7 million and are primarily invested in money market interest-bearing accounts. A hypothetical 10% change in the average interest rate on our money market cash investments would have had no material effect on net income for the twelve months ended December 30, 2007.

Foreign Exchange Risk

We were exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies prior to the disposition of our Canadian subsidiaries. We were exposed to the impact of foreign currency fluctuations due to the operations of and net monetary asset and liability positions in our former Canadian subsidiaries.

We currently do not have any foreign currency risk and accordingly, estimate that an immediate 10% change in foreign exchange rates would have no impact on our reported net loss. We do not currently utilize any derivative financial instruments to hedge foreign currency risks.

Item 8. Financial Statements and Supplementary Data.

The following documents are filed as part of this Annual Report on Form 10-K:

Financial Statements

Report of Independent Registered Public Accounting Firm			[21]
Consolidated Balance Sheets: December 30, 2007, and December 31, 2006			[22]
Consolidated Statements of Operations and Comprehensive Income (Loss): Years ended December 30, 2007, and December 31, 2006			[23]
Consolidated Statements of Stockholders’ Equity: Years ended December 30, 2007, and December 31, 2006			[24]
Consolidated Statements of Cash Flows: Years ended December 30, 2007, and December 31, 2006			[25]
Notes to Consolidated Financial Statements			[26]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Horne International, Inc.

We have audited the accompanying consolidated balance sheets of Horne International, Inc. (a Delaware corporation) and subsidiaries as of December 30, 2007 and December 31 2006, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the 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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Horne International, Inc. and subsidiaries as of December 30, 2007 and December 31 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 30, 2007 in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Baltimore, Maryland

April 14, 2008

HORNE INTERNATIONAL, INC.

Consolidated Balance Sheets

(Dollars in thousands except share amounts)

		December				December
		30, 2007				31, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	666			$	4,465
Receivables, net			2,464				5,170
Inventories			331				156
Prepaid expenses & Other current assets			865				333
Total current assets			4,326				10,124
Property and equipment, net			5,520				5,737
Goodwill			—				3,529
Other intangibles, net			—				9,007
Investments in joint ventures			311				311
Other assets			175				1,356
TOTAL ASSETS		$	10,332			$	30,064
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	638			$	717
Accrued expenses			1,884				2,517
Deferred revenues			103				319
Current portion of long-term debt			118				68
Total current liabilities			2,743				3,621
Long-term liabilities:
Long term debt, less current portion			1,969				1,926
TOTAL LIABILITIES			4,712				5,547
Commitments and contingencies (Note 18)
Stockholders’ 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, 41,774,082 and 41,272,200 issued and outstanding			4				4
Additional paid-in capital			78,617				78,371
Accumulated deficit			(73,001	)			(53,858	)
Total stockholders’ equity			5,620				24,517
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	10,332			$	30,064

See accompanying notes to consolidated financial statements.

HORNE INTERNATIONAL, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollars in thousands except share amounts)

		Twelve months ended
		December 30,				December 31,
		2007				2006
Revenue
Services		$	15,106			$	23,527
Products			2,570				4,729
Total			17,676				28,256
Cost of Revenue
Services			13,631				19,261
Products			3,026				5,243
Total			16,657				24,504
Gross Profit
Services			1,475				4,266
Products			(456	)			(514	)
Total			1,019				3,752
Operating Expense			20,970				10,106
Net Operating Loss			(19,951	)			(6,354	)
Non-operating income(expense), net			808				480
Loss before income taxes			(19,143	)			(5,874	)
Income tax expense			—				(26	)
Loss from continuing operations			(19,143	)			(5,900	)
Loss from discontinued operations			—				(2,694	)
Net and Total Comprehensive Loss		$	(19,143	)		$	(8,594	)
Weighted average common shares outstanding:
Basic and diluted			41,683,331				42,814,118
Loss per share:
Basic and diluted from continuing operations		$	(0.46	)		$	(0.14	)
Basic and diluted from discontinued operations		$	0.00			$	(0.06	)
Total basic and diluted loss per share		$	(0.46	)		$	(0.20	)

See accompanying notes to consolidated financial statements.

HORNE INTERNATIONAL, INC.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except share amounts)

																		Comprehensive
		Common Stock												Accumulated				Income
		Shares				Amount				APIC				Deficit				(Loss)				Total
Balance as of January 1, 2006			44,072,200			$	4			$	79,866			$	(45,264	)		$	491			$	35,097
Net Loss														$	(8,594	)						$	(8,594	)
Option Issuances										$	174											$	174
Foreign currency translation M&M disposition																		$	(491	)		$	(491	)
M&M sale																						$	(1,494	)
Augenbaum settlement										$	705											$	(175	)
Treasury Stock retirement			(2,800,000	)		$	—			$	(2,374	)										$	—
Balance as of January 1, 2007			41,272,200			$	4			$	78,371			$	(53,858	)		$	—			$	24,517
Net Loss														$	(19,143	)						$	(19,143	)
Stock Issuances			501,882			$	—			$	200											$	200
Option Issuances										$	46											$	46
Balance as of December 30, 2007			41,774,082			$	4			$	78,617			$	(73,001	)		$	—			$	5,620

See accompanying notes to the consolidated financial statements.

HORNE INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(Dollars in thousands)

		2007				2006
Net loss from continuing operations		$	(19,143	)		$	(5,900	)
Adjustments to reconcile net loss to net
Cash used in operating activities
Stock option issuances			46				174
Depreciation/Amortization			1,333				1,813
Allowance for bad debt			200				—
Write-off of goodwill and other acquired intangibles			11,874				—
Legal settlement costs not included in net income			—				(175	)
Loss(gain) on disposal of equipment			14				(5	)
Decrease (increase) in balance sheet items
Receivables			2,506				7,367
Inventory			(176	)			103
Prepaid Expenses			(117	)			54
Accounts Payable			(79	)			(5,129	)
Accrued Expenses			(433	)			(357	)
Deferred Revenue			(215	)			(58	)
Other balance sheet changes			350				(523	)
Net cash used in continuing operations			(3,840	)			(2,636	)
Cash flows from investing activities
Cash received from sale of subsidiary			830				6,190
Cash invested in potential acquisition			(559	)
Purchase of property and equipment			(183	)			(546	)
Proceeds from the sale of equipment			46				16
Net cash provided by investing activities			134				5,660
Cash flows from financing activities
Repayment of debt, net			(93	)			(102	)
Net cash used in financing activities			(93	)			(102	)
Cash flows used in discontinued operations			—				(270	)
Net (decrease)increase in cash and cash equivalents			(3,799	)			2,652
Cash and cash equivalents at beginning of period			4,465				1,813
Cash and cash equivalents at end of period		$	666			$	4,465

     See accompanying notes to the consolidated financial statements.

HORNE INTERNATIONAL, INC.

Notes To Consolidated Financial Statements

1. ORGANIZATION AND NATURE OF BUSINESS

Organization

Horne International, Inc. (the “Company” or “Horne”), headquartered in Fairfax, Virginia, has three reportable segments: Security Solutions, Repair and Overhaul, and Services. Security Solutions includes the design and construction of munitions ground support equipment and containers for the shipping and storage of munitions. Repair and Overhaul provides specialized fabrication and maintenance for ships, lifeboats and maritime navigation systems. The Services segment provides program engineering, occupational safety and health, environmental sciences, acquisition and procurement, business process engineering, technology integration, and public outreach services. The Services segment comprises the previously reported segments of Engineering and Procurement Services.

The Company decided to cease operations in the Spectrum Sciences & Software, Inc., and Coast Engine and Equipment Co. subsidiaries during the first quarter of 2008. These companies represented the entire operations of the Security Solutions and Repair and Overhaul segments, respectively. See additional information in the Subsequent Events Note 20.

The Company disposed of M&M in June 2006. Details of the divestiture are included in Note 3.

Liquidity

Cash and cash equivalents totaled approximately $0.7 million at December 30, 2007 and a loss of $19.1 million for the year ended December 30, 2007. The Company’s working capital position at December 30, 2007, was $1.6 million. The Company anticipates that funds from operations will be sufficient to provide for our 2008 operations and purchases of plant and equipment. The Company has recently received loans from an affiliate in the amount of $500,000 and secured commitments from affiliates for $500,000 in working capital financing and an additional $1,000,000 in a revolving line of credit facility. Details of the terms of these loans and financing commitments are included in Note 20. The Company is pursuing additional funding sources in the event that funds from operations and the affiliate financing referenced above are not sufficient to provide for our operations beyond 2008.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The fiscal-year for Horne International, Inc., is the 52 or 53 weeks ending on the last Sunday in December. Fiscal 2007 and 2006 were 52-week fiscal-years. The Consolidated Financial Statements include the accounts of Horne International, Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated joint ventures were adjusted to fair market value upon the acquisition of Horne Engineering in 2005. The investments are now recorded under the cost method.

Revenue Recognition

The Company’s principal method of revenue recognition varies by segment. The Security Solutions segment uses percentage of completion, our Repair and Overhaul segment uses the completed contract method of revenue recognition, and our Services segment primarily uses cost plus on reimbursable time-and-materials contracts. The revenue on these contracts is recognized as costs are incurred. The Services segment does have a limited number of short-term fixed-price contracts where revenue is recognized as milestones are achieved. Although the Repair and Overhaul segment uses the completed-contract method of revenue recognition, there is no material difference in the results of using completed contract versus percentage-of-completion due to the short-term nature of its contracts.

Security Solutions’ revenue on fixed price contracts is generally recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared with estimated total costs to complete the contract, which the Company believes is the best measure of progress toward completion. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses for our government contracts. These cost estimates are reviewed and, as necessary, revised on a contract-by-contract basis. If, as a result of this review, we determine that a loss on a contract is probable, then the full amount of estimated loss is charged to operations in the period it is determined that it is probable a loss will be realized from the full performance of the contract. Significant management judgments and estimates, including but not limited to the estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period.

Management believes the above methods and criteria are the best available measures of progress for such contracts. Because of the inherent uncertainties in estimating costs and revenues, it is reasonably possible that the estimates used will change in the future.

HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements

The Company, through its Services segment, performs equipment and material procurement contracts as a subcontractor. These contracts require the Company to acquire large dollar items for federal governmental entities through prime contractors. The Company has recognized revenue under these contracts on a gross basis when the goods are shipped to the end user. The Company uses the gross method of revenue recognition, as prescribed under EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” as the Company is the primary obligor in the transaction and is obligated to pay the supplier for work performed regardless of whether the customer accepts the work. The Company is responsible for the acceptability of the product and has the latitude and negotiability to determine both the suppliers and the price in the transaction. The customer has the right of return. Although the Company does not take title to the goods, the Company conducts all business under these contracts as a stand-alone entity using its own financial, staffing, and facility resources. The Company is compensated for the material purchases at a fixed fee percentage.

Use of Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, results could differ from those estimates and assumptions.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, receivables, accounts payable, and accrued expenses approximates fair value because of the short-term nature of those instruments. The carrying amount and fair market value of the Company’s short-term investments are the same since short-term investments are recorded at fair value. Debt is recorded at the cash settlement value of the underlying notes and is not revalued.

Significant Customers and Credit Risks

Revenues from individual customers greater than 10% of consolidated revenues, in the respective periods, were as follows:

		Year Ended December 31,
		2007				2006
Customer A			*				24.8	%
Customer B			39.6	%			*

Due to the nature of the Company’s business and the relative size of certain contracts, it is not unusual for a significant customer in one year to be insignificant in the next. However, it is possible that the loss of any single significant customer could have a material adverse effect on the Company’s results from operations. The Company’s primary customers are government entities. If revenue from a single government entity exceeds 10% of our total revenue, it is disclosed above.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents, accounts receivable, and unbilled services. As of December 30, 2007, all of the Company’s cash and cash equivalents were held in or invested with domestic banks. Accounts receivable from individual customers that are equal to or greater than 10% of consolidated accounts receivable in the respective periods were as follows:

HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements

		Fiscal December
		2007				2006
Customer A			*				*
Customer B			*				*
Customer C			26.6	%			*
Customer D			13.5	%			*

In determining the allowance for doubtful accounts, the Company analyzes the aging of the accounts receivable, historical bad debts, customer creditworthiness, and specific situations involving our customers. As the majority of our work is government related, the risk of uncollectiblity is greatly reduced. We do take specific bad debt reserves when we consider our ability to collect an amount to be in doubt.

Inventories

Inventory costs are stated at the lower of cost or market, determined by either the average cost or first-in, first-out method. Inventory costs normally consist of work in progress with minimal raw materials or finished goods. The Company strives to order raw materials and parts for delivery as needed. On occasion, the Company will advance purchase raw materials if the discounted price of those materials is sufficient to justify the carrying costs of said materials.

Property & Equipment

Property and equipment acquired as part of the acquisitions were adjusted to their approximate fair value at the time of acquisition. All other property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed on both an accelerated basis and straight-line methods over the estimated useful lives of the underlying assets. The lives range from 3 to 40 years depending on asset type. Routine maintenance and repairs are expensed as incurred. Major replacements and improvements are capitalized. Leasehold improvements are amortized over the shorter of the useful life or the lease term.

Goodwill

The Company records the excess of purchase price over the fair value of net assets of acquired companies as goodwill. In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,” the Company does not record amortization expense related to goodwill. In the fourth quarter of each year, or as an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, the Company completes a review of the market value of that investment and related goodwill.

Determining market values requires the Company to make significant estimates and assumptions. The Company’s judgments are based on historical experience, current market trends, consultations with external valuation specialists, and other information. While the Company believes that the estimates and assumptions underlying the valuation methodology are reasonable, different assumptions could result in a different market value. Our annual impairment tests for fiscal 2007 resulted in goodwill impairment. The goodwill impairment is further discussed in Note 7 to these financial statements.

Impairment of Long-Lived Assets

The Company reviews the recoverability of its long-lived asset groups, including furniture and equipment, computer hardware and software, leasehold improvements, and other finite-lived intangibles, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The Company’s primary measure of fair value is based on discounted cash flows. The measurement of impairment requires the Company to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. See Note 7 to these financials statements regarding the impairment charge taken in 2007.

HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Research and Development Costs

Research and development costs are expensed as incurred. The Company incurred approximately $0 and $22,000 in 2007 and 2006, respectively. These costs are included in the accompanying statements of operations.

Earnings (Loss) Per Share

The Company reports its earnings (loss) per share in accordance with Financial Accounting Standards Board (FASB) Statement No. 128, “Earnings Per Share.” Statement No. 128 requires the presentation of basic and diluted loss per share on the face of the statement of operations.

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS is computed in a manner consistent with that of basic EPS while giving effect to the impact of common stock equivalents. The Company’s common stock equivalents consist of employee, director, and consultant stock options to purchase common stock. Common stock equivalents of 1,912,514 and 4,124,950 were not included in the computation of diluted earnings (loss) per share for the twelve months ended December 30, 2007, and December 31, 2006, respectively, as the inclusion of these common stock equivalents would be anti-dilutive as the Company is in a net loss position and including such shares would reduce the net loss per share.

Foreign Currency Translation

The Company’s functional currency is the U.S. dollar, except that the functional currency of M&M was the Canadian dollar. In the accompanying consolidated financial statements, all monetary consolidated statements of operations items of M&M were translated at the average exchange rate for the six months ended June 30, 2006, at 0.8662 Canadian dollar to 1.00 U.S. dollar. The Company has had no foreign operations since the disposition of M&M on June 21, 2006.

Stock Based Compensation

The Company adopted the fair value recognition provisions of the Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” in 2004. Accordingly, the fair values of stock option awards are determined using the Black-Scholes model. The compensation expense is recognized on a straight-line basis over the vesting period. The Company has traditionally not included a vesting period for option grants, however, beginning in 2006, the Company has included a vesting period for most options granted. See Note 13 for a detailed discussion of the Company’s stock-based compensation plans.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal-years beginning after November 15, 2007; thus it will start affecting the Company on December 31, 2007, the beginning of the Company’s 2008 fiscal-year. The Company is assessing the impact the adoption of SFAS No. 157 will have on the Company’s consolidated financial position and results of operations.

Horne International, Inc.
Notes To Consolidated Financial Statements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115.”. SFAS 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal-years beginning after November 15, 2007. We will adopt SFAS 159 on December 31, 2007, and have not yet determined the impact, if any, on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development (IPR&D) is capitalized as an intangible asset and amortized over its estimated useful life. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal-year 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. SFAS No. 160 is effective for us on a prospective basis for business combinations with an acquisition date beginning in the first quarter of fiscal-year 2009. As of December 30, 2007, we did not have any minority interests. The adoption of SFAS No. 160 will not impact our consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective for us beginning in the first quarter of fiscal-year 2008. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.

3. ACQUISITIONS & DISPOSITIONS

M&M Engineering Limited

On June 21, 2006, the Company sold the M&M subsidiary to a management-led partnership. The total sale price was approximately $5.0 million and consisted of cash, the redemption of Company stock, and a two-year interest-bearing note receivable due June 2008. The sale also included the repayment, to the Company, of approximately $4.6 million of cash-backed bonding advanced to M&M in 2005. The two-year note, originally due in June 2008, was paid in June 2007.

In accordance with FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have segregated the financial results for M&M as discontinued operations in our accompanying consolidated financial statements. This includes both current-year statements and the comparative prior-year information.

As a result of this transaction, the Company recorded a loss of approximately $2.1 million related to the sale.

Horne International, Inc.
Notes To Consolidated Financial Statements

4. RECEIVABLES (000’s)

Receivables primarily comprise amounts due to the Company for work performed on contracts directly related to commercial and government customers. The Company’s Security Solutions segment’s customers include: the U.S. Navy and the U.S. Air Force. Repair and Overhaul’s customers include the U.S. Coast Guard, Cemex, and the U.S. Navy. The U.S. Department of Defense (including the Army Environmental Command and the Army Corps of Engineers), Lockheed Martin, Bechtel International, Inc., Battelle, Staubach, Louisiana State University, Department of Homeland Security, Federal Aviation Administration, General Services Administration (GSA Schedules), USAID, and other government agencies are the major customers for the Company’s Services segment.

		December				December
Accounts Receivable		30, 2007				31, 2006
Billed AR		$	1,944			$	3,779
Unbilled AR			653				1,197
Holdbacks			48				194
Bad Debt Reserve			(211	)			—
Other			30				—
Total AR		$	2,464			$	5,170

Unbilled receivables represent recoverable costs and estimated earnings consisting principally of contract revenues that have been recognized for accounting purposes but are not yet billable to the customer based upon the respective contract terms. Substantially all of these amounts will be billed in the following year.

5. INVENTORIES (000’s)

Inventories are valued at the lower of cost or market. Cost is determined either by using the average cost or first-in, first-out method. The major components of inventories are summarized as follows:

		December				December
Inventory		30, 2007				31, 2006
Raw Materials		$	321			$	100
Work in Process			11				56
Total Inventory		$	332			$	156

Horne International, Inc.
Notes To Consolidated Financial Statements

6. PROPERTY AND EQUIPMENT (000’s)

		December				December
Property & Equipment		30, 2007				31, 2006
Land		$	575			$	575
Buildings & Improvements			4,441				4,270
Furniture & Fixtures			285				256
Manufacturing Equipment			1,506				1,283
Tools & Equipment			295				354
Office Equipment			634				644
Vehicles			223				303
Investment Property			221				221
Total		$	8,180			$	7,906
Accumulated Depreciation			(2,660	)			(2,169	)
Property & Equipment, net		$	5,520			$	5,737

7. GOODWILL AND OTHER INTANGIBLES (000’s)

In 2005, the Company acquired CEECO and Horne Engineering. As a result of these acquisitions, the Company recorded goodwill for both acquisitions and other identified intangibles related to Horne Engineering. During the fourth quarter of 2007, the Company performed a valuation analysis on all of its goodwill and intangible assets. As a result of this review, the Company determined that all of the goodwill and intangible assets had been impaired and should be written off in their entirety.

The CEECO acquisition had goodwill based on its initial purchase price and subsequent earn-out payments as stipulated in the acquisition agreement. The first two earn-outs were based on annual net income as defined in the purchase agreement with the third payment based on the aggregate earnings for the three year period. Operationally, CEECO met those net income targets and the third earn-out will be paid in March 2008. At December 30, 2007, the Company has accrued for that earn-out of $200,000 that will be paid in stock. The total goodwill related to CEECO at December 30, 2007 was $654,000 immediately prior to write-down. The goodwill was written off due to the continued poor financial performance of the unit and financial projections that resulted in net losses. As CEECO could not reasonably forecast profitable operations, there is no value to the goodwill. See Subsequent Events Note 20 for further detail related to CEECO.

The Horne Engineering acquisition in 2005 resulted in the Company recording both goodwill of $3.054 million and certain identified intangibles as shown below.

Intangible		Value(000’s)				Useful Life
Customer Relationships		$	4,849			15 years
Trademarks			3,365			Indefinite
Non-Compete/Employment Agreements			1,091			5 years
Order Backlog			906			5 years

As a result of our analysis of the fair market value of these intangibles during our annual impairment review, we determined that the fair market value of Horne Engineering was significantly less than the value of its intangible assets. In working with our valuation consultants, we determined that the intangible assets’ value was near zero due to the current forecasted losses of the unit over the next three-year period. As a result, the Company decided that all intangibles should be written off as they provided no future benefit to the entity but rather an avoidance of further loss. The reason for the significant change, since the prior year, in the valuation analysis is a significant decrease in the forecasted revenues and net income for the subsidiary since both the time of the acquisition and since our valuation analysis in the fourth quarter of 2006.

Horne International, Inc.
Notes To Consolidated Financial Statements

The Company recorded amortization expense of $724,000 during 2007 and $1,204,000 during 2006. The 2006 amount included catch-up amortization of $453,000 related to 2005 upon finalization of the purchase price allocation. Accounting principles generally accepted in the United States of America permit an acquiring company twelve months, from the date of acquisition, to finalize its acquisition accounting entries. Accordingly, we recorded the valuation and related amortization during the second quarter of 2006.

8. ACCRUED EXPENSES (000’s)

		December				December
Accrued Expenses		30, 2007				31, 2006
Salaries & payroll related items		$	638			$	535
Accrued leave			160				381
Property & sales tax			—				38
Professional Fees			138				464
Deferred Rent			623				683
Other			325				416
Total Accrued Liabilities		$	1,884			$	2,517

9. BORROWINGS AND LINES OF CREDIT

The Company’s borrowings primarily consist of a mortgage totaling $1.9 million and capital leases of $0.2 million. The interest rate on the mortgage is adjustable at the U.S. federal funds rate plus 4% subject to certain interest rate floors and caps as specified in the agreement. The rates in effect at December 30, 2007, and December 31, 2006 were 8.95% and 8.5%, respectively. The interest rates on the capital leases are 7.1% and 8.85%.

Bank of America Facility

On March 2, 2006, the Company entered into a new revolving line of credit with Bank of America. Under the terms of the agreement, the Company was able to borrow up to $6.0 million to fund its operations. This agreement also provided for a $750,000 letter of credit sub-facility. The amount available under the line was determined by outstanding accounts receivable less than 90 days old. The interest rate was calculated as the London Inter-Bank Offering Rate, plus 2.5% (7.85% at December 31, 2006). The Company had no amounts outstanding and approximately $2.6 million available under the line at December 31, 2006. The loan also required the Company to be in compliance with the financial covenants related to tangible net worth and liquidity targets. At December 31, 2006, the Company was not in compliance with its tangible net worth covenant.

The line of credit expired on April 30, 2007. The Company continues to explore alternative financing sources to replace the expired line of credit but has not been able to secure financing at terms acceptable to the Company.

The schedule below represents future principal payments under existing debt agreements (000’s).

		2008				2009				2010				2011				2012+
Mortgage Payable		$	47			$	51			$	56			$	61			$	1,643
Capital Leases			71				74				65				19				—
Total Lease Commitments		$	118			$	125			$	121			$	80			$	1,643

Horne International, Inc.
Notes To Consolidated Financial Statements

10. STOCKHOLDERS’ EQUITY

During 2007, the Company had only one equity transaction other than option activity. On March 8, 2007, the Company issued 501,882 unregistered shares of stock to Louis and Marilyn Rogers in accordance with the Coast Engine and Equipment Co. acquisition agreement. This agreement contained an earn-out provision of up to $200,000 worth of Company stock at a 10-day average price centered on the two-year anniversary of the acquisition, or $0.3985 per share. The agreement also included a share price guarantee based on the 10 day average share-price centered on February 28, 2008. See Note 20 – Subsequent Events for details regarding the shares issued and cash paid in March 2008 related to the CEECO Earnout.

In 2006, there were two transactions, other than stock option issuances, that affected stockholders’ equity. The first was the sale of M&M which resulted in the redemption of 1.8 million shares of Company common stock. These shares were valued at $0.83 per share, which was the share price on the valuation date.

The second transaction was the settlement of the Section 16(b) claim filed by Mr. Augenbaum. Under the settlement, the Company received 1.0 million shares of Company stock, and in return assumed a liability of $175,000 payable to Augenbaum’s attorneys. As the final settlement was paid in Company stock, we are precluded from recognizing a gain on this transaction. Accordingly, we have valued the stock at $0.88 per share, the closing price on the settlement date, and recorded treasury stock in the amount of $880,000. We have also increased our additional paid-in capital by the difference between the treasury stock ($880,000) and the attorney fees ($175,000) resulting in an addition to paid-in capital of $705,000.

On July 20, 2006, the Board of Directors approved the retirement of the 2,800,000 shares of treasury stock received in the Augenbaum settlement and the M&M sale.

11. RELATED PARTY TRANSACTIONS

Transactions related to Coast Engine and Equipment Company

CEECO leased its facilities from a company owned by a related party through common ownership during all of 2006 and through September 30, 2007 until the building was sold to a non-related party. Monthly lease payments were approximately $7,000 during this period.

12. EMPLOYEE BENEFIT PLAN

The Company has a defined contribution 401(k) plan available to all U.S. employees who have completed minimum service requirements and meet minimum age requirements. Eligible employees may defer a portion of their salary as defined by Internal Revenue Service regulations. The Company currently matches 50% of an employee’s contribution up to 5%, subject to legal limits. The total expense for the years ended December 30, 2007 and December 31, 2006 were $109,000 and $129,000, respectively.

13. STOCK OPTION PLAN

During 2006, the Company issued 15,000 stock options to each of its 5 advisory board members, 75,000 options in total. The options vest over a two-year period with 5,000 options vesting immediately and 5,000 options vesting at the one and two year anniversaries of the grants. During 2007, the Company issued an additional 15,000 options to a new advisory board member with the same terms as prior advisory issuances and retired 15,000 options previously issued to a departed advisory member. These options have an exercise price of $0.50 and a ten year life from the grant date. The weighted-average assumptions used in the Black Scholes model to price the options were as follows: a risk-free rate of 4.5%, no dividend yield, a volatility factor of 0.63 and a life of 10 years. Accordingly, the Company has recorded stock-based compensation expense of $8,605 in 2007 and $7,403 in 2006. The expense recognized is based on the fair value at each reporting date since the recipients are non-employees.

Horne International, Inc.
Notes To Consolidated Financial Statements

On July 21, 2006, the Company issued 30,000 options to each of its five external Board of Directors members. These options vest in 10,000 share increments on July 21, 2007, 2008, and 2009. The option terms include an exercise price of $0.80, a life of three years and a service obligation to vest. The Company has recorded $14,544 and $7,271 of stock-based compensation expense in 2007 and 2006, respectively, related to these options.

On September 14, 2006, the Company issued 90,000 options to employees that required certain service time requirements be met prior to being able to exercise these options. No expense has been recorded for these options due to the uncertainty regarding the service time being met. The service component of the options was not met as the employees have left the Company.

During 2007, the Company granted 180,000 options to external members of its Board of Directors, 15,000 options to a non-employee member of the advisory board and 340,000 options to employees. On August 1, 2007, the Company issued external members of the Board of Directors options that vest over a three year period, expire three years from the vesting date, and have a strike price of $0.35. The Company has recorded $7,613 of expense related to these options in 2007. The employee options were issued at various strike prices some with immediate partial vesting but most with time requirements for vesting. 230,000 of the employee options have expired as the employees have left the company prior to vesting. Total expense related to employee options during 2007 was $12,022.

There were no options exercised in 2007 or 2006. As of December 30, 2007, there was $75,628 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2 years.

Information with respect to options granted at December 30, 2007, and December 31, 2006 is as follows:

						Option				Weighted Average
		Number of shares				Exercise Price				Exercise Price
Outstanding 1/1/2006			5,837,800				1.28 - 1.95
Granted			1,759,704				0.50 - 1.55				1.44
Exercised			—
Cancelled			(4,493,028	)			1.28 - 1.95				1.86
Options Outstanding 12/31/2006			3,104,476
Granted			535,000				0.35 - 0.53				0.51
Exercised			—
Cancelled			(1,726,962	)			1.40 - 1.95				1.55
Options Outstanding 12/30/2007			1,912,514

The following table summarizes information about the Plan’s stock options at December 30, 2007.

Horne International, Inc.
Notes To Consolidated Financial Statements

Options Exercisable & Outstanding

Exercise		Shares				Shares				Weighted Average
Price		Outstanding				Exercisable				Remaining Life (yrs)
0.35			180,000				—				4.5
0.37			50,000				—				4.5
0.40			60,000				39,000				4.5
0.50			75,000				45,000				8.5
0.80			150,000				50,000				1.5
1.28			2,000				2,000				0.5
1.55			795,514				795,514				0.1
1.65			600,000				600,000				0.1
			1,912,514				1,531,514

The intrinsic value of the options outstanding at December 30, 2007, is zero as the exercise price for all options is greater than our share price at that date.

14. INCOME TAXES

The provision for income taxes consisted of the following (000’s)

		Year Ended
		December 30, 2007				December 31, 2006
Current
Federal			—				33
State			—				—
Foreign			—				—
Total Current			—				33
Deferred
Federal			—				—
Foreign			—				—
Total Deferred			—				—
Total Tax Provision			—				33

The difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to income before taxes was as follows:

Rate Reconciliation:		2007				2006
Statutory Federal Income Tax Rate			34.00	%			34.0	%
State Taxes (Net of Federal Benefit)			3.19	%			3.8	%
Goodwill Impairment			-6.59	%			—
Permanent Difference			-0.06	%			-1.7	%
Valuation Allowance			-29.24	%			-32.2	%
Other			-1.29	%			-4.3	%
Effective Tax Rate			0.00	%			-0.4	%

Horne International, Inc.
Notes To Consolidated Financial Statements

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Significant components of the Company’s deferred taxes were as follows (numbers in 000’s)

Deferred Tax Asset/Liability:		2007				2006
Accrued Expenses			316				175
Depreciation			122				20
Amortization of Intangibles			9				(3,406	)
Allowance for Doubtful Accounts			80				203
Stock Compensation			428				653
NOL Carry-forwards			18,379				16,776
Other, Net			(34	)			(15	)
Valuation Allowance			(19,300	)			(14,406	)
Net Deferred Tax Asset/Liability			—				—

During 2006, the Company amended its 2004 tax return to include a tax deduction for nonqualified stock options exercised in 2004, resulting in an approximately $27 million increase to the net operating loss carry-forward. As of December 30, 2007, the Company has approximately $49 million of net operating loss carry-forwards available to offset future income. The net operating loss carry-forwards will expire on or before 2027.

In determining the extent to which a valuation allowance for net deferred tax assets is required, the Company evaluates all available evidence including projections of future taxable income, carry-back opportunities, and other tax-planning strategies. The valuation allowance relates to our U.S. net operating losses. Due to the continued losses incurred by the Company in 2007 and prior years, the Company believes that it is more likely than not that the deferred tax asset related to these net operating losses will not be realized. If, in the future, the Company determines that the utilization of these net operating losses becomes more likely than not, the Company will reduce the valuation allowance at that time.

The Company adopted FIN 48 on January 1, 2007, which requires financial statement benefits to be recognized for positions taken for tax return purposes when it is more-likely-than-not that the position will be sustained. There has been no change in our financial position and results of operation due to the adoption of FIN 48.

As of January 1, 2007 and December 31, 2007, the Company had no unrecognized tax benefits, nor did it have any that would have an effect on the effective tax rate. Income taxes are provided based on the liability method for financial reporting purposes. No interest or penalties were accrued as of January 1, 2007 as a result of the adoption of FIN 48. For the year ended December 31, 2007, there were no interest or penalties recorded included in tax expense.

Horne Engineering has an ongoing U.S. income tax audit for calendar years 2003 and 2004, which were years prior to the acquisition by the Company. Any tax assessment would be subject to indemnification by the selling shareholders in accordance with the purchase agreement. For income tax returns filed by the Company, the Company is no longer subject to U.S. federal, state and local examination by the tax authorities for tax years before 2004, except as previously noted.

Horne International, Inc.
Notes To Consolidated Financial Statements

15. NON-OPERATING INCOME (EXPENSE) (000’s)

		2007				2006
Income
Building Rent			228				228
Interest			125				101
Equity Investments			317				361
Legal Settlement			400				—
Expense
Interest			(262	)			(226	)
Other			—				16
Total net non-operating income			808				480

16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (000’S)

		2007				2006
Supplemental disclosure of cash flow information:
Cash paid for interest		$	194			$	224
Cash paid for taxes		$	132			$	156
Leasehold improvements provided by lessor		$	—			$	723
Acquisition of property and equipment under capital lease		$	186			$	—

The M&M sale included the return of 1.8 million common shares of stock. The CEECO earn-out in 2007 of $200,000 was paid via the issuance of 501,882 shares of Company common stock.

The Company received $400,000 in cash from the settlement of the Plum Island claim in 2008.

17. SEGMENT INFORMATION

Segment information has been presented on a basis consistent with how business activities are reported internally to management. Management evaluates operating profit by segment, taking into account direct costs of each segment’s products and services as well as an allocation of indirect corporate overhead costs. Each of the Company’s operating subsidiaries is a reportable segment. The Security Solutions segment, SSSI, concentrates on the manufacturing of aircraft and munitions support equipment. The Repair and Overhaul segment, CEECO, provides on-board ship repair and fabrication services for the maritime industry. The Services segment, conducted by Horne Engineering, consists of program engineering, occupational safety and health, environmental sciences, acquisition and procurement, business process engineering, technology integration, and public outreach services. The following is a summary of certain financial information related to the three segments during the years ended December 30, 2007, and December 31, 2006.

HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements

		For the Year ended December,
		(all dollars in 000’s)
		2007				2006
Total
Revenues			17,676				28,256
Cost of Revenue			16,657				24,504
Gross Profit			1,019				3,752
Operating Loss			(19,951	)			(6,354	)
		2007				2006
Security Solutions
Revenues			2,703				3,886
Cost of Revenue			3,163				4,922
Gross Loss			(460	)			(1,036	)
Operating Loss			(1,566	)			(1,848	)
		2007				2006
Repair & Overhaul
Revenues			1,423				2,711
Cost of Revenue			1,177				1,745
Gross Profit			246				966
Operating (Loss)profit			(348	)			443
		2007				2006
Services
Revenues			13,550				21,659
Cost of Revenue			12,317				17,837
Gross Profit			1,233				3,822
Operating (Loss)profit			(607	)			1,291
		2007				2006
Corp
Operating Loss			(17,430	)			(6,240	)

Corporate costs include costs for operating as a publicly traded company, the shared services group, the write-off of the goodwill and intangibles, and the executive management of the Company.

		Identifiable Assets (000’s)								Fixed Asset Additions								Depreciation Expense
		December								12 months ended								12 months ended
		2007				2006				2007				2006				2007				2006
Security Solutions		$	6,120			$	6,293			$	280			$	86			$	308			$	355
Repair and Overhaul			180				1,042				24				37				68				58
Services			932				10,007				22				124				87				106
Corporate			3,100				12,722				43				1,031				208				90
Total Assets		$	10,332			$	30,064			$	369			$	1,278			$	671			$	609

The corporate assets as of December 30, 2007, primarily consist of cash and leasehold improvements. The corporate assets at December 31, 2006, primarily consist of cash, goodwill and other intangibles, and the note receivable from the M&M sale.

HORNE INTERNATIONAL, INC.
Notes To Consolidated Financial Statements

The table below is a roll-forward of goodwill by segment (000’s)

		Overhaul				Services				Total
Balance at January 1, 2006			262				13,285				13,547
Reclass intangibles out of goodwill			—				(10,211	)			(10,211	)
CEECO earn-out			200				—				200
Acquisition tax adjustment			(7	)			—				(7	)
Balance at December 31, 2006		$	455			$	3,074			$	3,529
CEECO earn-out			200								200
Goodwill write-off			(655	)			(3,074	)			(3,729	)
Balance at December 30, 2007		$	—			$	—			$	—