10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 3)

ýQuarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2003

or

oTransition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

for the transition period from                     to                     

Commission File Number 0-7282

COMPUTER HORIZONS CORP.

(Exact name of registrant as specified in its charter)

New York	13-2638902
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
49 Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495
(Address of principal executive offices)            (Zip code)
Registrant’s telephone number, including area code (973) 299-4000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

ý	o
Yes	No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

ý	o
Yes	No

As of November 11, 2003 the issuer had 30,528,278 shares of common stock outstanding.

EXPLANATORY NOTE

The purpose of this Amendment No. 3 on Form 10-Q/A to the Quarterly Report on Form 10-Q of Computer Horizons Corp the (“Company”). for the three months ended September 30, 2003 as filed with the Securities and Exchange Commission is to reflect the restatement of the Company’s consolidated financial statements.

Subsequent to the issuance of its financial statements for the year ended December 31, 2003, and in connection with an internal review of accounting processes and procedures conducted in the third quarter of 2004, the Company discovered an error pertaining to the incorrect adjustment of consulting costs relating to intercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement of consolidated consultant costs (i.e. direct costs) in the Company’s consolidated income statement and accrued payroll on the balance sheet.

The aggregate amount for all periods affected was an understatement of consultant costs totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of this non-cash charge for each period affected are shown below (dollars in thousands, except per share data):

Quarter Ended	Gross Amount		Net of Tax Effect		Effect on EPS			Restated Loss per share
June 30, 2003	$	1,983	$	1,321	$	(0.05	)	$	(0.36	)
September 30, 2003	664		394		(0.01		)	(0.09		)
December 31, 2003	749		492		(0.01		)	(0.07		)
Year ended December 31, 2003	3,396		2,207		(0.07		)	(0.56		)
March 31, 2004	864		562		(0.02		)	(0.02		)
June 30, 2004	1,295		693		(0.03		)	(0.00		)
Six Months ended June 30, 2004	2,159		1,255		(0.05		)	(0.02		)
Total Restatement Impact	$	5,555	$	3,462	$	(0.12	)

As part of management’s investigation of this accounting error, an extensive review of intercompany transactions was completed.  As a result, other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheet corrected an overstatement of accrued expenses and an understatement of shareholders’ equity (specifically the overstatement of accumulated comprehensive loss).  The cumulative balance sheet adjustments for the affected dates are as follows (in thousands):

Balance Sheet Date	Cumulative Reduction in Accrued Expenses		Cumulative Increase in Shareholders’ Equity		Quarterly Net Change
As of June 30, 2003	$	1,376	$	1,376	1,376	*
As of September 30, 2003	1,351		1,351		(25	)
As of December 31, 2003	1,760		1,760		409
As of March 31, 2004	2,195		2,195		435
As of June 30, 2004	2,212		2,212		17

*Represents cumulative effect of all previous quarterly periods deemed not material on an individual quarter basis.

In addition, in the second quarter of 2003, the Company made a balance sheet correction resulting in an increase in shareholders’ equity and a decrease in accrued payroll of $41,000.

As a result of the Company’s investigation into the causes of this accounting error, several remediating actions have been or are in the process of being implemented to prevent future reoccurrence and are included in Part 1 - Item 4. Control and Procedures on this Amendment No. 3 of Form 10-Q/A.

The effects of this restatement on the consolidated balance sheet of the Company as at September 30, 2003, and on the consolidated statements of operations and condensed consolidated statements of cash flows for the three months and nine months ended September 30, 2003, are presented in Item 1 (Restated Financial Statements) and Item 2 (Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part I of this Amendment No. 2. Certain internal accounting control issues identified by management and related to the restatement are disclosed in Item 4 of Part I of this Amendment No. 3. The Company’s Chief Executive Officer and Chief Financial Officer have also reissued their certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act.

The Company’s restatement of its financial statements for the year ended December 31, 2003, is reflected in Amendment No. 3 on Form 10-K/A, filed concurrently herewith, which amends its previously filed Form 10-KA for the year ended December 31, 2003. The Company is also concurrently filing amendments on Forms 10-Q/A to its previously filed Forms 10-Q for each of the periods ended June 30, 2003, March 31, 2004 and June 30, 2004 to reflect the restatement of its financial statements for those periods.

Additional detail regarding the restatement is included in Note 2 of the Notes to Consolidated Financial Statements included in Part I — Item 1 of this Amendment No. 3 on Form 10-Q/A.

Except as required to reflect the effects of the restatement, no attempt has been made in this Amendment No. 3 to modify or update other disclosures presented in the original report on Form 10-Q/A for the period ended September 30, 2003. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures affected by subsequent events.

COMPUTER HORIZONS CORP. AND SUBSIDIARIES

Index

Part I Restated Financial Information
	Item 1	Consolidated Balance Sheets September 30, 2003 (unaudited) and December 31, 2002	2
		Consolidated Statements of Operations Three and Nine Months Ended September 30, 2003 and September 30, 2002 (unaudited)	3
		Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and September 30, 2002 (unaudited)	4
		Notes to Consolidated Financial Statements	5
	Item 2	Restated Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 4	Controls and Procedures	24
Part II		Other Information
	Item 1	Legal Proceedings	25
	Item 6	Exhibits and Reports on Form 8-K	26
		Signatures	27

1

Part I Financial Information
Item 1.
COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

	September 30, 2003			December 31, 2002
	(As restated note 2)
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	50,748		$	59,769
Accounts receivable, net of allowance for doubtful accounts of $8,207 and $7,696 at September 30, 2003 and December 31, 2002, respectively	52,506			56,616
Deferred income taxes	5,167			4,557
Refundable income taxes	—			19,051
Other	5,557			7,219
TOTAL CURRENT ASSETS	113,978			147,212
PROPERTY AND EQUIPMENT	41,476			37,643
Less accumulated depreciation	(31,357		)	(26,626		)
	10,119			11,017
OTHER ASSETS - NET:
Goodwill (Note 4)	33,551			19,203
Intangibles (Note 4)	2,966			—
Deferred income taxes	13,293			8,020
Other	11,267			8,279
TOTAL OTHER ASSETS	61,077			35,502
TOTAL ASSETS	$	185,174		$	193,731
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	10,836		$	10,830
Accrued payroll, payroll taxes and benefits	6,243			4,529
Restructuring reserve	3,028			3,266
Income taxes payable	1,144			—
Tax benefit reserve	19,600			19,600
Other accrued expenses	4,583			3,408
TOTAL CURRENT LIABILITIES	45,434			41,633
OTHER LIABILITIES	6,488			6,243
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 33,153,107 shares at September 30, 2003 and December 31, 2002 respectively	3,315			3,315
Additional paid-in capital	133,162			133,518
Accumulated comprehensive loss	(1,933		)	(4,306		)
Retained earnings	13,279			28,255
	147,823			160,782
Less shares held in treasury, at cost; 2,586,344 shares and 2,660,667 shares at September 30, 2003 and December 31, 2002, respectively	(14,571		)	(14,927		)
TOTAL SHAREHOLDERS’ EQUITY	133,252			145,855
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	185,174		$	193,731

2

COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share data)

	THREE MONTHS ENDED										NINE MONTHS ENDED
	September 30, 2003					September 30, 2002					September 30, 2003					September 30, 2002
	(As restated note 2)										(As restated note 2)
				% of revenue					% of revenue					% of revenue					% of revenue
REVENUES:
IT Services	$	32,235		50.0	%	$	49,127		66.8	%	$	103,738		56.5	%	$	157,800		68.6	%
Solutions Group	27,016			41.9	%	20,151			27.4	%	65,308			35.6	%	60,294			26.2	%
Chimes	5,208			8.1	%	4,296			5.8	%	14,499			7.9	%	12,017			5.2	%
	64,459			100.0	%	73,574			100.0	%	183,545			100.0	%	230,111			100.0	%
COSTS AND EXPENSES:
Direct costs	45,069			69.9	%	52,865			71.9	%	131,336			71.6	%	167,627			72.8	%
Selling, general and administrative	20,494			31.8	%	21,687			29.5	%	56,273			30.7	%	69,208			30.1	%
Bad Debt Expense	389			0.6	%	660			0.9	%	4,252			2.3	%	2,050			0.9	%
Restructuring charge (Note 7)	787			1.2	%	—			0.0	%	2,985			1.6	%	—			0.0	%
Special charges (Note 14)	800			1.2	%	—			0.0	%	8,778			4.8	%	—			0.0	%
Amortization of Intangibles	526			0.8	%	—			0.0	%	526			0.3	%	—			0.0	%
	68,065			105.6	%	75,212			102.3	%	204,150			111.2	%	238,885			103.8	%
LOSS FROM OPERATIONS	(3,606		)	-5.6	%	(1,638		)	-2.3	%	(20,605		)	-11.2	%	(8,774		)	-3.8	%
OTHER INCOME / (EXPENSE):
Gain/(loss) on sale of assets	—			0.0	%	—			0.0	%	(273		)	-0.1	%	3,570			1.6	%
Loss on investments	—			0.0	%	—			0.0	%	—			0.0	%	(61		)	0.0	%
Interest income	96			0.1	%	252			0.3	%	372			0.2	%	725			0.3	%
Interest expense	(18		)	0.0	%	(5		)	0.0	%	(36		)	0.0	%	(168		)	-0.1	%
	78			0.1	%	247			0.3	%	63			0.	%	4,066			1.8	%
LOSS BEFORE INCOME TAXES, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND MINORITY INTEREST	(3,528		)	-5.5	%	(1,391		)	-2.0	%	(20,542		)	-11.2	%	(4,708		)	-2.0	%
INCOME TAXES/(BENEFIT):
Current	298			0.5	%	—			0.0	%	298			0.2	%	—			0.0	%
Deferred	(962		)	-1.5	%	(473		)	-0.6	%	(5,883		)	-3.2	%	(1,601		)	-0.7	%
	(664		)	-1.0	%	(473		)	-0.6	%	(5,585		)	-3.0	%	(1,601		)	-0.7	%
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND MINORITY INTEREST	(2,864		)	-4.4	%	(918		)	-1.4	%	(14,957		)	-8.2	%	(3,107		)	-1.3	%
Minority Interest	21			0.0	%	—			0.0	%	(16		)	0.0	%	—			0.0	%
Cumulative effect of change in accounting principle (Note 4)	—			0.0	%	—			0.0	%	—			0.0	%	(29,861		)	-13.0	%
NET LOSS	$	(2,843	)	-4.4	%	$	(918	)	-1.4	%	$	(14,973	)	-8.2	%	$	(32,968	)	-14.3	%
LOSS PER SHARE (BASIC & DILUTED):
Before Cumulative Effect of Change in Accounting Principle and Minority Interest	$	(0.09	)			$	(0.03	)			$	(0.49	)			$	(0.10	)
Cumulative Effect of Change in Accounting Principle	$	—				$	—				$	—				$	(0.95	)
Net Loss	$	(0.09	)			$	(0.03	)			$	(0.49	)			$	(1.05	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic & Diluted	30,548,000					31,218,000					30,403,000					31,388,000

3

COMPUTER HORIZONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

	Nine Months Ended
	September 30, 2003				September 30, 2002
	(As restated note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,973		)	$	(32,968	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred taxes	(5,883			)	3,153
Depreciation	3,836				3,479
Amortization of intangibles	526				—
Provision for bad debts	4,252				2,050
Loss/(Gain) on sale of assets	273				(3,570		)
Write off of goodwill	—				29,861
Change in assets and liabilities, net of acquisitions:
Accounts receivable	10,816				17,185
Other current assets	1,741				(1,822		)
Assets held for sale	—				(1,929		)
Other assets	(2,544			)	1,393
Refundable income taxes	19,051				8,361
Accrued payroll, payroll taxes and benefits	1,714				(2,121		)
Accounts payable	(1,477			)	(859		)
Income taxes payable	934				—
Other accrued expenses	(1,389			)	(513		)
Other liabilities	(347			)	(775		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	16,530				20,925
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment	(1,683			)	(2,455		)
Acquisitions, net of cash	(22,141			)	—
Proceeds received from the sale of assets	149				15,880
Acquisition of intangibles	(566			)	—
Acquisition of goodwill	(427			)	—
NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES	(24,668			)	13,425
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable	(2,636			)	—
Notes payable - banks, net	—				(10,000		)
Stock options exercised	939				443
Purchase of treasury shares	(1,230			)	(4,357		)
Stock issued on employee stock purchase plan	291				948
NET CASH USED IN FINANCING ACTIVITIES	(2,636			)	(12,966		)
Foreign currency losses	1,753				(370		)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS	(9,021			)	21,014
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	59,769				41,033
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$		50,748		$	62,047
Supplemental disclosure of cash flow information:
Details of acquisition:
Tangible assets acquired (including cash of $347)	$		13,083		$	—
Liabilities assumed	(7,442			)	—
Goodwill	13,921				—
Intangibles	2,926				—
Cash paid	22,488				—
Less: Cash received in acquisition	(347			)	—
Net cash paid*	$		22,141		$	—

*              Includes a $1.5 million note payment

4

COMPUTER HORIZONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Periods September 30, 2003 and September 30, 2002

(unaudited)

1.Basis of Presentation

The consolidated balance sheet as of September 30, 2003, the consolidated statements of operations for the three and nine months ended September 30, 2003 and September 30, 2002, respectively and the statement of cash flows for the nine months ended September 30, 2003 and 2002 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2003 (and for all periods presented) have been made.

Certain information and note disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, which are not required for interim purposes, have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2002 filed by the Company. The results of operations for the periods ended September 30, 2003 and 2002 are not necessarily indicative of the operating results for the respective full years.

Reclassifications

Certain reclassifications have been made to the 2002 comparative financial statements to conform to the 2003 presentation.

2.Restatement of Financial Statements

Subsequent to the issuance of its financial statements for the year ended December 31, 2003, and in connection with an internal review of accounting processes and procedures conducted in the third quarter of 2004, the company discovered an error pertaining to the incorrect adjustment of consulting costs relating to intercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement of consolidated consultant costs (i.e. direct costs) in the Company’s consolidated income statement and accrued payroll on the balance sheet.

As part of management’s investigation of this accounting error, an extensive review of intercompany transactions was completed.  As a result, other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheet corrected an overstatement of accrued expenses and an understatement of shareholders’ equity (specifically the overstatement of accumulated comprehensive loss).  In addition, in the second quarter of 2003, the Company made a balance sheet correction resulting in an increase in shareholders’ equity and a decrease in accrued payroll of $41,000.

The following schedule reconciles net loss for the three months and nine months ended September 30, 2003 as originally reported, to the corresponding amounts on a restated basis after given effect to the adjustment described above.

	Three Months		Nine Months
(In thousands, except	Ended September 30,
per share data)	2003		2003
	(unaudited)		(unaudited)
Net loss as originally reported	(2,450	)	(13,259	)
Direct costs adjustment (pretax)	663		2,646
Income tax benefit	(270	)	(932	)
Net loss as restated	(2,843	)	(14,973	)
Loss per share (basic and diluted) as originally reported	(0.08	)	(0.44	)
Effect of Direct Costs adjustment	(0.01	)	(0.05	)
Loss per share (basic and diluted) as restated	(0.09	)	(0.49	)

The previously reported results of operations for the three and nine month ended September 30, 2003 as reported on Form 10Q with the Securities and Exchange Commission, have been amended to reflect the above adjustments.  The results of such adjustments, as compared with the Company’s previously reported results for the three and nine-month periods ended September 30, 2003, are set forth below.

(In thousands, except per share data)	Three Months ended September 30, 2003		Three Months ended September 30, 2003		Nine Months ended September 30, 2003		Nine Months ended September 30, 2003
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
	As Originally Reported		As Restated		As Originally Reported		As Restated
Revenue
IT Services	32,235		32,235		103,738		103,738
Solutions Group	27,016		27,016		65,308		65,308
Chimes	5,208		5,208		14,499		14,499
	64,459		64,459		183,545		183,545
Cost and expenses
Direct costs	44,406		45,069		128,690		131,336
Selling, general and administrative	20,494		20,494		56,273		56,273
Bad debt expense	389		389		4,252		4,252
Restructuring charge	787		787		2,985		2,985
Special charges	800		800		8,778		8,778
Amortization of intangibles	526		526		526		526
	67,402		68,065		201,504		204,150
Loss from Operations	(2,943	)	(3,606	)	(17,959	)	(20,605	)
Other income/expenses
Gain/(loss) on sale of assets	—		—		(273	)	(273	)
Interest income	96		96		372		372
Interest expense	(18	)	(18	)	(36	)	(36	)
	78		78		63		63
Loss before income taxes	(2,865	)	(3,528	)	(17,896	)	(20,542	)
Income tax benefit	(394	)	(664	)	(4,653	)	(5,585	)
Net loss before minority interest	(2,471	)	(2,864	)	(13,243	)	(14,957	)
Minority Interest	21		21		(16	)	(16	)
Net loss	(2,450	)	(2,843	)	(13,259	)	(14,973	)
Basic earnings and diluted per share	(0.08	)	(0.09	)	(0.44	)	(0.49	)

The following table sets forth the effects of the restatement adjustments discussed above on the consolidated balance sheets at September 30, 2003.

	September 30,			September 30,
	2003			2003
	(As originally reported)			(As restated)
	(unaudited)			(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	50,748		$	50,748
Accounts receivable, net of allowance for doubtful accounts of $8,207 September 30, 2003	52,506			52,506
Deferred income taxes	5,167			5,167
Refundable income taxes	—			—
Other	5,557			5,557
TOTAL CURRENT ASSETS	113,978			113,978
PROPERTY AND EQUIPMENT	41,476			41,476
Less accumulated depreciation	(31,357		)	(31,357		)
	10,119			10,119
OTHER ASSETS - NET:
Goodwill (Note 4)	33,551			33,551
Intangibles (Note 4)	2,966			2,966
Deferred income taxes	12,361			13,293
Other	11,267			11,267
TOTAL OTHER ASSETS	60,145			61,077
TOTAL ASSETS	$	184,242		$	185,174
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	10,836		$	10,836
Accrued payroll, payroll taxes and benefits	3,636			6,243
Restructuring reserve	3,028			3,028
Income taxes payable	1,144			1,144
Tax benefit reserve	19,600			19,600
Other accrued expenses	5,932			4,583
TOTAL CURRENT LIABILITIES	44,176			45,434
OTHER LIABILITIES	6,488			6,488
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 33,153,107 shares at September 30, 2003	3,315			3,315
Additional paid-in capital	133,162			133,162
Accumulated comprehensive loss	(3,324		)	(1,933		)
Retained earnings	14,996			13,279
	148,149			147,823
Less shares held in treasury, at cost; 2,586,344 shares at September 30, 2003	(14,571		)	(14,571		)
TOTAL SHAREHOLDERS’ EQUITY	133,578			133,252
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	184,242		$	185,174

3.Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwill and Other Intangible Assets.” The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new regulation has discontinued the amortization of goodwill. For the effect of this statement on the Company see Note 3.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods ending after December 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The effect of the adoption of this statement was immaterial to the Company.

In December 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 148, “Accounting for Stock-Based Compensation—Translation and Disclosure.” This statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amended the disclosure requirements of Statement

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123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The Company adopted the disclosure provisions as of December 31, 2002.

The exercise price per share on all options granted may not be less than the fair value at the date of the option grant. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as modified by FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for stock-based employee compensation, whereby no compensation cost had been recognized for the plans. The Company expects to continue following the guidance under APB 25 for stock based compensation to employees. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates and been consistent with the method of SFAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below:

		Three Months Ended						Nine Months Ended
		September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
		(As restated note 2)						(As restated note 2)
Net loss	As reported	$	(2,843	)	$	(918	)	$	(14,973	)	$	(32,968	)
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(438		)	(882		)	(1,746		)	(3,693		)
	Pro forma	$	(3,281	)	$	(1,800	)	$	(16,719	)	$	(36,661	)
Earnings per share
Basic	As reported	$	(0.09	)	$	(0.03	)	$	(0.49	)	$	(1.05	)
	Pro forma	(0.11		)	(0.06		)	(0.55		)	(1.17		)
Diluted	As reported	$	(0.09	)	$	(0.03	)	$	(0.49	)	$	(1.05	)
	Pro forma	(0.11		)	(0.06		)	(0.55		)	(1.17		)

Effective on January 1, 2003 the Company adopted Financial Accounting Standards Board No. 146, “Accounting for Exit or Disposal Activities,” (“SFAS 146”), which supersedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The new standards require that a liability for a cost associated with an exit or disposal activity, including costs related to terminating a contract that is not a capital lease and the termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not ongoing or an individual deferred-compensation contract, be recognized when the liability is incurred. Previously, under Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan, which may not necessarily meet the definition of a liability. SFAS 146 is effective for exit or disposal activities of the Company that are initiated after December 31, 2002. The Company adopted SFAS 146 as of January 1, 2003 (See Note 6).

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” It establishes classification and measurement standards for three types of freestanding financial instruments that have characteristics of both liabilities and equity. Instruments within the scope of SFAS 150 must be classified as liabilities within the Company’s financial statements. The provisions of SFAS No. 150 are effective for (1) instruments entered into or

6

modified after May 31, 2003 and (2) pre-existing instruments as of July 1, 2003. SFAS 150 is not expected to have a material effect on the Company’s financial statements.

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (VIEs). The accounting provisions and disclosure requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003, and are effective for reporting periods ending after December 15, 2003, for VIEs created prior to February 1, 2003. Although the Company is still evaluating the impact of FIN 46, it is not expected to have a material effect on the Company’s financial statements.

3.Adoption of FAS 142

Intangible Assets

Intangible assets are the result of the acquisition of certain assets and operations of RGII and the acquisition of the Xpress software from Commerce One. During the third quarter of 2003, the Company completed a purchase price allocation review and according to SFAS No. 142, assessed the useful lives of its acquired intangible assets.

The following table summarizes the acquired intangible assets, the remaining components and the accumulated amortization as of September 30, 2003 (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Non-compete agreements	$	250	$	9	$	241
RGII Trademark	150		37		113
RGII software	726		37		689
Customer contracts	1,800		427		1,373
Xpress software	566		16		550
Total	$	3,492	$	526	$	2,966

Intangible assets are being amortized over periods ranging from six months to seven years, based on the estimated useful lives. The amortization expense on these intangible assets for the three and nine months ended September 30, 2003 was $526,000. The estimated remaining amortization expense for each year ending December 31, is as follows (in thousands):

2003 (remaining period)	$	558
2004	755
2005	680
2006	613
2007	201
thereafter	159
Total	$	2,966

Goodwill

During the quarter ended June 30, 2002, the Company completed the initial valuation of the carrying value of goodwill existing at January 1, 2002. As a result a non-cash charge of $29.9 million, or $(0.95) per share was retroactively recorded as the cumulative effect of an accounting change in the six months ended June 30, 2002 statement of operations. For the year ended December 31, 2002 the Company completed a second valuation of the carrying

7

value of the remaining goodwill and it was determined that no further impairment had occurred. The changes in the carrying amount of goodwill for the nine months ended September 30, 2003, are as follows:

Reporting Units	Solutions		IT Services		Education		Chimes		Consolidated
	(in 000’s)
Balance as of December 31, 2002	$	19,203	$	—	$	—	$	—	$	19,203
Additions to goodwill*	14,348		—		—		—		14,348
Balance as of September 30, 2003	$	33,551	$	—	$	—	$	—	$	33,551

* reflects goodwill acquired as a result of the RGII ($13,921) and GBTS ($427) acquisitions. See Note 8.

The reporting units are equal to, or one level below, reportable segments. The Company engaged independent valuation consultants to assist with the transitional goodwill and annual impairment tests.

As of December 31, 2002, the fair value of each of the reporting units was calculated using the following approaches: (i) market approach and (ii) income approach. Under the market approach, value is estimated by comparing the performance fundamentals relating to similar public companies’ stock prices. Multiples are then developed of the value of the publicly traded stock to various measures and are then applied to each reporting unit to estimate the value of its equity. Under the income approach, value was determined using the present value of the projected future cash flows to be generated by the reporting unit.

The fair value conclusion of the reporting units reflects an appropriately weighted value of the market multiple approach and the income approach discussed above. An asset approach was not used because the asset approach is most relevant for liquidation approaches, investment company valuations and asset rich company valuations (i.e. real estate entities) and was not deemed relevant for manufacturing and service company going-concern valuations. When either the income approach or the market approach was used, each indicated value of the Solutions entity’s equity exceeds the carrying value of the Solutions entity by at least $15 million. Since each of the two approaches yielded values far in excess of carrying value, any weighting of the two approaches or either approach used alone results in the same conclusion, that the goodwill was not impaired. When the other entities were tested, both approaches yielded an indicated value which was far below the carrying value of those entity’s equity, therefore the entire amount of goodwill was written off. As a result, a loss of $29.9 million was recognized in June 2002 and recorded as a cumulative effect of change in accounting principle in the accompanying Consolidated Statements of Operations. There was no income tax effect on the impairment charge as approximately $19 million of the charge related to goodwill in foreign tax jurisdictions where the Company believes it is more likely than not that future taxable income in these jurisdictions will not be sufficient to realize the related income tax benefits associated with the charge. The remaining $11 million of the charge was related primarily to goodwill that was acquired prior to the ability to deduct goodwill for tax purposes.

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The following pro forma table shows the effect of the cumulative effect of change in accounting principle on the Company’s net loss as follows (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
	(As restated note 2)						(As restated note 2)
Reported Net Loss	$	(2,843	)	$	(918	)	$	(14,973	)	$	(32,968	)
Cumulative Effect of Change in Accounting Principle	—			—			—			29,861
Adjusted Net Loss	$	(2,843	)	$	(918	)	$	(14,973	)	$	(3,107	)
Reported Loss per Share:
Basic & Diluted	$	(0.09	)	$	(0.03	)	$	(0.49	)	$	(1.05	)
Adjustment for Cumulative Effect of Change in Accounting Principle:
Basic & Diluted	—			—			—			0.95
Adjusted Loss per Share:
Basic & Diluted	$	(0.09	)	$	(0.03	)	$	(0.49	)	$	(0.10	)

4.Earnings Per Share

The computation of diluted earnings per share excludes options with exercise prices greater than the average market price. As of September 30, 2003, there were 275,138 and 285,263 excluded options, respectively, for the third quarter and the first nine months ended September 30, 2003, with exercise prices between $4.40 and $26.63 and $4.00 and $26.63, respectively, per share. There were 3,096,126 and 5,743,813 excluded options, respectively, for the third quarter and the first nine months ended September 30, 2002, outstanding at September 30, 2002 with exercise prices between $4.40 and $26.63 and $2.02 and $26.63, respectively, per share.

5.Segment Information

The Company has identified three business segments: IT Services, the Solutions Group and Chimes, Inc. The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. IT Services is primarily staffing augmentation. The Solutions division provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Customer Relationship Management (CRM), network services, strategic outsourcing and managed resourcing as well as software and relational database products, up to the time of sale, March 25, 2002, of Princeton Softech Inc. In the segment information chart below, amounts pertaining to Princeton Softech Inc. for the nine months ended September 30, 2002, are included and total: revenues of $2.9 million, gross profit of $2.4 million and an operating loss of $1.9 million. Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies, which, according to Forbes magazine, represent the biggest and most important companies, as measured by sales, profits, assets and market value. Loss before income tax benefit consists of loss before income taxes, excluding interest income, interest expense, gain/(loss) on the sale of assets, restructuring charges, special charges, the write-off of a terminated project, minority interest, amortization of intangibles, and

9

net loss on investments. These exclusions total expense of $2.0 million and income of $247,000 for the quarter ended September 30, 2003 and 2002, respectively and expense of $15.3 million and income of $4.1 million for the first nine months ended September 30, 2003 and 2002, respectively (see reconciliation of segments operating loss to consolidated loss before income taxes). Corporate services, consisting of general and administrative services are provided to the segments from a centralized location. Such costs are allocated to the applicable segments based on revenue.

	Three Months Ended							Nine Months Ended
(in 000’s)	September 30, 2003			September 30, 2002				September 30, 2003			September 30, 2002
	(As restated note 2)							(As restated note 2)
Revenue:
IT Services	$	32,235		$	49,127			$	103,738		$	157,800
Solutions Group	27,016			20,151				65,308			60,294
Chimes	5,208			4,296				14,499			12,017
TOTAL	$	64,459		$		73,574		$	183,545		$	230,111
Gross Margin:
IT Services	$	6,514		$		10,441		$	20,763		$	31,997
Solutions Group	7,993			6,361				18,009			19,965
Chimes	4,882			3,907				13,436			10,522
TOTAL	$	19,389		$		20,709		$	52,208		$	62,484
Operating income / (loss):
IT Services	$	1,975		$		4,110		$	6,150		$	11,512
Solutions Group	2,143			2,252				6,525			4,586
Chimes	(113		)	(1,682			)	(2,377		)	(6,091		)
TOTAL	$	4,005		$		4,680		$	10,298		$	10,007
Corporate Allocation:
IT Services	$	3,213		$		4,219		$	9,249		$	12,871
Solutions Group	1,767			1,730				4,999			4,927
Chimes	519			369				1,303			984
TOTAL	$	5,499		$		6,318		$	15,551		$	18,782
Income/(loss) before income tax benefit:
IT Services	$	(1,238	)	$		(109	)	$	(3,099	)	$	(1,359	)
Solutions Group	376			522				1,526			(341		)
Chimes	(632		)	(2,051			)	(3,680		)	(7,075		)
TOTAL	$	(1,494	)	$		(1,638	)	$	(5,253	)	$	(8,775	)
Assets:
IT Services								$	27,057		$	43,579
Solutions Group								67,176			43,370
Chimes								15,625			20,285
Corporate and other								75,316			99,515
TOTAL								$	185,174		$	206,749

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Reconciliation of Segment Loss before Income Tax Benefit to Consolidated Loss Before Income Tax Benefit:

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
	(As restated note 2)						(As restated note 2)
Total Segments Loss before Income Tax Benefit	$	(1,494	)	$	(1,638	)	$	(5,253	)	$	(8,775	)
Adjustments:
Interest income, net	78			247			336			558
Gain/(loss) on sale of assets	—			—			(273		)	3,570
Restructuring charges	(787		)	—			(2,985		)	—
Amortization of intangibles	(526		)	—			(526		)	—
Special charges	(800		)	—			(8,778		)	—
Write-off of terminated project	—			—			(3,064		)	—
Net loss on investments	—			—			—			(61		)
Total Adjustments:	$	(2,035	)	$	(247	)	(15,290		)	4,067
Consolidated loss before income taxes, cumulative effect of change in accounting principle and minority interest	$	(3,529	)	$	(1,391	)	$	(20,543	)	$	(4,708	)

6.Restructuring Charges

During the third quarter of 2003, the Company recorded a restructuring charge of approximately $787,000 relating to the closing of Chimes (UK) Ltd. and severance charges related to US operations. The Company decided to continue business in this geographic area via a third party and therefore recorded the charge after the building was closed. The provision includes an accrual relating to the future costs associated with continuing rent on this property in the United Kingdom. The closing of this office resulted in a severance charge of $247,000. As of September 30, 2003, $203,000 had been paid in severance to terminated employees.

	Recorded		Paid			Remaining at September 30, 2003
Severance:
United Kingdom	$	247	$	(203	)	$	44
United States	219		(219		)	—
Total Severance	$	466	$	(422	)	$	44
Lease Obligations:
United Kingdom	$	149	$	(4	)	$	145
General Office Closure:
United Kingdom	$	172	$	(105	)	$	67
Total	$	787	$	(531	)	$	256

During the second quarter of 2003, the Company evaluated the geographic area in Canada and decided to close facilities and go virtual in the smaller Canadian markets. After the buildings were entirely closed, the Company recorded a restructuring charge of approximately $1.9 million relating to the consolidating and closing of these facilities in the Canadian subsidiary. This $1.9 million expense was calculated based on current rent commitments less a calculated sublease amount based on current market conditions. The provision included an accrual relating to the future costs associated with

11

continuing rent on six properties, five of which are in Canada, with rents continuing through 2004, 2006 and 2007. The closing of these offices resulted in the termination of 20 employees with a severance charge of $697,000. As of September 30, 2003, $524,000 had been paid in severance to the terminated employees.

	Recorded		Paid			Remaining at September 30,  2003
Lease Obligations:
Canada	$	1,100	$	(461	)	$	639
United States	36		(7		)	29
Total Lease Obligations	$	1,136	$	(468	)	$	668
Severance:
Canada	$	358	$	(185	)	$	173
United States	197		(197		)	—
United Kingdom	142		(142		)	—
Total Severance	$	697	$	(524	)	$	173
General Office Closure:
Canada	$	116	$	(116	)	$	—
Total	$	1,949	$	(1,108	)	$	841

During the fourth quarter of 2002, the Company recorded a restructuring charge of $2.8 million pertaining to 2002 office closings. During the second quarter of 2003, half of the rent for one office closing was reversed after the rent was negotiated at a lower rate for half the building.

	Remaining at December 31, 2002		Paid			Reversed			Remaining at September 30, 2003
Lease Obligations:
United States	$	2,483	$	(1,023	)	$	(25	)	$	1,435

At the end of 2002, the Company had $295,000 of five lease obligations remaining from the restructure expense recorded in 2001. Of the five lease obligations, four remain and the balance as of September 30, 2003 was $141,000.

	Remaining at Dec. 31, 2002		Paid			Remaining at September 30, 2003
Severance:
United States	$	1	$	(1	)	$	—
Lease Obligations:
United States	$	294	$	(153	)	$	141
Total	$	295	$	(154	)	$	141

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At the end of 2002 the Company had $488,000 of one lease obligation remaining on the restructure expense recorded in 2000 with the lease terminating in 2005. The balance remaining at September 30, 2003 was $355,000.

	Remaining at Dec. 31, 2002		Paid			Remaining at September 30, 2003
Lease Obligations:
United States	$	488	$	(133	)	$	355

7.Comprehensive Income / (Loss)

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFAS No.130”), requires that items defined as other comprehensive income/(loss), such as foreign currency translation adjustments, be separately classified in the financial statements and that the accumulated balance of other comprehensive income/(loss) be reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The components of comprehensive loss for the three and nine months ended September 30, 2003 and September 30, 2002 are as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2003			September 30, 2002			September 30, 2003			September 30, 2002
	(As restated note 2)						(As restated note 2)
Comprehensive Loss:
Net Loss	$	(2,843	)	$	(918	)	$	(14,973	)	$	(32,968	)
Other comprehensive income/(loss) - Foreign currency adjustment	214			(48		)	1,753			(370		)
Unrealized gain/(loss) on SERP investments	(112		)	—			621			—
Comprehensive Loss	$	(2,741	)	$	(966	)	$	(12,599	)	$	(33,338	)

8.Acquisitions

On September 12, 2003, the Company acquired, from Commerce One, the Xpress solution, a suite of software and services designed to rapidly facilitate product data synchronization between trading partners. The purchase price of the software was $566,000, recorded as intangible assets, and is being amortized over a three year period.

On July 8, 2003, the Company acquired all of the stock of privately-held RGII Technologies, Inc. (“RGII”). The Company purchased RGII because acquiring a platform company in the Federal government IT Services marketplace has been a long-term priority for the Company. The purchase price was approximately $22.1 million including an up-front cash payment, acquisition expenses, working capital adjustment and the payoff of a note payable of $1.5 million. In addition the Company paid off a RGII $665,000 note and line of credit of approximately $2 million. In addition, the seller may be entitled to contingent payments based on RGII’s performance against profitability objectives over the next three years. The contingent payments are evidenced by a contingent note with a face value of $10 million that is payable over three years, only if certain financial performance objectives are met. These financial performance objectives are based on earnings before interest and taxes (“EBIT”) targets totaling $19.8 million over a three-year period. There are no minimum or maximum payments obligations under the terms of the contingent note, whereby the contingent payment will be reduced on a dollar for dollar basis for financial performance below EBIT targets, and increased by 29 cents ($0.29) for each dollar exceeding EBIT targets. The Company also entered into employment agreements with the former shareholder and key employees of RGII and have agreed to issue an aggregate of 600,000 options to purchase shares of Computer Horizons stock over a three year period.

13

The Company completed the allocation of the purchase price to assets and liabilities acquired utilizing outside valuation consultants to assist in this process. Audited historical financial statements of RGII together with applicable pro forma financial information were filed with the SEC on September 19, 2003.

The allocation of the purchase price to assets acquired and liabilities assumed was as follows (in thousands):

	Allocation of Purchase Price
Accounts receivable	$	10,958
Other current assets	79
Property and equipment	1,255
Goodwill	13,921
Intangibles	2,926
Other assets	444
Total assets	29,583
Accounts payable	1,483
Taxes payable	210
Accrued expenses	2,520
Notes payable	2,636
Long-term liabilities	593
Total liabilities	7,442
Net assets	$	22,141

Purchased intangibles totaling $2.9 million included unfunded backlog, funded backlog, software and non compete agreements. $13.9 million was recorded as goodwill.

The acquisition will be treated as a purchase of assets for tax purposes. Accordingly, goodwill will be subject to amortization for tax purposes over fifteen years.

Pro Forma Results

Effective July 1, 2003, the results of RGII’s operations have been included in the consolidated financial statements of the Company. The following unaudited pro forma financial information presents the combined results of operations of the Company and RGII as if the acquisition had occurred as of the beginning of the periods presented. The revenues and results of operations included in the following pro forma unaudited consolidated condensed statement of operations is not considered necessarily

14

indicative of the results of operations for the periods specified had the transaction actually been completed at the beginning of the period.

	Actual			Pro Forma (in thousands)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
	(As restated, note 2)						(As restated, note 2)
Revenues:
IT Services	$	32,235		$	49,127		$	103,738		$	157,800
Solutions Group	27,016			28,499			84,173			83,931
Chimes	5,208			4,296			14,499			12,017
Total	64,459			81,922			202,410			253,748
Loss before minority interest and change in accounting principle	(2,864		)	(236		)	(14,671		)	(1,762		)
Minority interest	21			—			(16		)	—
Cumulative effect of change in accounting principle	—			—			—			(29,861		)
Net loss	$	(2,843	)	$	(236	)	$	(14,687	)	$	(31,623	)
Loss per share — (basic & diluted):
Net loss	$	(0.09	)	$	(0.01	)	$	(0.48	)	$	(1.01	)
Weighted average number of shares outstanding — basic & diluted	30,548,000			31,218,000			30,403,000			31,388,000

The unaudited pro forma financial information above reflects the following adjustments to the historical consolidated financial statements for the nine months ended September 30, 2003: $1.0 million amortization expense on purchased intangible assets, elimination of acquisition related costs of $1.8 million, $55,000 reduction of interest income for cash consideration paid less interest expense reduction pertaining to RGII debt and $66,000 adjustment to taxes to record income taxes for RGII as if it was a C-Corporation and to record income tax effect of pro forma adjustments.

On January 31, 2003, the Company acquired the IT Solutions operations of Global Business Technology Solutions (GBTS), from Alea (Bermuda) Limited, a member of the Alea Group of companies and Westfield Services, Inc., a subsidiary of Westfield Financial Corporation for $400,000. The outsourcing facility and its IT professionals are located in Chenni (Madras), India. This transaction was accounted for as a purchase and the entire purchase price was allocated to goodwill. Pro forma information has not been presented as the amounts are not material.

9.Sale of Subsidiaries

On February 14, 2003, the Company sold the business and net assets of Computer Horizons e-Solutions (Europe) Limited, (“Solutions UK”) to Systems Associates Limited for 92,822 British Pounds Sterling (approximately US$145,500). The loss from the transaction was $273,000.

On March 25, 2002, the Company sold the net assets of Princeton Softech to Apax Partners, Inc. and LLR Partners, for cash of $16 million, including amounts held in escrow of $1.5 million. The gain from the transaction was initially estimated as $3.6 million and was adjusted in the fourth quarter of 2002 to $3.2 million due to a purchase price adjustment. During the second quarter of 2003, the Company received approximately $748,000 of the escrow. The results of operations are included in the consolidated financial statements through February 28, 2002 within the Solutions group.

On April 17, 2001, the Company sold the SELECT Software Tools division “Select” of Princeton Softech to Aonix, a member of the Gores Technology Group, for approximately $895,000 including

15

$545,000 of cash received and a note receivable of $350,000, subsequently written off with the sale of Princeton Softech on March 25, 2002. This sale included all the software assets and intellectual property rights of Select and was sold at book value. The results of operations are included in the consolidated financial statements through April 17, 2001 within the Solutions group.

10.Purchase of Treasury Stock

In April of 2001, the Board of Directors approved the repurchase in the open market of up to 10% of its common shares outstanding, or approximately 3.2 million shares. As of the filing of this report, the Company had repurchased, in the open market, 3,114,900 shares of its stock at an average price of $3.47 per share for an aggregate purchase amount of $10.8 million. There were no stock repurchases during the third quarter and as of September 30, 2003 the remaining authorization for repurchase is approximately 93,000 shares.

11.Asset-Based Lending Facility

On July 31, 2001, amended February 14, 2003, the Company entered into a secured asset-based lending facility that replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing was Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $17.5 million. At the time of closing there was a $170,000 commitment fee paid to the agent. As of September 30, 2003, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible customer receivables and cash balances, $16.3 million was available for borrowing as of September 30, 2003. The fee for the unused portion of the line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $84,000 and $104,000 for the nine-month periods ended September 30, 2003 and 2002, respectively. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on incurring obligations and spending limits on capital expenditures.

12.Tax Benefit Reserve

On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 (the “Act”) was enacted into law. This Act contained many economic and tax incentives, including the extension of the carryback period for losses arising in years ending during 2001 and 2002 to five years from the previous two year carryback rule. As a result, the Company’s tax refund claim of approximately $10 million at December 31, 2001 was increased to approximately $30 million. The additional refund amount of $20 million was received in January 2003.

During 1998, the Company completed a business combination, which, for financial statement purposes, has been accounted for as a pooling-of-interests. For income tax purposes the Company believes the transaction qualifies as a taxable purchase that gives rise to future tax deductions. Upon the sale of the acquired business in 2001, these deductions were recognized for tax purposes. The tax benefit of $19.6 million relating to the part of these deductions that was carried back to prior years was included in refundable income taxes in 2002. Since the tax structure of the transaction is subject to determination by the tax authorities, the Company has recorded a reserve for the tax benefits resulting from the carryback and has not recorded deferred tax assets for the tax benefits being carried forward. When resolved, the Company will record a deferred tax asset for the part of the tax benefits being carried forward and a tax benefit for the portion that was carried back, net of an appropriate valuation allowance. The tax benefit will be reflected as an increase in additional paid-in capital. Any adjustments to the valuation allowance will be charged or credited to income.

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The Internal Revenue Service is currently examining the Company’s federal income tax returns for the years ended December 31, 2001 and 2000, along with its federal refund claims for the calendar years 1996 through 1999. The additional refund amount received in January 2003 is shown as a liability until the audit is completed.

13.Special Items

For the three months ended September 30, 2003, the Company incurred special charges of $800,000 related to the unilateral acquisition proposal and activities of Aquent LLC. The Company also incurred a restructuring expense of $787,000 relating primarily to the closing of facilities in the United Kingdom. During the first nine months of 2003, the Company incurred special charges of $8.8 million consisting primarily of a severance package for the former CEO and expenses related to Aquent LLC. The separation package of the former CEO, included a $3.5 million severance payment and $200,000 in continued medical coverage. In addition, a $5.1 million expense pertaining to the unilateral acquisition proposal and activities of Aquent LLC was recorded. This expense is primarily attributable to approximately $3.0 million of legal fees, $1.0 million in financial advisor fees and $1.0 million of proxy solicitation and other fees. As management considers these special items to be infrequent and material in nature, the Company has reported the expenses on a separate line for full disclosure purposes, however, the amounts are reported within operating income. The Company also incurred a restructuring expense of $3.0 million for the nine months ended September 30, 2003 relating primarily to the closing of facilities in Canada and the United Kingdom. In addition, the Company voluntarily terminated a sub-contract with ATEB, a privately held company, for financial reasons and recorded a write-off of approximately $3.1 million due to the uncertainty of the realization of the receivable. ATEB was the primary contractor to develop a new pharmacy system for Royal Ahold. The Company is continuing recovery efforts for this receivable.

14.Rescission Offer

From April 2001 through January 2003, the sale of shares of the Company’s common stock pursuant to the Employee Stock Purchase Plan were not exempt from registration or qualification under federal securities laws. As a result, the Company may have failed to comply with the registration or qualification requirements of federal and applicable state securities laws because the Company did not register or qualify these stock issuances under either federal or applicable state securities laws.

As a result the Company intends to make a rescission offer to all those persons who purchased shares of common stock pursuant to the Employee Stock Purchase Plan during the affected periods. The rescission offer will be made pursuant to a registration statement filed under the Securities Act and pursuant to applicable state securities laws. In this rescission offer, the Company is offering to repurchase the shares subject to our rescission offer for the price paid per share plus interest from the date of purchase until the rescission offer expires, at the current statutory rate per year mandated by the state in which the shares were purchased. The rescission offer will expire approximately 30 days after the effective date of the registration statement. Assuming all of the shares subject to the rescission offer (approximately 659,000) are tendered in the rescission offer, the aggregate purchase price, excluding interest is estimated to be approximately $1.8 million. This contingency payment is considered remote by the Company as the current price of the stock is above the price at which the shares would be repurchased.

16.Aquent/Legal Matters

On April 29, 2003, the Company filed an action in the United States District Court for the District of New Jersey (the “New Jersey action”) against Aquent LLC, seeking (i) to enjoin Aquent from disseminating false and misleading proxy materials and press releases in support of its two nominees for director positions in connection with the Company’s May 14, 2003 Annual Meeting; (ii) to invalidate

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any proxies secured by Aquent through the use of unlawful proxy solicitation materials; and (iii) to require Aquent to disseminate corrective disclosure that not only amended the false and misleading proxy materials but also advised CHC shareholders how Aquent’s solicitations had violated the securities laws. The court held that Aquent’s proxy materials were false and misleading but invalidated no proxies and permitted Aquent to limit corrective disclosure to new text enclosed with the old proxy materials, which contained the false and misleading statements. On May 30, 2003, the Company filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit, contending, among other things, that the corrective disclosure ordered by the United States District Court was inadequate and not in compliance with federal securities laws. On October 15, 2003, the Company filed its appellate papers.

On May 27, 2003, the Company brought an action in the Supreme Court of the State of New York, New York County (the “New York action”), seeking an order invalidating votes for directors Karl Meyer and Robert Trevisani cast at the Annual Meeting by stockholders of record who sold their shares between the record date and the date of the Annual Meeting. The court in the New York action denied temporary restraints but on June 11, 2003, deferred ruling on the Company’s application for preliminary injunctive relief pending discovery and trial. The matter has been scheduled for a hearing on December 15, 2003.

On or about June 2, 2003, Aquent filed a counterclaim in the New Jersey action against the Company and William J. Murphy, the Company’s President and Chief Executive Officer, alleging breach of fiduciary duty and seeking to enjoin the Company from delaying the continuation of the Annual Meeting — at which the certified election results would be accepted — or otherwise interfering with the seating of the Aquent nominees. Aquent also sought attorneys’ fees and costs. On or about June 20, 2003, Aquent filed an amended counterclaim in the New Jersey action, alleging breach of the duty of care and the duty of loyalty, waste of corporate assets, and violation of the proxy rules under Section 14(a) of the Securities Exchange Act of 1934. The amended counterclaim sought, essentially, to enjoin the Company from challenging the election of the Aquent nominees, and it sought attorneys’ fees and costs. The Company has filed an answer denying Aquent’s allegations.

On or about July 15, 2003, Aquent filed an Order to Show Cause in the New Jersey action, challenging an amendment to the Company’s by-laws adopted by the Board of Directors on June 30, 2003. The by-law amendment specifies (a) that any request for a special meeting of shareholders must set a date for the meeting not fewer than seventy-five (75) nor more than ninety (90) days after the date on which the request is received; (b) that any such request shall be ineffective, and any special meeting cancelled, if the shareholder(s) who sign the request is/are not the holder(s) of the beneficial interest of 10% or more of the Company’s issued and outstanding shares on each of the following dates: the date such request is mailed; the record date for the meeting (to be fixed by the Board within five business days after the receipt of the request); and the date of the meeting; and (c) that any such request for a special meeting shall be or become ineffective, and any meeting called or noticed pursuant thereto shall be cancelled, if such request of any solicitation therefore is not made in compliance with applicable law. The court took testimony in the New Jersey action on August 7, 2003 and directed the parties to submit additional briefs on the issues. The matter has been fully briefed and submitted and is pending before the court.

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Item 2. RESTATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Periods Ended September 30, 2003 and September 30, 2002

FORWARD-LOOKING STATEMENTS

The following section should be read in conjunction with our consolidated financial statements and related notes appearing in this Form 10Q/A.  Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission (SEC). Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology industry, the continued need of current and prospective customers for the Company’s services, the availability of qualified professional staff, and price and wage inflation.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in this Item 2 has been restated to reflect certain adjustments to the Company’s, consolidated financial statements for 2003 as previously reported in the Company’s Form 10-Q for the quarters September 30, 2003, as amended and 2002.  Details of the adjustments are shown below and address all quarterly periods affected by the adjustments, which include the quarterly periods ending June 30 2003 through June 30, 2004.

Subsequent to the issuance of its financial statements for the year ended December 31, 2003, and in connection with an internal review of accounting processes and procedures conducted in the third quarter of 2004, the company discovered an error pertaining to the incorrect adjustment of consulting costs relating to intercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement of consolidated consultant costs (i.e. direct costs) in the Company’s consolidated income statement and accrued payroll on the balance sheet.

The aggregate amount for all periods affected was an understatement of consultant costs totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.  The pre-tax, after tax and EPS effect of this non-cash charge for each period affected are shown below (dollars in thousands, except per share data):

Quarter Ended	Gross Amount		Net of Tax Effect		Effect on EPS			Restated Loss per share
June 30, 2003	$	1,983	$	1,321	$	(0.05	)	$	(0.36	)
September 30, 2003	664		394		(0.01		)	(0.09		)
December 31, 2003	749		492		(0.01		)	(0.07		)
Year ended December 31, 2003	3,396		2,207		(0.07		)	(0.56		)
March 31, 2004	864		562		(0.02		)	(0.02		)
June 30, 2004	1,295		693		(0.03		)	(0.00		)
Six Months ended June 30, 2004	2,159		1,255		(0.05		)	(0.02		)
Total Restatement Impact	$	5,555	$	3,462	$	(0.12	)

As part of management’s investigation of this accounting error, an extensive review of intercompany transactions was completed.  As a result, other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheet corrected an overstatement of accrued expenses and an understatement of shareholders’ equity (specifically the overstatement of accumulated comprehensive loss).  The cumulative balance sheet adjustments for the affected dates are as follows (in thousands):

Balance Sheet Date	Cumulative Reduction in Accrued Expenses		Cumulative Increase in Shareholders’ Equity		Quarterly Net Change
As of June 30, 2003	$	1,376	$	1,376	1,376	*
As of September 30, 2003	1,351		1,351		(25	)
As of December 31, 2003	1,760		1,760		409
As of March 31, 2004	2,195		2,195		435
As of June 30, 2004	2,212		2,212		17

*Represents cumulative effect of all previous quarterly periods deemed not material on an individual quarter basis.

In addition, in the second quarter of 2003, the Company made a balance sheet correction resulting in an increase in shareholders’ equity and a decrease in accrued payroll of $41,000.

Additional detail with respect to the impact of the restatement on the Company’s results of operations is reported in Note 2 of the notes to the Consolidated Financial Statement included in Part I Item 1 of this Amendment No. 3 of Form 10QA.

RESULTS OF OPERATIONS

Revenues.     Revenues decreased to $64.5 million in the third quarter of 2003 from $73.6 million in the third quarter of 2002, a decrease of $9.1 million or 12.4%. Revenues decreased to $183.5 million in the nine months of 2003 from $230.1 million in the nine months of 2002, a decrease of $46.6 million or 20.3%.

Solutions Group revenues increased to $27.0 million in the third quarter of 2003 from $20.2 million in the third quarter of 2002, an increase of $6.8 million or 33.7%. For the third quarter of 2003, RGII revenues totaled $9.3 million. Solutions Group revenues increased to $65.3 million in the nine months of 2003 from $60.3 million in the nine months of 2002, an increase of $5.0 million or 8.3%. The increase in Solutions Group revenues for the third quarter and first nine months of 2003 is attributable to the acquisition of RGII.

Excluding the revenue of the business unit held for sale, Princeton Softech, Inc., in the nine months of 2002, Solutions Group revenues increased $7.9 million or 13.8% to $65.3 million.

IT Services revenues decreased to $32.2 million in the third quarter of 2003 from $49.1 million in the third quarter of 2002, a decrease of $16.9 million or 34.4%. For the third quarter of 2003, IT Services consultant average headcount decreased by 22.1%, accounting for approximately $10.9 million of the revenue decrease. The balance of the decrease in revenue (approximately $6 million) is attributable to a reduction in average bill rates. IT Services revenues decreased to $103.7 million in the first nine months of 2003 from $157.8 million in the first nine months of 2002, a decrease of $54.1 million or 34.3%, which is attributable to the softness in the IT Staffing business. The decrease in IT Services revenue for the quarter and the first nine months of 2003, is the result of continued decreases in the demand for temporary technology workers, the trend of companies to outsource technology jobs offshore, the impact of pricing decreases by customers and the lagging economy.

For the first nine months of 2003, IT Services consultant average headcount decreased by 23.8%, accounting for approximately $38 million of the revenue decrease. The balance of the decrease in

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revenue (approximately $16 million) is attributable to a reduction in average bill rates. The Company does not anticipate any growth during the remainder of 2003 in IT Services headcount levels.

Chimes revenue increased to $5.2 million in the third quarter of 2003 from $4.3 million in the third quarter of 2002, an increase of $900,000, or 20.9%. Chimes revenue, for the first nine months of 2003, increased to $14.5 million from $12.0 million, an increase of $2.5 million or 20.8% from the comparable period of 2002. This increase in Chimes revenue, for the first nine months of 2003, is primarily due to an increase of approximately $2.5 million in revenue from new customers in this segment.

Direct Costs.     Direct costs decreased to $45.1 million and $131.3 million in the third quarter and first nine months of 2003, respectively, from $52.9 million and $167.6 million in the comparable periods of 2002.  Consolidated gross margin, revenues less direct costs, increased to 30.1% and 28.4% in the third quarter and nine months ended September 30, 2003 from 28.1% and 27.2% in the same periods of 2002.  In the Company’s Solutions Group, gross profit totaled $8.0 million, or 29.6% as a result of the RGII acquisition.  Without RGII, gross profit declined approximately $2.4 million during the third quarter of 2003 and declined 25.0% from 33.1% for the nine months ended September 30, 2003 and 2002, respectively.  These declines were a result of lower utilization rates in the Healthcare Practice and higher direct costs in the Education division.  Gross margin in the Company’s IT Services segment decreased to 20.2% and 20.0% from 21.3% and 20.3% for the third quarter and first nine months ended September 30, 2003 and 2002, respectively.  The decrease is attributable to a reduction in staff utilization (billable hours/available hours) in the third quarter of 2003, primarily resulting from the Northeast blackout.  Gross margin in the Company’s Chimes segment increased to 93.7% and 92.7% from 90.9% and 87.6% for the third quarter and first nine months ended September 30, 2003 and 2002, respectively, due to the increase in revenue from new customers at a higher gross margin.

Excluding the asset held for sale, Princeton Softech, Inc., in the first nine months of 2002, direct costs decreased to $131.3 million in the first nine months of 2003 from $167.6 million in the same period of 2002. Gross margin in the first nine months of 2002 was 26.4%.

The Company’s consolidated gross margins improvement is primarily attributable to the change in the revenue mix, including RGII, among the Company’s business segments. Chimes and the Solutions Group are higher gross margin businesses than the Company’s IT Services segment. For the quarter ended September 30, 2003, Chimes and Solutions Group revenue totaled 50% of consolidated revenue, compared to 33.2% of consolidated revenue for the comparable period in 2002. For the first nine months of 2003, Chimes and Solutions Group revenue totaled 43.5% of consolidated revenue, compared to 31.4% of consolidated revenue for the comparable period in 2002.

Costs and Expenses.     Selling, general and administrative expenses increased to $22.5 million in the third quarter of 2003 from $22.3 million in the comparable period of 2002. As a percentage of revenue, the Company’s SG&A expenses increased to 34.9% in the third quarter of 2003 from 30.4% in the comparable period of 2002. The expenses in the third quarter of 2003 included $787,000 of restructuring charges primarily related to the closing of the Chimes UK facility and $800,000 of special charges related to the unilateral acquisition proposal and activities of Aquent LLC. Without these special items, SG&A expenses would have decreased to $20.9 million or 32.4% of revenue.

SG&A expense increased to $72.3 million or 39.4% of revenue in the first nine months of 2003 from $71.3 million or 31.0% of revenue for the comparable period of 2002. The expenses in 2003 included special charges of $8.8 million or 4.8% of revenue, consisting of $3.7 million for the separation package of the former CEO and $5.1 million pertaining to expenses related to the unilateral acquisition proposal and activities of Aquent LLC, restructuring charges of $3.0 million, or 1.6% of revenue, for terminated leases ($1.3 million), severance ($1.4 million) and general office closure expense ($288,000) relating primarily to the closing of facilities in Canada and the United Kingdom. In addition, the Company voluntarily terminated a sub-contract with ATEB, a privately held company, for financial reasons and recorded a write-off of approximately $3.1 million due to the uncertainty of the realization of the receivable. ATEB was the primary contractor to develop a new pharmacy system for Royal Ahold. The Company is continuing recovery efforts for this receivable. The expenses in 2002 included assets held for sale (Princeton Softech, Inc.) of $4.3 million. Without these special items in 2003 and 2002, SG&A expenses would have decreased to $57.4 million in the first nine months of 2003 from $67.0 million in the comparable periods of 2002. This decrease in SG&A expenses was primarily

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attributable to cost reductions in all segments, with approximately $2 million from rent savings and the balance primarily related to staff reduction and personnel costs.

Loss from Operations.     The Company’s loss from operations totaled $3.6 million in the third quarter of 2003, an increase to the loss of $2.0 million, from a loss of $1.6 million in the third quarter of 2002. Operating margins were a loss of 5.6% in the third quarter of 2003 as compared to a loss of 2.3% in the third quarter of 2002. This increase in the loss from operations in 2003 included a special charge of $800,000 or 1.2% of revenue, the entire amount related to the unilateral acquisition proposal and activities of Aquent LLC. In addition, the Company incurred restructuring charges of $787,000, or 1.2% of revenue, relating primarily to the closing of facilities in the United Kingdom and amortization of intangibles of $526,000, or 0.8% of revenue. The composition of the operating loss, excluding special items in 2003, included a loss of $1.2 million in IT Services, profit of $376,000 in the Solutions Group and a loss of $632,000 in Chimes. This compares to the operating loss of $1.6 million in the third quarter of 2002, consisting of a loss of $109,000 in IT Services, profit of $522,000 in the Solutions Group and a loss of $2.0 million in Chimes. Operating margins, excluding these special items, were a loss of 2.3% in the third quarter of 2003 as compared to a loss of 2.2% in the third quarter of 2002.

The Company’s loss from operations totaled $20.6 million in the first nine months of 2003, an increase of $11.8 million, from a loss of $8.8 million in the comparable period of 2002. The loss from operations in 2003 included a special charge of $8.8 million, or 4.8%, consisting of $3.7 million for the separation package of the former CEO and $5.1 million pertaining to expenses related to the unilateral acquisition proposal and activities of Aquent LLC, restructuring charges of $3.0 million, or 1.6% of revenue, relating primarily to the closing of facilities in Canada and the United Kingdom, amortization of intangibles of $526,000, or 0.3% of revenue and a special bad debt charge of $3.1 million, or 1.7% of revenue due to the write-off of a terminated contract with a customer for financial reasons. The loss from operations in 2002 included the loss from operations of the asset held for sale, Princeton Softech, Inc., of $1.9 million, or 1.1% of revenue. The composition of the 2003 operating loss, excluding the special items noted above included a loss of $3.1 million in IT Services, profit of $1.5 million in the Solutions Group and a loss of $3.7 million in Chimes. This compares to the operating loss of $6.8 million, excluding operations of Princeton Softech, in the first nine months of 2002, consisting of a loss of $1.4 million in IT Services, income of $1.7 million in the Solutions Group and a loss of $7.1 million in Chimes. Operating margins, excluding all special items, were a loss of 2.9% in the first nine months of 2003 as compared to a loss of 3.0% in the comparable period of 2002.

Other Income/(Expense).     Other income was $78,000 in the third quarter of 2003, compared to other income of $247,000 in the comparable period of 2002. This decrease of other income during the third quarter of 2003 was due to decreased interest income primarily resulting from lower interest rates on cash investments. Other income was $63,000 in the first nine months of 2003, compared to other income of $4.1 million in the comparable period of 2002. This difference was primarily due to the gain on the sale of Princeton Softech in 2002.

Provision for Income Taxes.     The effective tax rates for Federal, state and local income taxes were 19% and 27% for the third quarter and first nine months of 2003, respectively, compared with 34% for the comparable periods of 2002. The decrease in the effective tax rates was primarily attributable to valuation allowances recorded for state and foreign net operating loss carryovers.

Net Loss.     Net loss for the third quarter of 2003 was $2.8 million, or $0.09 loss per diluted share, compared to net loss of $918,000, or $0.03 loss per diluted share for the third quarter of 2002, an increased loss of $1.9 million. The effect of special charges, restructuring charges and amortization of intangibles amounted to $0.06 loss per share, net of taxes, in the third quarter of 2003. For the first nine months of 2003, the net loss was $15.0 million, or $0.49 loss per diluted share, compared to a net loss of $33.0 million, or $1.05 loss per diluted share for the first nine months of 2002. The net loss in the first nine months of 2002 includes a charge for the cumulative effect of change in accounting

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principle of $29.9 million, or $0.95 per share, net of taxes, and operations of assets held for sale and the gain on sale of assets, which amounted to $1.1 million, or $0.03 loss per share, net of taxes.

Liquidity and Capital Resources

At September 30, 2003, the Company had approximately $68.5 million in working capital, of which $50.7 million was cash and cash equivalents.

Net cash provided by operating activities in the first nine months of 2003 was $16.5 million, consisting primarily of the tax refund received and a reduction in client accounts receivable.

Net cash used in investing activities in the first nine months of 2003 was $24.7 million, consisting primarily of the purchase of RGII.

Net cash used in financing activities in the first nine months of 2003 was $2.6 million, consisting of the payment of the notes for the acquisition of RGII. In April of 2001, the Board of Directors approved the repurchase in the open market of up to 10% of its common shares outstanding, or approximately 3.2 million shares. As of the date of filing of this report, the Company had repurchased, in the open market, 3,114,900 shares of its stock at an average price of $3.47 per share for an aggregate purchase amount of $10.8 million. There were no stock repurchases during the third quarter and as of September 30, 2003, the remaining authorization for repurchase is approximately 93,000 shares.

At September 30, 2003, the Company had a current ratio position of 2.5 to 1. The Company believes that its cash and cash equivalents, available borrowings and internally generated funds will be sufficient to meet its working capital needs through the next year.

On July 31, 2001, amended February 14, 2003, the Company entered into a secured asset-based lending facility that replaced its two unsecured discretionary lines of credit. This new line of credit is a three-year, $40 million facility with availability based primarily on eligible customer receivables. The interest rate for the first ninety days from closing was Prime plus 0.5%, thereafter the rate was LIBOR plus 2.75% based on the unpaid principal. The borrowing base less outstanding loans must equal or exceed $17.5 million. At the time of closing there was a $170,000 commitment fee paid to the agent.

As of September 30, 2003, the Company had no outstanding loan balance against the facility. Based on the Company’s eligible customer receivables and cash balances, $16.3 million was available for borrowing as of September 30, 2003. The fee for the unused portion of the line of credit is 0.375% per annum charged to the Company monthly. This charge was approximately $84,000 and $104,000 for the nine month periods ended September 30, 2003 and 2002, respectively. This line of credit includes covenants relating to the maintenance of cash balances and providing for limitations on incurring obligations and spending limits on capital expenditures.

As a result of the Company’s acquisition of RGII, the seller of RGII may be entitled to contingent payments based on RGII’s performance against profitability objectives over the next three years.  The contingent payments are evidenced by a contingent note with a face value of $10 million that is payable over three years, only if certain financial performance objectives are met.  These financial performance objectives are based on earnings before interest and taxes, (“EBIT”) targets totaling $19.8 million over a three-year period.  There are no minimum or maximum payment obligations under the terms of the contingent note, whereby the contingent payment will be reduced on a dollar for dollar basis for financial performance below EBIT targets and increased by 29 cents ($0.29) for each dollar exceeding EBIT targets.  The payments, if the applicable EBIT targets are met, will be due as follows: 2004 payment of $1.7 million, 2005 payment of $3.3, 2006 payment of $5 million.  These payments will be reduced or increased based on actual EBIT performance.

Contractual Obligations and Commercial Commitments

The Company does not utilize off balance sheet financing other than operating lease arrangements for office premises and related equipment. Leases are short term in nature and non-capital. The following table summarizes all commitments under contractual obligations as of September 30, 2003:

	Obligation Due
	Total Amount		1 Year		2-3 Years		4-5 Years		Over 5 Years
	(in 000’s)
Operating leases	$	11,282	$	3,774	$	5,889	$	1,543	$	76
Other long-term	6,488		35		—		—		6,453
Total Cash Obligations	$	17,770	$	3,809	$	5,889	$	1,543	$	6,529

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Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, “Business Combinations” and in July 2001, SFAS 142, “Goodwill and Other Intangible Assets.” The new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance with this new regulation has discontinued the amortization of goodwill. For the effect of this statement on the Company see Note 3.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This Issue provides guidance on when and how to separate elements of an arrangement that may involve the delivery or performance of multiple products, services and rights to use assets into separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods ending after December 15, 2003. The transition provision allows either prospective application or a cumulative effect adjustment upon adoption. The effect of the adoption of this statement was immaterial to the Company.

In December 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 148, “Accounting for Stock-Based Compensation - Translation and Disclosure.” This statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amended the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The Company adopted the disclosure provisions as of December 31, 2002.

The exercise price per share on all options granted may not be less than the fair value at the date of the option grant. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as modified by FIN 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for stock-based employee compensation, whereby no compensation cost had been recognized for the plans. The Company expects to continue following the guidance under APB 25 for stock based compensation to employees and has therefore included the disclosure requirements of FASB 148 in the accompanying financial statements.

Effective on January 1, 2003 the Company adopted Financial Accounting Standards Board No. 146, “Accounting for Exit or Disposal Activities,” (“SFAS 146”), which supersedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The new standards require that a liability for a cost associated with an exit or disposal activity, including costs related to terminating a contract that is not a capital lease and the termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not ongoing or an individual deferred-compensation contract, be recognized when the liability is incurred. Previously, under Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan, which may not necessarily meet the definition of a liability. SFAS 146 is effective for exit or disposal activities of the Company that are initiated after December 31, 2002. The Company adopted SFAS 146 as of January 1, 2003 (See Note 6).

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” It establishes classification and measurement standards for three types of freestanding financial instruments that have characteristics of both liabilities and

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equity. Instruments within the scope of SFAS 150 must be classified as liabilities within the Company’s financial statements. The provisions of SFAS No. 150 are effective for (1) instruments entered into or modified after May 31, 2003 and (2) pre-existing instruments as of July 1, 2003. SFAS 150 is not expected to have a material effect on the Company’s financial statements.

In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses consolidation by business enterprises of variable interest entities (VIEs). The accounting provisions and disclosure requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003, and are effective for reporting periods ending after December 15, 2003, for VIEs created prior to February 1, 2003. Although the Company is still evaluating the impact of FIN 46, it is not expected to have a material effect on the Company’s financial statements.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

The Company maintains controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

On October 7, 2004, our audit committee was advised by management that, based on an internal review of accounting processes and procedures, management had discovered an accounting error pertaining to the incorrect adjustment of consulting costs relating to intercompany transactions between the Company and its Canadian subsidiary.  This error caused an understatement of consolidated consultant costs (i.e. direct costs) in the Company’s consolidated income statement and an under accrual of consolidated accrued payroll on the balance sheet.

The aggregate amount for all periods affected was an understatement of consultant costs totaling $5,555,000, with an after-tax impact of $3,462,000 or $(0.12) per share.

As part of management’s investigation of this accounting error, an extensive review of  intercompany transactions was completed.  As a result, other adjustments, not affecting operating results, were recorded.  These adjustments to the balance sheet corrected an overstatement of accrued expenses and an understatement of shareholders’ equity (specifically the overstatement of accumulated comprehensive loss).

As a result of the discovery of this error, on October 26, 2004, management and the Audit Committee were informed by the Company’s independent accountants of certain matters involving internal controls that the Company’s auditors consider material weaknesses.  The first material weakness principally focused on the Company’s quarterly consolidation process, including intercompany transactions relating to the Company’s Canadian subsidiary, which were incorrectly recorded over the five fiscal quarters ending June 30, 2004.  This resulted in an understatement of consolidated consultant costs (direct cost) and an under accrual of consolidated accrued payroll in each period and for the year ended December 31, 2003.  The second material weakness principally focused on the fact that certain accounts were not properly reconciled, resulting in adjustments to accounts including accrued expenses and shareholders’ equity (not affecting operating results) to be recorded on the consolidated balance sheet.

During management’s evaluation of internal controls related to the previously noted accounting error, certain deficiencies were identified, including a complicated design of intercompany accounts which increased the potential for error, staff turnover in the accounting department, the incorrect recording of intercompany transactions by an accounting clerk and the failure to detect these incorrect transactions during management’s review and approval process.

As a result of these deficiencies, the following actions were taken, or will be taken, to prevent future reoccurrence:

•Management will implement an improved intercompany transaction process, including foreign currency translation and financial reporting/consolidation procedures, which will be documented, with all key controls identified.

•All intercompany elimination entries will require two levels of approval (Accounting Manager and Controller), as opposed to the previous one level of approval.

•Monthly, the Corporate Controller will review and approve all intercompany elimination entries to ensure amounts are properly recorded.

•Canadian intercompany accounts, which currently record all receivable and payable activity in the same balance sheet account, will be divided into two intercompany accounts – one to record only intercompany invoicing transactions, one to record other (funding) transactions.  This will allow better tracking of intercompany transactions and more easily highlight incorrect entries, if any.

•A more detailed review of gross margins by line of business will be completed by the Controller (and reviewed by the CFO) on a quarterly basis.

•Additional training (internal and external) will be provided to all General Accounting personnel with an emphasis on Consolidation accounting.

•Internal Audit will conduct a review of intercompany transactions and the consolidation process during the fourth quarter of 2004 to ensure that newly designed controls are functioning properly.

Management and the Audit Committee intend to closely monitor the implementation of the remediation actions noted above and are prepared to take additional measures where necessary to strengthen internal controls and procedures to meet the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act and the rules adopted thereunder.  Other than the foregoing initiatives, since the date of management’s evaluation, there have been no material changes in our disclosure controls and procedures, including our internal controls over financial reporting, which have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures, including our internal controls over financial reporting.

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PART II Other Information

Item 1. Legal Proceedings

On April 29, 2003, the Company filed an action in the United States District Court for the District of New Jersey (the “New Jersey action”) against Aquent LLC, seeking (i) to enjoin Aquent from disseminating false and misleading proxy materials and press releases in support of its two nominees for director positions in connection with the Company’s May 14, 2003 Annual Meeting; (ii) to invalidate any proxies secured by Aquent through the use of unlawful proxy solicitation materials; and (iii) to require Aquent to disseminate corrective disclosure that not only amended the false and misleading proxy materials but also advised CHC shareholders how Aquent’s solicitations had violated the securities laws. The court held that Aquent’s proxy materials were false and misleading but invalidated no proxies and permitted Aquent to limit corrective disclosure to new text enclosed with the old proxy materials, which contained the false and misleading statements. On May 30, 2003, the Company filed a Notice of Appeal to the United States Court of Appeals for the Third Circuit, contending, among other things, that the corrective disclosure ordered by the United States District Court was inadequate and not in compliance with federal securities laws. On October 15, 2003, the Company filed its appellate papers.

On May 27, 2003, the Company brought an action in the Supreme Court of the State of New York, New York County (the “New York action”), seeking an order invalidating votes for directors Karl Meyer and Robert Trevisani cast at the Annual Meeting by stockholders of record who sold their shares between the record date and the date of the Annual Meeting. The court in the New York action denied temporary restraints but on June 11, 2003, deferred ruling on the Company’s application for preliminary injunctive relief pending discovery and trial. The matter has been scheduled for a hearing on December 15, 2003.

On or about June 2, 2003, Aquent filed a counterclaim in the New Jersey action against the Company and William J. Murphy, the Company’s President and Chief Executive Officer, alleging breach of fiduciary duty and seeking to enjoin the Company from delaying the continuation of the Annual Meeting—at which the certified election results would be accepted—or otherwise interfering with the seating of the Aquent nominees. Aquent also sought attorneys’ fees and costs. On or about June 20, 2003, Aquent filed an amended counterclaim in the New Jersey action, alleging breach of the duty of care and the duty of loyalty, waste of corporate assets, and violation of the proxy rules under Section 14(a) of the Securities Exchange Act of 1934. The amended counterclaim sought, essentially, to enjoin the Company from challenging the election of the Aquent nominees, and it sought attorneys’ fees and costs. The Company has filed an answer denying Aquent’s allegations.

On or about July 15, 2003, Aquent filed an Order to Show Cause in the New Jersey action, challenging an amendment to the Company’s by-laws adopted by the Board of Directors on June 30, 2003. The by-law amendment specifies (a) that any request for a special meeting of shareholders must set a date for the meeting not fewer than seventy-five (75) nor more than ninety (90) days after the date on which the request is received; (b) that any such request shall be ineffective, and any special meeting cancelled, if the shareholder(s) who sign the request is/are not the holder(s) of the beneficial interest of 10% or more of the Company’s issued and outstanding shares on each of the following dates: the date such request is mailed; the record date for the meeting (to be fixed by the Board within five business days after the receipt of the request); and the date of the meeting; and (c) that any such request for a special meeting shall be or become ineffective, and any meeting called or noticed pursuant thereto shall be cancelled, if such request of any solicitation therefore is not made in compliance with applicable law. The court took testimony in the New Jersey action on August 7, 2003 and directed the parties to submit additional briefs on the issues. The matter has been fully briefed and submitted and is pending before the court.

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Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

10.1—Employment agreement between Computer Horizons Corp. and Kristin Evins.*

31.1—CEO Certification required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.

31.2—CFO Certification required by Rule 13a-14(a)/15d-14(a) 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.

* Previously filed.

b) Reports on Form 8-K

A report on Form 8-K/A was filed on September 19, 2003 to provide the financial statements and pro forma financial information of RGII.

A report on Form 8-K was filed on July 30, 2003, reporting the issuance of a press release reporting the financial results of Computer Horizons for its second fiscal quarter.

A report on Form 8-K was filed July 23, 2003 reporting that on July 8, 2003, pursuant to a Stock Purchase Agreement by and among Computer Horizons Corp., RGII Technologies, Inc. and Kathryn B. Freeland, Computer Horizons Corp. purchased all of the issued and outstanding capital stock of RGII.

A report on Form 8-K was filed on July 9, 2003, reporting the issuance of a press release announcing the completion of the acquisition of RGII Technologies, Inc.

A report on Form 8-K was filed on July 1, 2003, reporting the issuance of a press release announcing that its Board of Directors unanimously appointed Earl L. Mason as Chairman of the Board at a meeting held on June 27, 2003.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COMPUTER HORIZONS CORP.
		(Registrant)
DATE:	November 9, 2004	/s/ William J. Murphy
		William J. Murphy, President and CEO
		(Principal Executive Officer)
DATE:	November 9, 2004	/s/ Michael J. Shea
		Michael J. Shea, Vice President and CFO
		(Principal Financial Officer)
DATE:	November 9, 2004	/s/ John E. Ferdinandi
		John E. Ferdinandi, Corporate Controller
		(Principal Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, WILLIAM J. MURPHY, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of COMPUTER HORIZONS CORP.;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)    designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 9, 2004
/s/ William J. Murphy
WILLIAM J. MURPHY
Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, MICHAEL J. SHEA, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of COMPUTER HORIZONS CORP.;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a)    designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 9, 2004
/s/ Michael J. Shea
MICHAEL J. SHEA
Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of Computer Horizons Corp. (the “ Company “) for the quarterly period ended September 30, 2003 (the “ Periodic Report “), I, William J. Murphy, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 9, 2004	/s/ William J. Murphy
		William J. Murphy
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of Computer Horizons Corp. (the “ Company “) for the quarterly period ended September 30, 2003 (the “ Periodic Report “), I, Michael J. Shea, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	November 9, 2004	/s/ Michael J. Shea
		Michael J. Shea
		Chief Financial Officer