** **

**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-Q**
| **x**                                                                                                                                                                                     | ** ** | **Quarterly Report Under  Section 13 or 15(d) of the Securities Exchange Act of 1934**        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                | ** ** | ** **                                                                                         |
| **for the  quarterly period ended June 30, 2006**                                                                                                                                    |
| ** **                                                                                                                                                                                | ** ** | ** **                                                                                         |
| **or**                                                                                                                                                                                    |
| ** **                                                                                                                                                                                | ** ** | ** **                                                                                         |
| **o**                                                                                                                                                                                     | ** ** | **Transition Report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** **                                                                                                                                                                                | ** ** | ** **                                                                                         |
| **for the  transition period from                            to** |

 

**CommissionFile Number 0-7282**

**COMPUTERHORIZONS CORP.**(Exact name of registrant as specified in its charter)

| **New York**                     |   | **13-2638902**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

 

**49Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495**(Address of principal executiveoffices)              (Zipcode)

Registrant’stelephone number, including area code  **(973) 299-4000**

**NotApplicable**(Former name, former address and former fiscal year, ifchanged since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

| x   | o  |
|-----|----|
| Yes | No |

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer. See definitions of “accelerated filer and largeaccelerated filer”.

| o     Large Accelerated Filer |   | x     Accelerated Filer |   | o     Non-accelerated Filer |
|----------------------------------------------|--------|----------------------------------------|--------|--------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

| o   | x  |
|-----|----|
| Yes | No |

 

As of July 25, 2006 theissuer had 32,942,726 shares of common stock outstanding.

 

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIES**

Index
| Part I   |   | Financial  Information                                                                                        |   |   |
|----------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1   |   | Financial  Statements:                                                                                        |   |   |
|     |   | Consolidated Balance Sheets June 30, 2006 (unaudited)  and December 31, 2005                             |   |   |
|     |   | Consolidated Statements of Operations Three and Six  Months Ended June 30, 2006 and June 30, 2005 (unaudited) |   |   |
|     |   | Consolidated Statements of Cash Flows Six Months Ended  June 30, 2006 and June 30, 2005 (unaudited)           |   |   |
|     |   | Notes to Consolidated Financial Statements                                                                    |   |   |
| Item 2   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |   |   |
| Item 3   |   | Quantitative and Qualitative Disclosures about Market  Risk                                                   |   |   |
| Part  II |   | Other  Information                                                                                            |   |   |
| Item 6   |   | Exhibits                                                                                                      |   |   |
|     |   | Signatures                                                                                                    |   |   |

 

2

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**PART I.  Financial Information**

**Item 1.**

**COMPUTER HORIZONS CORP. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**(dollars in thousands)
| ** **                                                                                                                            | ** ** | **June 30,  2006** | ** ** | **December 31,   2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                            | ** ** | **(unaudited)**         | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                                            | ** ** | ** **              | ** ** | ** **                        | ** ** |
| **CURRENT ASSETS:**                                                                                                                   | ** ** | ** **              | ** ** | ** **                        | ** ** |
| Cash and cash  equivalents                                                                                                            |       | $                       | 36,224     |                              | $          | 46,365 |   |
| Accounts receivable,  less allowance for doubtful accounts of $4,660 and $4,654 at June 30, 2006  and December 31, 2005, respectively |       | 50,784                  |       | 48,124                            |       |
| Refundable income taxes                                                                                                               |       | 6,704                   |       | 6,430                             |       |
| Other Receivables                                                                                                                     |       | 2,591                   |       | —                            |       |
| Prepaid expenses and  other                                                                                                           |       | 3,422                   |       | 4,108                             |       |
| **TOTAL CURRENT ASSETS**                                                                                                              |       | 99,725                  |       | 105,027                           |       |
|                                                                                                                                  |       |                    |       |                              |       |
| **PROPERTY AND EQUIPMENT**                                                                                                            |       | 46,837                  |       | 46,116                            |       |
| Less accumulated  depreciation                                                                                                        |       | (42,469                 | )          | (41,051                           | )          |
| **TOTAL PROPERTY AND EQUIPMENT,  NET**                                                                                                |       | 4,368                   |       | 5,065                             |       |
| ** **                                                                                                                            |       |                    |       |                              |       |
| **OTHER ASSETS - NET:**                                                                                                               |       |                    |       |                              |       |
| Goodwill                                                                                                                              |       | 10,034                  |       | 27,625                            |       |
| Intangibles                                                                                                                           |       | 1,472                   |       | 1,938                             |       |
| Deferred income taxes                                                                                                                 |       | 1,484                   |       | —                            |       |
| Other                                                                                                                                 |       | 3,260                   |       | 3,687                             |       |
| **TOTAL OTHER ASSETS**                                                                                                                |       | 16,250                  |       | 33,250                            |       |
|                                                                                                                                  |       |                    |       |                              |       |
| **TOTAL ASSETS**                                                                                                                      |       | $                       | 120,343    |                              | $          | 143,342 |   |
|                                                                                                                                  |       |                    |       |                              |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                        |       |                    |       |                              |       |
| **CURRENT LIABILITIES:**                                                                                                              |       |                    |       |                              |       |
| Accounts payable                                                                                                                      |       | $                       | 22,637     |                              | $          | 36,252 |   |
| Accrued payroll,  payroll taxes and benefits                                                                                          |       | 11,070                  |       | 10,548                            |       |
| Income taxes payable                                                                                                                  |       | 1,150                   |       | 1,150                             |       |
| Restructuring reserve                                                                                                                 |       | 643                     |       | 1,668                             |       |
| Deferred Compensation                                                                                                                 |       | 577                     |       | —                            |       |
| Deferred income taxes                                                                                                                 |       | 1,511                   |       | —                            |       |
| Other accrued expenses                                                                                                                |       | 4,136                   |       | 4,005                             |       |
| **TOTAL CURRENT LIABILITIES**                                                                                                         |       | 41,724                  |       | 53,623                            |       |
|                                                                                                                                  |       |                    |       |                              |       |
| **OTHER LIABILITIES:**                                                                                                                |       |                    |       |                              |       |
| Deferred compensation                                                                                                                 |       | 1,652                   |       | 2,468                             |       |
| Change of control  payable                                                                                                            |       | 2,316                   |       | 2,938                             |       |
| Other                                                                                                                                 |       | 223                     |       | 286                               |       |
| **TOTAL LIABILITIES**                                                                                                                 |       | 45,915                  |       | 59,315                            |       |
|                                                                                                                                  |       |                    |       |                              |       |
| **SHAREHOLDERS’ EQUITY:**                                                                                                        | ** ** | ** **              | ** ** | ** **                        | ** ** |
| Preferred stock, $.10  par; authorized and unissued 200,000 shares, including 50,000 Series A                                         |       |                    |       |                              |       |
| Common stock, $.10 par;  authorized 100,000,000 shares; issued 33,158,105 shares at June 30, 2006 and  December 31, 2005              |       | 3,315                   |       | 3,315                             |       |
| Additional paid in  capital                                                                                                           |       | 146,638                 |       | 148,083                           |       |
| Accumulated other  comprehensive loss                                                                                                 |       | (136                    | )          | (643                              | )          |
| Retained earnings                                                                                                                     |       | (73,785                 | )          | (60,492                           | )          |
|                                                                                                                                  |       | 76,032                  |       | 90,263                            |       |
| Less shares held in  treasury, at cost; 254,914 and 1,118,014 shares at June 30, 2006 and December  31, 2005, respectively            |       | (1,604                  | )          | (6,236                            | )          |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                   |       | 74,428                  |       | 84,027                            |       |
|                                                                                                                                  |       |                    |       |                              |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                   |       | $                       | 120,343    |                              | $          | 143,342 |   |

 

The accompanying notes are an integral part of thesestatements.

3

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**COMPUTERHORIZONS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited)(dollars in thousands, except per share data)
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005**    | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | **% of revenue**     | ** ** | ** ** | ** ** | **% of revenue** | ** ** | ** ** | ** ** | **% of revenue** | ** ** | ** ** | ** ** | **% of revenue** | ** ** |
| **REVENUES:**                                                |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                   |       | $                                | 45,643     |                           | 72.1       | % | $ | 50,650 |   | 73.3 | % | $ | 91,482 |   | 72.1 | % | $ | 99,321 |   | 73.2 | % |
| Federal                                                      |       | 9,626                            |       | 15.2                           | %          | 11,404 |   | 16.5 | % | 19,952 |   | 15.7 | % | 22,943 |   | 16.9 | % |
| Chimes                                                       |       | 8,056                            |       | 12.7                           | %          | 7,012 |   | 10.2 | % | 15,497 |   | 12.2 | % | 13,375 |   | 9.9 | % |
| **Total**                                                    |       | 63,325                           |       | 100.0                          | %          | 69,066 |   | 100.0 | % | 126,931 |   | 100.0 | % | 135,639 |   | 100.0 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **COSTS  AND EXPENSES:**                                     |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Direct costs                                                 |       | 41,537                           |       | 65.6                           | %          | 47,763 |   | 69.2 | % | 83,608 |   | 65.9 | % | 93,351 |   | 68.8 | % |
| Selling, general  & administrative                       |       | 20,763                           |       | 32.8                           | %          | 21,208 |   | 30.7 | % | 41,577 |   | 32.8 | % | 42,185 |   | 31.1 | % |
| Amortization of  intangibles                                 |       | 233                              |       | 0.4                            | %          | 264 |   | 0.4 | % | 466 |   | 0.4 | % | 614 |   | 0.5 | % |
| Special charges /  (credits)                                 |       | 219                              |       | 0.3                            | %          | (115 | ) | -0.2 | % | 213 |   | 0.2 | % | (790 |   | -0.6 | % |
| Goodwill  impairment                                         |       | 15,000                           |       | 23.7                           | %          | — |   | 0.0 | % | 15,000 |   | 11.8 | % | — |   | 0.0 | % |
| Total Costs                                                  |       | 77,752                           |       | 122.8                          | %          | 69,120 |   | 100.1 | % | 140,864 |   | 111.0 | % | 135,360 |   | 99.8 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **INCOME/(LOSS)  FROM OPERATIONS**                           |       | (14,427                          | )          | -22.8                          | %          | (54 | ) | -0.1 | % | (13,933 | ) | -11.0 | % | 279 |   | 0.2 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **OTHER  INCOME/(EXPENSE):**                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                              |       | 451                              |       | 0.7                            | %          | 134 |   | 0.2 | % | 851 |   | 0.7 | % | 314 |   | 0.2 | % |
| Interest expense                                             |       | (6                               | )          | 0.0                            | %          | (14 | ) | 0.0 | % | (71 | ) | -0.1 | % | (19 | ) | 0.0 | % |
|                                                         |       | 445                              |       | 0.7                            | %          | 120 |   | 0.2 | % | 780 |   | 0.6 | % | 295 |   | 0.2 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **INCOME/(LOSS)  BEFORE INCOME TAXES**                       |       | (13,982                          | )          | -22.1                          | %          | 66 |   | 0.1 | % | (13,153 | ) | -10.4 | % | 574 |   | 0.4 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **INCOME  (TAXES)/BENEFIT:**                                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                      |       | (69                              | )          | -0.1                           | %          | — |   | 0.0 | % | (140 | ) | -0.1 | % | (124 | ) | -0.1 | % |
| Deferred                                                     |       | —                           |       | 0.0                            | %          | (22 | ) | 0.0 | % | — |   | 0.0 | % | (76 | ) | -0.1 | % |
|                                                         |       | (69                              | )          | -0.1                           | %          | (22 | ) | 0.0 | % | (140 | ) | -0.1 | % | (200 | ) | -0.1 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **NET  INCOME/(LOSS)**                                       |       | $                                | (14,051    | )                              | -22.2      | % | $ | 44 |   | 0.1 | % | $ | (13,293 | ) | -10.5 | % | $ | 374 |   | 0.3 | % |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **EARNINGS/(LOSS)  PER SHARE - BASIC**                       |       | $                                | (0.44      | )                              |       |   | $ | 0.00 |   |   |   | $ | (0.41 | ) |   |   | $ | 0.01 |   |   |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC**   |       | 32,247,000                       |       |                           |       | 31,272,000 |   |   |   | 32,280,000 |   |   |   | 31,232,000 |   |   |   |
| ** **                                                   |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| EARNINGS/(LOSS)  PER SHARE-DILUTED                           |       | $                                | (0.44      | )                              |       |   | $ | 0.00 |   |   |   | $ | (0.41 | ) |   |   | $ | 0.01 |   |   |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED** |       | 32,247,000                       |       |                           |       | 31,451,000 |   |   |   | 32,280,000 |   |   |   | 31,488,000 |   |   |   |

 

The accompanying notes are an integral part of thesestatements.

4

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**COMPUTER HORIZONS CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)(dollars in thousands)**
| ** **                                                           | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| ** **                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES**                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income/(loss)                                                    |       | $                              | (13,293    | ) | $ | 374 |   |
| Adjustments to  reconcile net income/(loss)                          |       |                           |       |   |   |
| to net cash provided  by/(used in) operating                         |       |                           |       |   |   |
| activities:                                                          |       |                           |       |   |   |
| Deferred taxes                                                       |       | 27                             |       | 76 |   |
| Depreciation                                                         |       | 1,372                          |       | 2,046 |   |
| Amortization of  intangibles                                         |       | 466                            |       | 614 |   |
| Provision for bad debts                                              |       | 289                            |       | 388 |   |
| Gain on sale of assets                                               |       | —                         |       | (327 | ) |
| FAS 123R Option Expense                                              |       | 378                            |       | — |   |
| Goodwill impairment                                                  |       | 15,000                         |       | — |   |
| Changes in assets and  liabilities, net                              |       |                           |       |   |   |
| of acquisitions:                                                     |       |                           |       |   |   |
| Accounts receivable                                                  |       | (2,949                         | )          | (175 | ) |
| Prepaid expenses and  other current assets                           |       | 796                            |       | 1,959 |   |
| Other assets                                                         |       | 426                            |       | (40 | ) |
| Refundable income taxes                                              |       | (274                           | )          | (790 | ) |
| Accrued payroll, payroll  taxes and benefits                         |       | 522                            |       | 254 |   |
| Accounts payable                                                     |       | (13,615                        | )          | 7,593 |   |
| Income taxes payable                                                 |       | —                         |       | 107 |   |
| RGII contingency  payment                                            |       | —                         |       | (1,851 | ) |
| Other accrued expenses,  change of control and restructuring reserve |       | (1,536                         | )          | (4,502 | ) |
| Deferred compensation                                                |       | (238                           | )          | (2 | ) |
| Supplemental executive  retirement plan                              |       | —                         |       | (115 | ) |
| Other liabilities                                                    |       | (174                           | )          | (131 | ) |
|                                                                 |       |                           |       |   |   |
| **NET CASH PROVIDED BY/(USED IN)  OPERATING ACTIVITIES**             |       | (12,803                        | )          | 5,478 |   |
|                                                                 |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES**                            |       |                           |       |   |   |
| Deferred merger costs                                                |       | —                         |       | (2,426 | ) |
| Proceeds from sale of  assets                                        |       | —                         |       | 563 |   |
| Purchases of furniture  and equipment                                |       | (674                           | )          | (1,523 | ) |
| **NET CASH PROVIDED BY/(USED IN)  INVESTING ACTIVITIES**             |       | (674                           | )          | (3,386 | ) |
|                                                                 |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES**                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Stock options exercised                                              |       | 2,582                          |       | 175 |   |
| Stock issued on  employee stock purchase plan                        |       | 247                            |       | 357 |   |
| **NET CASH PROVIDED BY/(USED IN)  FINANCING ACTIVITIES**             |       | 2,829                          |       | 532 |   |
|                                                                 |       |                           |       |   |   |
| Foreign currency  gains/(losses)                                     |       | 507                            |       | (419 | ) |
| **NET INCREASE/(DECREASE) IN CASH  AND CASH EQUIVALENTS**            |       | (10,141                        | )          | 2,205 |   |
|                                                                 |       |                           |       |   |   |
| **CASH AND CASH EQUIVALENTS AT  BEGINNING OF YEAR**                  |       | 46,365                         |       | 33,649 |   |
| ** **                                                           |       |                           |       |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**                       |       | $                              | 36,224     |   | $ | 35,854 |   |

 

The accompanying notes are an integral part of thesestatements.

5

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**COMPUTERHORIZONS CORP.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

For the PeriodsEnded June 30, 2006 and June 30, 2005(unaudited)

**1.****        Basis of Presentation**

The consolidatedbalance sheet as of June 30, 2006, the consolidated statements of operationsfor the three and six months ended June 30, 2006 and June 30, 2005,respectively, and the statement of cash flows for the six months ended June 30,2006 and 2005 have been prepared by the Company without audit.  In theopinion of management, all adjustments (which include normal recurringadjustments) necessary to present fairly the financial position, results ofoperations and cash flows at June 30, 2006 (and for all periods presented) havebeen made.

Certaininformation and note disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America, which are not required for interim purpose, have beencondensed or omitted.  It is suggested that these consolidated financialstatements be read in conjunction with the financial statements and notesthereto included in the Annual Report on Form 10-K for the year endedDecember 31, 2005 filed by the Company.  The results of operationsfor the periods ended June 30, 2006 and 2005 are not necessarily indicative ofthe operating results for the respective full years.

**2.****        Recent Accounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB StatementNo. 109 (FIN 48), which clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements.  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  This interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  The provisions of FIN 48 will be effectivefor the Company as of January 1, 2007, with the cumulative effect of applyingthe provisions of this Interpretation reported as an adjustment to the openingbalance of retained earnings. The Company is currently evaluating the impact ofadopting FIN 48.

In December 2004,the FASB issued Statement of Financial Accounting Standard No. 123(revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R requiresthat compensation cost be recognized for all new awards and awards that aremodified, repurchased or cancelled after the adoption date. The SEC amended theeffective dates of FAS 123R for public companies in April 2005, whichallowed registrants to implement FAS 123R at the beginning of their nextfiscal year, instead of the next interim period, that began after June 15,2005. The SEC also issued Staff Accounting Bulletin 107, “Share-BasedPayment” (SAB 107), in April 2005, which provides the views of the SECstaff regarding certain aspects of the application of FAS 123R.SAB 107 assists issuers in their initial implementation of FAS 123R.The provisions of this statement were effective for the Company’s first quarterended March 31, 2006.

FAS 123Rallows for two alternative transition methods. The first method is the modifiedprospective application whereby compensation cost for the portion of awards forwhich the requisite service has not yet been rendered that are outstanding asof the adoption date will be recognized over the remaining service period. Thecompensation cost for that portion of awards will be based on the grant-datefair value of those awards as calculated for pro forma disclosures underStatement 123, “Accounting for Stock-Based Compensation”, as originallyissued. All new awards and awards that are modified, repurchased or cancelledafter the adoption date will be accounted for under the provisions of FAS123(R). The second method is the modified retrospective application, whichrequires that the Company restate prior period financial statements. Themodified retrospective application may be applied either to all prior periodsor only to prior interim periods in the year of adoption of this statement. TheCompany has elected to apply the modified prospective method.

On November 2005, theFASB issued FASB Staff Position No. FAS 123R-3 — “Transition Election Relatedto Accounting for the Tax Effects of Share-Based Payment Awards.”  TheCompany has elected to adopt the alternative transition method provided in thisFASB Staff Position for calculating the tax effects of share-based compensationpursuant to FAS 123R. The alternative transition method includes a simplifiedmethod to establish the beginning balance of the additional paid-in capitalpool (APIC pool) related to the tax effects of employee share-basedcompensation, which is available to absorb tax deficiencies recognizedsubsequent to the adoption of FAS 123R.

6

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**3.****        Accounting for Stock-Based Compensation**

*Accountingfor Stock-Based Compensation*

In December 2002,the FASB approved the issuance of Statement of Financial Accounting StandardNo. 148, “Accounting for Stock-Based Compensation — Translation andDisclosure” (FAS No. 148).  This statement amends FASB StatementNo. 123, “Accounting for Stock-Based Compensation,” to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, thisStatement amended the disclosure requirements of the FAS 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodsused on reported results. The Company adopted these disclosure provisions as ofDecember 31, 2002.

*Adoptionof FAS 123R*

The Company issuescommon stock options to certain employees and Board members. In January 2006,the Company adopted Financial Accounting Standards Board Statement No. 123(revised 2004) (“FAS 123R”) - “Share-Based Payments*.*  FAS 123R requiresall entities to recognize compensation expense in an amount equal the fairvalue of share-based payments, such as stock options granted to employees. TheCompany has elected to apply FAS 123R on a modified prospective method. Underthis method, the Company is required to record compensation expense for newlygranted options and (as previous awards continue to vest) for the unvestedportion of previously granted awards that remain outstanding at the date ofadoption. Additionally, the financial statements for prior interim periods andfiscal years do not reflect any adjusted amounts.

On June 30, 2006,the Company has three share-based compensation plans and an Employee StockPurchase Plan (“ESPP”) which are described below. The compensation cost thathas been charged against income for the three and six months ended June 30,2006 was $95,000 and $378,000 respectively, comprised of $20,000 and $60,000ESPP and $75,000 and $318,000 for stock option plans. This reduced our earningsfrom continuing operations before and after taxes and net earnings. Basic anddiluted net earnings per common share for the three and six months ended June30, 2006 were each reduced by $0.01 as a result of adopting this pronouncement.As the Company has a net operating loss carryforward and has established a fullvaluation allowance on its deferred tax assets, there is no current tax benefitassociated with the accrued compensation expense for this quarter.

*Stock Options*

In 1994, theCompany adopted a stock option plan which provides for the granting of options,to officers and key employees, for the purchase of a maximum of 7,594,000shares of common stock and stock appreciation rights (“SARs”). Options and SARsgenerally expire ten years from the date of grant and become exercisable inspecified amounts during the life of the respective options. There are noshares available as of June 30, 2006 for the 1994 stock option plan.

In May 2004,the Company received shareholder approval and adopted the 2004 OmnibusIncentive Compensation Plan (the “Omnibus Plan”). This plan replaced the 1994Stock Option and Appreciation Plan and provides for a maximum number of3,500,000 shares of common stock issuable under the plan. These awards may bestock options, stock appreciation rights, restricted stock or performance shareawards, and expire after ten years. Awards from this plan are exercisableimmediately for members of the Board of Directors and ratably over a three yearperiod for employees. This Plan is scheduled to expire on May 19, 2014. Asof June 30, 2006, there were 2,711,500 shares available for awards under theOmnibus Plan.

The Company alsohas a non-qualified Directors’ stock option plan (the “Directors’ Plan”). In1998, the Company amended the Directors’ Plan, providing that each new directorof the Company who is not an employee of the Company (i) shall immediatelyreceive options to purchase 10,000 shares of the Company’s common stock and(ii) shall receive annual grants to purchase an additional 10,000 sharesof its common stock. Awards from this plan are exercisable immediately, andexpire in ten years. The Directors’ Plan originally was to expire onMarch 4, 2001 and was extended by the Board of Directors and Shareholdersthrough March 6, 2007. There were 24,000 shares of common stock availablefor grant at June 30, 2006 under the Directors’ Plan.

7

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A summary of the statusof all the Company’s stock option plans as of June 30, 2006 and the changesduring the three and six months ended on that date is presented below:
| **Options (Three Months)**                               | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                                           | ** ** | ** **                              | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **Shares  (000’s)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
| ** **                                                         | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                                           | ** ** | ** **                              | ** ** |
| Outstanding Mar  31, 2006                                          |       | 2,431                    |       | $                                      | 3.84       |                                                 | —     |                                    | —     |   |
| Granted                                                            |       | —                   |       | $                                      | 0.00       |                                                 | —     |                                    | —     |   |
| Exercised                                                          |       | 238                      |       | $                                      | 3.34       |                                                 | —     |                                    | —     |   |
| Canceled/forfeited/expired                                         |       | —                   |       |                                   |       | —                                               |       | —                                  |       |
| Outstanding June  30, 2006                                         |       | 2,193                    |       | $                                      | 3.89       |                                                 | 5.5        |                                    | $          | 1,678 |   |
| Options  exercisable June 30, 2006                                 |       | 1,778                    |       | $                                      | 3.80       |                                                 | 5.8        |                                    | $          | 1,583 |   |
| Weighted average  fair value of options granted during the quarter |       |                     |       | $                                      | 0.00       |                                                 |       |                                    |       |   |

 

 
| **Options (Six Months)**                                          | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                                         | ** ** | ** **                              | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **Shares  (000’s)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  ContractualTerm** | ** ** | **Aggregate  Intrinsic  Value  ($000)** | ** ** |
| ** **                                                                  | ** ** | ** **               | ** ** | ** **                             | ** ** | ** **                                         | ** ** | ** **                              | ** ** |
| Outstanding Dec  31, 2005                                                   |       | 2,673                    |       | $                                      | 3.69       |                                               | —     |                                    | —     |   |
| Granted                                                                     |       | 315                      |       | $                                      | 4.39       |                                               | —     |                                    | —     |   |
| Exercised                                                                   |       | 795                      |       | $                                      | 3.41       |                                               | —     |                                    | —     |   |
| Canceled/forfeited/expired                                                  |       | —                   |       |                                   |       | —                                             |       |                                    |       |
| Outstanding June  30, 2006                                                  |       | 2,193                    |       | $                                      | 3.89       |                                               | 5.5        |                                    | $          | 1,678 |   |
| Options  exercisable June 30, 2006                                          |       | 1,778                    |       | $                                      | 3.80       |                                               | 538        |                                    | $          | 1,583 |   |
| Weighted average  fair value of options granted during the six month period |       |                     |       | $                                      | 2.47       |                                               |       |                                    |       |   |

 

The fair value ofeach option grant is estimated on the date of the grant using the Black-Scholesoptions pricing model. The following weighted-average assumptions used forgrants in the six months ended June 30, 2006: expected volatility of 37%; arisk-free interest rate of 5.15%; and an expected life of 5.18 years. Theexpected term of the options is based on evaluations of historical and expectedfuture employee exercise behavior. The risk-free rate is based on the USTreasury rates at the close of the quarter with maturity dates approximatelyequal to the expected life at the grant date. The expected volatility is basedon the historical volatility of the Company’s stock.

Cash received fromoption exercise under all share-based payment arrangements for the three andsix months ended June 30, 2006 was $993,000 and $2,829,000. The actual taxbenefit realized for the tax deductions from option exercise of the share-basedpayment arrangements totaled $50,656 and $204,456 for the same period. As theCompany currently has a full valuation allowance with respect to its deferredtax assets, no tax benefit from the options are recognized at this time. If theCompany determines that it is more likely than not that it will recognize a taxbenefit from the exercise of the options, then this amount would generallyreflect the overall tax benefit.

Prior to theadoption of SFAS 123R, the Company presented all tax benefits of deductionsresulting from the exercise of share-based awards as operating cash flows inthe consolidated statement of cash flows. SFAS 123R requires the cash flowsresulting from the tax benefits generated from tax deductions in excess of thecompensation costs recognized for the share-based awards (excess tax benefits)be classified as financing cash flows. SFAS 123R requires the cash flowsresulting from the tax benefits for the tax deductions in excess of thecompensation expense recorded for those options to be classified as financingcash flows. As the Company currently has a net operating loss carryforward anda full valuation allowance, no excess tax deductions are recognized at thistime.

8

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As of June 30,2006, there was $732,700 of total unrecognized compensation cost related tononvested share-based compensation arrangements granted under these plans; thatcost is expected to be recognized over a period of three years or upon a changeof control.

The Company offersan Employee Stock Purchase Plan (“ESPP”) to its employees. The ESPP purchasesshares quarterly at a 15% discount from the lower of the opening and closingstock prices for the period. The shares are purchased at a fixed discount andtherefore give rise to a liability under FAS 123R. The liability for thequarter ended June 30, 2006 is $20,000. Shares are purchased the first businessday after the end of each quarter. There were 1,975,595 shares of common stockavailable for purchase after July 5, 2006 under the ESPP Plan.

Prior to theadoption of FAS 123R, the Company applied Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (APB 25), as modifiedby FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,”in accounting for stock-based employee compensation, whereby no compensationcost had been recognized for the plans. Had compensation cost for theplans been determined based on the fair value of the options at the grant datesand been consistent with the method of FAS 123, the Company’s net income andearnings per share for the comparable periods of 2005 would have been decreasedto the pro forma amounts indicated below:

 
| ** **                                                         | ** ** | ** **                                                                                                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | ** **                                                                                                                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(in thousands, except per share data)** | ** ** | ** **                                                                                                                                     | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| ** **                                                         | ** ** | ** **                                                                                                                                     | ** ** | ** **                       | ** ** | ** **                     |       |
| Net income/(loss)                                                  |       | As reported                                                                                                                                    |       | $                                | 44         |                           | $          | 374 |   |
|                                                               |       | Deduct : Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (197                             | )          | (529                           | )          |
|                                                               |       | Pro forma                                                                                                                                      |       | $                                | (153       | )                              | $          | (155 | ) |
| Earnings per share                                                 |       |                                                                                                                                           |       |                             |       |                           |       |
| Basic                                                              |       | As reported                                                                                                                                    |       | $                                | 0.00       |                           | $          | 0.01 |   |
|                                                               |       | Pro forma                                                                                                                                      |       | (0.00                            | )          | (0.00                          | )          |
|                                                               |       |                                                                                                                                           |       |                             |       |                           |       |
| Diluted                                                            |       | As reported                                                                                                                                    |       | $                                | 0.00       |                           | $          | 0.01 |   |
|                                                               |       | Pro Forma                                                                                                                                      |       | (0.00                            | )          | (0.00                          | )          |

 

The effect ofadopting SFAS No. 123R was a reduction of $95,000 and $378,000 to theCompany’s income from continuing operations for the three and six months endedJune 30, 2006. There was no additional cumulative effect of adoption using themodified-prospective transition method was similarly material.

**4.****        Cash**

Included in cashand cash equivalents at June 30, 2006 and December 31, 2005 is restrictedcash of $194,883 and $219,000 respectively.  Restricted cash representsfunds received by Chimes and held in client-specific bank accounts, to be usedto make payments to vendors of the applicable client. Cash and cash equivalentsat June 30, 2006 and December 31, 2005 also include approximately $17.2million and $29.4 million, respectively, of cash to be disbursed to Chimesvendors in accordance with the client payment terms.

**5.    Earnings/(Loss) Per Share**

Basic Earnings PerShare (“EPS”) is based on the weighted average number of common sharesoutstanding without consideration of common stock equivalents.  Dilutedearnings per share are based on the weighted average number of common andcommon equivalent shares outstanding.  The calculation takes into accountthe shares that may be issued upon exercise of stock options, reduced by theshares that may be repurchased with the funds received from the exercise, basedon the average price during the year.

9

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In accordance with SFASNo. 128, the table below presents both basic and diluted earnings per share:

 
| ** **                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                         | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Numerator:                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Net income/(loss) - in thousands                                                                                   |       | $                                | (14,051)   |                           | $          | 44 |   | $ | (13,293 | ) | $ | 374 |   |
| Denominator:                                                                                                       |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic earnings per share - weighted  average shares outstanding                                    |       | 32,247,000                       |       | 31,272,000                     |       | 32,280,000 |   | 31,232,000 |   |
| Effect of stock  options                                                                                           |       | —                           |       | 179,000                        |       | — |   | 256,000 |   |
| Diluted earnings/(loss)  per share:                                                                                |       |                             |       |                           |       |   |   |   |   |
| Denominator for diluted earnings per share -  adjusted weighted average shares outstanding and assumed conversions |       | 32,247,000                       |       | 31,451,000                     |       | 32,280,000 |   | 31,488,000 |   |
| Basic  earnings/(loss) per share                                                                                   |       | $                                | (0.44      | )                              | $          | 0.00 |   | $ | (0.41 | ) | $ | 0.01 |   |
| Diluted earnings/(loss)  per share                                                                                 |       | $                                | (0.44      | )                              | $          | 0.00 |   | $ | (0.41 | ) | $ | 0.01 |   |

 

The computation ofdiluted loss per share excludes all options because they are antidilutive. Forthe second quarter and the first six months ended June 30, 2006, there were30,000 options excluded with exercise prices between $14.00 and $16.38.

In June 30, 2005, therewere 2,410,409 and 2,247,909 excluded options, respectively, for the secondquarter and the first six months ended June 30, 2005, with exercise pricesbetween $3.21 and $16.375 and $3.65 and $16.375 respectively, per share.

 

10

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**6.****        Segment Information**

During the fourthquarter of 2004, the Company completed a restructuring initiative whereby theCompany’s business model was realigned, effective January 1, 2005, aroundits three distinct segments of clients: Commercial, Federal Government andVendor Management services (Chimes). This realigned business model is designedto deliver improved operational performance for the Company and reduce annualoperating costs.

Income/(loss)before income tax benefit consists of income/(loss) before income taxes,excluding interest income, interest expense, gain/(loss) on the sale ofassets/investments, change of control charges, restructuring charges, special charges/(credits),the write-off of assets, amortization of intangibles and goodwillimpairment. These exclusions total income of $15.1 million and $29,000 forthe quarters ended June 30, 2006 and 2005 respectively and $15.0 millionand $471,000 for the six months ended June 30, 2006 and 2005. Long-term assets include goodwill, intangibles and property, plant andequipment. Corporate services, consisting of general and administrativeservices are provided to the segments from a centralized location. Such costsare allocated to the applicable segments receiving Corporate services based ona combination of services received and revenue.
| ** **                                               | ** ** | **Three Months ended** | ** ** | **Six Months ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30** | ** ** | **June 30** | ** ** |
| **(dollars in thousands)**                     | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues :                                               |       |                             |       |                           |       |   |   |   |   |
| Commercial                                               |       | $                                | 45,643     |                           | $          | 50,650 |   | $ | 91,482 |   | $ | 99,321 |   |
| Federal                                                  |       | 9,626                            |       | 11,404                         |       | 19,952 |   | 22,943 |   |
| Chimes                                                   |       | 8,056                            |       | 7,012                          |       | 15,497 |   | 13,375 |   |
| Total revenues                                           |       | $                                | 63,325     |                           | $          | 69,066 |   | $ | 126,931 |   | $ | 135,639 |   |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Gross Profit :                                           |       |                             |       |                           |       |   |   |   |   |
| Commercial                                               |       | $                                | 9,624      |                           | $          | 9,208 |   | $ | 19,256 |   | $ | 18,726 |   |
| Federal                                                  |       | 4,330                            |       | 5,279                          |       | 8,969 |   | 10,694 |   |
| Chimes                                                   |       | 7,834                            |       | 6,816                          |       | 15,098 |   | 12,868 |   |
| Total Gross Profit                                       |       | $                                | 21,788     |                           | $          | 21,303 |   | $ | 43,323 |   | $ | 42,288 |   |
| %                                                        |       | 34.4                             | %          | 30.8                           | %          | 34.1 | % | 31.2 | % |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Operating Income :                                       |       |                             |       |                           |       |   |   |   |   |
| Commercial                                               |       | $                                | 3,984      |                           | $          | 2,306 |   | $ | 7,721 |   | $ | 4,912 |   |
| Federal                                                  |       | 712                              |       | 1,133                          |       | 1,763 |   | 2,456 |   |
| Chimes                                                   |       | 1,429                            |       | 1,607                          |       | 2,691 |   | 2,796 |   |
| Total Operating Income                                   |       | $                                | 6,125      |                           | $          | 5,046 |   | $ | 12,175 |   | $ | 10,164 |   |
| %                                                        |       | 9.7                              | %          | 7.3                            | %          | 9.6 | % | 7.5 | % |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Corporate Allocation :                                   |       |                             |       |                           |       |   |   |   |   |
| Commercial                                               |       | $                                | 3,882      |                           | $          | 3,930 |   | $ | 8,019 |   | $ | 8,003 |   |
| Federal                                                  |       | 383                              |       | 409                            |       | 815 |   | 852 |   |
| Chimes                                                   |       | 774                              |       | 612                            |       | 1,528 |   | 1,206 |   |
| Total Corporate Allocation                               |       | $                                | 5,039      |                           | $          | 4,951 |   | $ | 10,362 |   | 10,061 |   |
| %                                                        |       | 8.0                              | %          | 7.2                            | %          | 8.2 | % | 7.4 | % |
|                                                     |       |                             |       |                           |       |   |   |   |   |
| Total Income / (Loss)  before Income Taxes / (benefit) : |       |                             |       |                           |       |   |   |   |   |
| Commercial                                               |       | $                                | 102        |                           | $          | (1,624 | ) | $ | (298 | ) | $ | (3,091 | ) |
| Federal                                                  |       | 329                              |       | 724                            |       | 948 |   | 1,604 |   |
| Chimes                                                   |       | 655                              |       | 995                            |       | 1,163 |   | 1,590 |   |
| Total Income / (Loss) before Income Taxes /  (Benefit)   |       | $                                | 1,086      |                           | $          | 95 |   | $ | 1,813 |   | $ | 103 |   |
| %                                                        |       | 1.7                              | %          | 0.1                            | %          | 1.4 | % | 0.1 | % |

 

11

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*Reconciliationof Segment Income / (Loss) before Income Taxes / (Benefit) to ConsolidatedIncome / (Loss) Before Income Taxes / (Benefit):*

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **(dollars in thousands)**                         | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Total segment  income/(loss) before income taxes/(benefit) : |       | $                                | 1,086      |                           | $          | 95 |   | $ | 1,813 |   | $ | 103 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Adjustments :                                                |       |                             |       |                           |       |   |   |   |   |
| Special (charges) / credits                                  |       | (280                             | )          | 115                            |       | (280 | ) | 790 |   |
| Goodwill impairment                                          |       | (15,000                          | )          | —                         |       | (15,000 | ) |   |   |
| Amortization of intangibles                                  |       | (233                             | )          | (264                           | )          | (466 | ) | (614 | ) |
| Net interest income                                          |       | 445                              |       | 120                            |       | 780 |   | 295 |   |
| Total adjustments                                            |       | (15,068                          | )          | (29                            | )          | (14,966 | ) | 471 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Consolidated  income/(loss) before income taxes/(benefit)    |       | $                                | (13,982    | )                              | $          | 66 |   | $ | (13,153 | ) | $ | 574 |   |

 

For the three andsix months ended June 30, 2006 $67,000 of the $280,000 special chargesrelates to salary and travel expenses which are included in SG&A on theconsolidated statement of operations.

**7.****        Shareholders’ Equity**

 
| ** **                                        | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **Amount**                                                  | ** ** | **Shares** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)**                        | ** ** | ** ** | ** ** |
| Balance at  beginning of period                   |       | $                                                           | 84,027     |   | 32,040,091 |   |
| Net income/(loss)                                 |       | (13,293                                                     | )          |   |   |
| Proceeds upon  exercise of stock options and ESPP |       | 2,829                                                       |       | 863,100 |   |
| Stock option  expense                             |       | 358                                                         |       |   |   |
| Other  comprehensive income                       |       | 507                                                         |       |   |   |
|                                              |       | $                                                           | 74,428     |   | 32,903,191 |   |

 

**8.****        Comprehensive Income/ (Loss)**

Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income” (FAS130), requires that items defined as other comprehensive income/ (loss), suchas foreign currency translation adjustments and unrealized gains and losses, beseparately classified in the financial statements and that the accumulatedbalance of other comprehensive income/ (loss) be reported separately from retainedearnings and additional paid-in capital in the equity section of thebalance sheet. The components of comprehensive loss for the three and sixmonths ended June 30, 2006 and June 30, 2005 are as follows:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(dollars in thousands)**                 | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Comprehensive income/ (loss) :**         | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Income / (Loss)                        |       | $(14,051               | )          | $44                  |       | $(13,293 | ) | $374 |   |
| Foreign Currency                           |       | 414                    |       | (187                 | )          | 507 |   | (419 | ) |
| Unrealized gain/(loss) on SERP investments |       | —                 |       | 25                   |       | — |   | (145 | ) |
| Comprehensive income/(loss)                |       | $(13,637               | )          | $(118                | )          | $(12,786 | ) | $(190 | ) |

 

The accumulatedbalances related to each component of other comprehensive income (loss) for thesix months ended June 30, 2006 and June 30, 2005 were as follows:

 
| ** **                               | ** ** | **Foreign Currency** | ** ** | **Unrealized Gain/(Loss)** | ** ** | **Accumulated Other**  | ** ** |
|------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)**     | ** ** | **Translation**           | ** ** | **on Investments**         | ** ** | **Comprehensive Loss** | ** ** |
| Balance at  December 31, 2005       |       | $                         | (643       | )                               | **$**      | **—**                  |       | $ | (643 | ) |
| Accumulated  comprehensive income/(loss) |       | 507                       |       | —                          |       | 507                         |       |
| Balance at June  30, 2006                |       | $                         | (136       | )                               | $          | —                      |       | $ | (136 | ) |
|                                     |       |                      |       |                            |       |                        |       |
| Balance at  December 31, 2004       |       | $                         | (936       | )                               | $          | (1,264                      | )          | $ | (2,200 | ) |
| Accumulated  comprehensive income/(loss) |       | (419                      | )          | (145                            | )          | (564                        | )          |
| Balance at June 30,  2005                |       | $                         | (1,355     | )                               | $          | (1,409                      | )          | $ | (2,764 | ) |

 

12

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**9.****    Purchase of Treasury Stock**

In April of2001, the Board of Directors approved the repurchase in the open market of upto 10% of its common shares outstanding, or approximately 3.2 millionshares.  The Company did not repurchase shares of its common stock duringthe six months ended June 30, 2006 and June 30, 2005, respectively. As of June30, 2006, the remaining authorization for repurchase is approximately 93,000shares.

**10.****  Asset-BasedLending Facility**

On June 16, 2006the Company amended the line of credit facility.  The line was reduced to $20 million from $40million, reflecting management’s belief that there was no need for the higherlevel of funding and thereby reducing associated costs.  The amendment extended the termination of theFinancing Agreement from July 31, 2006 to July 31, 2007.  The Administrative Management Fee, the EarlyTermination Fee and the Line of Credit Fee have all been eliminated.  Since November 2, 2005, the interest rate hasbeen calculated using the lesser of: Prime or LIBOR plus 2.5% based on unpaidprincipal.  The minimum borrowing basethreshold has been eliminated as of November 4, 2005.  As of June 30, 2006, the Company had nooutstanding loan balance against the facility. Based on the Company’s eligible client receivables and cash balances,$6.9 million was available for borrowing as of June 30, 2006. The unused linefee has been eliminated beginning  June1, 2006, however, the unused line fee and other associated fees, including thefloat and wire fees, were approximately $53,000 and $64,000 for the six monthsended June 30, 2006 and 2005, respectively. This line of credit involves covenants relating to the maintenance ofcash balances and providing for limitations on incurring obligations of operatingleases exceeding $9 million annually and spending limits on capitalexpenditures exceeding $8 million annually. As of June 30, 2006, the Company was in compliance with thecovenants.  This credit facility willremain in effect until July 31, 2007.

**11.****  Income Taxes**

In accordance withAccounting for Income Taxes-an interpretation of FASB Statement No. 109 (FIN18), the Company has recorded its first and second quarter tax provision usingthe actual effective tax rate. The Company has determined that this method willyield a more reliable tax provision calculation due to the inclusion of thevaluation allowance created during the prior year (see note below). This is achange from the prior year method as the Company was able to determine anannual effective tax rate during the year ended December 31, 2005.  Accordingly, the Company is not in a positionto disclose its projected December 31, 2006 annual effective tax rate but willupdate the actual 2006 quarterly effective tax rate in the subsequent reportingperiods.  If the Company utilizes itsexisting net operating losses, in a jurisdiction by jurisdiction basis,additional tax provision could be recorded in the remaining two quarters of theyear.

As a result of themix of foreign and domestic earnings, the Company has recorded a current incometax provision on a loss from worldwide operations. Accordingly, the effectivetax rate is represented as a negative percentage of the global statutory rate.For the second quarter ended June 30, 2006, the Company calculated itsactual effective tax rate to be -1.06%. For the quarter ended June 30,2005, the Company calculated its annual effective tax to be 34.8%.

*DeferredTax Asset and Valuation Allowance*

The Companyrecords deferred tax assets for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand their respective tax bases, and operating loss carryforwards. Deferred taxassets are reduced by a valuation allowance if, based on available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized. In assessing the realizability of deferred tax assets,management considers the scheduled reversal periods of the deferred tax assets,whether sustained profitability has been achieved and tax planning strategies.

The Company has significantdeferred tax assets resulting from net operating loss carryforwards, capitalloss carryforwards, and deductible temporary differences that may reducetaxable income in future periods. The Company has provided full valuationallowances on the future tax benefits related to capital losses, foreign netoperating losses, and all state net operating losses. The Company believes thatthe valuation allowance is appropriate because these deferred tax assets haverelatively short carryforward periods or relate to taxing jurisdictions whichdo not allow the filing of consolidated tax returns. The Company expects tocontinue to maintain a valuation allowance on these deferred tax assets untilan appropriate level of profitability has been achieved in the applicabletaxing jurisdictions, or strategies are developed that would enable the Companyto conclude that it is more likely than not that a portion of these deferredtax assets will be realized.

          In prior years, management reliedprimarily on future projected income in assessing the realizability of deferredtax assets resulting from federal net operating loss carryforwards and otherdeductible temporary differences. As of December 31, 2005 and June 30,2006, it was determined that because of continued losses through the fourthquarter of the prior year, it was no longer appropriate to rely on futureprojected income until sustained profitability has been achieved.  Accordingly, the Company recorded a full valuationallowance on its remaining net deferred tax assets for the year end and quarterend, respectively

13

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**12.****  Legal Matters**

The Company isinvolved in various and routine litigation matters, which arise through thenormal course of business. Management believes that the resolution of thesematters will not have a material adverse effect on the Company’s financialposition or results of operations.

**13.**** ****Board Review of Strategic Alternatives**

In September of2005, the Company’s Board of Directors retained the services of JefferiesBroadview to assist the Company in exploring strategic alternatives to maximizeshareholder value. These alternatives include, but are not limited to, thepossible sale of all or parts of the Company. We continue to work withJefferies Broadview to finalize the review of all strategic alternatives tomaximize shareholder value.

**14.****  Change ofControl and other Special Charges**

In the secondquarter of 2006, the Company recorded special charges of approximately $219,000relating to expenses in connection with the review of strategic alternatives.

In the fourthquarter of 2005, the Company recorded a charge of approximately $13.2 millionrelated to the change of control resulting from the removal of the Company’sthen existing Board of Directors. The $13.2 million charge is comprised of thefollowing:

• $9.7 million charge for change of control payments resulting from provisionsdefined in the Company’s supplemental executive retirement plan (SERP);

• $3.5 million charge pertaining to employment agreements which contain change ofcontrol provisions requiring payments of specified amounts;

For fiscal year2005, the Company recorded special charges/ (credits) of $5.7 million primarilypertaining to expenses associated with two proxy contests (includingapproximately $0.5 million paid to reimburse participants in the proxycontest for costs incurred therein) and merger-related charges pertaining tothe proposed merger with Analysts International Corp., which was not approvedby the Company’s shareholders at the September 2, 2005 special meeting.

*Vestingof Stock Options*

Under the Company’svarious equity incentive plans, as a result of the October 2005 change ofcontrol as defined in each plan, approximately 704,000 of outstanding unvestedstock options vested and became immediately exercisable.

**15. Restructuring Charges**

          During 2005, in connection with thereorganization of the Commercial Services Division, the Company recordedrestructuring charges of approximately $2.2 million, comprised of $1.2 millionin severance costs and $1.0 million pertaining to the closing/consolidation ofoffice space in the United States. The lease obligation is calculated based oncurrent rent commitments, less an estimated sublease amount.

 
| ** **           | ** ** | **Remaining at**                | ** ** | ** ** | ** ** | **Remaining at**       | ** ** |
|----------------------|------------|--------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **           | ** ** | **December 31, 2005**      | ** ** | **Paid**   | ** ** | **June 30, 2006** | ** ** |
| ** **           | ** ** | **(dollars in thousands)** | ** ** |
|                 |       |                                 |       |       |       |                        |       |
| Severance:           |       |                                 |       |       |       |                        |       |
| Canada               |       | $                                    | 401        |       | $          | (370                        | )          | $ | 31 |   |
| United States        |       | 9                                    |       | (9         | )          | 0                           |       |
| Total Severance      |       | $                                    | 410        |       | $          | (379                        | )          | $ | 31 |   |
| Lease  Obligations : |       |                                 |       |       |       |                        |       |
| United States        |       | $                                    | 530        |       | $          | (506                        | )          | $ | 24 |   |
| Total                |       | $                                    | 940        |       | $          | (885                        | )          | $ | 55 |   |

 

14

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During 2004, in connection with the Company’s businessmodel realignment, the Company recorded a restructuring charge of approximately$2.9 million comprised of approximately $2.8 million in severance costs and$0.1 million in lease obligation costs. The lease obligation of $110,000 iscalculated based on current rent commitments less a calculated sublease amountbased on current market conditions. Paid column represents payments net of anyexchange rate fluctuations.

 
|                     | ** ** | **Remaining at**                | ** ** | **Paid (net of**     | ** ** | **Remaining at**       | ** ** |
|--------------------------|------------|--------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **December 31, 2005**      | ** ** | **Currency translation)** | ** ** | **June 30, 2006** | ** ** |
| ** **               | ** ** | **(dollars in thousands)** | ** ** |
|                     |       |                                 |       |                           |       |                        |       |
| Severance :              |       |                                 |       |                           |       |                        |       |
| Canada                   |       | $                                    | 383        |                           | $          | 7                           |       | $ | 390 |   |
| United States            |       | 107                                  |       | (53                            | )          | 54                          |       |
| Total Severance          |       | $                                    | 490        |                           | $          | (46                         | )          | $ | 444 |   |
|                     |       |                                 |       |                           |       |                        |       |
| Lease  Obligations :     |       |                                 |       |                           |       |                        |       |
| United States            |       | $                                    | 12         |                           | $          | (12                         | )          | $ | — |   |
| United Kingdom           |       | 85                                   |       | (10                            | )          | 75                          |       |
| Canada                   |       | 141                                  |       | (72                            | )          | 69                          |       |
| Total Lease  Obligations |       | $                                    | 238        |                           | $          | (94                         | )          | $ | 144 |   |
|                     |       |                                 |       |                           |       |                        |       |
| Total                    |       | $                                    | 728        |                           | $          | (140                        | )          | $ | 588 |   |

 

During 2003, theCompany recorded restructuring charges of approximately $3.3 million relatingto the closing of several offices in the United States, Canada and the UnitedKingdom, including the related severance costs. The severance costsapproximated $1.5 million and future lease obligation costs (less a calculatedsublease amount), including office closure expenses, approximated $1.8 million,which were fully paid by December 31, 2005.

**16.****  Goodwill**

In accordance withStatement of Financial Accounting Standards No. 141 “BusinessCombinations” (“FAS 141”), and Financial Accounting Standards No. 142“Goodwill and Other Intangible Assets” (“FAS 142”), all business combinationsinitiated after June 30, 2001 must be accounted for under the purchasemethod.  In addition, all intangibleassets acquired that are obtained through contractual or legal right, or arecapable of being separately sold, transferred, licensed, rented or exchangedare recognized as an asset apart from goodwill. Goodwill and intangibles withindefinite lives are not subject to amortization, but are subject to at leastan annual assessment for impairment by applying a fair value based test.

The changes in thecarrying amount of goodwill for the periods ended June 30, 2006 andDecember 31, 2005, are as follows (in thousands):
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Federal Sector (RGII) Goodwill** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Balance as of  the beginning of the year          |       | $                 | 27,625     |                  | $          | 27,625 |   |
| Reduction of  Goodwill*                           |       | (2,591            | )          | —                |       |
| Goodwill  Impairment loss**                       |       | (15,000           | )          |                  |       |
| Balance as of the end  of the period              |       | $                 | 10,034     |                  | $          | 27,625 |   |

 

*Pursuant to theterms of the Company’s acquisition of RGII, the seller of RGII was entitled tocontingent payments based on RGII’s performance against profitabilityobjectives over three years.  The contingent payments were evidenced by acontingent note with a face value of $10 million that was payable over threeyears, only if certain financial performance objectives were met.  Thesefinancial performance objectives were based on earnings before interest andtaxes (“EBIT”) targets totaling $19.8 million over a three-year period. There were no minimum or maximum payment obligations under the terms of thecontingent note. The contingent payment was reduced on a dollar for dollarbasis for financial performance below EBIT targets and increased by 29 cents($0.29) for each dollar exceeding EBIT targets.  In February 2004, apayment was made for the first six-month installment of approximately $631,000,pertaining to this contingent note.  InFebruary 2005, a payment of approximately $1.8 million was maderepresenting the next installment of the contingent note.  Since thetargeted EBITs were not achieved, the seller of RGII was required to repay amountspreviously paid, plus interest.  Thisamount of $2.6 million was repaid on July 31. 2006.  At June 30, 2006, a receivable in this amountwas established and a corresponding reduction in Goodwill.

**For the year endedDecember 31, 2005, using an evaluation prepared by an independentappraisal firm, the Company completed an assessment of the fair value andcarrying value of its Federal Government segment.  The fair value was calculated using thefollowing approaches (i) market approach and (ii) income approach.  Under the market approach, value is estimatedby comparing the performance fundamentals relating to similar public companies’stock prices. Multiples are then developed of the value of the publicly tradedstock to various measures and are then applied to each reporting unit toestimate the value of its equity. Under the income approach, value wasdetermined using the present value of the projected future cash flows to begenerated by the reporting unit.  An assetapproach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich companyvaluations (i.e. real estate entities) and was not deemed relevant formanufacturing and service company going-concern valuations.  As of December 31, 2005, the indicatedfair value of the Federal Government reporting unit exceeded the carryingvalue. As a result, the Company concluded that the goodwill of approximately$27.6 million was not impaired.  As ofJune 30, 2006, because of changed conditions, the Company had a reevaluationperformed by the same independent appraisal firm of the goodwill of the FederalGovernment Sector.  Because ofsignificant changes in projected revenues and market conditions, the Companydetermined that the goodwill of $25.1 million was impaired by $15.0 million anda non-cash charge was taken for this amount.

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**Item2.**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**For the Periods Ended June 30, 2006 and June 30, 2005

The followingdetailed discussion and analysis of the Company’s financial condition andresults of operations should be read in conjunction with the financialstatements and related notes included in the Company’s Form 10-K for the yearended December 31, 2005, and the financial statements and notes includedelsewhere in this Form 10-Q.

**FORWARD-LOOKINGSTATEMENTS**

This reportcontains forward-looking statements within the meaning of the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. In somecases, forward-looking statements can be identified by words such as “believe,”“expect,” “anticipate,” “plan,” “potential,” “continue” or similar expressions.Forward-looking statements also include the assumptions underlying or relatingto any of the foregoing statements. Such forward-looking statements are basedupon current expectations and beliefs and are subject to a number of factorsand uncertainties that could cause actual results to differ materially fromthose described in the forward-looking statements including, but not limitedto, risks associated with unforeseen technical difficulties, the ability tomeet customer requirements, market acceptance of service offerings, changes intechnology and standards, the ability to complete cost reduction initiatives,dependencies on certain technologies, delays, market acceptance and competition,as well as other risks described from time to time in the Company’s filingswith the Securities and Exchange Commission, press releases and othercommunications. All forward-looking statements included in this report arebased on information available to the Company on the date hereof. The Companyundertakes no obligation (and expressly disclaims any such obligation) toupdate forward-looking statements made in this report to reflect events orcircumstances after the date of this report or to update reasons why actualresults would differ from those anticipated in such forward-looking statements.

**Overview**

Computer HorizonsCorp. (“CHC”, or the “Company”), founded in 1969, provides professionalinformation technology (IT) services to national and multi-national companiesthroughout North America and to the United States government. CHC was foundedin 1969 and incorporated in 1972 under the laws of the State of New York. TheCompany provides a broad range of IT staffing and project-based solutionservices using a global delivery model that allows the Company to perform workat client sites or at CHC development centers in the U.S., Montreal, Canada andChennai, India. Effective January 1, 2005, the Company began reporting by itsrealigned operating segments: Commercial, Federal Government and VendorManagement Services (Chimes.).

The Company hadrevenues for the quarter ended June 30, 2006 of $63.3 million, an 8 percentdecrease from $69.0 million revenue during the comparable period in2005.  For the six months ended June 30, 2006, revenues totaled $126.9 million,compared to $135.6 million in the comparable period of 2005.  Net loss before taxes for the second quarterof 2006 totaled $14.0 million compared with a net income of $66,000 in thecomparable period of 2005.  The increase in income before taxes for thesix months ended June 30, 2006, reflects the positive impact of the businessrestructuring completed in the fourth quarter of 2005, as well as additionalcost containment in SG&A.

Managementcontinues to focus on maintaining a strong balance sheet, with approximately$36.2 million in cash and cash equivalents (including $17.2 million of Chimesvendor cash) at June 30, 2006, along with $58 million in working capital and nodebt outstanding at the end of the quarter.

**RecentDevelopments**

*BoardReview of Strategic Alternatives*

In September of2005, the Company’s Board of Directors retained the services of JefferiesBroadview to assist the Company in exploring strategic alternatives to maximizeshareholder value. These alternatives include, but are not limited to, thepossible sale of all or parts of the Company. We continue to work withJefferies Broadview to finalize the review of all strategic alternatives tomaximize shareholder value.

*SpecialMeeting of Shareholders*

On July 22, 2005,a group comprised of Crescendo Partners II, L.P., Series R, CrescendoInvestments II, LLC, Eric Rosenfeld, F. Annette Scott Florida Trust, Richard L.Scott Florida Trust, Scott Family Florida Partnership Trust, Richard L. Scott ,Stephen T. Braun and The Computer Horizons Full Value Committee (collectively,the “Full Value Committee”), filed a Statement on Schedule 13D (the “Schedule13D”) with the SEC disclosing their opposition to the Company’s previouslyannounced proposed merger with Analysts International Corporation a MinnesotaCorporation (“Analysts”) and their intention to solicit the Company’sshareholders to vote against the Company’s proposals in furtherance of theproposed merger.

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The Schedule 13Dfurther disclosed the Full Value Committee’s intention to call a specialmeeting of the Company’s shareholders in order to remove up to all of theCompany’s existing directors and to replace them with the Full Value Committee’sown slate of director nominees. As previously reported, at the Company’sSpecial Meeting of Shareholders held on September 2, 2005, the Company’sshareholders voted not to approve the proposals related to the proposed mergerand, as such, the proposed merger was not consummated.

On July 27, 2005,the Company received from the Full Value Committee a request that a specialmeeting of the shareholders of the Company be called for the followingpurposes: (i) to remove all of the existing directors serving on the Company’sboard of directors without cause, (ii) to fix the number of members comprisingthe board at five, and (iii) to elect five director nominees selected by theFull Value Committee.

This secondSpecial Meeting of Shareholders took place on October 11, 2005. At the SpecialMeeting, the Company’s shareholders voted (i) to remove all of the existingdirectors serving on the Company’s board of directors without cause, (ii) tofix the number of members comprising the board at five, and (iii) to elect thefive director nominees selected by the Full Value Committee, specifically:Messrs. Eric Rosenfeld, Karl L. Meyer, Robert F. Walters, Frank J. Tanki, andWillem van Rijn.

Since the SpecialMeeting, Mr. Eric Rosenfeld has been named non-executive Chairman of theCompany and the Company’s Board of Directors named Dennis J. Conroy, Presidentand Chief Executive Officer, and Brian A. Delle Donne, Executive Vice Presidentand Chief Operating Officer.  Mr. Conroy replaces William J. Murphy asPresident and Chief Executive Officer.

*Changeof Control and other Special Charges*

In the secondquarter of 2006, the Company recorded special charges of approximately $219,000relating to expenses in connection with the review of strategic alternatives.

In the 4th quarter of 2005, the Company recorded a chargeof approximately $13.2 millions related to the change of control resulting fromthe removal of the Company’s then existing Board of Directors. The $13.2million charge is comprised of the following:

•           $9.7million charge for change of control payments resulting from provisions definedin the Company’s supplemental executive retirement plan (SERP);

•           $3.5million charge pertaining to employment agreements which contain change ofcontrol provisions requiring payments of specified amounts;

For fiscal year2005, the Company recorded special charges/(credits) of $5.7 million primarilypertaining to expenses associated with two proxy contests (includingapproximately $0.5 million paid to reimburse participants in the proxycontest for costs incurred therein) and merger-related charges pertaining tothe proposed merger with Analysts International Corp., which was not approvedby the Company’s shareholders at the September 2, 2005 special meeting.

For the year endedDecember 31, 2004, the Company recorded a special credit of $939,000consisting of an insurance refund. In addition, as of December 31, 2004,the Company determined that goodwill pertaining to Commercial Solutionsbusiness unit was impaired and recorded a non-cash impairment charge of $20.3million.  The Company also recorded a write-off of assets in 2004approximating $0.9 million relating to the write-off of a security deposit inconnection with an escrow agreement of a previously sold subsidiary and thewrite-off of fixed assets related to previously closed offices.

*Vestingof Stock Options*

Under the Company’svarious equity incentive plans, as a result of the October 2005 change ofcontrol as defined in each plan, approximately 704,000 of outstanding unvestedstock options vested and became immediately exercisable.

**RevenueGenerating Activities**

The majority ofthe Company’s revenues are derived from professional services rendered in theinformation technology sector. Effective January 1, 2005, the Companyrealigned its business operations into three segments: Commercial, FederalGovernment and Vendor Management Services (Chimes).

The Commercialbusiness consists of providing technology consultants to large organizations ona temporary hire basis and is classified in two general categories, staffaugmentation and solutions work.  For the quarter ended June 30, 2006,this segment represented approximately 72% of total revenues, including $32million of staff augmentation revenue and $14 million of commercialsolutions revenue. For six months ended June 30, 2006, this segment representedapproximately 72% of total revenues, including $63 million of staffaugmentation revenue and $28 million of commercial solutions revenue.

For staffaugmentation assignments, the consultant work is supervised and managed by thecustomer. Staff augmentation tends to be a lower risk, lower gross marginbusiness with very competitive pricing.  The Company’s solutions worktends to be higher margin, higher risk business, due to the fact that theCompany is responsible for project deliverables and other conditions containedin statements of work and/or contracts with clients.  Virtually allprojects performed by the commercial solutions group are IT related and consistof practices such as application development, outsourcing arrangements,government services, technology training and managed services.

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The Company’scustomer relationships are memorialized in master agreements that address theterms and conditions that define the client engagement.  Depending on theservice to be performed for the client, either a task order (in the case of aStaffing engagement) or a Statement of Work (“SOW”) (in the case of a Solutionsengagement) is generated. The SOW is signed by both the Company and thecustomer.  In general, no Solutions work is done unless there is a SOWbecause the SOW provides the technical details of the work to be done. The SOW, although falling under the corresponding master agreement, is astand-alone binding contractual document, typically outlining the projectobjectives, describing the personnel who will work on the project, describingphases of the project, the timeframes for work performance, and the rate ofcompensation.  In the event that the parameters of the project expand orotherwise change, a Project Change Request is implemented to memorializewhatever change has occurred to the deliverables, personnel and/or time andmaterials.  The master agreements, in conjunction with the SOWs, arewritten to define, with as much detail as possible, the client relationship andall aspects of the work to be performed for the client.  With regard torevenues expected in future periods, each SOW has a defined term or sets forththe anticipated length of a project.  Where a client engagement ison-going, like certain “Help Desk” type services, the master agreements wouldstill have a term length, but would recite that the agreement wasrenewable.  Generally, commercial solutions engagements are for a year orless.  Staff augmentation engagements can and do last for more than ayear, with variations in the number of consultants being provided at any giventime.  Staffing engagements are generally cancelable by clients with a twoto four week notice period.

The FederalGovernment segment consists primarily of solutions type assignments, wherebythe Company is responsible for project deliverables and other conditionscontained in SOWs and/or contracts with the Federal Government.  FederalGovernment engagements generally have a duration of several years, contingentupon the Federal Government exercising annual options to continue work. For the quarter and six months ended June 30, 2006, the FederalGovernment segment accounted for approximately 15% and 16% of consolidatedrevenues, respectively.

Chimes, Inc.is a human capital management solution that, through the use of proprietarysoftware and processes, manages the temporary workforce of large organizations.For the quarter and six months ended June 30, 2006, Chimes accounted forapproximately 13% and 12% of total revenues, respectively.

**CriticalAccounting Policies**

The most criticalaccounting policies used in the preparation of the Company’s financialstatements are related to revenue recognition, the evaluation of the bad debtreserve, the valuation of goodwill, and the valuation of deferred tax assets.

**RevenueRecognition**

The Companyrecognizes staff augmentation and solutions revenues either on atime-and-materials basis or on a fixed fee basis.  Under a typicaltime-and-materials billing arrangement, our customers are billed on a regularlyscheduled basis, such as biweekly or monthly.  At the end of eachaccounting period, revenue is estimated and accrued for services performedsince the last billing cycle.  These unbilled amounts are billed thefollowing month.

For fixed fee contracts,revenue is recognized on the basis of the estimated percentage ofcompletion.  Each fixed fee contract has different terms, milestones anddeliverables.  The milestones and deliverables primarily relate to thework to be performed and the timing of the billing.  At the end of eachreporting period an assessment of revenue recognized on the percentage ofcompletion and milestones achieved criteria is made.  If it becomesapparent that estimated cost will be exceeded or required milestones or deliverableswill not have been obtained, an adjustment to revenue and/or costs will bemade.  The cumulative effect of revisions in estimated revenues and costsare recognized in the period in which the facts that give rise to the impact ofany revisions become known.

Unbilled accountsreceivable represent amounts recognized as revenue based on services performedin advance of customer billings principally on a time-and-materialsbasis.  At the end of each accounting period, revenue is accrued forservices performed since the last billing cycle.  For solutions contracts,unbilled revenues occur when the contractual criteria for billing are met afterthe final quarterly billing cycle. These unbilled amounts are billed thefollowing month.

The Company’sChimes subsidiary recognizes revenue on a transaction fee basis.  TheChimes service offering aggregates the suppliers of temporary workers to thecustomer and renders one invoice to the customer.  Upon payment from thecustomer, Chimes deducts a transaction fee and remits the balance of the clientpayment to the applicable vendors.  Chimes recognizes only the fee for theservice as revenue, not the aggregate billing to the customer.  The grossamount of the customer invoicing is not considered revenue or a receivable toChimes because there is no earnings process for the gross amount and bycontract terms, Chimes is not obligated to pay the vendor until paid by thecustomer.

**Evaluationof Bad Debt Reserve**

The Companydetermines its allowance by considering a number of factors, including thelength of time trade accounts receivable are past due, the Company’s previousloss history, the customer’s current ability to pay its obligation to theCompany and the condition of the general economy and the industry as awhole.  The Company writes off accounts receivable when they becomeuncollectible, and payments subsequently received on such receivables arecredited to the allowance for doubtful accounts.

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**Goodwill**

In accordance withStatement of Financial Accounting Standards No. 141 “Business Combinations”(“FAS 141”), and Financial Accounting Standards No. 142 “Goodwill andOther Intangible Assets” (“FAS 142”), all business combinations initiated afterJune 30, 2001 must be accounted for under the purchase method.  In addition, all intangible assets acquiredthat are obtained through contractual or legal right, or are capable of beingseparately sold, transferred, licensed, rented or exchanged are recognized asan asset apart from goodwill. Goodwill and intangibles with indefinite livesare not subject to amortization, but are subject to at least an annualassessment for impairment by applying a fair value based test.

The changes in thecarrying amount of goodwill for the periods ended June 30, 2006 andDecember 31, 2005, are as follows (in thousands):

 
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Federal Sector (RGII) Goodwill** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Balance as of  the beginning of the year          |       | $                 | 27,625     |                  | $          | 27,625 |   |
| Reduction of  Goodwill*                           |       | (2,591            | )          | —                |       |
| Goodwill  Impairment loss**                       |       | (15,000           | )          |                  |       |
| Balance as of the end  of the period              |       | $                 | 10,034     |                  | $          | 27,625 |   |

 

*Pursuant to theterms of the Company’s acquisition of RGII, the seller of RGII was entitled tocontingent payments based on RGII’s performance against profitabilityobjectives over three years.  The contingent payments were evidenced by acontingent note with a face value of $10 million that was payable over threeyears, only if certain financial performance objectives were met.  Thesefinancial performance objectives were based on earnings before interest andtaxes (“EBIT”) targets totaling $19.8 million over a three-year period. There were no minimum or maximum payment obligations under the terms of thecontingent note. The contingent payment was reduced on a dollar for dollarbasis for financial performance below EBIT targets and increased by 29 cents($0.29) for each dollar exceeding EBIT targets.  In February 2004, apayment was made for the first six-month installment of approximately $631,000,pertaining to this contingent note.  InFebruary 2005, a payment of approximately $1.8 million was maderepresenting the next installment of the contingent note.  Since thetargeted EBITs were not achieved, the seller of RGII was required to repayamounts previously paid, plus interest. This amount of $2.6 million was repaid on July 31. 2006.  At June 30, 2006, a receivable in this amountwas established and a corresponding reduction in Goodwill.

**For the yearended December 31, 2005, using an evaluation prepared by an independentappraisal firm, the Company completed an assessment of the fair value andcarrying value of its Federal Government segment.  The fair value was calculated using thefollowing approaches (i) market approach and (ii) income approach.  Under the market approach, value is estimatedby comparing the performance fundamentals relating to similar public companies’stock prices. Multiples are then developed of the value of the publicly tradedstock to various measures and are then applied to each reporting unit toestimate the value of its equity. Under the income approach, value wasdetermined using the present value of the projected future cash flows to begenerated by the reporting unit.  Anasset approach was not used because the asset approach is most relevant forliquidation approaches, investment company valuations and asset rich companyvaluations (i.e. real estate entities) and was not deemed relevant formanufacturing and service company going-concern valuations.  As of December 31, 2005, the indicated fairvalue of the Federal Government reporting unit exceeded the carrying value. Asa result, the Company concluded that the goodwill of approximately $27.6million was not impaired.  As of June 30,2006, because of changed conditions, the Company had a reevaluation performedby the same independent appraisal firm of the goodwill of the FederalGovernment Sector.  Because ofsignificant changes in projected revenues and market conditions, the Companydetermined that the goodwill of $25.1 million was impaired by $15.0 million anda non-cash charge was taken for this amount.

**Valuationof Deferred Tax Assets**

The Companyrecords deferred tax assets for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand their respective tax bases, and operating loss carryforwards. Deferred taxassets are reduced by a valuation allowance if, based on available evidence, itis more likely than not that some portion or all of the deferred tax assetswill not be realized. In assessing the realizability of deferred tax assets,management considers the scheduled reversal periods of the deferred tax assets,whether sustained profitability has been achieved and tax planning strategies.

The Company hassignificant deferred tax assets resulting from net operating losscarryforwards, capital loss carryforwards, and deductible temporary differencesthat may reduce taxable income in future periods. The Company has provided fullvaluation allowances on the future tax benefits related to capital losses,foreign net operating losses, and all state net operating losses. The Companybelieves that the valuation allowance is appropriate because these deferred taxassets have relatively short carryforward periods or relate to taxingjurisdictions which do not allow the filing of consolidated tax returns. TheCompany expects to continue to maintain a valuation allowance on these deferredtax assets until an appropriate level of profitability has been achieved in theapplicable taxing jurisdictions, or strategies are developed that would enablethe Company to conclude that it is more likely than not that a portion of thesedeferred tax assets will be realized.

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In prior years,management relied primarily on future projected income in assessing therealizability of deferred tax assets resulting from federal net operating losscarryforwards and other deductible temporary differences. As ofDecember 31, 2005, it was determined that because of continued lossesthrough the fourth quarter of the prior year, it was no longer appropriate torely on future projected income until sustained profitability has beenachieved. Accordingly, the Company recorded a full valuation allowance on itsremaining net deferred tax assets for the year end and quarter end,respectively.

**Resultsof Operations**

*Revenues*. Consolidated revenues were $63 million in the second quarter of 2006, adecrease of $6 million or 8% from $69 million reported in the secondquarter of 2005.  The decrease came asthe Company deemphasized certain underperforming parts of the business, andheightened its focus on more profitable services, geographies andrelationships.  Similarly, for the firstsix months of 2006, revenues decreased to $126.9 million, compared to $135.6million in the first six months of 2005, a decrease of $8.7 million or 6%.

Commercial Grouprevenues in the second quarter of 2006 were $46 million, a decrease of $5million or 10% from $51 million in the second quarter of 2005.  For the first six months of 2006, CommercialGroup revenues were $91.5 million, compared to $99.3 million for the first sixmonths of 2005, a decrease of $7.8 million or 8%.  The year-over-year decrease in the CommercialGroup revenues for first six months and the second quarter of 2006 related to thereemphasis on profitability of the business and reflected a decrease in averageconsultant headcount of approximately 11%, along with an increase inaverage bill rates in comparison to the comparable periods of 2005.

Federal GovernmentGroup revenues (comprised of RGII and AIM) decreased to $9.6 million in thesecond quarter of 2006 from $11.4 million in the second quarter of 2005, a netdecrease of approximately $1.8 million or 16%.  Federal Government Grouprevenues, for the first six months, decreased to $19.9 million from $22.9 millionin the first six months of 2005, a decrease of $3 million or 13%.  The year-over-year decrease is attributableto the transition of restricted contracts, customer/agency budget cuts anddelays in funding.  In spite of thedecrease in revenue, management has been able to maintain profitability.

Chimes revenuesincreased to $8 million in the second quarter of 2006 from $7 million inthe second quarter of 2005, an increase of $1million, or 14%. Chimes revenues,for the first six months of 2006, increased to $15.4 million from $13.4 millionin the first six months of 2005, an increase of $2 million of 14.9%. Grossprofits increased from $6.8 million at June 30, 2005 to $7.8 million at June30, 2006, an increase of 15%.  Theadditional revenue was generated from the addition of new customers andincrease in sales to existing customers.

*DirectCosts and Gross Margins*.  Direct costs were $41.5million and $47.8 million in the second quarter of 2006 and 2005,respectively.  Gross margin, or revenues less direct costs, increasedto $21.8 million, or 34.4% in the second quarter of 2006 from 30.8%in the same period of 2005.  For the six months ended June 30, 2006, grossmargin increased to $43.3 million or 34.1%, compared to $42.2 million or 31.2%in the same period of 2005.  In theCompany’s Commercial Group, gross profit totaled $19.2 million, or 21% for thefirst six months of 2006, compared to $18.7 million, or 18.9% in thecomparable prior year period. This increase is primarily attributable to anemphasis on improved gross profit margins. The Federal Government Group grossmargins for the six months ended June 30, 2006 were $9 million, or 44.9%,compared to $10.7 million, or 46.6% for the comparable period of2005.  Chimes gross margins totaled $15 million, or 97.4% for the sixmonths ended June 30, 2006, compared to $12.9 million, or 96.2% in the sameperiod of 2005.

*Costsand Expenses*.  Selling, general and administrativeexpenses were $21 million in the second quarter of 2006, compared to $21.2million in the comparable period of 2005.  Selling, general andadministrative was $41.6 million in the first six months of 2006, comparedto $42.2 in the comparable period of 2005. As a percentage of revenue, theCompany’s selling, general, and administrative expenses were 32.8% in thesecond quarter of 2006, as compared to 30.7% in the comparable period of2005. The second quarter 2006 increase as a percentage of revenue is primarilyattributable to the adoption of FAS 123R, including a charge of $75,000 for the2004 Omnibus Incentive Compensation Plan and $20,000 for the Employee StockPurchase Plan, combined with a decrease in revenue in 2006.

*Income/ (Loss) from Operation*.  The Company’s loss fromoperations totaled $14.4 million in the second quarter of 2006, and includesa $15.0 million goodwill impairment loss. This compares to a loss fromoperations of $54,000 in the second quarter of 2005, which included a specialcredit of $115,000 (primary from gain on sale of assets, partially offset byrestructing charges and merger related expenses.)  The composition of the operating income forthe quarter ended June 30, 2006, excluding special charges, restructuringcharges and amortization expense and goodwill impairment charge included incomeof $102,000 in the Commercial Group, income of $329,000 in the FederalGovernment Group and income of $655,000 in Chimes.  For the comparablequarter of 2005, the Commercial Group had a loss of $1.6 million, the FederalGroup had an income of approximately $724,000 and Chimes had an income of$995,000.

*OtherIncome /(Expense)*.  Other income (primarily net interestincome) totaled $445,000 in the second quarter of 2006, compared to $120,000 inthe second quarter of 2005. Other income for the first half of 2006 approximated$780,000 compared to $295,000 for the first half of 2005.

 

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* *

*Provisionfor Income Taxes*.  In accordance with Accounting forIncome Taxes-an interpretation of FASB Statement No. 109 (FIN 18),the Company has recorded its first and second quarter tax provision using theactual effective tax rate. The Company has determined that this method willyield a more reliable tax provision calculation due to the inclusion of thevaluation allowance created during the prior year (see note below). This is achange from the prior year method as the Company was able to determine anannual effective tax rate during the year ended December 31, 2005.Accordingly, the Company is not in a position to disclose its projectedDecember 31, 2006 annual effective tax rate but will update the actual2006 quarterly effective tax rate in the subsequent reporting periods. If theCompany utilizes its existing net operating losses, in a jurisdiction byjurisdiction basis, additional tax provision could be recorded in the remainingtwo quarters of the year.

As a result of themix of foreign and domestic earnings, the Company has recorded a current incometax provision on a loss from worldwide operations. Accordingly, the effectivetax rate is represented as a negative percentage of the global statutory rate.For the second quarter ended June 30, 2006, the Company calculated itsactual effective tax rate to be -1.06%. For the quarter ended June 30,2005, the Company calculated its annual effective tax to be 34.8%.

*NetIncome /(Loss)*.  The net loss for the second quarter of2006 was $14.1 million, or $(0.44) per basic and diluted share, comparedto a net income of $44,000, or $0.00 per basic and diluted share for the secondquarter of 2005. For the first half of 2006, net loss was $13.3 million or$(0.41) per basic and dilute share, compared to a net income of $374,000 or$0.01 per basic and diluted share for the first half of 2005.

**Liquidityand Capital Resources**

Computer Horizonshas historically financed its operations through cash generated fromoperations, borrowings against bank lines of credit and the public sale of itscommon stock. At June 30, 2006, the Company had approximately $58.0 million inworking capital, of which $36.2 million was cash and cash equivalents. Cash andcash equivalents at June 30, 2006 and December 31, 2005 includesapproximately 17.2 million and $29.4 million of cash, respectively, to bedisbursed to Chimes vendors in accordance with the client payment terms. Vendorcash varies quarter to quarter based on the relationship of the final billingcycle to the end of the quarter, and does not represent a change in the levelof operations. At June 30, 2006, the Company had a current ratio position of2.4 to 1.

Net cash used inoperating activities in the first six months of 2006 was $12.8 millionconsisting primarily of net loss of $13.3 million offset by an increase innet Accounts Receivable of $2.9 million and a decrease in Accounts Payable of$13.6 million.

Net accountsreceivable increased $2.7 million to $50.8 million at June 30, 2006, from $48.1million at December 31, 2005.  Accounts receivable days salesoutstanding (“DSO”) were 72 days at June 30, 2006, down from 74 days at March31, 2006 and up from 66 days at December 31, 2005.  DSO is expected to return to the year-end2005 level over the remainder of 2006.  All client receivable collectibilityand billing issues identified by management have been adequately reserved. Forthe period ended June 30, 2006, there were no significant changes in creditterms, credit policies or collection efforts.

The decrease inAccounts Payable of $13.6 million was primarily due to the decrease in Chimesvendor cash associated with the timing of the billing and payment cyclesrelative to the end of the quarter.

Net cash used ininvesting activities in the first six months of 2006 was $674,000, consistingprimarily of capital expenditures.

Net cash providedby financing activities in the first six months of 2006 was $2.8 million,primarily consisting of shares issued pursuant to the employee stock optionplan and employee stock purchase plan.

On June 16, 2006the company amended its line of credit facility.  The line was reduced to $20 million from $40million, reflecting management’s belief that there was no need for the higherlevel of funding and to reduce associated costs.  The amendment extended the termination of theFinancing Agreement from July 31, 2006 to July 31, 2007.  The Administrative Management Fee, the EarlyTermination Fee and the Line of Credit Fee have all been eliminated.  Since November 2, 2005, the interest rate hasbeen calculated using the lesser of Prime or LIBOR plus 2.5% based on unpaidprincipal.  The minimum borrowing basethreshold has been eliminated as of November 4, 2005.  As of June 30, 2006, the Company had no outstandingloan balance against the facility.  Basedon the Company’s eligible client receivables and cash balances, $6.9 millionwas available for borrowing as of June 30, 2006.  The unused line fee has been eliminatedbeginning  June 1, 2006, however, theunused line fee and other associated fees, including the float and wire fees,were approximately $53,000 and $64,000 for the six months ended June 30, 2006and 2005, respectively.  This line ofcredit involves covenants relating to the maintenance of cash balances andproviding for limitations on incurring obligations of operating leasesexceeding $9 million annually and spending limits on capital expendituresexceeding $8 million annually.  As ofJune 30, 2006, the Company was in compliance with the covenants.  This credit facility will remain in effectuntil July 31, 2007.

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Pursuant to theterms of the Company’s acquisition of RGII, the seller of RGII was entitled tocontingent payments based on RGII’s performance against profitabilityobjectives over three years.  The contingent payments were evidenced by acontingent note with a face value of $10 million that was payable over threeyears, only if certain financial performance objectives were met.  Thesefinancial performance objectives were based on earnings before interest andtaxes (“EBIT”) targets totaling $19.8 million over a three-year period. There were no minimum or maximum payment obligations under the terms of thecontingent note. The contingent payment was reduced on a dollar for dollarbasis for financial performance below EBIT targets and increased by 29 cents($0.29) for each dollar exceeding EBIT targets.  In February 2004, apayment was made for the first six-month installment of approximately $631,000,pertaining to this contingent note.  InFebruary 2005, a payment of approximately $1.8 million was made representingthe next installment of the contingent note.  Since the targeted EBITswere not achieved, the seller of RGII was required to repay amounts previouslypaid, plus interest.  This amount of $2.6million was repaid on July 31. 2006.  AtJune 30, 2006, a receivable in this amount was established and a correspondingreduction in Goodwill.

On October 18,2005, as a consequence of the removal of the Company’s then existing Board ofDirectors without cause and the election of the new Board of Directors, achange of control was deemed to have occurred under the Company’s SERP.Accordingly, change of control payments totaling $11.9 million were paid onOctober 25, 2005, including $10.4 million to the SERP participants and $1.5million to a key executive, pursuant to the terms of the related employmentagreement. As of October 25, 2005, the recorded accrual for the SERP paymentsapproximated $2.2 million, resulting in a charge of approximately $9.7 million,which was recorded in the fourth quarter of 2005. In addition, as of October25, 2005, the Company had unrealized losses on the applicable SERP investmentstotaling $1.2 million. This loss was recognized in the fourth quarter of 2005as a result of the sale of all SERP investments, which generated sales proceedsof approximately $4.7 million.

On October 18,2005, the Company’s Board of Directors appointed a new President and CEO forthe Company. The former CEO was paid severance in the amount of $895,000, alongwith his deferred compensation funds, which approximated $381,000.

The Companybelieves that its cash and cash equivalents, available borrowings andinternally generated funds will be sufficient to meet its working capital needsthrough the next year.

**ContractualObligations and Commercial Commitments**

The Company doesnot utilize off balance sheet financing other than operating lease arrangementsfor office premises and related equipment.  The following table summarizesall commitments under contractual obligations as of June 30, 2006:
| ** **                           | ** ** | **Obligation Due** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| **(dollars in thousands)** | ** ** | **Total Amount**   | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Over 5 Years** | ** ** |
| Operating Leases                     |       | $                       | 6,660      |   | $ | 2,265 |   | $ | 3,274 |   | $ | 825 |   | $ | 296 |   |
| Deferred  Compensation               |       | 2,229                   |       | 577 |   | 20 |   | 10 |   | 1,622 |   |
| Retention Bonus                      |       | 376                     |       | 376 |   | 0 |   |   |   |   |   |
| Change of  Control                   |       | 2,603                   |       | 287 |   |   |   |   |   | 2,316 |   |
| Other                                |       | 812                     |       | 762 |   | 50 |   | 0 |   | 0 |   |
| Total Cash Obligations               |       | $                       | 12,680     |   | $ | 4,267 |   | $ | 3,344 |   | $ | 835 |   | $ | 4,234 |   |

 

**RecentAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes-an interpretation of FASB StatementNo. 109 (FIN 48), which clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements.  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  This interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  The provisions of FIN 48 will be effectivefor the Company as of January 1, 2007, with the cumulative effect of applyingthe provisions of this Interpretation reported as an adjustment to the openingbalance of retained earnings. The Company is currently evaluating the impact ofadopting FIN 48.

In December 2004,the FASB issued Statement of Financial Accounting Standard No. 123(revised 2004), “Share-Based Payment” (FAS 123R). FAS 123R requires thatcompensation cost be recognized for all new awards and awards that aremodified, repurchased or cancelled after the adoption date. The SEC amended theeffective dates of FAS 123R for public companies in April 2005, whichallows registrants to implement FAS 123R at the beginning of their nextfiscal year, instead of the next interim period, that begins afterJune 15, 2005. The SEC also issued Staff Accounting Bulletin 107, “Share-BasedPayment” (SAB 107), in April 2005, which provides the views of the SECstaff regarding certain aspects of the application of FAS 123R.SAB 107 assists issuers in their initial implementation of FAS 123R.The provisions of this statement are effective for the Company’s first quarterending June 30, 2006.

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FAS 123Rallows for two alternative transition methods. The first method is the modifiedprospective application whereby compensation cost for the portion of awards forwhich the requisite service has not yet been rendered that are outstanding asof the adoption date will be recognized over the remaining service period. Thecompensation cost for that portion of awards will be based on the grant-datefair value of those awards as calculated for pro forma disclosures underStatement 123, “Accounting for Stock-Based Compensation”, as originallyissued. All new awards and awards that are modified, repurchased or cancelledafter the adoption date will be accounted for under the provisions of FAS123(R). The second method is the modified retrospective application, whichrequires that the Company restates prior period financial statements. Themodified retrospective application may be applied either to all prior periodsor only to prior interim periods in the year of adoption of this statement. TheCompany has elected to apply the modified prospective method.

On November 2005,the FASB issued FASB Staff Position No. FAS 123R-3 — “Transition ElectionRelated to Accounting for the Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the alternative transition method provided inthis FASB Staff Position for calculating the tax effects of share-basedcompensation pursuant to FAS 123R. The alternative transition method includes asimplified method to establish the beginning balance of the additional paid-incapital pool (APIC pool) related to the tax effects of employee share-basedcompensation, which is available to absorb tax deficiencies recognizedsubsequent to the adoption of FAS 123R.

Item3.    Quantitative and Qualitative Disclosures about Market Risk

The Company doesnot ordinarily hold market risk sensitive instruments for trading purposes.However, the Company does recognize market risk from interest rate and foreigncurrency exchange exposure. The Company has financial instruments that aresubject to interest rate risk. As of June 30, 2006, the Company was debt-free. Historically, the Company hasnot experienced material gains or losses due to interest rate changes. However,a reduction in interest rates would reduce the interest income received by theCompany on the cash it holds for payment to Chimes vendors. The Company’sinternational operations expose it to translation risk when the local currencyfinancial statements are translated to US dollars. As currency exchange ratesfluctuate, translation of the financial statements of international businessesinto US dollars will affect the comparability of revenues and expenses betweenyears. In addition, the Company bills customers with respect to certainCanadian operations in US dollars but pays Canadian workers in Canadiandollars.

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Item4.    Controls and Procedures

**DisclosureControls and Procedures**

The Company’s CEOand CFO have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) under theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovered by this report.  Based upon such evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Securities Exchange Act of 1934, as amended.

**InternalControls over Financial Reporting**

There have notbeen any changes in the Company’s internal controls over financial reporting(as such term is defined in Rules 13a-15(f) and 15d-15e under theSecurities Exchange Act of 1934, as amended) during the period to which thisreport relates that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected.

 

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PART II - OtherInformation

Item6.    Exhibits

 
|        | Exhibits |   |                                                                                                                                    |
|--------|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |     |   |                                                                                                                                    |
| 31.1   | —   |   | CEO Certification  required by Rule 13a-15(e)/15d-15(e) under the Securities Exchange Act of  1934.                                     |
|   |     |   |                                                                                                                                    |
| 31.2   | —   |   | CFO Certification  required by Rule 13a-15(e)/15d-15(e) under the Securities Exchange Act of  1934.                                     |
|   |     |   |                                                                                                                                    |
| 32.1   | —   |   | CEO Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |     |   |                                                                                                                                    |
| 32.2   | —   |   | CFO Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|        |          |        |                                                                                                                                         |  |  |

 

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Signatures

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|        |           | COMPUTER HORIZONS CORP.          |
|--------|----------------|----------------------------------|
|   |           | (Registrant)                     |
|   |           |                             |
|   |           |                             |
| DATE:  | August 9, 2006 |                             |   | /s/  Dennis Conroy |
|   |           | Dennis Conroy, President and CEO |
|   |           | (Principal Executive Officer)    |
|   |           |                             |
|   |           |                             |
| DATE:  | August 8, 2006 |                             |   | /s/ Barbara Moss |
|   |           | Barbara Moss,                    |
|   |           | Chief Financial Officer          |
|   |           | (Principal Financial Officer)    |
|   |           |                             |
|   |           |                             |
| DATE:  | August 8, 2006 |                             |   | /s/ Marci Braunstein |
|   |           | Marci Braunstein,                |
|   |           | Corporate Controller             |
|   |           | (Principal Accounting Officer)   |
|   |           |                             |

 

 

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