10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

(Mark One)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to

Commission file number 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 No.)
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
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
None	None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock (Par value $.10 per share)

(Title of class)

Series A Preferred Stock Purchase Rights

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2).    Yes   ý  No  o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was approximately $ 100,000,000.

The number of shares outstanding of each of the registrant’s classes of common stock as of March 14, 2005 were 31,012,113 shares.

DOCUMENTS INCORPORATED BY REFERENCE

There is incorporated herein by reference the registrant’s (i) portions of the Annual Report to Shareholders for the year ended December 3l, 2004, in Part II of this Report and (ii) portions of the Definitive Proxy Statement for the 2005 Annual Meeting of Shareholders, expected to be filed with the Securities and Exchange Commission in Parts II and III.

COMPUTER HORIZONS CORP.

December 31, 2004

Form 10-K

Table of Contents

PART I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.	Controls and Procedures
Item 9B.	Other Information
PART III
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services
PART IV
Item 15.	Exhibits Financial Statement Schedules and Reports
SIGNATURES

Disclosure Regarding Forward Looking Statements

Statements included in this Report 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 clients for the Company’s services, the availability of qualified professional staff, and price and wage inflation.

PART I

Item 1.  Business

General

Computer Horizons Corp., or CHC, or the Company, is a strategic solutions and professional services company with more than thirty-seven years of experience, specifically in information technology.  CHC was incorporated in 1969 under the laws of the State of New York.  The Company provides its services to multi-national companies through its “bestshore” delivery centers located globally, and enabling its Global 2000 (which, Forbes magazine defines as the biggest and most important companies as measured by sales, profits, assets and market value), client base to maximize technology investments.  With the acquisition of RGII Technologies, Inc (“RGII”)., in July 2003, and acquisition of Automated Information Management, Inc. (“AIM”) in April 2004, CHC expanded its government practice to include the Federal government sector, in addition to various other vertical markets it serves, such as healthcare, insurance and financial services. The Company’s wholly-owned subsidiary, Chimes, Inc. uses its proprietary technology to enable its Global 2000 client base to align and integrate business planning with human resource management across an enterprise’s business functions.

The Company markets solutions to existing and potential clients with the objective of becoming a preferred provider of comprehensive information technology services and solutions for such clients.  The Company believes that the range of services and solutions that it offers, combined with its proprietary Chimes technology, provides it with competitive advantages in the information technology marketplace.

The Company’s clients are generally very large, Global 2000 companies in many industries and with wide geographic dispersion.  For the years ended December 31, 2004, 2003 and 2002, the Company’s ten largest clients accounted for approximately 24%, 38% and 38% of its revenues, respectively.  In 2004, the Company provided information technology services to 405 clients. During 2004, the Company’s largest client accounted for approximately 6% of the Company’s consolidated revenues .  The Company offers its clients a broad range of business and technical services as an outsourcer and systems integrator capable of providing complex total solutions.  This total solutions approach comprises proprietary software and tools, proven processes and methodologies, tested project management practices and resource management and procurement programs.

3

The Company offers global technology services and solutions, which are divided into three divisions; (1) Solutions, (2) IT Services and (3) Chimes.  The following describes each of these divisions :

(1) Solutions:  CHC Solutions Group (including RGII Technologies Inc., AIM, CHC Healthcare Solutions and CHC’s training/education practice) is an e-Business Solutions provider, enabling enterprises and Federal, State and Local government agencies to build business-critical and highly scalable solutions.  The Solutions Group, comprised of approximately 1,000 IT professionals, offers a comprehensive list of integrated solutions including e-business strategy and assessment; HIPAA compliance; on shore, near-shore and offshore outsourcing;  enterprise network management; web architecture design; hosting and integration; application development; client relationship management (CRM); project management; systems integration; networking services and education/training.   For projects in the Solutions’ division, CHC is responsible for the project management and supervision.  Generally, the gross margins in this division are higher than that of the IT Services division.  Revenues in the Solutions Group are recognized as services are performed under either time-and-material or a fixed fee basis.  However, adjustments are made if necessary to reflect progress against milestones or deliverables.  The Solutions group contains the following practices :

(1a) RGII Technologies, Inc. (RGII): In July 2003, the Company acquired RGII, a solutions provider of high-end technology and program management to Federal, State and Local government agencies.  RGII offers services and solutions in such areas as: enterprise management, network infrastructure, information assurance and security, web development and integration, call management, engineering technology and technical services.  On April 1, 2004, RGII Technologies, Inc. acquired Automated Information Management, Inc. (“AIM”). The Company purchased AIM to further its commitment to driving the growth potential that exists in the Federal government market and to expand RGII’s footprint, providing an entrance into certain government agencies, as well as strong relationships with large, prime contractors.

(1b) Outsourcing:  Spurred by global competition and rapid technological change, large companies, in particular, are downsizing and outsourcing for reasons such as cost reduction, capital asset improvement, improved technology and better strategic focus.  In response to this trend, the Company has created a group of outsourcing centers onshore, near-shore in Montreal, Canada and offshore in Chennai, India with 24 hour / 7 day a week support, which are fully equipped with the latest technology and communications, as well as a complete staff that includes experienced project managers, technicians and operators.  These professionals facilitate essential data functions including:  applications development, systems maintenance, data network management, voice network administration and help desk operations.

(1c) CHC Healthcare Solutions, LLC:CHC Healthcare Solutions was formed in 2002, as a consortium of Computer Horizons Corp. and a healthcare consulting firm, ZA Consulting, LLC. CHC Healthcare Solutions, which is reported under CHC Solutions, offers operational, compliance and technology services and solutions to the healthcare industry.  On December 31, 2004, the Company acquired the 20% minority interest owned by ZAC, in exchange for the forgiveness of a ZAC note obligation to the Company approximating $630,000.

(1d) Education/Training:  The Company’s education division offers custom-designed and/or existing training programs to enhance the competencies of client staff in specific technologies, languages, methodologies and applications.  The prevailing focus of the Company is to assist clients through instructor-led, on-site training and consulting in the transitioning IT organization of Global 2000 corporations nationwide.   To support these changing technologies, the Company has developed extensive curriculum offerings in Web Technologies, Relational Databases, Programming Languages, Reporting Tools, Process Improvement, UNIX, Client/Server and Mainframe Technologies.

(1e) Xpress ^TM : In September 2003, the Company acquired the Xpress ^TM   software suite which, along with related implementation services, enables manufacturers to become UCCnet compliant whereby product identification data is synchronized and standardized with retailers.

4

(1f) The Company has sold several subsidiaries within the past five years which were formerly practices within their Solutions Group. These practices include :

•Princeton Softech (Including the SELECT Software Tools division), a software products company that was sold by the Company in March 2002.

•EbNetworks, a storage networking company, sold in September 2001.

•CHC International Limited (“Spargo”), the Company’s European Solutions company, sold in January 2001.

(2) IT Services:  CHC’s IT Services Group provides highly skilled software professionals to augment the internal information management staffs of major corporations.  The Company offers its clients a just-in-time solution to supply their staffing needs from the Company’s approximately 1,600 IT Services division professionals.  Clients are serviced through the Company’s branch network of offices in the United States and Canada, and virtually through Chimes.  The client is responsible for managing and supervising our software professionals. As a result, gross margins in this business area are significantly less than Solutions services.  Revenue for the IT Services Group is recognized as services are rendered on a time-and-material basis.  Hourly and daily rates are determined in advance and agreed to with the client.  Time worked is documented in various forms using the applicable timekeeping process (i.e. the client’s or the Company’s timekeeping systems).

(3) Chimes: Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies.   Through scalable, web-based software, Chimes administers the hiring cycle to identify, leverage and manage the enterprise-wide spend on human capital.  Chimes’ portfolio of services addresses contingent hiring (CVM), full-time hiring (CAM), program management (RPM) and consolidated time sheet and expense processing (CTE).  Research and Development costs for the years ended December 31, 2004, 2003 and 2002 were approximately $3.3 million, $3.8 million and $3.7 million, respectively.

During the fourth quarter of 2004, the Company completed a restructuring initiative whereby the Company’s business model has been realigned, effective January 1, 2005, around its three distinct segments of clients : Federal Government, Commercial and Vendor Management services (Chimes), and will report accordingly to conform to the new presentation of CHC business segments for the first quarter of 2005.   This realigned business model is designed to deliver improved operational performance for the Company and reduce annual operating costs.

Financial Information about Industry Segments

The information required by this item is incorporated herein by reference to Note 9 of the Notes to Consolidated Financial Statements included under Item 8 of this Report.

Employees

As of December 3l, 2004, the Company had a staff of 3,137, including approximately 2,600 IT professionals.  None of the Company’s employees are subject to a collective bargaining arrangement.  The Company devotes significant resources to recruitment of qualified professionals and provides continuing in-house training and education, and a career path management development program within the Company.

Intellectual Property

Certain aspects of our products and technology are proprietary. We rely on U.S. intellectual property laws, including patent, copyright, trademark, and trade secret laws to protect our proprietary rights. We also maintain contractual restrictions in our agreements with customers, employees, and others to protect our intellectual property rights. In addition, we license software and technology from third parties, and incorporate them into our own software products as well as using them as tools in developing our products or providing our services.  The source code for our products is protected both as a trade secret and as a copyrighted work.

5

Seasonality

The Company experiences a moderate amount of seasonality, primarily in the fourth quarter of the year, due to the large number of holidays and an increased amount of vacation time taken by our employees and clients.  As a result, revenues and profitability may be reduced in the fourth quarter.

Backlog

The Company’s backlog of services to be completed pertains primarily to the Solutions (Federal) Group.  Funded and unfunded backlog approximated $20.2 million and $115.5 million, respectively, as of December 31, 2004.  Funded and unfunded backlog was approximately $20.1 million and $112.3 million, respectively, as of December 31, 2003.

Competition

The Company competes in the commercial information technology services market which is highly competitive. Although there has been a significant amount of consolidation in this sector, the competitive landscape remains highly fragmented and characterized by small local and regional firms and a few large, multi-national competitors.  The market includes participants in a variety of market segments, including systems consulting and integration firms, professional services companies, application software firms, temporary employment agencies, the professional service groups of computer equipment companies, facilities management and management information systems or MIS outsourcing companies, certain accounting firms, and general management consulting firms.  The Company’s competitors include companies such as Analysts International Corp., CIBER, Inc., Computer Task Group Inc., iGATE Corp. and Covansys Corp.  Many participants in the information technology consulting and software solutions market have significantly greater financial, technical and marketing resources and generate greater revenues than the Company.  Management believes that the principal competitive factors in the commercial information technology services industry include responsiveness to client needs, speed of application software development, quality of service, price, project management capability and technical expertise.  Pricing has its greatest importance as a competitive factor in the area of professional service staffing.  Management believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate skilled technical and management personnel, the ownership by competitors of software used by potential clients, the price at which others offer comparable services and the extent of its competitors’ responsiveness to client needs.

Available Information

The Company’s internet website address is www.computerhorizons.com.  The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

6

Item 2.   Properties

The Company’s Corporate and Financial Headquarters, as well as its Eastern Regional Office, comprising approximately 63,000 square feet, are located at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey.  The Mountain Lakes lease is for a term expiring December 31, 2005, at a current annual rental of approximately $1,800,000.  Upon lease expiration, the Company intends to enter a new lease for its Headquarters (for approximately 50,000 square feet) located in the general vicinity of its current leased property.  As of December 3l, 2004, the Company also maintained operating facilities, which are shared between the IT Services and Solutions Group business segments, in California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana,  Maryland, Michigan, Minnesota, New Jersey, New York, Ohio, Oklahoma, Tennessee, Texas,  Virginia and Washington as well as international operations located in India and Canada, with an aggregate of approximately 309,000 square feet. Chimes maintains facilities in California, Illinois, Michigan, Minnesota and New Jersey.  The leases for all of these facilities are at a current annual aggregate rental of approximately $4,066,000.  These leases expire at various times with no lease commitment longer than April 30, 2008.  The Company believes that the facilities are adequate for the current level of operations.

Item 3.  Legal Proceedings

The Company is involved in various and routine litigation matters, which arise through the normal course of business. Although the outcome of such matters is unpredictable with assurance, management does not expect that the ultimate outcome of any of these matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.  However, depending on the amount and timing of any unfavorable outcome of any such matters, such outcome could possibly materially and adversely affect our future results of operations or cash flows in any particular period.

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

No matters were submitted to a vote of our shareholders during the fourth quarter of 2004.

7

Executive Officers of the Company

The following table sets forth certain information with respect to the executive officers of the Company.  All the positions listed are or were held by such officers with the Company as of the filing date of this Annual Report.

NAME	AGE	TITLE	PERIOD POSITION HELD
William J. Murphy	60	President and CEO	2003 - Present
		Director	1999 - Present
		Executive Vice President
		and Chief Financial Officer	1997-2003
Michael J. Shea	45	Chief Financial Officer	2003 - Present
		Vice President	1996 - Present
		Controller	1995 - 2003
John E. Ferdinandi	34	Corporate Controller	2004 - Present

8

PART II

Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is quoted on the Nasdaq National Market, under the symbol CHRZ.  The range of high and low closing stock prices, as reported by the Nasdaq National Market, for each of the quarters for the years ended December 31, 2004 and 2003 is as follows:

	2004				2003
	High		Low		High		Low
Quarter
First	$	4.50	$	3.85	$	3.93	$	2.60
Second	4.23		3.38		4.72		2.84
Third	4.62		3.66		4.56		3.57
Fourth	4.41		3.45		4.21		3.43

The Company plans to reinvest its earnings in future growth opportunities and, therefore, does not anticipate paying cash dividends in the near future and has not paid any to date.  During 2004, the Company did not issue or repurchase shares of its common stock.  As of March 14, 2005, there were approximately 852 registered holders of common stock, according to the Company’s transfer agent.

9

Item 6.  Selected Financial Data

Consolidated Statement of Operations Data:

	December 31,
	2004			2003			2002			2001			2000
	(dollars amounts in thousands, except per share data)
Revenues	$	262,527		$	245,210		$	297,115		$	400,784		$	445,479
Costs and expenses:
Direct costs	180,606			173,198			216,181			281,576			312,815
Selling, general and administrative	85,141			80,634			91,343			128,832			170,143
Amortization of intangibles	1,695			1,084			—			2,695			7,434
Restructuring charges	2,859			3,278			2,515			1,048			1,166
Write-down of assets held for sale	—			—			—			5,473			40,362
Special charges / (credits)	(939		)	10,113			—			—			—
Goodwill impairment	20,306			—			—			—			—
Write-off of assets	910			—			—			—			—
Loss from operations	(28,051		)	(23,097		)	(12,924		)	(18,840		)	(86,441		)
Other income / (expense):
Gain/(loss) on sale of assets	—			(424		)	5,890			(3,197		)	—
Net (loss) / gain on investments	—			(432		)	(61		)	90			—
Interest income	337			529			928			2,293			620
Interest expense	(103		)	(51		)	(174		)	(1,944		)	(1,825		)
Loss before income taxes and cumulative effect of a change in accounting principle and minority interest	(27,817		)	(23,475		)	(6,341		)	(21,598		)	(87,646		)
Income taxes / (benefit)	(2,690		)	(6,409		)	1,869			(7,148		)	(29,819		)
Loss before cumulative effect of change in accounting principle and minority interest	(25,127		)	(17,066		)	(8,210		)	(14,450		)	(57,827		)
Minority interest	(45		)	(89		)	35			—			—
Cumulative effect of change in accounting principle	—			—			(29,861		)	—			—
Net loss	$	(25,172	)	$	(17,155	)	$	(38,036	)	$	(14,450	)	$	(57,827	)
Loss per share:
Basic and diluted	$	(0.82	)	$	(0.56	)	$	(1.22	)	$	(0.45	)	$	(1.83	)
Weighted average number of shares outstanding:
Basic and diluted	30,870,000			30,455,000			31,243,000			31,911,000			31,656,000

10

	December 31,
	2004			2003			2002			2001			2000
Analysis (%)
Revenues	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%
Gross margin	31.2			29.4			27.2			29.7			29.8
Selling, general and administrative	32.4			32.9			30.8			32.1			38.2
Amortization of intangibles	0.6			0.4			—			0.7			1.7
Restructuring charges	1.1			1.3			0.8			0.2			0.3
Write-down of assets held for sale	—			—			—			1.4			9.0
Special charges / (credits)	(0.3		)	4.1			—			—			—
Goodwill impairment	7.7			—			—			—			—
Write-off of assets	0.3			—			—			—			—
Loss from operations	(10.7		)	(9.4		)	(4.4		)	(4.7		)	(19.4		)
Gain / (loss) on sale of assets	—			(0.2		)	2.0			(0.8		)	—
Net (loss) / gain on investments	—			(0.2		)	—			—			—
Interest income / (expense) – net	0.1			0.2			0.3			0.1			(0.3		)
Loss before income taxes and cumulative effect of a change in accounting principle and minority interest	(10.6		)	(9.6		)	(2.1		)	(5.4		)	(19.7		)
Income taxes / (benefit)	(1.0		)	(2.6		)	0.6			(1.8		)	(6.7		)
Loss before cumulative effect of change in accounting principle	(9.6		)	(7.0		)	(2.7		)	(3.6		)	(13.0		)
Cumulative effect of change in accounting principle	—			—			(10.1		)	—			—
Net loss	(9.6		)	(7.0		)	(12.8		)	(3.6		)	(13.0		)
Revenue growth / (decline) YOY	7.1			(17.5		)	(25.9		)	(10.0		)	(16.7		)
Net income growth / (decline)YOY	(46.7		)	54.9			(163.2		)	75.0			(495.4		)
Return on equity, average (1)	(19.7		)	(12.4		)	(22.7		)	(7.3		)	(24.6		)
Effective tax rate	9.7			27.3			29.5			33.1			34.0
Consolidated Balance Sheet Data:
At year-end
Total assets	$	159,084		$	180,326		$	193,731		$	237,721		$	269,396
Working capital	68,882			64,824			105,579			115,747			134,472
Long-term debt	—			—			—			—			—
Shareholders’ equity	125,781			130,337			145,855			189,855			207,924
Other Data:
Stock price	$	3.81		$	3.92		$	3.27		$	3.21		$	2.44
P/E multiple	N/A			N/A			N/A			N/A			N/A
Employees	3,137			2,665			2,800			3,313			4,186
Clients (during year)	405			967			905			879			800
Offices (worldwide)	31			31			36			52			43

(1)Return on equity, average is calculated by dividing Net Income / (loss) for the period by the average shareholders’ equity for the same period.

11

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

The following detailed discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the December 31, 2004 financial statements and related notes included in separate sections of this Form 10-K.

Overview

Computer Horizons Corp., (“CHC”, “the Company”), is a strategic solutions and professional services company with more than thirty-seven years of experience, specifically in information technology.  The Company’s clients are primarily Global 2000 companies, serviced by the Company’s 30+ offices in the United States, Canada and India.

The Company had revenues for the full year 2004 of $262.5 million, compared to $245.2 million in the comparable period of 2003.  The revenue increase of 7.1%  for the full year 2004 was primarily attributable to growth in our Solutions (Federal) business due to the April 2004 acquisition by RGII of AIM.  Also contributing to the 2004 revenue increase was growth achieved by the Company’s Chimes subsidiary.  Revenue growth during the year of 2004 was partially offset by revenue declines in our commercial (non-Federal) Solutions business and declines in our IT Services (staff augmentation) due to a decrease in demand for temporary technology workers and the trend of companies to outsource technology jobs offshore.

The Company’s net loss for the year 2004 totaled $25.2 million, or $(0.82) per share, compared with a net loss of $17.2 million, or $(0.56) per share, in the comparable period of 2003.  The net loss for the current year includes amortization of intangibles and special charges/credits which approximate :

•$20.3 million (net of tax), or $(0.65) per share non-cash charge related to goodwill impairment;

•$1.8 million (net of tax), or $(0.06) per share, pertaining to restructuring and severance costs;

•$583,000 (net of tax), or $(0.02) per share, related to a write-off of assets;

•$378,000 (net of tax), or $(0.01) per share, pertaining to professional fees for the restatement of financials associated with a previously announced accounting error;

•$1.1 million (net of tax), or $(0.03) per share, related to the amortization of intangibles, and

•$603,000 (net of tax) credit or $0.02 per share, related to an insurance refund.

Management continues to focus on maintaining a strong balance sheet, with approximately $33.6 million in cash and cash equivalents at December 31, 2004, along with $68.9 million in working capital and no debt outstanding.

On April 1, 2004, the Company’s subsidiary RGII acquired AIM, a Federal government IT Services company, for approximately $15.8 million in cash.  The acquisition of AIM is directly linked to the Company’s strategy of expanding its presence in the Federal government IT market and pursuing bolt-on expansions to RGII.

During the fourth quarter of 2004, the Company completed a restructuring initiative whereby the Company’s business model has been realigned, effective January 1, 2005, around its three distinct segments of clients : Federal Government, Commercial and Vendor Management services (Chimes), and will report accordingly to conform to the new presentation of CHC business segments for the first quarter of 2005.

12

As a result of the realigned business model, the Company has reduced its annual costs by approximately $5 million, which will be predominately reflected in CHC’s Commercial division (reported in Solutions segment in 2004). Although this realigned business model is designed to deliver improved operational performance for the Company, the level of business activity in the IT market remains uncertain.  This uncertainty reduced revenues in the Company’s IT Services and Commercial (non-Federal) Solutions businesses in 2004 as compared to the prior year.  The IT Services business accounted for approximately 50% of the Company’s total revenue in 2004, compared to 54% in 2003.  Although IT Services revenue has shown signs of stabilization during 2004, the Company cannot predict if this growth is sustainable and when the overall level of business activity in the IT market will improve.

Revenue Generating Activities

The Company’s consolidated revenues are primarily derived from professional services rendered in the information technology sector.

The Company operates its business in three basic segments, IT Services, the Solutions Group and Chimes, Inc.  The distinctions between the IT Services and Solutions Group segments primarily relate to the management and supervision of services performed and related gross margins.  Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies.

The IT Services business consists of providing technology consultants to large organizations on a temporary hire basis (i.e. staff augmentation). The consultant work is supervised and managed by the client. For the most recent year 2004, this segment represented approximately 50% of total revenues. The IT Services business tends to be a lower risk, lower gross margin business with very competitive pricing.

The Solutions Group, tends to be a higher margin, higher risk business, due to the fact that the Company is responsible for project deliverables and other conditions contained in statements of work and/or contracts with clients. Virtually all projects performed by the Solutions Group are IT related and consist of practices such as application development, outsourcing arrangements, government services, Health Insurance Portability and Accountability Act, (“HIPAA”), services, technology training and managed services.   For the year 2004, the Solutions Group (excluding Chimes) accounted for approximately 41% of consolidated revenues.

The Company’s client relationships are memorialized in a master agreement, which addresses the terms and conditions which define the engagement.  Depending on the service to be performed for the client, either a task order (in the case of a Staffing engagement) or a Statement of Work (“SOW”) (in the case of a Solutions engagement) is generated. The SOW is signed by both the Company and the client.  In general, no Solutions work is done unless there is a SOW because the SOW provides the technical details of the work to be done.  The SOW, although falling under the corresponding master agreement, is a stand-alone binding contractual document, typically outlining the project objectives, describing the personnel who will work on the project, describing phases of the project, the timeframes for work performance, and the rate of compensation, on a time-and-material basis.  In the event that the parameters of the project expand or otherwise change, a Project Change Request is implemented, to memorialize whatever change has occurred to the deliverables, personnel and/or time-and-material.  The master agreements, in conjunction with the SOW’s, are written to define, with as much detail as possible, the client relationship and all aspects of the work to be performed for the client.  With regard to revenues expected in future periods, each SOW has a defined term or sets forth the anticipated length of a project.  Where a client engagement is on-going, like certain “Help Desk” type services, the master agreement would still have a term length, but would recite that the agreement was renewable.  Generally, Solutions engagements are for a year or less.  Staffing engagements can and do last for more than a year, with variations in the number of consultants being provided at any given time.  Staffing engagements are generally cancelable by clients with a two to four week notice period.

Chimes, Inc. is a human capital management solution company that, through the use of proprietary software and processes, manages the temporary workforce of large organizations. During 2004, Chimes accounted for approximately 9% of total revenues.

13

Critical Accounting Policies

The most critical accounting policies used in the preparation of the Company’s financial statements are related to revenue recognition, the evaluation of the bad debt reserve, the valuation of goodwill and the valuation of the deferred tax asset.

Revenue Recognition

Approximately 94% of consolidated revenue in both 2004 and 2003 was derived from time-and-material contracts.

For the IT Services division, revenues are recognized as services are performed under time-and material contracts.  Under a typical time-and-material billing arrangement, our clients are billed on a regularly scheduled basis, such as biweekly or monthly.  At the end of each accounting period, revenue is estimated and accrued for services performed since the last billing cycle.  These unbilled amounts are billed the following month.

The Solutions Group recognizes revenue either on a time-and-material basis or on a fixed fee basis, however, principally on a time-and-material basis. For fixed-fee contracts, revenue is recognized on the basis of the estimated percentage of completion.  Each fixed fee contract has different terms, milestones and deliverables.  The milestones and deliverables primarily relate to the work to be performed and the timing of the billing.  At the end of each reporting period an assessment of revenue recognized on the percentage of completion and milestones achieved criteria is made.  If it becomes apparent that estimated cost will be exceeded or required milestones or deliverables will not have been obtained, an adjustment to revenue and/or costs will be made.  The cumulative effect of revisions in estimated revenues and costs are recognized in the period in which the facts that give rise to the impact of any revisions become known.

Unbilled accounts receivable, in the IT Services and Solutions Group, represent amounts recognized as revenue based on services performed in advance of client billings principally on a time-and- material basis.  At the end of each accounting period, revenue is accrued for services performed since the last billing cycle.  These unbilled amounts are billed the following month.  Costs and estimated earnings in excess of billings on fixed fee contracts arise when percentage of completion accounting is used.  Such amounts are billed at specific dates or at contract completion.

The Company’s Chimes subsidiary recognizes revenue primarily on a transaction fee basis.  The Chimes service offering aggregates the suppliers of temporary workers to the client and renders one invoice to the client.  Upon payment from the client, Chimes deducts a transaction fee and remits the balance of the client payment to the applicable vendor.  Chimes recognizes only their fee for the service, not the aggregate billing to the client.  The gross amount of the client invoicing is not considered revenue or a receivable to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the vendor until paid by the client.

Evaluation of Bad Debt Reserve

The Company determines its bad debt reserve by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the client’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

14

Goodwill

As of December 31, 2004 and 2003, the fair value of each of the reporting units was calculated using the following approaches (i) market approach and (ii) income approach.  The reporting units are equal to, or one level below, reportable segments.  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.

For the year ended December 31, 2004, using an evaluation prepared by an independent appraisal firm, the Company reassessed the carrying value of goodwill associated with its Solutions Group.  Because of a reduction in projected future cash flows in the Commercial Solutions business unit, primarily resulting from significant revenue declines in 2004, the Company determined that goodwill was impaired and recorded a non-cash charge of $20.3 million, related to the write-off of the Commercial Solutions goodwill.  There was no income tax effect on the impairment charge as the related goodwill was primarily attributable to acquisitions which yielded no tax basis for the Company. The remaining Solutions goodwill of $27.6 million, as of December 31, 2004, is associated with the Company’s Federal government practice.  As of December 31, 2004, the indicated fair value of the Federal Government reporting unit exceeded the carrying value.  As a result, the Company concluded that the goodwill of approximately $27.6 million is not impaired.

For the year ended December 31, 2003, the Company completed valuations of the carrying value of the remaining goodwill and as of December 31, 2003, it was determined that no impairment had occurred at that date.

Valuation of the Deferred Tax Asset

The Company records deferred tax assets for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and their respective tax bases, and operating loss carryforwards.  Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In assessing the realizability of deferred tax assets, management considers the scheduled reversal periods of the deferred tax assets as well as projected future taxable income and tax planning strategies.

The Company has significant deferred tax assets resulting from net operating loss carryforwards, capital loss carryforwards, and deductible temporary differences that may reduce taxable income in future periods.  The Company has provided full valuation allowances on the future tax benefits related to capital losses, foreign net operating losses, and most state net operating losses.  The Company believes that the valuation allowance is appropriate because these deferred tax assets have relatively short carryforward periods or relate to taxing jurisdictions which do not allow the filing of consolidated tax returns.  The Company expects to continue to maintain a valuation allowance on these deferred tax assets until an appropriate level of profitability is sustained in the applicable taxing jurisdictions, or strategies are developed that would enable the Company to conclude that it is more likely than not that a portion of these deferred tax assets will be realized.

15

The Company believes that it is more likely than not that the net remaining deferred tax assets of $19.6 million at December 31, 2004 will be realized, principally based upon forecasted taxable income.  Although the Company has experienced operating losses in the past, the Company anticipates improved operational performance in 2005 resulting from the Company’s realignment initiatives completed in the fourth quarter of 2004, and continued improvement in the operating results of its Chimes subsidiary. The realignment initiatives are expected to reduce annual expenses by approximately $5 million, while Chimes operating performance is expected to improve significantly in 2005. It should be noted that Chimes reduced its operating loss in 2004 to approximately $700,000, from a loss of approximately $4.0 million in 2003. This operating improvement is expected to continue in 2005.  The minimum average annual taxable income required to realize the deferred tax assets over the 20-year net operating loss carryforwrd period is approximately $2.8 million.

16

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues.  Consolidated revenue increased to $262.5 million in the year ended December 31, 2004 from $245.2 million in the year ended December 31, 2003, an increase of $17 million or 7%.

Solutions Group revenues increased to $108.2 million in the year ended December 31, 2004 from $92.1 million in the year ended December 31, 2003, an increase of $16.1 million or 17.5%.  This increase in Solutions Group revenues is attributable to expansion in the Company’s Federal government practice, including the July 2003 acquisition of RGII and the April 2004 acquisition, by RGII, of AIM.  The revenue increase in the Solutions Federal government practice of $30.1 million for 2004 was partially offset by revenue declines in the commercial Solutions business of approximately $14.0 million, or 19%, as compared to 2003.

IT Services revenues decreased to $131.2 million in the year ended December 31, 2004 from $133.1 million in the year ended December 31 2003, a decrease of $1.9 million or 1.4%.  The slight decrease in IT Services revenue is the result of continued decreases in the demand for temporary technology workers, the trend of companies to outsource technology jobs offshore, and the impact of pricing decreases by clients.  For the year ended December 31, 2004, IT Services consultant average headcount decreased by 0.8%, accounting for approximately $1.1 million of the revenue decrease.  The balance of the decrease in revenue (approximately $0.8 million) is attributable to a reduction in average bill rates.   As the consultant average headcount decrease in 2004 is significantly less than the 23.9% headcount decrease sustained in 2003, the Company believes that stabilization in the IT market is occurring.

Chimes revenue increased to $23.1 million in the year ended December 31, 2004, from $20.0 million in the year ended December 31, 2003, an increase of $3.1 million or 15.4%.  This increase was primarily due to an expansion of managed spend at existing clients, with less than 1% of the increase attributable to new clients started in 2004.

Direct Costs.  Direct costs increased to $180.6 million in the year ended December 31, 2004 from  $173.2 million in the year ended December 31, 2003. Consolidated gross margin, revenue less direct costs, increased to 31.2% for the year ended December 31, 2004 from 29.4% in the same period of 2003.  In the Company’s Solutions Group, gross profit increased to $35.6 million, or 32.9% as a result of the RGII and AIM acquisitions.  IT Services gross margins for 2004 were $24.6 million, or 18.8%, compared to $26.7 million, or 20.1% for 2003. This decrease is primarily attributable to an increase in IT Services revenue being transacted through Vendor Managed Service providers (18% in 2004 vs. 14% in 2003). Gross margin in the Company’s Chimes segment stayed relatively flat at 94.0% for 2004.

The Company’s consolidated gross margin improvement is primarily attributable to the increases in revenue from the Company’s higher margin Solutions Group and Chimes, partially offset by gross margin declines in the IT Services segment.  For the year ended December 31, 2004, Solutions Group (including RGII and AIM) and Chimes revenue totaled 50.0% of consolidated revenue, compared to 45.7% of consolidated revenue for the comparable period in 2003.

Selling, general and administrative expenses.   Selling, general and administrative (“SG&A”) expenses increased to $85.1 million in the year ended December 31, 2004 from $80.6 million for the comparable period of 2003.  As a percentage of revenue, the Company’s SG&A expenses decreased to 32.4% in the year ended December 31, 2004 from 32.9% in the year ended December 31, 2003.  The expenses in 2003 included a bad debt charge of $3.1 million related to the write-off of a sub-contract with ATEB, a privately held company, which the Company voluntarily terminated for financial reasons.  ATEB was the primary contractor to develop a new pharmacy system for Royal Ahold.  The Company is continuing recovery efforts for this receivable.

17

Excluding the $3.1 million ATEB write-off in 2003, SG&A expenses would have increased by $7.6 million in 2004 in comparison to the prior year. This increase is primarily attributable to the July 2003 acquisition of RGII, and the April 2004 acquisition, by RGII, of AIM (which yielded incremental SG&A expense of approximately $9.6 million); costs related to Sarbanes-Oxley activities of approximately $1.2 million, and approximately $590,000 pertaining to professional fees for the restatement of financials associated with a previously announced accounting error.

Amortization of Intangibles.   During the year ended December 31, 2004, the Company recorded $1.7 million of amortization expense related to the 2003 acquisition of intangibles for RGII and Xpress Software.  The increase in 2004 is attributable to intangibles for the AIM acquisition completed in April 2004 by RGII.

Restructuring charges / (credits).   For the year ended December 31, 2004, the Company recorded restructuring charges of $2.9 million.  During the fourth quarter of 2004, the Company completed its realignment initiatives whereby the Company’s business model has been realigned, effective January 1, 2005, around its three distinct segments of clients : Federal Government, Commercial and Vendor Management Services (Chimes). In connection with the realignment, the Company recorded a $2.9 million restructuring charge, comprised of approximately $2.8 million in severance costs and $0.1 million in lease obligation costs.  As a result of this restructuring, the Company is expecting an approximate $5 million reduction in its annual costs, which will be predominantly reflected in the IT Services and Commercial Solutions (non-Federal) businesses, designed to deliver improved operational performance.  During the year ended December 31, 2003, the Company recorded restructuring charges of $3.3 million pertaining to terminated leases ($1.4 million), severance ($1.6 million) and general office closure expenses ($330,000) relating primarily to the closing of facilities in Canada and the United Kingdom.   In 2003, the office closings were made to eliminate the infrastructure costs related to having offices in certain areas.  The Company did not eliminate marketing efforts or business in these areas, but rather turned these areas into virtual marketplaces whereby sales personnel work from their homes.

Special charges / (credits).  For the year ended December 31, 2004, the Company recorded a special credit of $0.9 million related to an insurance refund.   For the year ended December 31, 2003, the Company incurred special charges of $10.1 million consisting of a severance package for the Company’s former CEO and expenses related to the unilateral acquisition proposal and activities of Aquent LLC.  The separation package of the former CEO included a $3.5 million severance payment and $200,000 in continued medical coverage.  The remaining $6.4 million of the expense pertained to the unilateral acquisition proposal and activities of Aquent LLC.  This expense is primarily attributable to approximately $3.4 million of legal fees, $1.8 million in financial advisor fees and $1.2 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.

Goodwill impairment.  As of December 31, 2004, based on a valuation completed by an independent appraisal firm, it was determined that the indicated fair value for the Commercial Solutions business unit was below the carrying value of the entity’s equity. Because of a reduction in projected future cash flows, primarily resulting from significant revenue declines in 2004, the Company determined that the Commercial Solutions goodwill was impaired and recorded a non-cash goodwill impairment charge of $20.3 million. There was no income tax effect on the impairment charge as the related goodwill was primarily attributable to acquisitions which yielded no tax basis for the Company.

Write-off of assets.  For the year ended December 31, 2004, the Company recorded a write-off of assets approximating $0.9 million. This charge pertained to the write-off of a security deposit in connection with an escrow agreement of a previously sold subsidiary and a write-off of fixed assets related to previously closed offices.

18

Loss from Operations.   The Company’s loss from operations totaled $28.1 million in the year ended December 31, 2004, an increased loss of $5.0 million, from a loss of $23.1 million in the year ended December 31, 2003.  As discussed above, the loss from operations in 2004 included goodwill impairment of $20.3 million, or 7.7% of revenue, restructuring charges of $2.9 million, or 1.1% of revenue, amortization of intangibles of $1.7 million, or 0.6% of revenue, $0.9 million, or 0.3% of revenue, pertaining to the write-off of assets, and a special credit of $0.9 million, or 0.4% of revenue, related to an insurance refund.  The loss from operations in 2003 included special charges of $10.1 million, or 4.1% of revenue, restructuring charges of $3.3 million, or 1.3% of revenue, amortization of intangibles of $1.1 million, or 0.4% of revenue and a special bad debt charge (recorded in SG&A expense) of $3.1 million, or 1.3% of revenue due to the write-off of a terminated contract with a client for financial reasons.   The 2004 loss before income taxes, excluding the special items noted above and net interest income, totaled $3.2 million and was comprised of : a loss of $6.3 million in IT Services, profit of $3.7 million in the Solutions Group and a loss of $0.6 million in Chimes.  This compares to the loss before income taxes of $5.6 million, excluding the special items noted above and loss on sale of assets, net loss on investments and net interest income and was comprised of :  $4.1 million loss in IT Services, profit of $2.5 million in the Solutions Group and a loss of $4.0 million in Chimes.  The consolidated loss before income taxes, excluding all special items, was a loss of 1.2% of revenue for the year ended December 31, 2004 as compared to a loss of 2.3% in the comparable period of 2003.

Other Income/(Expense).   Other income was $234,000 in the year ended December 31, 2004, compared to other expense of $378,000 in the comparable period of 2003.  This difference was primarily due to the loss on sale of assets and loss on investments in 2003.

Provision for Income Taxes.  The effective tax rate for Federal, state and local income taxes was a tax benefit of 9.7% for the year ended December 31, 2004 compared with 27.3% benefit for the year ended December 31, 2003.  The primary reasons for the decrease in the effective tax rate were goodwill impairment charges which did not give rise to a tax benefit and increases in the valuation allowance for certain Federal and state deferred tax assets.  A review of all available positive and negative evidence was conducted by the Company, including the Company’s past, current and projected operating performance, the market environment in which the company operates, and the length of carryback and carryforward periods. (see Note 7 of the Notes to Consolidated Financial Statements contained elsewhere in this Form 10-K).

Net Loss.  For the year ended December 31, 2004, the net loss was $25.2 million, or $0.82 loss per share, compared to a net loss of $17.2 million, or $0.56 loss per share for the year ended December 31, 2003.  The effect of restructuring charges, goodwill impairment, amortization expense, write-off of assets, professional fees for the restatement of financials associated with a previously announced accounting error, and special credit for an insurance refund amounted to $0.75 loss per share, net of taxes, in 2004.  The effect of restructuring charges, loss on sale of assets, loss on investments, amortization expense, write-off of terminated project and special charges amounted to $0.45 loss per share, net of taxes, in 2003.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues

Revenues.  Consolidated revenue decreased to $245.2 million in the year ended December 31, 2003 from $297.1 million in the year ended December 31, 2002, a decrease of $51.9 million or 17.5%.

Solutions Group revenues, which included revenue from assets held for sale of $2.9 million for Princeton in 2002, increased to $92.1 million in the year ended December 31, 2003 from $79.3 million in the year ended December 31, 2002, an increase of $12.8 million or 16.1%.  The increase in Solutions Group revenues for the year ended December 31, 2003 is attributable to the acquisition of RGII in July 2003.  Solutions Group revenue was $73.9 million for the year ended December 31, 2003 excluding RGII.  The Solutions Group revenue excluding Princeton Softech, Inc. in 2002 was $76.4 million.  The $2.5 million decrease in Solutions Group revenue, excluding RGII, was primarily due to declining client demand in several Solution Group practices, primarily web design/integration and education/training.

19

IT Services revenues decreased to $133.1 million in the year ended December 31, 2003 from $201.3 million in the year ended December 31 2002, a decrease of $68.2 million or 33.9%.  The decrease in IT Services revenue of $68.2 million, 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 clients and the lagging economy.  For the year ended December 31, 2003, IT Services consultant average headcount decreased by 23.9%, accounting for approximately $48 million of the revenue decrease.  The balance of the decrease in revenue (approximately $20 million) is attributable to a reduction in average bill rates.   The reduction in average bill rates was due to the competitive pricing pressures in the domestic staff augmentation market.

Chimes revenue increased to $20.0 million in the year ended December 31, 2003, from $16.5 million in the year ended December 31, 2002, an increase of $3.5 million or 21.2%.  This increase was primarily due to an increase in revenue from new clients of approximately $2.8 million and an increase of approximately $700,000 in revenue from existing clients in this segment.

Direct Costs.  Direct costs decreased to $173.2 million in the year ended December 31, 2003 from  $216.2 million in the year ended December 31, 2002. Consolidated gross margin, revenue less direct costs, increased to 29.4% for the year ended December 31, 2003 from 27.2% in the same period of 2002.  In the Company’s Solutions Group, gross profit increased to $26.6 million, or 28.9% as a result of the RGII acquisition.  Without RGII, gross profit for the year ended December 31, 2003 declined approximately $7.0 million from the year ended December 31, 2002.  These declines were a result of continued softness in the healthcare arena.  Gross margin in the Company’s IT Services segment stayed relatively flat at 20.1% for the year ended December 31, 2003.  Gross margin in the Company’s Chimes segment increased to 93.0% from 88.3% for the year ended December 31, 2003 and 2002, respectively, due to improved margins at existing clients.

Excluding the asset held for sale, Princeton Softech, Inc., in the year ended December 31, 2002, direct costs decreased to $173.2 million in the year ended December 31, 2003 from $215.7 million for the year ended December 31, 2002.  Gross margin for the year of 2002 excluding Princeton Softech, Inc. was 26.7%.

The Company’s consolidated gross margin improvement is primarily attributable to the change in the revenue mix among the Company’s business segments.  Chimes and the Solutions Group, including RGII, are higher gross margin businesses than the Company’s IT Services segment.  For the year ended December 31, 2003, Chimes and Solutions Group revenue totaled 45.7% of consolidated revenue, compared to 32.3% of consolidated revenue for the comparable period in 2002.

Selling, general and administrative expenses.   Selling, general and administrative expenses decreased to $80.6 million in the year ended December 31, 2003 from $91.3 million for the comparable period of 2002.  As a percentage of revenue, the Company’s SG&A expenses increased to 32.9% in the year ended December 31, 2003 from 30.7% in the year ended December 31, 2002.  The expenses in 2003 included a bad debt charge of $3.1 million related to the write-off of a sub-contract with ATEB, a privately held company, which the Company voluntarily terminated for financial reasons.  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 $77.5 million in the year ended December 31, 2003 from $87.0 million in the comparable periods of 2002.  This decrease in SG&A expenses was primarily attributable to cost reductions in all segments, with approximately $544,000 from rent savings (office closures) and the balance primarily related to staff reduction and personnel costs.

Amortization of Intangibles.   During the year ended December 31, 2003, the Company recorded $1.1 million of amortization expense related to the 2003 acquisition of intangibles for RGII and Xpress Software.

20

Restructuring charges / (credits).   During the year ended December 31, 2003, the Company recorded restructuring charges of $3.3 million for terminated leases ($1.4 million), severance ($1.6 million) and general office closure expense ($330,000) relating primarily to the closing of facilities in Canada and the United Kingdom.  During the year ended December 31, 2002, the Company recorded a restructuring charge of $2.5 million pertaining to 2002 office closings, including a reversal of $192,000 of the previously recorded restructure reserves pertaining to lease buyouts and $140,000 pertaining to severance adjustments.  In both 2003 and 2002, the office closings were made to eliminate the infrastructure costs related to having offices in certain areas.  The Company did not eliminate marketing efforts or business in these areas, but rather turned these areas into virtual marketplaces whereby sales personnel work from their homes.  As a result of these office closings, in both IT Services and the Solutions business areas, rent expense and the related reduction of SG&A headcount (salary and fringe benefits) were eliminated from the current SG&A cost structure.

Special charges.  For the year ended December 31, 2003, the Company incurred special charges of $10.1 million consisting of a severance package for the Company’s former CEO and expenses related to the unilateral acquisition proposal and activities of Aquent LLC.  The separation package of the former CEO included a $3.5 million severance payment and $200,000 in continued medical coverage.  The remaining $6.4 million of the expense pertained to the unilateral acquisition proposal and activities of Aquent LLC.  This expense is primarily attributable to approximately $3.4 million of legal fees, $1.8 million in financial advisor fees and $1.2 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.

Loss from Operations.   The Company’s loss from operations totaled $23.1 million in the year ended December 31, 2003, an increased loss of $10.2 million, from a loss of $12.9 million in the year ended December 31, 2002.  As discussed above, this increase in the loss from operations in 2003 included special charges of $10.1 million, or 4.1% of revenue, restructuring charges of $3.3 million, or 1.3% of revenue, amortization of intangibles of $1.1 million, or 0.4% of revenue and a special bad debt charge of $3.1 million, or 1.3% of revenue due to the write-off of a terminated contract with a client 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 0.6% of revenue and restructuring charges of $2.5 million or 0.8% of revenue.  The 2003 loss before income taxes, excluding the special items noted above and loss on sale of assets, net loss on investments and net interest income totaling expense of $378,000 totaled $5.6 million and was comprised of a loss of $4.1 million in IT Services, profit of $2.5 million in the Solutions Group and a loss of $4.0 million in Chimes.  This compares to the loss before income taxes of $10.4 million, excluding the special items noted above and gain on sale of assets, net loss on investments and net interest income totaling income of $6.6 million in the year ended December 31, 2002, consisting of a loss of $2.2 million in IT Services, income of $766,000 in the Solutions Group and a loss of $8.9 million in Chimes.  Loss before income taxes, excluding all special items, was a loss of 2.3% of revenue for the year ended December 31, 2003 as compared to a loss of 3.5% in the comparable period of 2002.

Other Income/(Expense).   Other expense was $378,000 in the year ended December 31, 2003, compared to other income of $6.6 million in the comparable period of 2002.  This difference was primarily due to the gain on the sale of Princeton and Spargo in 2002 totaling approximately $5.9 million.

Provision for Income Taxe .  The effective tax rate for Federal, state and local income taxes was a tax benefit of 27.3% for the year ended December 31, 2003 compared with a tax expense of 29.5% for the year ended December 31, 2002.  The primary reason for the change in the effective tax rate was the establishment of a valuation allowance of state deferred tax assets in 2002.  A review of all available positive and negative evidence was conducted by the Company, including the Company’s current and past performance, market environment in which the company operates, and the length of carryback and carryforward periods.  In January 2003, the Company received a Federal income tax refund of $20 million, resulting from the Economic Stimulus Act of 2002 (see Note 7 of the Notes to Consolidated Financial Statements contained elsewhere in this Form 10-K).

21

Net Loss.  For the year ended December 31, 2003, the net loss was $17.2 million, or $0.56 loss per diluted share, compared to a net loss of $38.0 million, or $1.22 loss per diluted share for the year ended December 31, 2002.  The effect of restructuring charges, loss on sale of assets, loss on sale of investments, amortization expense, the write-off of the terminated project and special charges amounted to $0.45 loss per share, net of taxes in 2003.  The net loss in the year ended December 31, 2002 includes a charge for the cumulative effect of change in accounting principle of $29.9 million, or $0.96 per share and differences in the effective tax rate primarily relating to the recording of a valuation allowance in the Company’s state deferred tax assets of approximately $4.0 million, or $0.13 per share.  The effect of restructuring charges, operations of assets held for sale, gain on sale of assets, cumulative effect of change in accounting principle and the valuation allowance on deferred tax assets amounted to $1.06 loss per share, net of taxes, in 2002.

Liquidity and Capital Resources

The Company has historically financed its operations primarily through cash generated from operations, borrowings against bank lines of credit and the public sale of its common stock.  At December 31, 2004, the Company had $68.9 million in working capital, of which $33.6 million was cash and cash equivalents.  The Company’s working capital ratio at December 31, 2004 was 3.5 to 1.  The Company has remained debt free throughout 2003 and 2004.   In January 2003, the Company received a Federal income tax refund of $20 million, resulting from the Economic Stimulus Act of 2002. This refund pertained to deductions carried back to prior years and since the tax structure of the transaction giving rise to the deduction was subject to determination by the tax authorities, the Company recorded a reserve for the tax benefit until IRS audits for the applicable years were completed.  During the first quarter of 2004, the Internal Revenue Service and the Joint Committee on Taxation completed their examination of the Company’s Federal income tax returns and Federal refund claims, and accepted them without change.  Accordingly, the tax benefit was recorded as a decrease in tax benefit reserves of $19.6 million, a decrease in other tax reserves of $0.3 million, and an increase in additional paid-in capital of $19.9 million. There was no charge or credit to income.

Net cash (used in)/provided by operating activities for the years ended December 31, 2004, December 31, 2003 and December 31, 2002 totaled $(1.4) million, $16.9 million, and $20.7 million respectively.  For the year ended December 31, 2004, the cash used in operating activities totaled $1.4 million and was primarily attributable to the net loss of $25.2 million, offset by non-cash charges of $27.4 million, and an increase in refundable income taxes of $4.1 million.   In 2003, the cash provided by operating activities was primarily due to the Federal income tax refund received and a reduction in accounts receivable partially offset by the Company’s net loss.  In 2002, cash provided by operating activities  was primarily attributable to a reduction in accounts receivable.

Net cash used in investing activities was $19.2 million for the year ended December 31, 2004.  This was primarily attributable to the purchase of AIM by RGII in April 2004.  Net cash used in investing activities was $23.5 million for the year ended December 31, 2003 primarily due to the purchase of RGII. Net cash provided by investing activities was $13.0 million for the year ended December 31, 2002, primarily from the sale of assets.

For the years ended December 31, 2004, 2003 and 2002, respectively, net cash provided by / (used in) financing activities was $1.4 million, $(2.5) million, and $(14.6) million, resulting in 2004 from proceeds from stock options exercised of $0.8 million and $0.6 million from stock issued through the employee stock purchase plan. The $2.5 million used in 2003 resulted from the pay off of the notes payable of $2.6 million related to the acquisition of RGII and $1.2 million used in the repurchase of the Company’s common stock.  The $14.6 million used in 2002 resulted from a $10.0 million reduction of debt and a $6.1 million use in the repurchase of the Company’s common stock.

Total accounts receivables increased $3.0 million to $51.3 million at December 31, 2004 (including $3.3 million of accounts receivable acquired from AIM), from $48.3 million at December 31, 2003. Accounts

22

receivable days sales outstanding (“DSO”) were 68 days at December 31, 2004 compared to 70 days at December 31, 2003, based on quarterly sales.  The decrease in DSO’s from December 31, 2003 is primarily attributable to more timely collections from clients. Looking forward, the Company expects an increase in DSO’s for the first quarter of 2005 attributable to the seasonal slowdown of payments from clients, which historically occurs in the first quarter of each year.  All client receivable collectibility and billing issues identified by management have been adequately reserved.  For the year ended December 31, 2004, there were no significant changes in credit terms, credit policies or collection efforts.

The Company has a $40 million line of credit facility with availability based primarily on eligible client receivables.  The interest rate is LIBOR plus 2.75% based on unpaid principal.  The borrowing base less outstanding loans must equal or exceed $5.0 million.  As of December 31, 2004, the Company had no outstanding loan balance against the facility.  Based on the Company’s eligible client receivables and cash balances, $17.7 million was available for borrowing as of December 31, 2004.  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 $99,000 and $109,000 for the years ended December 31, 2004 and 2003, 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.  The Company did not satisfy this covenant for the quarter ended March 31, 2004.  A waiver was received from the lending institution for the quarter ended March 31, 2004 along with an amendment to the loan agreement lowering the three-month average minimum collections covenant to $10 million.  At December 31, 2004, the Company was in compliance with the covenant.  The facility was scheduled to expire in July 2004; however, on July 14, 2004, the Company signed a one-year extension of the facility, which will remain in effect until July 2005.  In February 2005, the Company and the current lending institution agreed in principal to terms (non-binding) which would extend the credit facility for a three-year term. The line of credit would remain at $40 million, with all other terms, conditions and costs similar to those which were in effect as of December 31, 2004.

During the first quarter of 2004, the Company recorded a non-cash reduction in tax benefit reserves and an increase in additional paid-in capital of $19.9 million.

Pursuant to the terms 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 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. 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.  In February 2004, a payment was made for the first six-month installment of approximately $631,000, pertaining to this contingent note.  In February 2005, a payment of approximately $1.8 million was made representing the next installment of the contingent note.  Future payments, if the applicable EBIT targets are met, will be due as follows: 2005 payment of $3.3 million and 2006 payment of $4.3 million.  These payments will be reduced or increased based on actual EBIT performance over the three-year period.

On April 1, 2004, the Company’s subsidiary, RGII, closed on its acquisition of AIM, a Federal government IT Services company with 2003 revenues of approximately $18.5 million.  The all-cash transaction totaled approximately $15.8 million, including a working capital adjustment.  As a result of the integration of AIM into RGII, the Company and the seller of RGII have agreed that the operating results of AIM shall remain separate from and not be included in the RGII EBIT targets related to contingent payments.  RGII, however, shall be permitted an intercompany charge to AIM for AIM’s share of combined operating overhead expenses.

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.

23

Contractual Obligations and Commercial Commitments / Off-Balance Sheet Arrangements

The Company does not utilize off balance sheet financing other than operating lease arrangements for office premises and related equipment. The following table summarizes all commitments under contractual obligations as of December 31, 2004:

	Total Amount			1 year		2-3 years		4-5 years		Over 5 years
	in thousands
Operating Leases	$		9,954	$	5,287	$	4,577	$	90	$	—
RGII Contingent Note*	7,596			3,300		4,296		—		—
Deferred Compensation	2,633			176		13		399		2,045
Supplemental Retirement Plans	9,750			—		250		1,000		8,500
Other long term	541			541		—		—		—
Total Cash Obligations	$	30,474		$	9,304	$	9,136	$	1,489	$	10,545

*  Obligation if applicable EBIT targets are met.

Savings Plan and Other Retirement Plans

The Company maintains a defined contribution savings plan covering eligible employees.  The Company makes contributions up to a specific percentage of the participants contributions.

The Company also maintains a Supplemental Executive Retirement Plan (SERP), whereby key executives are entitled to receive payments upon reaching the age of 65 and being in the employment of the Company.  The maximum payment commitment of the Company is approximately $9.8 million if all members remain in the employment of the Company until age 65.  Benefits accrue and vest based on a formula which includes total years with the Company and total years possible until age 65.  In the event of a change of control, as defined in the Plan, this event would result in an immediate vesting of the retirement benefit.  The Plan is nonqualified and not formally funded.  Life insurance policies on the members are purchased to assist in funding the cost.  The cumulative accrued liability for the SERP is determined based on the Unit Credit Method by using a discount rate of 9% until age 65 for each participant.

In addition, the Company maintains a deferred compensation plan for key executives that permits the individuals to defer a portion of their salary/bonus.  There is no effect on the Company’s operating results since all amounts deferred under the plan are expensed in the period incurred.

Foreign Currency Exposure

The Company’s international operations expose it to translation risk when the local currency financial statements are translated to U.S. dollars.  As currency exchange rates fluctuate, translation of the financial statements of international businesses into U.S. dollars will affect the comparability of revenues and expenses between years.  None of the components of the Company’s consolidated statements of income was materially affected by exchange rate fluctuations in 2004, 2003 or 2002.  At December 31, 2004 the Company had $2,254,000 in cash maintained in foreign financial institutions.

24

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“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 the Company’s fiscal period ending March 31, 2004, for VIEs created prior to February 1, 2003.  In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities.  Under the guidance of FIN 46R, public companies that have interests in VIE’s that are commonly referred to as special purpose entities are required to apply the provisions of FIN 46R for periods ending after December 15, 2003.  A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004.  Adoption of FIN 46R did not have a material effect on the Company’s financial statements.

In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for determining whether impairment for certain debt and equity investments is other-than-temporary and the measurement of an impaired loss. The recognition and measurement requirements of EITF 03-1 were initially effective for reporting periods beginning after June 15, 2004. In September 2004, the FASB Staff issued FASB Staff Position (“FSP”) EITF 03-1-1 that delayed the effective date for certain measurement and recognition guidance contained in EITF 03-1. The FSP requires that entities continue to apply previously existing “other-than-temporary” guidance until a final consensus is reached. Management does not anticipate that issuance of a final consensus will materially impact the Company’s financial condition or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”). The provisions of this statement are effective for the Company’s third quarter ending September 30, 2005. FAS 123R requires compensation cost be recognized for new awards of equity instruments and unvested awards on the adoption date.  We expect the adoption of this statement will have a material effect on the Company’s financial statements, but we cannot reasonably estimate the impact of the adoption because certain assumptions used in the calculation of the value of share-based payments may change in 2005.

Risk Factors

The Company’s IT Services and Solutions (Commercial) revenues have declined and the operating loss has increased because demand for IT services has weakened and may continue to weaken, in the industries and markets that CHC serves.

The Company’s revenues are affected by the level of business activity of its clients, and the related demand for IT services to support these client activities.  As a result of weakened demand for the Company’s IT services, revenues and results of operations have been negatively impacted.  For the year ended December 31, 2004 and 2003, IT Services revenue decreased to $131.2 million from $133.1 million, respectively, a decrease of $1.9 million, or 1.4%.  Solutions (Commercial) decreased approximately $14 million in 2004.  For the years ended December 31, 2004 and 2003, IT Services operating loss increased to $6.3 million from $4.1 million, respectively, an increase of $2.2 million, or 55%.  CHC cannot predict when client demand will improve, and to what extent demand for the Company’s IT Services and Solutions (Commercial) will improve.

25

The current trend of companies moving technology jobs and projects offshore has caused and could continue to cause revenues to decline.

In the past few years, more companies are using or are considering using low cost offshore outsourcing centers, particularly in India, to perform technology related work and projects.  This trend has contributed to the decline in domestic IT staff augmentation revenue as well as on-site solutions oriented projects.  The Company now has its own outsourcing centers in India and Canada to compete for this business, but this new business has not been sufficient to offset the revenue decline.  Additionally, the equivalent amount of work in low cost centers will generate substantially less revenue due to the lower billing rates that are charged in these offshore outsourcing centers.

The Company’s operating results have varied, and are likely to continue to vary significantly.  This may result in volatility in the market price of our common stock.

The Company’s revenues and operating results have varied in the past and are likely to vary significantly from year to year.  This may lead to volatility in the share price.  Some other factors that may cause the market price of the common stock to fluctuate substantially, include:

•the failure to be awarded a significant project on which the Company has bid;

•the termination by a client of a material project or the decision by a client not to proceed to the stage of a project anticipated by the Company;

•announcement of new services by CHC or the competitors;

•announcement of acquisitions or other significant transactions by CHC or the competitors;

•changes in or failure to meet earnings estimates by the Company and/or securities analysts;

•sales of common stock by CHC or the existing shareholders or the perception that such sales may occur;

•adverse judgments or settlements obligating CHC to pay liabilities;

•changes in management; and

•general economic conditions and overall stock market volatility.

The failure to be successful in retaining existing and future highly-skilled technical personnel and attracting a sufficient number of IT professionals and project managers could adversely affect the Company’s business.

The Company’s business is labor intensive and depends to a large extent on its ability to attract, train, motivate and retain highly-skilled IT professionals and project managers.  The Company’s ability to win and retain new business is significantly affected by client relationships and the quality of service rendered.  The loss of key IT professionals and project managers may jeopardize existing client relationships with businesses that continue to use the Company’s services based upon past relationships with key IT professionals and project managers.

The Company derives a significant portion of its revenues from a limited number of large clients and the loss of any large client could have an adverse effect on its business.

The Company has derived, and it believes will continue to derive, a significant portion of its revenues from a limited number of large clients.  For the years ended December 31, 2004, 2003 and 2002, the Company’s ten largest clients accounted for approximately 24%, 38% and 38% of its revenues, respectively.  The loss of any large client could have an adverse effect on the Company’s business, results of operations and financial condition.  As of December 31, 2004, approximately 10% of RGII’s revenues were derived from restricted contracts (minority based contracts, etc.)  These contracts may be terminated pursuant to the Federal government’s rights under the Federal Acquisition Regulations (“FAR”).  In addition, as a result of RGII’s acquisition by the Company, RGII will not be eligible to compete for these types of contracts in the future and will have to replace this revenue stream with new contracts.  If these contracts are terminated or the Company is not able to enter new contracts on acceptable terms, the Company’s business could be adversely affected.

26

Changes in Federal government programs and requirements, or budgetary changes affecting Federal government spending in Company specific agencies, or changes in fiscal policies or available funding, may adversely affect the Company’s results of operations.

The Company acquired RGII Technologies, Inc. in July 2003 and RGII acquired AIM in April 2004. RGII receives substantially all its revenue from contracts with the Federal government.  For the year ended December 31, 2004, the Company received approximately 18% of its total revenue from RGII.  Significant changes in RGII’s revenues may adversely affect the Company’s results of operations.

Projects performed by RGII are subject to Defense Contract Audit Agency audits and compliance with government cost accounting standards.  The results of such audits may result in adjustments to RGII’s reported financial results.

RGII has cost reimbursable type contracts with the U.S. Government.  Consequently, RGII is reimbursed based upon direct expenses attributable to the contract plus a percentage based upon indirect expenses.  The indirect rates are estimated.  Accordingly, if the actual rates as determined by the Defense Contract Audit Agency (“DCAA”) are below the estimated rates, a refund for the difference will be due to the U.S. Government.  A significant refund due to the U.S. Government may adversely affect the Company’s results of operations.  DCAA has completed its incurred cost audits for all fiscal years through December 31, 2001.   Past audits have not resulted in significant adjustments.

The Company faces competition from a number of existing competitors, as well as potential new competitors, which could result in loss of market share and adversely affect business.

The markets for CHC services are highly competitive.  The Company competes with large providers of IT staffing services including Comsys IT Partners Inc. and MPS Group, Inc.  In addition, it competes for staffing projects with the information systems groups of prospective clients.  In the Solutions business, the Company competes with consulting and system integration firms, including Analysts International Corporation, iGATE Corp., Covansys Corp., Accenture, Bearingpoint, CIBER, Inc., Computer Sciences Corporation, Computer Task Group, Electronic Data Systems Corp., IBM Corp. and Keane, Inc.  The Company also competes in the IT solutions market with vendors of application software.  There are relatively low barriers to entry in the markets the Company competes in and it has faced and expects to continue to face, additional competition from other established and emerging companies.  Increased competition may result in greater pricing pressure which could have an adverse effect on the Company’s business, results of operations and financial condition.  Many of the Company’s current and potential competitors have significantly greater financial, technical, marketing and other resources and generate greater revenues than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in clients’ requirements, or to devote greater resources to the development, promotion, sale and support of their services and products.  In addition, current and potential competitors may establish cooperative relationships among themselves or with third parties to increase the ability of their services or products to address the staffing and solution needs of prospective clients.  Accordingly, it is possible that new competitors, alliances among competitors or alliances between competitors and third parties may emerge and acquire significant market share.  If this were to occur, it could have an adverse effect on the Company’s business, results of operations and financial condition.

27

The introduction of competitive IT solutions embodying new technologies and the emergence of new industry standards may render the Company’s existing IT solutions or underlying technologies obsolete or unmarketable which could have an adverse effect on its business.

The IT solutions industry is characterized by rapid technological change, changing client requirements and new service and product introductions.  The introduction of competitive IT solutions embodying new technologies and the emergence of new industry standards may render the Company’s existing IT solutions or underlying technologies obsolete or unmarketable.  As a result, it is dependent in large part upon its ability to develop new IT solutions that address the increasingly sophisticated needs of its clients, keep pace with new competitive service and product offerings and emerging industry standards and achieve broad market acceptance.  The business will be adversely affected if CHC is not successful in developing and marketing new IT solutions that respond to technological change, changing client requirements or evolving industry standards.

Some of the Company’s services are offered on a fixed-price basis.  The failure to estimate accurately the resources and time required for a project or failure to complete our contractual obligations within the time frame committed could have an adverse effect on the Company’s business.

The Company offers some of its services on a fixed-price rather than on a time-and-materials or best efforts basis.  Under the terms of these contracts the Company bears the risk of cost overruns and inflation in connection with these projects.  In the event that the Company fails to estimate accurately the resources and time required for a project or fails to complete its contractual obligations within the time frame committed, the Company’s business, operating results and financial condition could be adversely affected.

The Company’s business strategy includes the pursuit of strategic acquisitions which present many risks and may have an adverse effect on its business in the event the financial and strategic goals that were contemplated at the time of the transaction are not realized.

As part of its strategy, the Company pursues strategic acquisitions.  On July 8, 2003, CHC purchased all of the capital stock of RGII Technologies, Inc., a Federal IT services company.  On April 1, 2004, RGII purchased AIM to further its commitment to driving the growth potential that exists in the Federal government market and to expand RGII’s footprint, providing an entrance into certain government agencies, as well as strong relationships with large, prime contractors. Some of the risks faced in completing acquisitions similar to the RGII and AIM transactions are:

•difficulties integrating new operations, technology and personnel into operations;

•loss of significant clients acquired;

•loss of key management and technical personnel acquired;

•assumption of unanticipated legal or other financial liabilities;

•unanticipated operating, accounting or management difficulties in connection with the acquired entities; and

•diversion of management attention from other business concerns.

These difficulties could disrupt ongoing business and increase expenses.  Any acquisition, depending on its size, could result in the use of a significant portion of cash, or if the acquisition is made utilizing securities, could result in significant dilution to shareholders.  Furthermore, there can be no assurance that any acquired service capacity or technology will gain acceptance in the market.  Each of these results could adversely affect the Company’s business, results of operations, financial condition and the price of common stock.

28

The Company’s international operations subject it to additional risks that can adversely affect operating results.

CHC’s international operations, which comprised 10.7%, 10.5%, and 8.6%  of consolidated revenues for the years ended December 31, 2004, 2003, and 2002, respectively, depend greatly upon business, immigration and technology transfer laws in those countries in which it has international operations and upon the continued development of technology infrastructure.  As a result, the Company’s business is subject to the risks generally associated with non-U.S. operations including:

•unexpected changes in regulatory environments;

•the costs and difficulties relating to geographically diverse operations;

•differences in, and uncertainties arising from changes in, foreign business culture and practices;

•fluctuations in currency exchange rates;

•restrictions on the movement of cash;

•longer accounts receivable payment cycles and greater difficulties in collecting accounts receivable;

•potential foreign tax consequences, including the impact of repatriation of earnings, tariffs and other trade barriers; and

•political unrest and changing conditions in countries in which our services are provided or facilities are located.

If any of these factors were to render the conduct of business in a particular country undesirable or impracticable, there could be an adverse effect on the Company’s business, operating results and financial condition.

If CHC fails to protect its intellectual property rights, competitors may be able to use its technology and this could weaken its competitive position, reduce revenue and increase costs.

CHC relies primarily upon a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual arrangements to protect proprietary rights.  The steps taken to protect proprietary rights may not prevent misappropriation of CHC’s proprietary rights, particularly in foreign countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States.  If third parties were to use or otherwise misappropriate CHC’s copyrighted materials, trademarks or other proprietary rights without consent or approval, CHC’s competitive position could be harmed, or it could become involved in litigation to enforce its rights.

Third parties could assert that the Company’s services infringe their intellectual property rights, which if successful, could adversely affect the Company’s business.

Third parties may assert trademark, copyright, patent and other types of infringement or unfair competition claims against the Company.  If CHC is forced to defend against any such claims, whether they are with or without merit or are determined in its favor, the Company may face costly litigation, loss of access to, and use of software and diversion of technical and management personnel.  As a result of such dispute, CHC may have to develop non-infringing technology or enter into royalty or licensing arrangements.  Such royalty or licensing agreements, if required, may be unavailable on terms acceptable to CHC, or at all.  If there is a successful claim of infringement against the Company and it is unable to develop non-infringing technology or license the infringed or similar technology on a timely basis, it could adversely affect CHC’s business.

29

In the event of a failure in a client’s computer system, a claim for substantial damages may be made against the Company regardless of its responsibility for the failure, which if successful, could adversely affect the Company’s business.

Much of the Company’s business involves projects that are critical to the operations of its clients’ businesses and provide benefits that may be difficult to quantify.  Any failure in a client’s system could result in a claim for substantial damages against CHC, regardless of its responsibility for such failure.  Limitations of liability set forth in service contracts may not be enforceable in all instances and may not otherwise protect the Company from liability for damages.  CHC maintains general liability insurance, including coverage for errors and omissions, however, CHC may not be able to avoid significant claims and attendant publicity. Furthermore, there can be no assurance that the insurance coverage will be adequate or that coverage will remain available at acceptable costs.  Successful claims brought against the Company in excess of its insurance coverage could have an adverse effect on business, operating results and financial condition.

As a provider of staffing services, there are risks associated with placing employees (and independent contractors) at clients’ businesses, which could result in costly and time-consuming litigation.

CHC could be subject to liability if any of the following risks associated with placing its employees (and independent contractors) at clients’ businesses occurs:

•possible claims of discrimination and harassment;

•liabilities for errors and omissions by CHC’s employees (and independent contractors);

•misuse of client proprietary information or intellectual property;

•injury to client employees;

•misappropriation of client property;

•other criminal activity; and

•torts and other similar claims.

Any claims made against CHC could result in costly and time-consuming litigation.  In addition, under some circumstances, the Company may be held responsible for the actions of persons not under its direct control.

The Company has adopted anti-takeover defenses that could make it difficult for another company to acquire control of the Company or limit the price investors might be willing to pay for its stock.

Certain provisions of the Company’s Certificate of Incorporation and Bylaws could make a merger or tender offer involving CHC more difficult, even if such events would be beneficial to the interests of the shareholders. These provisions include adoption of a Preferred Shares Rights Agreement, commonly known as a “poison pill” and giving the Board the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without shareholder approval.  The rights of the holders of CHC’s common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.  The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of CHC’s outstanding voting stock.  The above factors and certain provisions of the New York Business Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of the Company, including transactions in which the shareholders might otherwise receive a premium over the fair market value of CHC common stock.

30

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Exposure

The Company has financial instruments that are subject to interest rate risk.  Historically, the Company has not experienced material gains or losses due to interest rate changes.  Based on the current holdings, the exposure to interest rate risk is not material.  Additionally, at December 31, 2004 the Company was debt free.

Item 8.  Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Computer Horizons Corp.

We have audited the accompanying consolidated balance sheets of Computer Horizons Corp. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Computer Horizons Corp. and Subsidiaries as of December 31, 2004 and 2003 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Oversight Board (United States), the effectiveness of Computer Horizons Corp. and Subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2005 expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Grant Thornton LLP

Edison, New Jersey

March 14, 2005

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Computer Horizons Corp.

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Computer Horizons Corp. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit .

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and th at receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Computer Horizons Corp. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the three years in the period ended December 31, 2004, and our report dated March 14, 2005 expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Grant Thornton LLP

Edison, New Jersey

March 14, 2005

32

Computer Horizons Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

	December 31,
	2004		2003
	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents (Note 1)	$	33,649	$	52,610
Accounts receivable (Note 2)	51,322		48,295
Deferred income taxes (Note 7)	1,868		4,514
Refundable income taxes (Note 7)	4,088		—
Other	5,550		4,759
Total current assets	96,477		110,178
Property and equipment:
Furniture, equipment and other	42,810		42,252
Less : accumulated depreciation	36,815		32,929
	5,995		9,323
Other assets – net:
Goodwill (Note 1)	27,625		34,218
Intangibles (Note 1)	3,253		2,408
Deferred income taxes (Note 7)	17,698		14,813
Other	8,036		9,386
	56,612		60,825
Total Assets	$	159,084	$	180,326

The accompanying notes are an integral part of these statements.

33

	December 31,
	2004			2003
	(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities :
Accrued payroll, payroll taxes and benefits	$	8,489		$	7,791
Accounts payable	7,615			8,287
Restructuring reserve (Note 13)	3,351			2,620
Income taxes payable	1,377			1,243
Tax benefit reserve (Note 7)	—			19,600
RGII contingency payment (Note 15)	1,851			630
Other accrued expenses	4,912			5,183
Total current liabilities	27,595			45,354
Deferred compensation (Note 10)	2,633			2,103
Supplemental executive retirement plan (Note 10)	2,162			1,682
Other liabilities	913			850
Total liabilities	33,303			49,989
Commitments and Contingencies (Notes 4, 7 and 11)
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 33,153,805 and 33,153,107 shares at December 31, 2004 and 2003, respectively	3,315			3,315
Additional paid-in capital	151,281			133,046
Accumulated other comprehensive loss	(2,200		)	(2,789		)
Retained earnings / (deficit)	(14,072		)	11,100
	138,324			144,672
Less shares held in treasury, at cost; 2,060,011 and 2,537,692 shares at December 31, 2004 and 2003, respectively	(12,543		)	(14,335		)
Total shareholders’ equity	125,781			130,337
Total Liabilities and Shareholders’ Equity	$	159,084		$	180,326

34

Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year ended December 31,
	2004			2003			2002
	(in thousands, except per share data)
Revenues	$	262,527		$	245,210		$	297,115
Costs and expenses:
Direct costs	180,606			173,198			216,181
Selling, general and administrative	85,141			80,634			91,343
Amortization of intangibles	1,695			1,084			—
Restructuring charges (Note 13)	2,859			3,278			2,515
Special charges/(credits) (Note 18)	(939		)	10,113			—
Goodwill impairment	20,306			—			—
Write-off of assets	910			—			—
	290,578			268,307			310,039
Loss from operations	(28,051		)	(23,097		)	(12,924		)
Other income /(expense):
Gain / (loss) on sale of assets (Note 17)	—			(424		)	5,890
Net gain /(loss) on investments	—			(432		)	(61		)
Interest income	337			529			928
Interest expense	(103		)	(51		)	(174		)
	234			(378		)	6,583
Loss before income taxes and cumulative effect of a change in accounting principle and minority interest	(27,817		)	(23,475		)	(6,341		)
Income taxes / (benefit) (Notes 1 and 7):
Current	(1,436		)	341			(4,292		)
Deferred	(1,254		)	(6,750		)	6,161
	(2,690		)	(6,409		)	1,869
Loss before cumulative effect of change in accounting principle and minority interest	(25,127		)	(17,066		)	(8,210		)
Cumulative effect of change in accounting principle (Note 1)	—			—			(29,861		)
Minority interest	(45		)	(89		)	35
Net Loss	$	(25,172	)	$	(17,155	)	$	(38,036	)
Loss per share – Basic and Diluted (Notes 1 and 8):
Before cumulative effect of change in accounting principle	$	(0.82	)	$	(0.56	)	$	(0.26	)
Cumulative effect of change in accounting principle	$	—		$	—		$	(0.96	)
Net Loss	$	(0.82	)	$	(0.56	)	$	(1.22	)
Weighted average number of shares outstanding:
Basic and Diluted	30,870,000			30,455,000			31,243,000

The accompanying notes are an integral part of these statements.

35

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2004, 2003 and 2002

	Common Stock			Additional Paid-in			Accumulated other Comprehensive			Retained Earnings /			Treasury Stock
	Shares	Amount		Capital			Income/(Loss)			(Deficit)			Shares		Amount			Total
	(dollars in thousands)
Balance, December 31, 2001	33,153,107	$	3,315	$	135,230		$	(2,932	)	$	66,291		1,720,191		$	(12,049	)	$	189,855
Net loss for the year										(38,036		)						(38,036		)
Other comprehensive loss:
Current year unrealized loss on investments							(1,100		)									(1,100		)
Foreign currency translation adjustments							(274		)									(274		)
Total comprehensive loss																		(39,410		)
Stock options exercised													(265,858	)	449			449
Employee stock purchase program				(1,712		)							(405,366	)	2,814			1,102
Purchase of treasury shares													1,611,700		(6,141		)	(6,141		)
Balance, December 31, 2002	33,153,107	3,315		133,518			(4,306		)	28,255			2,660,667		(14,927		)	145,855
Net loss for the year										(17,155		)						(17,155		)
Other comprehensive loss:
Current year unrealized loss on investments							(489		)									(489		)
Foreign currency translation adjustments							2,006											2,006
Total comprehensive loss																		(15,638		)
Stock options exercised													(361,410	)	959			959
Employee stock purchase program				(472		)							(153,765	)	863			391
Purchase of treasury shares													392,200		(1,230		)	(1,230		)
Balance, December 31, 2003	33,153,107	3,315		133,046			(2,789		)	11,100			2,537,692		(14,335		)	130,337
Net Loss for the year										(25,172		)						(25,172		)
Other comprehensive Loss:
Current year unrealized gain on investments							325											325
Foreign currency translation adjustments							264											264
Total comprehensive loss																		(24,583		)
Other issuance of common stock	698
Stock options exercised													(306,460	)	774			774
Employee stock purchase program				(395		)							(171,221	)	1,018			623
Tax benefits/other, net, related to acquisitions				18,630														18,630
Balance, December 31, 2004	33,153,805	$	3,315	151,281			(2,200		)	(14,072		)	2,060,011		(12,543		)	125,781

The accompanying notes are an integral part of this statement.

36

Computer Horizons Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,
	2004			2003			2002
	(in thousands)
Cash flows from operating activities
Net loss	$	(25,172	)	$	(17,155	)	$	(38,036	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Deferred taxes	(1,254		)	(6,750		)	6,161
Depreciation	4,821			5,336			4,634
Amortization of intangibles	1,695			1,084			—
Provision for bad debts	969			4,644			4,996
Loss / (gain) on sale of assets	—			424			(5,890		)
Loss on investments	—			432			—
Goodwill impairment	20,306			—			29,861
Write-off of assets	910			—			—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(696		)	14,635			21,952
Other current assets	(786		)	2,388			(1,981		)
Assets held for sale	—			—			397
Other assets	(245		)	(3,612		)	1,298
Refundable income taxes/benefit reserve	(4,088		)	19,051			8,541
Accrued payroll, payroll taxes and benefits	(49		)	3,262			(4,648		)
Accounts payable	(1,072		)	(4,026		)	(4,366		)
Income taxes payable	134			1,033			—
RGII contingency payment	1,221			630			—
Other accrued expenses	582			(2,303		)	(1,432		)
Deferred compensation	530			747			69
Supplemental executive retirement plan	480			117			401
Other liabilities	317			(3,064		)	(1,307		)
Net cash provided by / (used in) operating activities	(1,397		)	16,873			20,650
Cash flows from investing activities
Purchases of furniture and equipment	(2,050		)	(2,387		)	(3,178		)
Proceeds on sale of investments	—			2,517			—
Acquisitions, net of cash received	(14,714		)	(22,178		)	—
Proceeds received from the sale of assets	—			149			16,467
Acquisitions of intangibles	—			(566		)	—
Acquisitions of goodwill	(2,461		)	(1,057		)	(339		)
Net cash provided by / (used in) investing activities	(19,225		)	(23,522		)	12,950
Cash flows from financing activities
Notes payable — banks, net	—			—			(10,000		)
Payment of notes payable	—			(2,636		)	—
Stock options exercised	774			959			449
Purchase of treasury shares	—			(1,230		)	(6,141		)
Stock issued on employee stock purchase plan	623			391			1,102
Net cash provided by / (used in) financing activities	1,397			(2,516		)	(14,590		)
Effect of foreign currency gains/ (losses)	264			2,006			(274		)
Net increase/ (decrease) in cash and cash equivalents	(18,961		)	(7,159		)	18,736
Cash and cash equivalents at beginning of year	52,610			59,769			41,033
Cash and cash equivalents at end of year	$	33,649		$	52,610		$	59,769
Supplemental disclosures of cash flow information:
Cash paid/(received) during the year for:
Interest	$	(224	)	$	(427	)	$	(461	)
Income taxes	461			(20,339		)	(10,967		)
Details of acquisition:
Tangible assets acquired **	$	4,613		$	13,083		$	—
Liabilities assumed	(2,523		)	(7,442		)	—
Goodwill	11,252			13,958			—
Intangibles	2,540			2,926			—
Cash paid	15,882			22,525			—
Less: cash received in acquisition	(1,168		)	(347		)	—
Net cash paid *	$	14,714		$	22,178		$	—

* 2003 Included a $1.5 million note payment

** Excluding cash of $1,168 in 2004 for the AIM acquisition and $347 in 2003 for the RGII acquisition

  Non Cash Activities:

During the first quarter of 2004, the Company recorded a reduction in tax benefit reserves and an increase in additional paid-in capital of $19.9 million.  During the third quarter of 2004, the Company recorded a reduction in other assets and a reduction in additional paid-in capital of $1.2 million.

The accompanying notes are an integral part of these statements.

37

Computer Horizons Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Computer Horizons Corp. is a strategic Information Technology solutions and professional services company which does business principally in the United States and Canada.  The Company enables its Global 2000 (which Forbes magazine defines as the biggest and most important companies as measured by sales, profits, assets and market value) client base to realize competitive advantages through three major divisions, IT Services, Solutions and Chimes, Inc.  The IT Services division provides highly skilled software professionals to augment the internal information management staffs of major corporations. The Solutions division, which includes RGII Technologies Inc. (“RGII”), provides enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Client Relationship Management, network services, strategic outsourcing and managed resourcing as well as education and training.  RGII provides innovative technology services and solutions to the Federal, state and local government markets.  Chimes, Inc., a wholly-owned subsidiary of CHC (“Chimes”), provides workforce procurement and management services to Global 2000 companies.

Principles of Consolidation

The consolidated financial statements include the accounts of Computer Horizons Corp. and its wholly-owned and majority-owned subsidiaries (the “Company”).  All subsidiaries of the Company have been consolidated into these financial statements.  ISG - Canada reports their financials on a one-month lag. All material intercompany accounts and transactions have been eliminated.

Revenue Recognition

Approximately 94% of consolidated revenue in both 2004 and 2003 was derived from time-and-material contracts.

For the IT Services division revenues are recognized as services are performed under time-and-material contracts.  Under a typical time-and-material billing arrangement, our clients are billed on a regularly scheduled basis, such as biweekly or monthly.  At the end of each accounting period, unbilled revenue is estimated and accrued for services performed since the last billing cycle.  These unbilled amounts are billed the following month.

The Solutions Group recognizes revenue either on a time-and-material basis as described above or on a fixed fee basis, though, principally on a time-and-material basis. For fixed fee contracts, revenue is recognized on the basis of the estimated percentage of completion.  Each fixed fee contract has different terms, milestones and deliverables.  The milestones and deliverables primarily relate to the work to be performed and the timing of the billing.  At the end of each reporting period an assessment of revenue recognized on the percentage of completion and milestones achieved criteria is made.  If it becomes apparent that estimated cost will be exceeded or required milestones or deliverables will not have been obtained, an adjustment to revenue and/or costs will be made.  The cumulative effect of revisions in estimated revenues and costs are recognized in the period in which the facts that give rise to the impact of any revisions become known.

38

Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of client billings principally on a time-and-material basis.  At the end of each accounting period, revenue is accrued for services performed since the last billing cycle.  These unbilled amounts are billed the following month.  Costs and estimated earnings in excess of billing on fixed fee contracts arise when percentage of completion accounting is used.  Such amounts are billed at specific dates or at contract completion.

The Company’s Chimes subsidiary recognizes revenue on a transaction fee basis.  The Chimes service offering aggregates the suppliers of temporary workers to the client and renders one invoice to the client.  Upon payment from the client, Chimes deducts a transaction fee and remits the balance of the client payment to the applicable vendor.  Chimes recognizes only its fee for the service, not the aggregate billing to the client.  The gross amount of the client invoicing is not considered revenue or a receivable to Chimes because there is no earnings process for the gross amount and by contract terms, Chimes is not obligated to pay the vendor until paid by the client.

Recruitment Costs

Recruitment costs are charged to operations as incurred.

Advertising Costs

The Company expenses all advertising costs as incurred and classifies these costs under selling, general and administrative expenses.  Advertising costs for the years ended December 31, 2004, 2003 and 2002 were $0.2 million, $ 0.2 million and $0.3 million, respectively.

Research and Development Costs

The Company charges all costs incurred to establish the technological feasibility of software products or product enhancements to research and development costs, which are included in selling, general and administrative expenses and are primarily attributable to the Company’s Chimes subsidiary.  Research and Development costs for the years ended December 31, 2004, 2003 and 2002 were approximately $3.3 million, $3.8 million and $3.7 million, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid instruments with an original maturity of three months or less at the time of purchase and consist of the following at December 31:

	2004		2003
	in thousands
Cash	$	25,456	$	16,473
Commercial paper	8,002		33,980
Restricted cash	191		2,157
	$	33,649	$	52,610

Restricted cash represents funds received by Chimes and held in client-specific bank accounts, to be used to make payments to vendors of the applicable client.

39

Investments

The Company’s marketable securities are categorized as available-for-sale securities, as defined by the Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  Unrealized gains and losses are reflected as a net amount under the caption of accumulated other comprehensive loss within the statement of shareholders’ equity.  Realized gains and losses are recorded within the statement of income under the caption other income or expenses. For the purposes of computing realized gains and losses, cost is identified on a specific identification basis.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, regardless of the degree of such risk, consist principally of cash and cash equivalents and trade accounts receivable. The Company invests the majority of its excess cash in overnight commercial paper of high-credit, high quality short-term money market instruments, high-quality financial institutions or companies, with certain limitations as to the amount that can be invested in any one entity.

The Company maintains its cash balances principally in twelve financial institutions located in the United States, Canada, India and the United Kingdom.  The balances in U.S. banks are insured by the Federal Deposit Insurance Corporation up to $100,000 for each entity at each institution. The balance in the Canadian bank is insured by the Canadian Deposit Insurance Corporation up to $60,000 Canadian (approximately $49,000 U.S.).  The balance in the Indian bank is insured by the Deposit Insurance and Credit Guarantee Corporation up to 100,000 Rupees (approximately $2,000 U.S.).  There is no depository insurance in the United Kingdom.  At December 31, 2004, uninsured amounts held by the Company at these financial institutions total approximately $32,373,000.  At December 31, 2004, the Company had approximately $2,254,000 in cash maintained in overseas financial institutions.

The Company’s clients are generally very large, Global 2000 companies in many industries and with wide geographic dispersion.  For the years ended December 31, 2004, 2003 and 2002, the Company’s ten largest clients accounted for approximately 24%, 38% and 38% of its revenues, respectively, and no single client represents more than 10% of annual revenues.

Fair Value of Financial Instruments

The carrying value of financial instruments (principally consisting of cash and cash equivalents, accounts receivable and payable) approximates fair value because of their short maturities.

Property and Equipment and Depreciation

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

Up to and including the year ended December 31, 2001, the Company evaluated its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicated that the carrying amount of such assets or intangibles may not be recoverable.  Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such an asset was considered to be impaired, the impairment to be recognized was measured by the amount by which the carrying amount of the asset exceeded the fair value of the assets.  Assets to be disposed of were reported at the lower of the carrying amount or fair value less costs to sell.

40

Effective on January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets,” (“FAS 144”).  This supersedes Statement of Financial Accounting Standard No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“FAS 121”), while retaining many of the requirements of such statement. The effect of the adoption of this statement was immaterial to the Company.

Income Taxes

The Company and its domestic subsidiaries file a consolidated Federal income tax return.  The foreign subsidiaries file in each of their local jurisdictions.

The Company follows the liability method of accounting for income taxes.  Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes.  Deferred income taxes are recognized for temporary differences between the financial statement carrying amounts and the tax bases of certain assets and liabilities.  Temporary differences result primarily from net operating loss carryovers, amortization of goodwill, allowance for doubtful accounts and certain accrued liabilities which are deductible, for tax purposes, only when paid.  In assessing the realizability of deferred tax assets, management considers the scheduled reversal periods of the deferred tax assets as well as projected future taxable income and tax planning strategies.  A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Tax benefits from early disposition of the stock by optionees under incentive stock options and from exercise of non-qualified options are credited to additional paid-in capital.

The Company provides United States income taxes on the earnings of foreign subsidiaries, unless they are considered permanently invested outside the United States.  As of December 31, 2004, there is no cumulative amount of foreign earnings on which United States income taxes have not been provided.

Loss Per Share

Basic loss per share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents.  Diluted loss per share is based on the weighted average  number of common and common equivalent shares outstanding, except when the effect is anti-dilutive.  The calculation takes into account when dilutive, the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the year.  For all years presented all stock options (See Note 8) were excluded for diluted loss per share because they were antidilutive.

Use of Estimates in Financial Statements

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Foreign Currency Translation

For operations outside the United States that prepare financial statements in currencies other than the United States dollar (Canadian dollar, British pound, and Indian Rupee), results of operations and cash flows are translated at the average exchange rates during the period, and assets and liabilities are translated at end of period exchange rates.  Exchange amounts included in operations are income of $392,000 and $0 for December 31, 2004, and 2003, respectively.  Translation adjustments are included as a separate component of comprehensive income/(loss) within the statement of shareholders’ equity.

41

Accounts Receivable

Accounts receivable are generally due within 30 days and are stated at amounts due from clients net of an allowance for doubtful accounts.  Accounts outstanding longer than the contractual payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the client’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Goodwill

In June 2001, the FASB approved the issuance of Statement of Financial Accounting Standards No. 141 “Business Combinations” (“FAS 141”), and in July 2001, Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”).  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 are recognized as an asset apart from goodwill.  Goodwill and intangibles with indefinite lives are no longer subject to amortization, but are subject to at least an annual assessment for impairment by applying a fair value based test.  The Company adopted FAS 142 as of January 1, 2002 and in compliance with this new regulation has discontinued the amortization of 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 $(0.96) 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 years ended December 31, 2003 and 2002 the Company completed valuations of the carrying value of the remaining goodwill and it was determined that no additional impairment had occurred.

For the year ended December 31, 2004, using an evaluation prepared by an independent appraisal firm, the Company reassessed the carrying value of goodwill associated with its Solutions Group.  Because of a reduction in projected future cash flows in the Commercial Solutions business unit, primarily resulting from significant revenue declines in 2004, the Company determined that goodwill was impaired and recorded a non-cash charge of $20.3 million, related to the write-off of the Commercial Solutions goodwill.  There was no income tax effect on the impairment charge as the related goodwill was primarily attributable to acquisitions which yielded no tax basis for the Company. The remaining Solutions goodwill of $27.6 million, as of December 31, 2004, is associated with the Company’s Federal government practice.  As of December 31, 2004, the indicated fair value of the Federal Government reporting unit exceeded the carrying value.  As a result, the Company concluded that the goodwill of approximately $27.6 million is not impaired.

The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003, are as follows (in 000’s):

Reporting Units	December 31, 2004			December 31, 2003
Balance as of January 1,	$	34,218		$	19,203
Additions to goodwill*	13,713			15,015
Impairment losses (Commercial Solutions)	(20,306		)	—
Balance as of December 31,	$	27,625		$	34,218

* Additions to goodwill in 2004 recorded principally as a result of the acquisition of AIM ($11.2 million) by RGII, and the Contingent Note paid on the EBIT target of RGII ($1.8 million).  Additions to goodwill in 2003 recorded as a result of the RGII ($14.6 million) and Global Technology Services ($0.4 million) acquisitions.  See Note 15 of the notes to the consolidated financial statements.

42

As of December 31, 2004 and 2003, the fair value of each of the reporting units was calculated using the following approaches (i) market approach and (ii) income approach.  The reporting units are equal to, or one level below, reportable segments. 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.

As of December 31, 2004, based on a valuation completed by an independent appraisal firm, both approaches noted above yielded an indicated value for the Commercial Solutions business unit which was below the carrying value of the entity’s equity. As a result, the Company determined that the commercial Solutions goodwill was impaired and recorded a non-cash goodwill impairment charge of $20.3 million. There was no income tax effect on the impairment charge as the related goodwill was primarily attributable to acquisitions which yielded no tax basis for the Company.

As of December 31, 2004, the indicated fair value of the Federal government reporting unit exceeded the carrying value by approximately $5 million. As a result, the company concluded that the goodwill of approximately $27.6 million was not impaired as of December 31, 2004.

The following pro forma table shows the effect of amortization expense and the cumulative effect of change in accounting principle on the Company’s net loss as follows:

	December 31, 2002
Reported net loss	$	(38,036	)
Cumulative effect of change in accounting  principle	29,861
Goodwill impairment	—
Amortization of intangibles	—
Adjusted net loss	$	(8,175	)
Reported loss per share:
Basic & Diluted	$	(1.22	)
Adjustment for cumulative effect of change in accounting principle:
Basic & Diluted	0.96
Adjustments for goodwill impairment:
Basic & Diluted	—
Adjustment for amortization of intangibles:
Basic & Diluted	—
Adjusted loss per share:
Basic & Diluted	$	(0.26	)

43

Intangible Assets

Intangible assets are the result of the acquisition, in July 2003, of certain assets and operations of RGII, the acquisition of the Xpress software from Commerce One and the acquisition of AIM, by RGII, in April 2004.  Accordingly, the Company completed purchase price allocation reviews and according to FAS 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 December 31, 2004 (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Amortization Period
Amortized intangible assets:
Non-compete agreements	410		78		332		6.2 yrs
RGII trademark	430		360		70		1 yr
RGII software	726		222		504		4.9 yrs
Client contracts	3,900		1,867		2,033		3.0 yrs
Xpress software	566		252		314		3 yrs
Total	$	6,032	$	2,779	$	3,253	3.3 yrs

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 year ended December 31, 2004 was $1,695,000.  The estimated remaining amortization expense for each year ending December 31, is as follows (in thousands):

2005	$		1,190
2006	1,053
2007	641
2008	308
2009	44
Thereafter	17
Total	$	3,253

Recent Accounting Pronouncements

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 the Company’s fiscal period ending March 31, 2004, for VIEs created prior to February 1, 2003.  In December 2003, the FASB published a revision to FIN 46 (“FIN 46R”) to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities.  Under the guidance of FIN 46R, public companies that have interests in VIEs that are commonly referred to as special purpose entities are required to apply the provisions of FIN 46R for periods ending after December 15, 2003.  A public company that does not have any interests in special purpose entities but does have a variable interest in a VIE created before February 1, 2003, must apply the provisions of FIN 46R by the end of the first interim or annual reporting period ending after March 14, 2004.  Adoption of FIN 46R did not have a material effect on the Company’s financial statements.

44

In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for determining whether impairment for certain debt and equity investments is other-than-temporary and the measurement of an impaired loss. The recognition and measurement requirements of EITF 03-1 were initially effective for reporting periods beginning after June 15, 2004. In September 2004, the FASB Staff issued FASB Staff Position (“FSP”) EITF 03-1-1 that delayed the effective date for certain measurement and recognition guidance contained in EITF 03-1. The FSP requires that entities continue to apply previously existing “other-than-temporary” guidance until a final consensus is reached. Management does not anticipate that issuance of a final consensus will materially impact the Company’s financial condition or results of operations.

In December 2004, the FASB issued FAS 123R, “Share-Based Payment”. The provisions of this statement are effective for the Company’s third quarter ending September 30, 2005. Statement 123R requires compensation cost be recognized for new awards of equity instruments and unvested awards on the adoption date.   We expect the adoption of this statement will have a material effect on the Company’s financial statements, but we cannot reasonably estimate the impact of the adoption because certain assumptions used in the calculation of the value of share-based payments may change in 2005.

Accounting for Stock Based Compensation

In December 2002, the FASB approved the issuance of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Translation and Disclosure” (“FAS 148”).  This statement amends FAS 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 FAS 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” (“APB 25”) as modified by Financial Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”) 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 FAS 123, the Company’s net loss and loss per share would have been reduced to the pro forma amounts indicated below:

		2004			2003			2002
Net loss	As reported	$	(25,172,000	)	$	(17,155,000	)	$	(38,036,000	)
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(1,754,000		)	(2,401,000		)	(3,334,000		)
	Pro forma	$	(26,926,000	)	$	(19,556,000	)	$	(41,370,000	)
Loss per share
Basic	As reported	$	(0.82	)	$	(0.56	)	$	(1.22	)
	Pro forma	(0.87		)	(0.64		)	(1.32		)
Diluted	As reported	$	(0.82	)	$	(0.56	)	$	(1.22	)
	Pro forma	(0.87		)	(0.64		)	(1.32		)

45

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively:  expected volatility of 36%, 62% and 64%;  risk-free interest rates of 4.24%, 4.27% and 3.62%; and expected lives of 6.1, 7.8 and 4.4 years.

Reclassifications

Certain reclassifications have been made to the 2003 and 2002 comparative financial statements to conform to the 2004 presentation.

NOTE 2 - ACCOUNTS RECEIVABLE

Accounts receivable consist of the following at December 31:

	2004			2003
	(in thousands)
Billed	$		50,925	$	44,489
Unbilled	6,311			9,238
	57,236			53,727
Less allowance for doubtful accounts	5,914			5,432
	$	51,322		$		48,295

At December 31, 2004 and 2003, the allowance for doubtful accounts includes $0 and $400,000 respectively, pertaining to unbilled receivables.  Included in unbilled accounts receivable at December 31, 2004 and 2003 are amounts not yet billable to clients of approximately $0 and $708,000, respectively.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

	2004		2003
	(in thousands)
Furniture, Fixtures and Equipment	$	36,669	$	36,527
Software	3,406		3,242
Leasehold Improvements	2,735		2,483
	42,810		42,252
Less : accumulated depreciation	36,815		32,929
	$	5,995	$	9,323

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to seven years.  Depreciation expense was $4.8 million, $5.3 million and $4.6 million for the years ended December 31, 2004, 2003 and 2002, respectively.

46

NOTE 4 – ASSET-BASED LENDING FACILITY

The Company has a $40 million line of credit facility with availability based primarily on eligible client receivables.  The interest rate is LIBOR plus 2.75% based on unpaid principal.  The borrowing base less outstanding loans must equal or exceed $5.0 million.  As of December 31, 2004, the Company had no outstanding loan balance against the facility.  Based on the Company’s eligible client receivables and cash balances, $17.7 million was available for borrowing as of December 31, 2004.  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 $99,000 and $109,000 for the years ended December 31, 2004 and 2003, 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.  The Company did not satisfy this covenant for the quarter ended incurring March 31, 2004.  A waiver was received from the lending institution for the quarter ended March 31, 2004 along with an amendment to the loan agreement lowering the three-month average minimum collections covenant to $10 million.  At December 31, 2004, the Company is in compliance with the covenant.  The facility was scheduled to expire in July 2004. However, on July 14, 2004, the Company signed a one-year extension of the facility, which will remain in effect until July 2005.  In February 2005, the Company and its current lending institution agreed in principal to terms (non-binding) which would extend the credit facility for a three-year term. The line of credit would remain at $40 million, with all other terms, conditions and costs similar to those which were in effect as of December 31, 2004.

NOTE 5 - 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 stock outstanding, or approximately 3.2 million shares.  The Company did not repurchase shares of its common stock during the year ended December 31, 2004.  For the year ended December 31, 2003, the Company had repurchased, in the open market, 392,200 shares of its common stock at an average price of $3.08 per share for an aggregate purchase amount of $1.2 million.  For the year ended December 31, 2002, the Company had repurchased, in the open market, 1,611,700 shares of its common stock at an average price of $3.81 per share for an aggregate purchase amount of $6.1 million.  As of December 31, 2004 authorization for repurchase relates to approximately 93,000 shares of common stock.

NOTE 6 - SHAREHOLDERS’ EQUITY

Stock Options

In 1994, the Company adopted a stock option plan which provides for the granting of options, to officers and key employees, for the purchase of a maximum of 7,594,000 shares of common stock and stock appreciation rights (“SARs”). Options and SARs generally expire ten years from the date of grant and become exercisable in specified amounts during the life of the respective options.  No SARs have been granted as of December 31, 2004.  There were 2,427,000 and 2,036,000 shares available for option grants at December 31, 2003 and 2002, respectively, and no shares available as of December 31, 2004 for the 1994 stock option plan.

In May 2004, the Company received shareholder approval and adopted the 2004 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). This plan replaced the 1994 Stock Option and Appreciation Plan and provides for a maximum number of 3,500,000 shares of common stock issuable under the plan. These awards may be stock options, stock appreciation rights, restricted stock or performance share awards.  This Plan is scheduled to expire on May 19, 2014. As of December 31, 2004, there were 3,294,000 shares available for awards under the Omnibus Plan.

47

The Company also has a non-qualified Directors’ stock option plan (the “Directors’ Plan”).  In 1998, the Company amended the Directors’ Plan, providing that each new director of the Company who is not an employee of the Company (i) shall immediately receive options to purchase 10,000 shares of the Company’s common stock and (ii) shall receive annual grants to purchase an additional 10,000 shares of its common stock.  The Directors’ Plan originally was to expire on March 4, 2001 and was extended by the Board of Directors and Shareholders through March 6, 2007.  There were 184,000, 264,000 and 334,000 shares of common stock available for grant at December 31, 2004, 2003 and 2002, respectively, under the Directors’ Plan.

A summary of the status of all the Company’s stock option plans as of December 31, 2004, 2003 and 2002, and changes during the years ending on those dates is presented below:

	2004				2003				2002
	Shares (000’s)		Weighted average exercise price		Shares (000’s)		Weighted average exercise price		Shares (000’s)		Weighted average exercise price
Outstanding – January 1	3,845		$	4.08	4,527		$	7.93	4,841		$	10.11
Granted	276		3.88		1,527		3.76		1,340		3.68
Exercised	(321	)	2.40		(361	)	2.66		(266	)	1.47
Canceled/forfeited/expired	(144	)	3.68		(1,848	)	13.27		(1,388	)	12.45
Outstanding – December 31	3,656		4.23		3,845		4.08		4,527		7.93
Options exercisable – December 31	2,326		4.49		1,420		4.98		2,573		10.89
Weighted average fair value of options granted during the year			$	1.68			$	1.93			$	2.72

The following information applies to options outstanding at December 31, 2004:

Range of exercise prices	Outstanding as of December 31, 2004 (000’s)	Weighted average remaining contractual life	Weighted average exercise price		Exercisable as of December 31, 2004 (000’s)	Weighted average exercise price
0.00 – 4.55	3,397	7.4	$	3.44	2,079	$	3.23
4.55 – 9.10	73	2.7	7.70		61	8.30
9.10 – 13.65	61	0.2	11.59		61	11.59
13.65 – 18.20	60	4.2	15.97		60	15.97
18.20 – 22.75	24	3.1	20.63		24	20.63
22.75 – 27.30	41	3	26.13		41	26.13
	3,656	7.1	$	4.23	2,326	$	4.49

Prior to the adoption of FIN 44 and the Sarbanes-Oxley Act of 2002, certain officers had the right to borrow from the Company against the exercise price of options exercised.  As of December 31, 2004 and 2003, total outstanding borrowings, pertaining to one officer, amounted to $100,000 which borrowings occurred in 1999.

48

The Company issued 150,001 warrants in 2003 to purchase shares of its common stock to one major shareholder.  The exercise price of such warrants is $3.89, representing the fair value of the Company’s common stock at the date of grant.  As of December 31, 2003, 152,134 warrants were outstanding.  There were no warrants exercised in 2004, 2003 or 2002.

Shareholder Rights Plan

In July 1989, the Board of Directors declared a dividend distribution of .131 preferred stock purchase right on each outstanding share of common stock of the Company.  The rights were amended on February 13, 1990.  Each right will, under certain circumstances, entitle the holder to buy one one-thousandth (1/1000) of a share of Series A preferred stock at an exercise price of $90.00 per one one-thousandth (1/1000) share, subject to adjustment.  Each one one-thousandth (1/1000) of a share of Series A preferred stock has voting, dividend and liquidation rights and preferences substantively equivalent to one share of common stock.

The rights will be exercisable and transferable separately from the common stock only if a person or group acquires 20% or more, subject to certain exceptions, of the Company’s outstanding common stock or announces a tender offer that would result in the ownership of 20% or more of the common stock.  If a person becomes the owner of at least 20% of the Company’s common shares (an “Acquiring Person”), each holder of a right other than the Acquiring Person is entitled, upon payment of the then current exercise price per right (the “Exercise Price”), to receive shares of common stock (or common stock equivalents) having a market value equal to twice the Exercise Price.

Additionally, if the Company subsequently engages in a merger or other business combination with the Acquiring Person in which the Company is not the surviving corporation, or in which the outstanding shares of the Company’s common stock are changed or exchanged, or if more than 50% of the Company’s assets or earning power is sold or transferred, a right would entitle a Computer Horizon Corp. shareholder, other than the Acquiring Person and its affiliates, to purchase upon payment of the Exercise Price, shares of the Acquiring Person having a market value of twice the Exercise Price.  Prior to a person becoming an Acquiring Person, the rights may be redeemed at a redemption price of one cent per right, subject to adjustment.  The rights are subject to amendment by the Board.  No shareholder rights have become exercisable.  The rights originally would have expired on July 16, 1999, however, the Board of Directors approved the adoption of a new Shareholder Rights Plan to replace the existing plan.  The terms of the new Rights Plan are substantially the same as the original plan.  The new rights will expire on July 15, 2009.

Stock Option Exchange Program

On January 8, 2003, the Company commenced a tender offer to its employees to exchange stock options granted under the Company’s 1994 Incentive Stock Option and Appreciation Plan with an exercise price of $10.01 or greater for new stock options with a new exercise price.  The tender offer expired on February 10, 2003, and 1,635,526 options were accepted for exchange.  On August 13, 2003, 545,928 options were issued for the exchange at an exercise price of $3.89 per share.

NOTE 7 - INCOME TAXES

The following is a geographical breakdown of the Company’s loss before taxes:

	Year ended December 31,
	2004			2003			2002
	(in thousands)
Domestic	$	(26,929	)	$	(20,360	)	$	(6,005	)
Foreign	(888		)	(3,115		)	(336		)
	$	(27,817	)	$	(23,475	)	$	(6,341	)

49

The provision for income taxes/(benefit) consists of the following for the years ended December 31:

	2004			2003			2002
	(in thousands)
Current
Federal	$	(1,181	)	$	30		$	(4,993	)
State	(255		)	311			701
Foreign	—			—			—
Total current	(1,436		)	341			(4,292		)
Deferred
Federal	(2,320		)	(6,750		)	819
State	1,066			—			5,342
Foreign	—			—			—
Total deferred	(1,254		)	(6,750		)	6,161
	$	(2,690	)	$	(6,409	)	$	1,869

Deferred tax assets and liabilities consist of the following at December 31:

	2004			2003
	(in thousands)
Deferred tax liabilities
Depreciation	$	—		$	(498	)
Amortization of intangibles	(276		)	—
Prepaid insurance	(372		)	—
Total deferred tax liabilities	$	(648	)	$	(498	)
Deferred tax assets
Federal and state net operating losses	24,336			16,260
Foreign net operating losses	2,654			4,742
Capital losses	1,222			—
Amortization of intangibles	—			4,167
Accrued payroll and benefits	2,431			1,709
Allowance for doubtful accounts	2,077			2,324
Restructuring charges	277			837
Other	1,010			1,398
Total deferred tax assets	34,007			31,437
Valuation allowance	(13,793		)	(11,612		)
Net deferred tax assets	$	19,566		$	19,327
Current	$	1,868		$	4,514
Non current	17,698			14,813
Total	$	19,566		$	19,327

50

A reconciliation of income taxes/(benefit), as reflected in the accompanying statements, with the statutory Federal income tax rate of 35% for the years ended December 31, 2004, 2003 and 2002 is as follows:

	2004			2003			2002
	(in thousands)
Statutory Federal income taxes	$	(9,736	)	$	(8,217	)	$	(2,219	)
State and local income taxes/(benefit), net of Federal tax effect	527			203			91
Goodwill impairment	5,391			—			—
Change in valuation allowance, sale of assets	—			—			(1,855		)
Change in valuation allowance, other	2,181			1,092			5,095
Other, net	(1,053		)	513			757
	$	(2,690	)	$	(6,409	)	$	1,869

At December 31, 2004 the Company had a Federal net operating loss carryforward of approximately $48.7 million; $11.4 million expires in 2022, $18.3 million expires in 2023 and $19.0 million expires in 2024.

At December 31, 2004 the Company had state deferred tax assets, net of Federal tax effect, of approximately $8.1 million relating primarily to state net operating loss carryforwards.  These state net operating loss carryforwards are subject to limitations which differ from Federal law.  Many states do not allow the carryback of net operating losses, have shorter carryforward periods and do not allow the filing of consolidated returns.  These state limitations create uncertainties with respect to the realization of these state deferred tax assets.  Accordingly, the Company has recorded a valuation allowance of approximately $7.6 million with respect to these assets.

Certain foreign subsidiaries of the Company had net operating loss carryforwards at December 31, 2004, totaling approximately $7.5 million (including $5.8 million in Canada and $1.7 million in the United Kingdom); $1.6 million expires in 2006, $1.1 million expires in 2007, $1.8 million expires in 2008, $1.3 million expires in 2011 and the remainder has no expiration.  A full valuation allowance has been recorded on the foreign taxes due to the uncertainty of the realization of certain tax benefit from these net operating loss carryforwards.

At December 31, 2004 refundable income taxes consisted primarily of refundable payroll credits claimed on the Company’s Canadian income tax returns.

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, which was received in April 2002, 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, was accounted for as a pooling-of-interests.  For income tax purposes, the transaction was treated as a taxable purchase that gave 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 was subject to review by the tax authorities, the Company recorded a reserve for the tax benefits resulting from the carryback and did not record deferred tax assets for the tax benefits being carried forward.

51

In December 2003, the Internal Revenue Service examined 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 was shown as a liability until the audit was completed.  During the first quarter of 2004, the Internal Revenue Service and the Joint Committee on Taxation completed their examination of the Company’s Federal income tax returns and Federal refund claims, and accepted them without change.  Accordingly, the tax benefit was recorded as a decrease in tax benefit reserves of $19.6 million, a decrease in other tax reserves of $0.3 million, and an increase in additional paid-in capital of $19.9 million. There was no charge or credit to income.  The Company did not record deferred tax assets for the tax benefits being carried forward due to remaining uncertainties.  It is anticipated that a deferred tax asset, net of an appropriate valuation allowance, will be recorded when it is probable that the tax benefit will be realized.  The tax benefit will be reflected as an increase in additional paid-in capital.

The Company assesses the likelihood of the ultimate determination of various contingent tax liabilities that arise in many different tax jurisdictions.  These tax matters can be complex in nature and uncertain as to the ultimate outcome.  The Company establishes reserves for tax contingencies when it believes that an unfavorable outcome is likely to occur and the liability can be reasonably estimated.  Although the Company believes these positions are fully supportable, the likelihood of potential challenges and sustainability of such challenges upon examination are considered.  The Company had reserves for tax contingencies at December 31, 2004 and December 31, 2003 of approximately $1.3 million and $2.8 million, respectively. Changes in the Company’s tax reserves have occurred and are likely to continue to occur as changes occur in the current facts and circumstances.  The net impact of the reassessments of such changes resulted in the recognition of income tax benefits of $1.5 million for the year ended December 31, 2004, and income tax expense of  $0.2 million for the year ended December 31, 2003.  In addition, the Company’s Federal net operating loss carryforward at December 31, 2004 of $48.7 million excludes deductions of approximately $17.8 million for uncertain tax positions relating to transactions occurring in the ordinary course of business.

NOTE 8 - LOSS PER SHARE DISCLOSURES

The computation of diluted loss per share excludes all options because they are antidilutive.  During 2004, there were 3,656,000 excluded options outstanding at December 31, 2004 with a weighted average exercise price of $4.23 per share.   During 2003, there were 3,854,000 excluded options outstanding at December 31, 2003 with a weighted average exercise price of $4.08 per share.  During 2002, there were 4,527,000 excluded options outstanding at December 31, 2002 with a weighted average exercise price of $7.93 per share.

NOTE 9 - SEGMENT INFORMATION

Through December 31, 2004, the Company 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 Federal government, enterprise application services, e-business solutions, customized Web development and Web enablement of strategic applications, Client Relationship Management (CRM), network services, strategic outsourcing and managed resourcing to major corporations, along with Federal, state and local governments.  Chimes, Inc., a wholly-owned subsidiary of CHC, provides workforce procurement and management services to Global 2000 companies, which, according to Forbes magazine, represents the biggest and most important companies as measured by sales, profits, assets and market value.

During the fourth quarter of 2004, the Company completed a restructuring initiative whereby the Company’s business model has been realigned, effective January 1, 2005, around its three distinct segments of clients : Federal Government, Commercial and Vendor Management services (Chimes), and will report accordingly to conform to the new presentation of CHC business segments for the first quarter of 2005.   This realigned business model is designed to deliver improved operational performance for the Company and reduce annual operating costs.

52

Income/(loss) before income tax benefit consists of income/(loss) before income taxes, excluding interest income, interest expense, gain/(loss) on the sale of assets/investments, restructuring charges, special charges/(credits), the write-off of  assets and a terminated project, amortization of intangibles and goodwill impairment.  These exclusions total expense of $24.6 million, $18.0 million and income of $4.1 million December 31, 2004, 2003 and 2002, respectively.   Long-term assets include goodwill, intangibles and property, plant and equipment for 2004 and 2003, and goodwill and property, plant and equipment for 2002.  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 receiving Corporate services based on revenue.

53

BY LINE OF BUSINESS	2004			2003			2002
	(in thousands)
Revenue:
IT Services	$	131,204		$	133,070		$	201,295
Solutions Group	108,231			92,122			79,283
Chimes	23,092			20,018			16,537
Total revenue	$	262,527		$	245,210		$	297,115
Gross Margin:
IT Services	$	24,613		$	26,740		$	40,626
Solutions Group	35,612			26,646			25,712
Chimes	21,696			18,626			14,596
Total gross margin	$	81,921		$	72,012		$	80,934
Operating income / (loss):
IT Services	$	5,631		$	8,053		$	15,044
Solutions Group	9,187			9,258			7,621
Chimes	1,420			(2,177		)	(7,490		)
Total operating income/(loss)	$	16,238		$	15,134		$	15,175
Corporate Allocation:
IT Services	$	11,915		$	12,108		$	17,287
Solutions Group	5,438			6,743			6,855
Chimes	2,105			1,841			1,442
Total corporation allocation	$	19,458		$	20,692		$	25,584
Income / (loss) before income tax benefit:
IT Services	$	(6,284	)	$	(4,055	)	$	(2,243	)
Solutions Group	3,749			2,515			766
Chimes	(685		)	(4,018		)	(8,932		)
Total income / (loss) before income tax benefit	$	(3,220	)	$	(5,558	)	$	(10,409	)
Assets:
IT Services	$	27,353		$	21,253		$	47,876
Solutions Group	76,659			70,322			29,640
Chimes	12,313			14,402			26,762
Corporate and other	42,759			74,349			89,453
Total assets	$	159,084		$	180,326		$	193,731
Depreciation Expense:
IT Services	$	300		$	563		$	482
Solutions Group	1,142			1,433			1,133
Chimes	1,532			1,476			1,044
Corporate and other	1,847			1,864			1,975
Total depreciation	$	4,821		$	5,336		$	4,634

54

BY GEOGRAPHIC AREA *	2004		2003			2002
	(in thousands)
REVENUE
United States	$	234,525	$		219,453	$	270,890
Canada	27,592		24,709			23,390
Europe	272		627			2,775
India	138		421			—
Australia	—		—			60
Total Revenue	$	262,527	$	245,210		$		297,115

* Revenue is generated for each geographic segment based on the locale of the client.

LONG-TERM ASSETS
United States	$	35,621	$	45,191	$	29,486
Canada	1,211		705		628
Europe	—		—		106
India	41		53		—
Total Long-Term Assets	$	36,873	$	45,949	$	30,220

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

	2004				2003				2002
	(in thousands)
Total segments loss before income tax benefit	$		(3,220	)	$	(5,558		)	$	(10,409		)
Adjustments:
Special credits / (charges)	939				(10,113			)	—
Restructuring charges	(2,859			)	(3,278			)	(2,515			)
Write off of terminated project	—				(3,064			)	—
Amortization of intangibles	(1,695			)	(1,084			)	—
Net gain/(loss) on investments	—				(432			)	(61			)
Gain/(loss) on sale of assets	—				(424			)	5,890
Interest income	337				529				928
Interest expense	(103			)	(51			)	(174			)
Goodwill impairment	(20,306			)	—				—
Write-off of assets	(910			)	—				—
Total Adjustments	(24,597			)	(17,917			)	4,068
Consolidated loss before income taxes	$	(27,817		)	$		(23,475	)	$		(6,341	)

NOTE 10 - SAVINGS PLAN AND OTHER RETIREMENT PLANS

The Company maintains a defined contribution savings plan covering eligible employees.  The Company makes contributions up to a specific percentage of participants’ contributions.  The Company contributed approximately $661,000, $821,000 and $1,089,000 in 2004, 2003 and 2002, respectively.

55

In 1995, the Company instituted a Supplemental Executive Retirement Plan, or SERP, whereby key executives are entitled to receive lump-sum payments (or, if they elect, a ten-year payout) upon reaching the age of 65 and being in the employment of the Company.  The maximum commitment if all plan members remain in the employment of the Company until age 65 is approximately $9.8 million.  Benefits accrue and vest based on a formula which includes total years with the Company and total years possible until age 65.   In the event of a change of control, as defined in the Plan, this event would result in an immediate vesting of the retirement benefit. The plan is nonqualified and not formally funded.  Life insurance policies on the members are purchased to assist in funding the cost.  The SERP expense is charged to operations during the remaining service lives of the members and was $480,000 in 2004, $480,000 in 2003 and $407,000 in 2002.  The cumulative accrued liability for the SERP was $2.2 million as of December 31, 2004 and $1.7 million at December 31, 2003 based on the Unit Credit Method by using a discounting rate of 9% until age 65 for each participant.   Benefit distributions (assuming all participants remain in employment until age 65) are scheduled to be nil for 2005, $250,000 for 2006 through 2007, $1.0 million for 2008 through 2009, and $8.5 million for 2010 through 2025.

The following represents the fair value (included in Other Non-current Assets) and unrealized gain/(loss) for the deferred compensation and SERP plans as of December 31, 2004 and 2003 (amounts in thousands):

	As of				For the years ended
	December 31, 2004		December 31, 2003		December 31, 2004			December 31, 2003
	Fair Value				Unrealized gain / (loss) on SERP investments
Money market funds	$	395	$	386	$	96		$	(7	)
Debt securities issued by the US Treasury	367		327		(32		)	(7		)
Corporate debt securities	148		282		(17		)	(5		)
Mortgage-backed securities	227		—		(16		)	—
Equity securities	4,903		4,166		294			(470		)
Total	$	6,040	$	5,161	$	325		$	(489	)

During 1999, the Company adopted an Employee Stock Purchase Plan to provide substantially all employees who have completed six months of service an opportunity to purchase shares of its common stock through payroll deductions, up to 10 percent of eligible compensation.  Quarterly, participant account balances are used to purchase shares of stock at 85 percent of its fair market value on either the first or last trading day of each calendar quarter.  A total of 4 million shares were approved, with approximately 2.3 million available for purchase under the plan at December 31, 2004.  There were 171,222, 153,765 and 405,366 shares purchased under the plan in 2004, 2003 and 2002, respectively.

In addition, the Company adopted a Deferred Compensation Plan for key executives that permits the individuals to defer a portion of their annual salary or bonus for a period of at least five years.  There is no effect on the Company’s operating results since any amounts deferred under the plan are expensed in the period incurred.  Amounts deferred amounted to $2.6 million and $2.1 million as of December 31, 2004 and 2003, respectively.

In December 2003, John Cassese, the former CEO of Computer Horizons Corp., received a lump-sum payment of $1.3 million, net of taxes from his deferred compensation plan account in accordance with his severance agreement.  The Company redeemed insurance policies to fund this payment and received approximately $2.5 million for the surrender values of the split dollar policies.  The Company recorded a realized loss of approximately $432,000 on investments for these insurance policies, which had an original cost of approximately $2.9 million.

56

NOTE 11 - COMMITMENTS

Leases

The Company leases office space and equipment under long-term operating leases expiring through 2008.  As of December 31, 2004, approximate minimum rental commitments were as follows:

Year ending	(in thousands)
2005	$	5,287
2006	2,599
2007	1,978
2008	90
Thereafter	—
	$	9,954

Office rentals are subject to escalations based on increases in real estate taxes and operating expenses.  Rent expense, net of sublease income of approximately $ 131,000, $137,000 and $480,000 for December 31, 2004, 2003 and 2002, respectively, for operating leases approximated $5.7 million, $5.0 million and $5.3 million in the years ended December 31, 2004, 2003 and 2002, respectively.

Other

In 2003, the Company entered into a separation package with the Company’s former CEO which contained a commitment for the Company to provide continued medical coverage until age 75, with remaining payments totaling approximately $102,000 at December 31, 2004.

NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

For the years ended December 31, 2004 and 2003, selected quarterly financial data is as follows:

	Quarters
	First				Second			Third			Fourth
	(in thousands, except per share data)
2004
Revenues	$	59,706			$	65,790		$	69,397		$		67,634
Direct costs	40,806				44,507			47,880			47,413
Gross profit	18,900				21,283			21,517			20,221
Selling, general and administrative	19,587				21,554			21,851			22,149
Restructuring charges	—				—			—			2,859
Goodwill impairment	—				—			—			20,306
Write-off of assets	—				—			—			910
Special (credits)	—				(939		)	—			—
Amortization of intangibles	208				520			484			483
(Loss)/profit from operations	(895			)	148			(818		)	(26,486			)
Interest income/(expense) - net	83				29			93			29
(Loss)/profits before income taxes	(812			)	177			(725		)	(26,457			)
Income taxes/(benefit)	(254			)	97			(323		)	(2,210			)
Minority interest	(9			)	45			(58		)	(23			)
Net(loss)/profit	$	(567		)	$	125		$	(460	)	$	(24,270		)
Loss per share (basic and diluted):
Net loss	$		(0.02	)	$	0.00		$	(0.01	)	$	(0.78		)

57

	Quarters
	First			Second			Third			Fourth
	(in thousands, except per share data)
2003
Revenues	$	60,253		$	58,833		$	64,459		$	61,665
Direct costs	42,773			43,494			45,069			41,862
Gross profit	17,480			15,339			19,390			19,803
Selling, general and administrative	18,926			20,716			20,883			20,109
Restructuring charges	249			1,949			787			293
Special charges	—			7,978			800			1,335
Amortization of intangibles	—			—			526			558
Loss from operations	(1,695		)	(15,304		)	(3,606		)	(2,491		)
Loss on sale of assets	(273		)	—			—			(151		)
Loss on investments	—			—			—			(432		)
Interest income/(expense) - net	168			90			78			142
Loss before income taxes	(1,800		)	(15,214		)	(3,528		)	(2,933		)
Income taxes/(benefit)	(540		)	(4,381		)	(664		)	(824		)
Minority interest	(19		)	(18		)	21			(73		)
Net loss	$	(1,279	)	$	(10,851	)	$	(2,843	)	$	(2,182	)
Loss per share (basic and diluted):
Net loss	$	(0.04	)	$	(0.36	)	$	(0.09	)	$	(0.07	)

NOTE 13 - RESTRUCTURING CHARGES

During the fourth quarter of 2004, in connection with the Company’s business model realignment, the Company recorded a restructuring charge of approximately $2.9 million comprised of approximately $2.8 million in severance costs and $0.1 million in lease obligation costs.  The lease obligation of $110,000 is calculated based on current rent commitments less a calculated sublease amount based on current market conditions.  As a result of this restructuring, the Company is expecting an approximate $5 million reduction in its annual costs, which will be predominantly reflected in the IT Services and Commercial Solutions (non-Federal) businesses, designed to deliver improved operational performances.

	Recorded		Paid			Adjusted		Remaining at December 31, 2004
Severance :
Canada	$	494	$	—		$	41	$	535
United States	2,255		(353		)	—		1,902
Total Severance	$	2,749	$	(353	)	$	41	$	2,437
Lease Obligations :
United States	$	110	$	—		$	—	$	110
Total	$	2,859	$	(353	)	$	41	$	2,547

58

During 2003, the Company recorded restructuring charges of approximately $3.3 million relating to the closing of several offices in the United States, Canada and the United Kingdom, including the related severance costs.  The severance costs approximated $1.5 million and the future lease obligation costs (less a calculated sublease amount), including office closure expenses, approximated $1.8 million.

	Remaining at December 31, 2003		Paid			Currency Translation *		Remaining at December 31, 2004
Severance:
United Kingdom*	$	47	$	—		$	3	$	50
Total Severance	$	47	$	—		$	3	$	50
Lease Obligations:
United States	$	90	(90		)	$	—	$	—
United Kingdom*	150		(35		)	8		123
Canada	739		(420		)	—		319
Total Lease Obligations	$	979	$	(545	)	$	8	$	442
General Office Closure:
United Kingdom*	$	49	$	(7	)	$	3	$	45
Total	$	1,075	$	(552	)	$	14	$	537

* Recorded balances change due to fluctuations in exchange rates

During 2002, the Company recorded restructuring charges approximating $2.8 million, primarily pertaining to office closings. Amounts remaining from this restructuring, and previous restructurings, pertain to future lease obligation costs.

	Remaining at December 31, 2003		Paid			Adjusted			Remaining at December 31, 2004
Lease Obligations:
United States	$	1,545	$	(1,244	)	$	(34	)	$	267

NOTE 14 – MAJORITY-OWNED SUBSIDIARY

On September 30, 2002, the Company announced that it had joined its existing HIPAA compliance, healthcare information technology and other compliance business practices with ZA Consulting LLC (ZAC) to form CHC Healthcare Solutions, LLC.  Under the terms of the agreement, CHC had an 80% interest in the newly formed company.

On December 31, 2004, the Company acquired the 20% minority interest owned by ZAC, in exchange for the forgiveness of a ZAC note obligation to the Company approximating $630,000.

59

NOTE 15 - ACQUISITIONS

On April 1, 2004, RGII acquired Automated Information Management, Inc. (“AIM”). The cash transaction is valued at approximately $13.8 million plus an adjustment to purchase price for excess working capital of approximately $2.0 million.

The Company purchased AIM to further its commitment to driving the growth potential that exists in the Federal government market and to expand RGII’s footprint, providing an entrance into certain government agencies, as well as strong relationships with large, prime contractors.

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

	Allocation of Purchase Price
Cash	$	1,168
Accounts receivable	3,300
Other current assets	18
Property and equipment	127
Goodwill	11,252
Intangibles	2,540
Total assets	18,405
Accounts payable	400
Accrued payroll	747
Other accrued expenses	361
Deferred tax liabilities	1,015
Total liabilities	2,523
Net assets	$	15,882

Purchased intangibles totaling $2.5 million included unfunded backlog, funded backlog, AIM trademark and non compete agreements.  Approximately $11.2 million was recorded as goodwill.

The acquisition was structured as a purchase of common stock; and accordingly, the goodwill will not be subject to amortization for tax purposes.

Pro Forma Results

Effective April 1, 2004, the results of AIM’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 AIM 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 indicative of the results of operations for the periods specified had the transaction actually been completed at the beginning of the period.

60

	Unaudited Pro Forma (in thousands)
	Year Ended December 31,
	2004			2003
Revenues:
IT Services	$	131,204		$	133,070
Solutions Group	112,669			110,578
Chimes	23,092			20,018
Total	266,965			263,666
Loss before minority interest	(25,214		)	(16,675		)
Minority interest	(45		)	(89		)
Net loss	$	(25,259	)	$	(16,764	)
Loss per share – (basic & diluted):
Net loss	$	(0.82	)	$	(0.55	)
Weighted average number of shares outstanding – basis & diluted	30,870,000			30,455,000

The unaudited pro forma financial information above reflects the following adjustments to the historical consolidated financial statements for the year ended December 31, 2004: $313,000 amortization expense on purchased intangible assets, elimination of Acquisition related bonuses of $2.3 million, $43,500 reduction of interest income for cash consideration paid and $40,000 adjustment to record income tax benefit for AIM as if it was a C-Corporation and to record income tax effect of pro forma adjustments.

The unaudited pro forma financial information above reflects the following adjustments to the historical consolidated financial statements for the year ended December 31, 2003:  $1.3 million amortization expense on purchased intangible assets, $174,000 reduction of interest income for cash consideration paid and $146,000 adjustment to record income taxes for AIM as if it was a C-Corporation and to record income tax effect of pro forma adjustments.

As a result of the integration of AIM into RGII, the Company and the seller of RGII have agreed that the operating results of AIM shall remain separate from and not be included in the RGII EBIT targets related to contingent payments.   RGII, however shall be permitted an intercompany charge to AIM for AIM’s share of combined operating overhead expenses.

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 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 a 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 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. 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.  At the years ended December 31, 2003 and 2004, the seller received payments of $631,000 and $1.8 million, respectively.  The Company also entered into employment agreements with the former shareholder and key employees of RGII and has agreed to issue an aggregate of 600,000 options to purchase shares of Computer Horizons stock over a three-year period.

61

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

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 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 Chennai (Madras), India.  This transaction was accounted for as a purchase and the entire purchase price was allocated to goodwill.

NOTE 16 - NET ASSETS HELD FOR SALE

The Company decided in 2000 to offer three of its subsidiaries (Princeton Softech “Princeton”, including the SELECT Software Tools division “Select”, CHC International Limited “Spargo”, and eB Networks “EBN”) for sale or disposition and accordingly classified these entities as “assets held for sale.”

During 2001, two of the subsidiaries and Select were sold (See Note 17).  During 2002, the last remaining asset held for sale, Princeton, was sold (See Note 17).  During the year ended December 31, 2002 Princeton’s revenue was $2.9 million and its loss, net of taxes, was $1.3 million.

NOTE 17 - 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 $272,000.

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 September 10, 2001, the Company sold the assets of EBN to Inrange Technologies, a storage networking company, for cash of $5.4 million, including amounts held in escrow of $540,000.  The loss from the transaction was initially estimated as $3.2 million, which included the final write-down of related goodwill of $2.1 million.  A purchase price adjustment was recorded in the fourth quarter of 2002 resulting in an increase to the loss of $144,000.

On August 30, 2001, the Company sold the ICM Education name to AlphaNet Solutions, Inc., an IT professional services firm, for $0.5 million.  The gain from the transaction was $332,000.  In November 2002, the Company received an additional $100,253 from AlphaNet Solutions, Inc. relating to an earnout.

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 $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.

62

On January 31, 2001, the Company sold the stock of CHC International Limited, (“Spargo”), to an information technology consultancy services provider for cash of $3.2 million.  The gain from the transaction was initially estimated as $438,000.  A purchase price adjustment of $2.7 million was recorded, in the fourth quarter of 2002, to increase the gain after the final resolution of outstanding accounts receivables and the termination of leases.

NOTE 18 – SPECIAL ITEMS

For the year ended December 31, 2004, the Company recorded a special credit of $939,000 consisting of an insurance refund.  The Company also incurred restructuring charges of $2.9 million ($2.8 million in severance costs and $0.1 million in lease obligation costs) as a result of realigning the Company’s business model effective January 1, 2005.   In addition, as of December 31, 2004, the Company determined that goodwill pertaining to Commercial Solutions business unit was impaired and recorded a non-cash impairment charge of $20.3 million.   The Company also recorded a write-off of assets in 2004 approximating $0.9 million relating to the write-off of a security deposit in connection with an escrow agreement of a previously sold subsidiary and the write-off of fixed assets related to previously closed offices.

During the year ended December 31, 2003, the Company incurred special charges of $10.1 million consisting of a severance package for the Company’s former CEO and expenses related to the unilateral acquisition proposal and activities of Aquent LLC.  The separation package of the Company’s former CEO, included a $3.5 million severance payment and $200,000 in continued medical coverage.  In addition, $6.4 million of the special charges pertained to the unilateral acquisition proposal and activities of Aquent LLC.  This expense is primarily attributable to approximately $3.4 million of legal fees, $1.8 million in financial advisor fees and $1.2 million of proxy solicitation and other fees.  As management considers these special items to be infrequent, yet 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 $3.3 million for the year ended December 31, 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.

NOTE 19- COMPREHENSIVE INCOME/(LOSS)

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“FAS 130”), requires that items defined as other comprehensive income/(loss), such as foreign currency translation adjustments and unrealized gains and losses, 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 years ended December 31, 2004 and 2003 are as follows :

63

	Year Ended
	December 31, 2004			December 31, 2003
	(dollars in thousands)
Comprehensive Income/(Loss) :
Net Income/(Loss)	$	(25,172	)	$	(17,155	)
Other comprehensive income/ (loss) – foreign currency adjustment	264			2,006
Unrealized gain / (loss) on SERP investments	325			(489		)
Comprehensive Income/(Loss)	$	(24,583	)	$	(15,638	)

The accumulated balances related to each component of other comprehensive income (loss) were as follows:

	Foreign Currency Translation		Unrealized gain/(loss) on Investments		Accumulated Other Comprehensive Income/Loss)
	(dollars in thousands)
Balance at December 31, 2002	(3,206	)	(1,100	)	(4,306	)
Other comprehensive income (loss)	2,006		(489	)	1,517
Balance at December 31, 2003	(1,200	)	(1,589	)	(2,789	)
Other comprehensive income (loss)	264		325		589
Balance at December 31, 2004	(936	)	(1,264	)	(2,200	)

NOTE 20 – 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 made a rescission offer, effective July 27, 2004, to all those persons who purchased shares of common stock pursuant to the Employee Stock Purchase Plan during the affected periods.  The rescission offer was made pursuant to a registration statement filed under the Securities Act and pursuant to applicable state securities laws.  In this rescission offer, the Company offered 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 expired on August 27, 2004, with no individuals accepting the rescission offer.

NOTE 21 – LEGAL MATTERS

The Company is involved in various and routine litigation matters, which arise through the normal course of business.  Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

64

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

There have been no disagreements with the Company’s independent accountants involving accounting and financial disclosure matters.

Item 9A.  Controls and Procedures

Disclosure Controls and Procedures

The Company’s CEO and CFO have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended.

Internal Controls over Financial Reporting

Except as described below, there have not been any changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  However, in October 2004, the 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 a material weakness.  This 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.  In addition, certain accounts were not properly reconciled, resulting in adjustments to accrued expenses and shareholders’ equity (not effecting 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.

65

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

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

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

•Monthly, the Corporate Controller reviews and approves all intercompany elimination entries to ensure amounts are properly recorded.

•Canadian intercompany accounts, which previously recorded all receivable and payable activity in the same balance sheet account, were divided into two intercompany accounts – one to record only intercompany invoicing transactions, one to record other (funding) transactions.  This allows better tracking of intercompany transactions and would more easily highlights incorrect entries, if any.

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

•Additional training (internal and external) has been and 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 to ensure that newly designed controls are functioning properly.

Management and the Audit Committee have closely monitored 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 there under.  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.

As of December 31, 2004, management has implemented substantially all of the above noted procedures and believes that the previously noted material weakness has been remediated.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15 (f) and 15d-15 (f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that :

1.Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;

2.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

66

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004.  In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission.

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of our internal control over financial reporting as prescribed above for the periods covered by this report.  Based on our evaluation, our Principal Executive Officer and Principal Financial Officer concluded that the Company’s internal control over financial reporting is effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s independent auditors have attested to, and reported on, management’s evaluation of our internal control over financial reporting.  This report is contained in this Annual Report on Form 10-K.

Item 9B. Other Information

The Company has no information required to be disclosed in a current report on a Form 8-K during the fourth quarter 2004 and not otherwise disclosed in a current report on a Form 8-K.

67

PART III

Item 10.  Directors and Executive Officers of the Registrant

(a)The information called for by Item 10 with respect to identification of directors of the Company is incorporated herein by reference to the material under the caption “Election of Directors” in the Company’s Proxy Statement for its 2005 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission (the “2005 Proxy Statement”).

(b)The information called for by Item 10 with respect to executive officers of the Company is included in Part I herein under the caption “Executive Officers of the Company.”

(c)The information called for by Item 10 with respect to compliance with Section 16(a) of the Securities Exchange Act of 1939 is incorporated herein by reference to the material under the caption “Compliance with Section 16(a) of the Exchange Act” in the 2005 Proxy Statement.

Code of Ethics

Our executive officers are subject to a code of ethics that complies with standards mandated by the Sarbanes-Oxley Act of 2002.  The complete code of ethics is available on our website at www.computerhorizons.com.  At any time it is not available on our website, we will provide a copy upon written request made to our Investor Relations Department, at 49 Old Bloomfield Avenue, Mountain Lakes, New Jersey 07046-1495.  Information on our website is not part of this Annual Report.  If we amend or grant any waiver from a provision of our code of ethics that applies to our executive officers, we will publicly disclose such amendment or waiver as required by applicable law, including by posting such amendment or waiver on our website at www.computerhorizons.com or by filing a Current Report on Form 8-K.

Item 11. Executive Compensation

The information called for by Item 11 with respect to management remuneration and transactions is incorporated herein by reference to the material under the caption “Executive Compensation” in the 2005 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information called for by Item 12 with respect to security ownership of certain beneficial owners and management and the equity compensation plan information is incorporated herein by reference to the material under the caption “Security Ownership of Certain Beneficial Owners” in the 2005 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

In December 2003, John Cassese, the former CEO of Computer Horizons Corp., received a lump-sum payment of $1.3 million, net of taxes from his deferred compensation plan account in accordance with his severance agreement.  The Company redeemed insurance policies to fund this payment and received approximately $2.5 million for the surrender values of the split dollar policies.  The Company recorded a realized loss of approximately $432,000 on investments for these insurance policies, which had an original cost of approximately $2.9 million.

Item 14. Principal Accountant Fees and Services

The information called for by Item 14 with respect to Principal Accountant Fees and Services is incorporated herein by reference to the material under the caption “Audit Fees” in the 2005 Proxy Statement.

68

PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports

(a) Financial Statements and Financial Statement Schedules

1.  Consolidated financial statements

•Report of independent registered public accounting firm on the consolidated financial statements

•Report of independent registered public accounting firm on internal controls

•Consolidated balance sheets as of December 3l, 2004 and 2003

•Consolidated statements of operations for each of the three years in the period ended December 31, 2004

•Consolidated statement of shareholders’ equity for each of the three years in the period ended December 31, 2004

•Consolidated statements of cash flows for each of the three years in the period ended December 31, 2004

•Notes to consolidated financial statements

69

2.  Schedule II - Valuation and qualifying accounts for the years ended December 31, 2004, 2003 and 2002.

	Column B		Column C	Column D		Column E
Column A	Balance at beginning of period		Charged to cost and expenses	Deductions - describe		Balance at end of period
Description
Year ended December 31, 2004
Allowance for doubtful accounts	$	5,432,000	969,000	487,000	(1)	$	5,914,000
Deferred tax asset valuation	$	11,612,000	2,181,000	—		$	13,793,000
2004 Restructure Reserve	—		2,859,000	312,000	(2)	$	2,547,000
2003 Restructure Reserve	$	1,075,000	—	538,000	(2)	$	537,000
2002 Restructure Reserve	$	1,159,000	—	1,018,000	(2)	$	141,000
2000 Restructure Reserve	$	78,000	—	78,000	(2)	$	—
1999 Restructure Reserve	$	308,000	—	182,000	(2)	$	126,000
Year ended December 31, 2003
Allowance for doubtful accounts	$	7,696,000	4,644,000	6,908,000	(1)	$	5,432,000
Deferred tax asset valuation	$	10,289,000	1,323,000	—		$	11,612,000
2003 Restructure Reserve	$	—	3,278,000	2,203,000	(2)	$	1,075,000
2002 Restructure Reserve	$	2,483,000	—	1,324,000	(2)	$	1,159,000
2000 Restructure Reserve	$	295,000	—	217,000	(2)	$	78,000
1999 Restructure Reserve	$	488,000	—	180,000	(2)	$	308,000
Year ended December 31, 2002
Allowance for doubtful accounts	$	7,542,000	4,996,000	4,842,000	(1)	$	7,696,000
Deferred tax asset valuation	$	3,340,000	6,949,000	—		$	10,289,000
2002 Restructure Reserve	$	—	2,847,000	364,000	(2)	$	2,483,000
2000 Restructure Reserve	$	1,464,000	—	1,169,000	(2)	$	295,000
1999 Restructure Reserve	$	626,000	—	138,000	(2)	$	488,000

Notes

(1)Uncollectible accounts written off, net of recoveries.

(2)Includes payments for severance (in 2004) and lease obligation payments for closed offices.

70

Report of Independent Registered Public Accounting Firm on Schedule II

Board of Directors and Shareholders

Computer Horizons Corp.

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of Computer Horizons Corp. and Subsidiaries referred to in our report dated March 14, 2005, which is included in the 2004 Annual Report on Form 10-K.  Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.  Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements.  This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statement taken as a whole.

/s/ Grant Thornton LLP

Grant Thornton LLP

Edison, New Jersey

March 14, 2005

71

Report of independent registered public accounting firm on the financial statements schedule.

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

3.  List of Exhibits

Exhibit	Description	Incorporated by Reference to
2.1	Stock purchase agreement dated as of July 8, 2003 between the Company, RGII and Kathryn B. Freeland.	Exhibit 2.1 to Form 8-K dated July 8, 2003.
3(a-1)	Certificate of Incorporation as amended through 1971.	Exhibit 3(a) to Registration Statement on Form S-1 (File No. 2-42259)
3(a-2)	Certificate of Amendment dated May 16, 1983 to Certificate of Incorporation.	Exhibit 3(a-2) to Form 10K for the fiscal year ended February 28, 1983.
3(a-3)	Certificate of Amendment dated June 15, 1988 to Certificate of Incorporation.	Exhibit 3(a-3) to Form 10K for the fiscal year ended December 31, 1988.
3(a-4)	Certificate of Amendment dated July 6, 1989 to Certificate of Incorporation.	Exhibit 3(a-4) to Form 10K for the fiscal year ended December 31, 1994.
3(a-5)	Certificate of Amendment dated February 14, 1990 to Certificate of Incorporation.	Exhibit 3(a-5) to Form 10K for the fiscal year ended December 31, 1989.
3(a-6)	Certificate of Amendment dated May 1, 1991 to Certificate of Incorporation.	Exhibit 3(a-6) to Form 10K for the fiscal year ended December 31, 1994.
3(a-7)	Certificate of Amendment dated July 12, 1994 to Certificate of Incorporation.	Exhibit 3(a-7) to Form 10K for the fiscal year ended December 31, 1994.
3.2	Bylaws, as amended and presently in effect.	Exhibit 3.2 to Form 10K for the fiscal year ended December 31, 2003.

72

4(a)	Rights Agreement dated as of July 6, 1989 between the Company and Chemical Bank, as Rights Agent (“Rights Agreement”) which includes the form of Rights Certificate as Exhibit B.	Exhibit 1 to Registration Statement on Form 8-A dated July 7, 1989.
4(b)	Amendment No. 1 dated as of February 13, 1990 to Rights Agreement.	Exhibit 1 to Amendment No. 1 on Form 8 dated February 13, 1990 to Registration Statement on Form 8-A.
4(c)	Amendment No. 2 dated as of August 10, 1994 to Rights Agreement.	Exhibit 4(c) to Form 10K for the fiscal year ended December 31, 1994.
4(d)	Employee’s Savings Plan and Amendment Number One.	Exhibit 4.4 to Registration Statement on Form S-8 dated December 5, 1995.
4(e)	Employee’s Savings Plan Trust Agreement as Amended and Restated Effective January 1, 1996.	Exhibit 4.5 to Registration Statement on Form S-3 dated December 5, 1995.
4(f)	Amendment No. 3 dated as of July 13, 1999 to Rights Agreement.	Exhibit 4.1 to Form 8-K dated July 13, 1999.
10(a)	Employment Agreement dated as of February 16, 1990 between the Company and John J. Cassese.	Exhibit 10(a) to Form 10K for the year ended December 31, 1989.
10(b)	Employment Agreement dated as of January 1, 1997 between the Company and William J. Murphy.	Exhibit 10(g) to Form S-3 dated August 14, 1997.
10(c)	Employment Agreement dated as of March 6, 1997 between the Company and Michael J. Shea.	Exhibit 10(c) to Form 10K for the year ended December 31, 1996.
10(d)	1991 Directors’ Stock Option Plan, as amended.	Exhibit 10(g) to Form 10-K for the year ended December 31, 1994.
10(e)	1994 Incentive Stock Option and Appreciation Plan.	Exhibit 10(h) to Form 10K for the fiscal year ended December 31, 1994.

73

10(f)	$15,000,000 Discretionary Line of Credit payable to Chase Manhattan Bank dated as of June 30, 1998.	Exhibit 10(h) to Form S-3 dated August 14, 1997.
10(g)	$10,000,000 Discretionary Line of Credit from PNC Bank dated as of June 5, 1998.	Exhibit 10(h) to Form 10K for the fiscal year ended December 31, 1996.
10(h)	1999 Employee Stock Purchase Plan.	Exhibit 99.1 to Form S8 dated March 17, 1999.
10 (i)	Amendment to the employment agreement dated as of March 24, 2000 between the Company and William J. Murphy.	Exhibit 10(i) to Form 10K for the fiscal year ended December 31, 1999.
10 (j)	$15,000,000 Discretionary Line of Credit payable to Chase Manhattan Bank dated as of June 30, 1998, as amended on March 15, 2000 (increased to $30,000,000).	Exhibit 10(j) to Form 10K for the fiscal year ended December 31, 1999.
10 (k)	$20,000,000 Discretionary Line of Credit payable to Chase Manhattan Bank  dated as of March 20, 2001.	Exhibit 10(k) to Form 10K for the fiscal year ended December 31, 2000.
10 (l)	$40,000,000 Asset-Based Lending Agreement payable to CIT dated as of July 31, 2001.	Exhibit 10(l) to Form 10K for the fiscal year ended December 31, 2001
10(n)	Amendment to the $40,000,000 Asset-Based Lending Agreement payable to CIT dated as of February 14, 2003.	Exhibit 10 (n) to Form 10-K for the fiscal year ended December 31, 2002.
10(o)	Non-qualified supplemental retirement benefit agreement for William J. Murphy.	Exhibit 10 (o) to Form 10-K/A for the fiscal year ended December 31, 2003.
10 (p)	Non-qualified supplemental retirement benefit agreement for Michael J. Shea.	Exhibit 10 (p) to Form 10-K/A for the fiscal year ended December 31, 2003.
10(q)	First Amendment to the non-qualified supplemental retirement benefit agreement for William J. Murphy.	Exhibit 10 (q) to Form 10-K/A for the fiscal year ended December 31, 2003.
10(r)	First Amendment to the non-qualified supplemental retirement benefit agreement for Michael J. Shea.	Exhibit 10 (r) to Form 10-K/A for the fiscal year ended December 31, 2003.
10(s)	Summary of Executive Compensation Exchange Program with John J. Cassese.	Exhibit 10 (s) to Form 10-K/A for the fiscal year ended December 31, 2002.

74

10(t)	Severance Agreement dated as of April 28, 2003 between the Company and John J. Cassese.	Exhibit 10.1 to Form 10-Q for the fiscal quarter ended March 31, 2003.
10(u)	Amendment to the Employment Agreement dated as of March 31, 2003 between the Company and William J. Murphy.	Exhibit 10.2 to Form 10-Q for the fiscal quarter ended March 31, 2003.
10(v)	Amendment to the Employment Agreement dated as of April 3, 2003 between the Company and Michael J. Shea.	Exhibit 10.3 to Form 10-Q for the fiscal quarter ended March 31, 2003.
10(w)	Employment agreement dated as of July 8, 2003 between RGII and Kathryn B. Freeland.	Exhibit 10.1 to Form 8-K dated July 8, 2003.
10(x)	Employment agreement dated as of August 19, 2003 between the Company and Kristin R. Evins.	Exhibit 10.1 to Form 10-Q for the fiscal quarter ended September 30, 2003.
10(y)	2004 Omnibus Incentive Compensation Plan dated May 19, 2004.	Filed herewith
10(z)	Stock Purchase Agreement between RGII Technologies, Inc. and Automated Information Management, Inc. dated April 1, 2004	Filed herewith
21	List of Subsidiaries.	Filed herewith
23	Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.	Filed herewith
31.1	CEO Certification required by Rule 13a– 14(a)/ 15d – 14 (a) under the Securities Exchange Act of 1934.	Filed herewith
31.2	CFO Certification required by Rule 13a– 14(a)/ 15d – 14 (a) under the Securities Exchange Act of 1934.	Filed herewith
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.	Filed herewith
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.	Filed herewith

75

4.  Reports on Form 8-K during the fourth quarter of fiscal 2004.

A report on Form 8-K was filed on December 22, 2004 reporting that the Board of Directors of Computer Horizons Corp. had approved a restructuring plan resulting from the realignment of the Company’s business model into three distinct segments: Commercial, Federal and Chimes.

A report on Form 8-K was filed on November 10, 2004 reporting the issuance of a press release reporting the Company’s financial results for its fiscal quarter ended September 30, 2004.

A report on Form 8-K was filed on October 8, 2004 reporting the issuance of a press release regarding the discovery of an accounting error in the Company’s financial statements.

76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COMPUTER HORIZONS CORP.
Date:   March 16, 2005		By:	/s/ William J. Murphy
		William J. Murphy, President, CEO
		(Principal Executive Officer) and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

		COMPUTER HORIZONS CORP.
Date:	March 16, 2005		By:	/s/ William J. Murphy
			William J. Murphy, President, CEO (Principal Executive Officer) and Director
Date:	March 16, 2005		By:	/s/ Michael J. Shea
			Michael J. Shea,
			Vice President and CFO
			(Principal Financial Officer)
Date:	March 16, 2005		By:	/s/ John Ferdinandi
			John Ferdinandi, Corporate Controller (Principal Accounting Officer)
Date:	March 16, 2005		By:	/s/ Earl Mason
			Earl Mason, Chairman of the Board and Director
Date:	March 16, 2005		By:	/s/ William M. Duncan
			William M. Duncan, Director
Date:	March 16, 2005		By:	/s/ Eric P. Edelstein
			Eric P. Edelstein, Director
Date:	March 16, 2005		By:	/s/ William J. Marino
			William J. Marino, Director
Date:	March 16, 2005		By:	/s/ L. White Matthews III
			L. White Matthews III, Director
Date:	March 16, 2005		By:	/s/ Edward J. Obuchowski
			Edward J. Obuchowski, Director

77

EX-10.Y

Exhibit 10(y)

2004 Omnibus Incentive Compensation Plan

Computer Horizons Corp.

Effective May 19, 2004

Contents

Computer Horizons Corp.
2004 Omnibus Incentive Compensation Plan

Article 1. Establishment, Purpose, and Duration

1.1Establishment. Computer Horizons Corp., a New York corporation (hereinafter referred to as the “Company”), establishes an incentive compensation plan to be known as the 2004Omnibus Incentive Compensation Plan (hereinafter referred to as the “Plan”), as set forth in this document.

The Plan permits the grant of Cash-Based Awards, Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, and Other Stock-Based Awards.

The Plan shall become effective upon shareholder approval (the “Effective Date”) and shall remain in effect as provided in Section 1.3 hereof.

1.2Purpose of the Plan. The purpose of the Plan is to promote the interests of the Company and its shareholders by strengthening the Company’s ability to attract, motivate, and retain Employees and Directorsof the Company upon whose judgment, initiative, and efforts the financial success and growth of the business of the Company largely depend, and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of the Company and create value for shareholders.

1.3Duration of the Plan. Unless sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plan’s terms and conditions. Notwithstanding the foregoing, no Incentive Stock Options may be granted more than ten years after the earlier of (a) adoption of the Plan by the Board, and (b) the Effective Date.

Article 2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized.

2.1“Affiliate” shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations of the Exchange Act.

2.2“Annual Award Limit” or “Annual Award Limits” have the meaning set forth in Section 4.3.

2.3“Award” means, individually or collectively, a grant under this Plan of Cash-Based Awards, Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units, or Other Stock-Based Awards, in each case subject to the terms of this Plan.

1

2.4“Award Agreement” means either (i) a written agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award granted under this Plan, or (ii) a written statement issued by the Company to a Participant describing the terms and provisions of such Award.

2.5“Beneficial Owner” or “Beneficial Ownership” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.

2.6“Board” or “Board of Directors” means the Board of Directors of the Company.

2.7“Cash-Based Award” means an Award granted to a Participant as described in Article 10.

2.8“Change of Control” means any of the following events:

(a)The acquisition by any Person of Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this Section 2.8, the following acquisitions shall not constitute a Change of Control: (i) any acquisition by a Person who on the Effective Date is the Beneficial Owner of twenty percent (20%) or more of the Outstanding Company Voting Securities, (ii) any acquisition directly from the Company, including without limitation, a public offering of securities, (iii) any acquisition by the Company, (iv) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries, or (v) any acquisition by any corporation pursuant to a transaction which complies with subparagraphs (i), (ii), and (iii) of Section 2.8(c);

(b)Individuals who constitute the Board as of the Effective Date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a Director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election or removal of the Directors of the Company or other actual or threatened solicitation of proxies of consents by or on behalf of a Person other than the Board;

(c)Consummation of a reorganization, merger, or consolidation to which the Company is a party or a sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case unless, following such Business Combination: (i) all or substantially all of the individuals and entities who were the Beneficial Owners of Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own,

2

directly or indirectly, more than fifty percent (50%) of the combined voting power of the outstanding voting securities entitled to vote generally in the election of Directors of the corporation resulting from the Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) (the “Successor Entity”) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Voting Securities; and (ii) no Person (excluding any Successor Entity or any employee benefit plan, or related trust, of the Company or such Successor Entity) beneficially owns, directly or indirectly, twenty percent (20%) or more of the combined voting power of the then outstanding voting securities of the Successor Entity, except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the Successor Entity were members of the Incumbent Board (including persons deemed to be members of the Incumbent Board by reason of the proviso to paragraph (b) of this Section 2.8) at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

(d)Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

2.9“Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time.

2.10“Committee” means the compensation committee of the Board, or any other committee designated by the Board to administer this Plan. The members of the Committee shall be appointed from time to time by and shall serve at the discretion of the Board.

2.11“Company” means Computer Horizons Corp., a New York corporation, and any successor thereto as provided in Article 21 herein.

2.12“Covered Employee” means a Participant who is a “covered employee,” as defined in Code Section 162(m) and the regulations promulgated under Code Section 162(m), or any successor statute.

2.13“Director” means any individual who is a member of the Board of Directors of the Company.

2.14“Effective Date” has the meaning set forth in Section 1.1.

2.15“Employee” means any employee of the Company, its Affiliates, and/or Subsidiaries.

2.16“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

3

2.17“Fair Market Value” or “FMV” means a price that is based on the opening, closing, actual, high, low, or average selling prices of a Share quoted through the National Association of Securities Dealers’ Automatic Quotation (“NASDAQ”) National Market System or other established stock exchange (or exchanges) on the applicable date, the preceding trading days the next succeeding trading day, or an average of trading days, as determined by the Committee in its discretion.  Unless the Committee determines otherwise, if the Shares are traded over the counter at the time a determination of its Fair Market Value is required to be made hereunder, its Fair Market Value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of a Share on the most recent date on which Shares were publicly traded. In the event Shares are not publicly traded at the time a determination of their value is required to be made hereunder, the determination of their Fair Market Value shall be made by the Committee in such manner as it deems appropriate. Such definition(s) of FMV shall be specified in each Award Agreement and may differ depending on whether FMV is in reference to the grant, exercise, vesting, settlement, or payout of an Award.

2.18“Full Value Award” means an Award other than in the form of an ISO, NQSO, or SAR, and which is settled by the issuance of Shares.

2.19“Freestanding SAR” means an SAR that is granted independently of any Options, as described in Article 7.

2.20“Grant Price” means the price established at the time of grant of a SAR pursuant to Article 7, used to determine whether there is any payment due upon exercise of the SAR.

2.21“Incentive Stock Option” or “ISO” means an Option to purchase Shares granted under Article 6 to an Employee and that is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422, or any successor provision.

2.22“Insider” shall mean an individual who is, on the relevant date, an officer, Director, or more than ten percent (10%) Beneficial Owner of any class of the Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Board in accordance with Section 16 of the Exchange Act.

2.23“Nonemployee Director” means a Director who is not an Employee.

2.24“Nonemployee Director Award” means any NQSO, SAR, or Full Value Award granted, whether singly, in combination, or in tandem, to a Participant who is a Nonemployee Director pursuant to such applicable terms, conditions, and limitations as the Board or Committee may establish in accordance with this Plan.

2.25“Nonqualified Stock Option” or “NQSO” means an Option that is not intended to meet the requirements of Code Section 422, or that otherwise does not meet such requirements.

4

2.26“Option” means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6.

2.27“Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.

2.28“Other Stock-Based Award” means an equity-based or equity-related Award not otherwise described by the terms of this Plan, granted pursuant to Article 10.

2.29“Participant” means any eligible person as set forth in Article 5 to whom an Award is granted.

2.30“Performance-Based Compensation” means compensation under an Award that satisfies the requirements of Section 162(m) of the Code for deductibility of remuneration paid to Covered Employees.

2.31“Performance Measures” means measures as described in Article 11 on which the performance goals are based and which are approved by the Company’s shareholders pursuant to this Plan in order to qualify Awards as Performance-Based Compensation.

2.32“Performance Period” means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award.

2.33“Performance Share” means an Award granted to a Participant, as described in Article 9.

2.34“Performance Unit” means an Award granted to a Participant, as described in Article 9.

2.35“Period of Restriction” means the period when Restricted Stock or Restricted Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), as provided in Article 8.

2.36“Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof.

2.37“Plan” means the Computer Horizons Corp.2004Omnibus Incentive Compensation Plan.

2.38“Plan Year” means the calendar year.

2.39“Restricted Stock” means an Award granted to a Participant pursuant to Article 8.

5

2.40“Restricted Stock Unit” means an Award granted to a Participant pursuant to Article 8, except no Shares are actually awarded to the Participant on the date of grant.

2.41“Share” means a share of common stock of the Company, $.10 par value per share.

2.42“Stock Appreciation Right” or “SAR” means an Award, designated as a SAR, pursuant to the terms of Article 7 herein.

2.43“Subsidiary” means any corporation or other entity, whether domestic or foreign, in which the Company has or obtains, directly or indirectly, a proprietary interest of more than fifty percent (50%) by reason of stock ownership or otherwise.

2.44“Tandem SAR” means an SAR that is granted in connection with a related Option pursuant to Article 7 herein, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled).

Article 3. Administration

3.1General. The Committee shall be responsible for administering the Plan, subject to this Article 3 and the other provisions of the Plan. The Committee may employ attorneys, consultants, accountants, agents, and other persons, any of whom may be an Employee, and the Committee, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participants, the Company, and all other interested persons.

3.2Authority of the Committee. The Committee shall have full and exclusive discretionary power to interpret the terms and the intent of the Plan and any Award Agreement or other agreement or document ancillary to or in connection with the Plan, to determine eligibility for Awards and to adopt such rules, regulations, forms, instruments, and guidelines for administering the Plan as the Committee may deem necessary or proper. Such authority shall include, but not be limited to, selecting Award recipients, establishing all Award terms and conditions, including the terms and conditions set forth in Award Agreements, and, subject to Article 18, adopting modifications and amendments to the Plan or any Award Agreement, including without limitation, any that are necessary to comply with the laws of the countries and other jurisdictions in which the Company, its Affiliates, and/or its Subsidiaries operate.

3.3Delegation. The Committee may delegate to one or more of its members or to one or more officers of the Company, and/or its Subsidiaries and Affiliates or to one or more agents or advisors such administrative duties or powers as it may deem advisable, and the Committee or any person to whom it has delegated duties or powers as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may, by resolution, authorize one or more officers of the Company to do one or both of the following on the same basis as can the Committee: (a) designate Employees to be recipients of Awards; and (b) determine the size of any such Awards; provided, however, (i) the Committee shall not delegate such responsibilities to any such officer for Awards granted to an Employee that is considered an Insider; (ii) the resolution providing such authorization sets forth the

6

total number of Awards such officer(s) may grant; and (iii) the officer(s) shall report periodically to the Committee regarding the nature and scope of the Awards granted pursuant to the authority delegated.

7

Article 4. Shares Subject to the Plan and Maximum Awards

4.1Number of Shares Available for Awards.

(a)Subject to adjustment as provided in Section 4.4 herein, the maximum number of Shares available for issuance to Participants under the Plan (the “Share Authorization”) shall be three million five hundred thousand (3,500,000).

(b)Subject to the limit set forth in Section 4.1(a) on the number of Shares that may be issued in the aggregate under the Plan, the maximum number of Shares that may be issued pursuant to ISOs and NQSOs shall be:

(i)Three million five hundred thousand (3,500,000)Shares that may be issued pursuant to Awards in the form of ISOs; and

(ii)Three million five hundred thousand (3,500,000) Shares that may be issued pursuant to Awards in the form of NQSOs.

4.2Share Usage. Shares covered by an Award shall only be counted as used to the extent they are actually issued. Any Shares related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee’s permission, prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under the Plan. Moreover, if the Option Price of any Option granted under the Plan or the tax withholding requirements with respect to any Award granted under the Plan are satisfied by tendering Shares to the Company (by either actual delivery or by attestation), or if an SAR is exercised, only the number of Shares issued, net of the Shares tendered, if any, will be deemed delivered for purposes of determining the maximum number of Shares available for delivery under the Plan. The maximum number of Shares available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into additional Shares or credited as additional Restricted Stock, Restricted Stock Units, Performance Shares, or Stock-Based Awards. The Shares available for issuance under the Plan may be authorized and unissued Shares or treasury Shares.

4.3Annual Award Limits. Unless and until the Committee determines that an Award to a Covered Employee shall not be designed to qualify as Performance-Based Compensation, the following limits (each an “Annual Award Limit,” and, collectively, “Annual Award Limits”) shall apply to grants of such Awards under the Plan:

(a)Options: The maximum aggregate number of Shares subject to Options granted in any one Plan Year to any one Participant shall be one hundred thousand (100,000) plus the amount of the Participant’s unused applicable Annual Award Limit for Options as of the close of the previous Plan Year.

(b)SARs: The maximum number of Shares subject to Stock Appreciation Rights granted in any one Plan Year to any one Participant shall be one hundred thousand (100,000) plus the amount of the Participant’s unused applicable Annual Award Limit for SARs as of the close of the previous Plan Year.

8

(c)Restricted Stock or Restricted Stock Units: The maximum aggregate grant with respect to Awards of Restricted Stock or Restricted Stock Units in any one Plan Year to any one Participant shall be one hundred thousand (100,000) plus the amount of the Participant’s unused applicable Annual Award Limit for Restricted Stock or Restricted Stock Units as of the close of the previous Plan Year.

(d)Performance Units or Performance Shares: The maximum aggregate Award of Performance Units or Performance Shares that a Participant may receive in any one Plan Year shall be one hundred thousand (100,000) Shares, or equal to the value of one hundred thousand (100,000) Shares determined as of the date of vesting or payout, as applicable plus the amount of the Participant’s unused applicable Annual Award Limit for Performance Units or Performance Shares as of the close of the previous Plan Year.

(e)Cash-Based Awards: The maximum aggregate amount awarded or credited with respect to Cash-Based Awards to any one Participant in any one Plan Year may not exceed the value of five hundred thousand dollars ($500,000) determined as of the date of vesting or payout, as applicable plus the amount of the Participant’s unused applicable Annual Award Limit for Cash-Based Awards as of the close of the previous Plan Year.

(f)Other Stock-Based Awards. The maximum aggregate grant with respect to other Stock-Based Awards pursuant to Section 10.2 in any one Plan Year to any one Participant shall be one hundred thousand (100,000) plus the amount of the Participant’s unused applicable Annual Award Limit for Other Stock-Based Awards as of the close of the previous Plan Year.

4.4Adjustments in Authorized Shares. In the event of any corporate event or transaction (including, but not limited to, a change in the Shares of the Company or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of Shares, exchange of Shares, dividend in kind, or other like change in capital structure or distribution (other than normal cash dividends) to shareholders of the Company, or any similar corporate event or transaction, the Committee, in its sole discretion, in order to prevent dilution or enlargement of Participants’ rights under the Plan, shall substitute or adjust, as applicable, the number and kind of Shares that may be issued under the Plan or under particular forms of Awards, the number and kind of Shares subject to outstanding Awards, the Option Price or Grant Price applicable to outstanding Awards, the Annual Award Limits, and other value determinations applicable to outstanding Awards.

The Committee, in its sole discretion, may also make appropriate adjustments in the terms of any Awards under the Plan to reflect or related to such changes or distributions and to modify any other terms of outstanding Awards, including modifications of performance goals and changes in the length of Performance Periods. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.

9

Subject to the provisions of Article 18, without affecting the number of Shares reserved or available hereunder, the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with the ISO rules under Section 422 of the Code, where applicable.

Article 5. Eligibility and Participation

5.1Eligibility. Individuals eligible to participate in this Plan include all Employees and Directors.

5.2Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible individuals, those to whom Awards shall be granted and shall determine, in its sole discretion, the nature of, any and all terms permissible by law, and the amount of each Award.

Article 6. Stock Options

6.1Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee, in its sole discretion; provided that ISOs may be granted only to eligible Employees of the Company or of any parent or subsidiary corporation (as permitted by Section 422 of the Code and the regulations thereunder).

6.2Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of the Plan. The Award Agreement also shall specify whether the Option is intended to be an ISO or a NQSO.

6.3Option Price. The Option Price for each grant of an Option under this Plan shall be as determined by the Committee and shall be specified in the Award Agreement. The Option Price shall be: (i) based  on one hundred percent (100%) of the FMV of the Shares on the date of grant, (ii) set at a premium to the FMV of the Shares on the date of grant, or (iii) indexed to the FMV of the Shares on the date of grant, with the index determined by the Committee, in its discretion; provided, however, the Option Price on the date of grant must be at least equal to one hundred percent (100%) of the FMV of the Shares on the date of grant.

6.4Duration of Options. Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant; provided, however, no Option shall be exercisable later than the fifth (5^th) anniversary date of its grant. Notwithstanding the foregoing, for Options granted to Participants outside the United States, the Committee has the authority to grant Options that have a term greater than five (5) years.

6.5Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which terms and restrictions need not be the same for each grant or for each Participant.

10

6.6Payment. Options granted under this Article 6 shall be exercised by the delivery of a notice of exercise to the Company or an agent designated by the Company in a form specified or accepted by the Committee, or by complying with any alternative procedures which may be authorized by the Committee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares.

A condition of the issuance of the Shares as to which an Option shall be exercised shall be the payment of the Option Price. The Option Price of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the Option Price (provided that except as otherwise determined by the Committee, the Shares that are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price or have been purchased on the open market); (c) by a combination of (a) and (b); or (d) any other method approved or accepted by the Committee in its sole discretion., including, without limitation, if the Committee so determines, a cashless (broker-assisted) exercise.

Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and full payment (including satisfaction of any applicable tax withholding), the Company shall deliver to the Participant evidence of book entry Shares, or upon the Participant’s request, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s).

Unless otherwise determined by the Committee, all payments under all of the methods indicated above shall be paid in United States dollars.

6.7Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, or under any blue sky or state securities laws applicable to such Shares.

6.8Termination of Employment.Each Participant’s Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s employment or provision of services to the Company, its Affiliates, its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination.

6.9Transferability of Options.

(a)Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under this Article 6 shall be exercisable during his or her lifetime only by such Participant.

11

(b)Nonqualified Stock Options. Except as otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, no NQSO granted under this Article 6 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; provided that the Board or Committee may permit further transferability, on a general or a specific basis, and may impose conditions and limitations on any permitted transferability. Further, except as otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, or unless the Board or Committee decides to permit further transferability, all NQSOs granted to a Participant under this Article 6 shall be exercisable during his or her lifetime only by such Participant. With respect to those NQSOs, if any, that are permitted to be transferred to another person, references in the Plan to exercise or payment of the Option Price by the Participant shall be deemed to include, as determined by the Committee, the Participant’s permitted transferee.

6.10Notification of Disqualifying Disposition. If any Participant shall make any disposition of Shares issued pursuant to the exercise of an ISO under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof.

6.11Substituting SARs. Only in the event the Company is not accounting for equity compensation under APB Opinion 25, the Committee shall have the ability to substitute, without receiving Participant permission, SARs paid only in Stock (or SARs paid in Stock or cash at the Committee’s discretion) for outstanding Options; provided, the terms of the substituted Stock SARs are the same as the terms for the Options and the aggregate difference between the Fair Market Value of the underlying Shares and the Grant Price of the SARs is equivalent to the aggregate difference between the Fair Market Value of the underlying Shares and the Option Price of the Options. If, in the opinion of the Company’s auditors, this provision creates adverse accounting consequences for the Company, it shall be considered null and void.

Article 7. Stock Appreciation Rights

7.1Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SARs.

Subject to the terms and conditions of the Plan, the Committee shall have complete discretion in determining the number of SARs granted to each Participant and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs.

The Grant Price for each grant of a Freestanding SAR shall be determined by the Committee and shall be specified in the Award Agreement. The Grant Price shall be: (i) based on one hundred percent (100%) of the FMV of the Shares on the date of grant, (ii) set at a premium to the FMV of the Shares on the date of grant, or (iii) indexed to the FMV of the Shares on the date of grant, with the index determined by the Committee, in its discretion; provided, however, the Grant Price on the date of grant must be at least equal to one hundred percent (100%) of the FMV of the Shares on the

12

date of grant. The Grant Price of Tandem SARs shall be equal to the Option Price of the related Option.

7.2SAR Agreement. Each SAR Award shall be evidenced by an Award Agreement that shall specify the Grant Price, the term of the SAR, and such other provisions as the Committee shall determine.

7.3Term of SAR. The term of an SAR granted under the Plan shall be determined by the Committee, in its sole discretion, and except as determined otherwise by the Committee and specified in the SAR Award Agreement, no SAR shall be exercisable later than the fifth (5^th) anniversary date of its grant. Notwithstanding the foregoing, for SARs granted to Participants outside the United States, the Committee has the authority to grant SARs that have a term greater than five (5) years.

7.4Exercise of Freestanding SARs. Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes.

7.5.Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable.

Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (a) the Tandem SAR will expire no later than the expiration of the underlying ISO; (b) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the excess of the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised over the Option Price of the underlying ISO; and (c) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO.

7.6Payment of SAR Amount. Upon the exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a)The excess of the Fair Market Value of a Share on the date of exercise over the Grant Price; by

(b)The number of Shares with respect to which the SAR is exercised.

At the discretion of the Committee, the payment upon SAR exercise may be in cash, Shares, or any combination thereof, or in any other manner approved by the Committee in its sole discretion. The Committee’s determination regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR.

7.7Termination of Employment. Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall

13

be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.

7.8Nontransferability of SARs. Except as otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement or otherwise determined at any time by the Committee, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. With respect to those SARs, if any, that are permitted to be transferred to another person, references in the Plan to exercise of the SAR by the Participant or payment of any amount to the Participant shall be deemed to include, as determined by the Committee, the Participant’s permitted transferee.

7.9Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares received upon exercise of a SAR granted pursuant to the Plan as it may deem advisable or desirable. These restrictions may include, but shall not be limited to, a requirement that the Participant hold the Shares received upon exercise of a SAR for a specified period of time.

Article 8. Restricted Stock and Restricted Stock Units

8.1Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no Shares are actually awarded to the Participant on the date of grant.

8.2Restricted Stock or Restricted Stock Unit Agreement. Each Restricted Stock and/or Restricted Stock Unit grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the Committee shall determine.

8.3Transferability. Except as provided in this Plan or an Award Agreement, the Shares of Restricted Stock and/or Restricted Stock Units granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Award Agreement (and in the case of Restricted Stock Units until the date of delivery or other payment), or upon earlier satisfaction of any other conditions, as specified by the Committee, in its sole discretion, and set forth in the Award Agreement or otherwise at any time by the Committee. All rights with respect to the Restricted Stock and/or Restricted Stock Units granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant, except as otherwise provided in an Award Agreement or at any time by the Committee.

8.4Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, time-based restrictions on

14

vesting following the attainment of the performance goals, time-based restrictions, and/or restrictions under applicable laws or under the requirements of any stock exchange or market upon which such Shares are listed or traded, or holding requirements or sale restrictions placed on the Shares by the Company upon vesting of such Restricted Stock or Restricted Stock Units.

To the extent deemed appropriate by the Committee, the Company may retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse.

Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been satisfied or lapse (including satisfaction of any applicable tax withholding obligations), and Restricted Stock Units shall be paid in cash, Shares, or a combination of cash and Shares as the Committee, in its sole discretion shall determine.

8.5Certificate Legend. In addition to any legends placed on certificates pursuant to Section 8.4, each certificate representing Shares of Restricted Stock granted pursuant to the Plan may bear a legend such as the following or as otherwise determined by the Committee in its sole discretion:

The sale or transfer of Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Computer Horizons Corp.2004Omnibus Incentive Compensation Plan, and in the associated Award Agreement. A copy of the Plan and such Award Agreement may be obtained from Computer Horizons Corp.

8.6Voting Rights. Unless otherwise determined by the Committee and set forth in a Participant’s Award Agreement, to the extent permitted or required by law, as determined by the Committee, Participants holding Shares of Restricted Stock granted hereunder may be granted the right to exercise full voting rights with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder.

8.7Termination of Employment. Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Restricted Stock and/or Restricted Stock Units following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock or Restricted Stock Units issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.

8.8Section 83(b) Election. The Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning a Restricted Stock Award, the Participant shall be required to file promptly a copy of such election with the Company.

15

Article 9. Performance Units/Performance Shares

9.1Grant of Performance Units/Performance Shares. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance Units and/or Performance Shares to Participants in such amounts and upon such terms as the Committee shall determine.

9.2Value of Performance Units/Performance Shares. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the value and/or number of Performance Units/Performance Shares that will be paid out to the Participant.

9.3Earning of Performance Units/Performance Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Performance Shares shall be entitled to receive payout on the value and number of Performance Units/Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.

9.4Form and Timing of Payment of Performance Units/Performance Shares. Payment of earned Performance Units/Performance Shares shall be as determined by the Committee and as evidenced in the Award Agreement. Subject to the terms of the Plan, the Committee, in its sole discretion, may pay earned Performance Units/Performance Shares in the form of cash or in Shares (or in a combination thereof) equal to the value of the earned Performance Units/Performance Shares at the close of the applicable Performance Period, or as soon as practicable after the end of the Performance Period. Any Shares may be granted subject to any restrictions deemed appropriate by the Committee. The determination of the Committee with respect to the form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.

9.5Termination of Employment. Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Performance Units and/or Performance Shares following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards of Performance Units or Performance Shares issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.

9.6Nontransferability. Except as otherwise provided in a Participant’s Award Agreement or otherwise at any time by the Committee, Performance Units/Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement or otherwise at any time by the Committee, a Participant’s rights under the Plan shall be exercisable during his or her lifetime only by such Participant.

Article 10. Cash-Based Awards and Other Stock-Based Awards

10.1Grant of Cash-Based Awards. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such

16

amounts and upon such terms, including the achievement of specific performance goals, as the Committee may determine.

10.2Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted Shares) in such amounts and subject to such terms and conditions, as the Committee shall determine. Such Awards may involve the transfer of actual Shares to Participants, or payment in cash or otherwise of amounts based on the value of Shares and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

10.3Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as determined by the Committee. The Committee may establish performance goals in its discretion. If the Committee exercises its discretion to establish performance goals, the number and/or value of Cash-Based Awards or Other Stock-Based Awards that will be paid out to the Participant will depend on the extent to which the performance goals are met.

10.4Payment of Cash-Based Awards and Other Stock-Based Awards. Payment, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash or Shares as the Committee determines.

10.5Termination of Employment. The Committee shall determine the extent to which the Participant shall have the right to receive Cash-Based Awards or other Stock-Based Awards following termination of the Participant’s employment with or provision of services to the Company, its Affiliates, and/or its Subsidiaries, as the case may be. Such provisions shall be determined in the sole discretion of the Committee, such provisions may be included in an agreement entered into with each Participant, but need not be uniform among all Awards of Cash-Based Awards or Other Stock-Based Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination.

10.6Nontransferability. Except as otherwise determined by the Committee, neither Cash-Based Awards nor Other Stock-Based Awards may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided by the Committee, a Participant’s rights under the Plan, if exercisable, shall be exercisable during his or her lifetime only by such Participant. With respect to those Cash-Based Awards or Other Stock-Based Awards, if any, that are permitted to be transferred to another person, references in the Plan to exercise or payment of such Awards by or to the Participant shall be deemed to include, as determined by the Committee, the Participant’s permitted transferee.

Article 11. Performance Measures

11.1Performance Measures. Unless and until the Committee proposes for shareholder vote and the shareholders approve a change in the general Performance Measures set forth in this Article 11, the performance goals upon which the payment or vesting of an Award to a Covered Employee

17

that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:

(a)Net earnings or net income (before or after taxes);

(b)Earnings per share;

(c)Net sales growth;

(d)Net operating profit;

(e)Return measures (including, but not limited to, return on assets, capital, invested capital, equity, or sales);

(f)Cash flow (including, but not limited to, operating cash flow , free cash flow, and cash flow return on capital);

(g)Earnings before or after taxes, interest, depreciation, and/or amortization;

(h)Gross or operating margins;

(i)Productivity ratios;

(j)Share price (including, but not limited to, growth measures and total shareholder return);

(k)Expense targets;

(l)Margins;

(m)Operating efficiency;

(n)Customer satisfaction;

(o)Working capital targets; and

(p)Economic value added or EVA^® (net operating profit after tax minus the sum of capital multiplied by the cost of capital).

Any Performance Measure(s) may be used to measure the performance of the Company, Subsidiary, and/or Affiliate as a whole or any business unit of the Company, Subsidiary, and/or Affiliate or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Measures as compared to the performance of a group of comparator companies, or published or special index that the Committee, in its sole discretion, deems appropriate, or the Company may select Performance Measure (j) above as compared to various stock market indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Article 11.

11.2Evaluation of Performance. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occurs during a Performance Period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year, (f) acquisitions or divestitures, and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.

11.3Adjustment of Performance-Based Compensation. Awards that are designed to qualify as Performance-Based Compensation, and that are held by Covered Employees, may not be adjusted upward. The Committee shall retain the discretion to adjust such Awards downward, either on a formula or discretionary basis or any combination, as the Committee determines.

18

11.4Committee Discretion. In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance Measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on Performance Measures other than those set forth in Section 11.1.

Article 12. Nonemployee Director Awards

12.1Nonemployee Director Awards. All Awards to Nonemployee Directors shall be determined by the Board or Committee.

12.2Nonemployee Director Retainer Deferral. The Committee may permit or require a Nonemployee Director Participant to defer all or some portion of any cash retainer to be paid to such Participant. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such retainer deferrals.

Article 13. Dividend Equivalents

Any Participant selected by the Committee may be granted dividend equivalents based on the dividends declared on Shares that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests or expires, as determined by the Committee. Such dividend equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee.

Article 14. Beneficiary Designation

Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

Article 15. Deferrals

The Committee may permit or require a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock or Restricted Stock Units, or the satisfaction of any requirements or performance goals with respect to Performance Shares, Performance Units, Cash-Based Awards, Other Stock-Based Awards, or Cash-Based Awards. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals.

Article 16. Rights of Participants

16.1Employment. Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Affiliates, and/or its Subsidiaries, to terminate any

19

Participant’s employment or service on the Board at any time or for any reason not prohibited by law, nor confer upon any Participant any right to continue his or her employment or service as a Director for any specified period of time.

Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company, its Affiliates, and/or its Subsidiaries and, accordingly, subject to Articles 3 and 18, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or its Subsidiaries.

16.2Participation. No individual shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

16.3Rights as a Shareholder. Except as otherwise provided herein, a Participant shall have none of the rights of a shareholder with respect to Shares covered by any Award until the Participant becomes the record holder of such Shares.

Article 17. Change of Control

17.1Change of Control of the Company. Upon the occurrence of a Change of Control, unless otherwise specifically prohibited under applicable laws or by the rules and regulations of any governing governmental agencies or national securities exchanges, or unless the Committee shall determine otherwise in the Award Agreement:

(a)Any and all Options and SARs granted hereunder shall become immediately vested and exercisable; additionally, if a Participant’s employment is terminated for any reason except Cause within three (3) months prior to such Change of Control or within twelve (12) months subsequent to such Change of Control, the Participant shall have until the earlier of: (i) twelve (12) months following such termination date, or (ii) the expiration of the Option or SAR term, to exercise any such Option or SAR;

(b)Any Period of Restriction and restrictions imposed on Restricted Stock or Restricted Stock Units shall lapse and such Restricted Stock or Restricted Stock Units shall become fully vested;

(c)The target payout opportunities attainable under all outstanding Awards of performance-based Restricted Stock, performance-based Restricted Stock Units, Performance Units, and Performance Shares, shall be deemed to have been fully earned based on targeted performance being attained as of the effective date of the Change of Control;

(i)The vesting of all Awards denominated in Shares shall be accelerated as of the effective date of the Change of Control, and shall be paid out to Participants within thirty (30) days following the effective date of the Change of Control. The Committee has the authority to pay all or any portion of the value of the Shares in cash;

20

(ii)Awards denominated in cash shall be paid to Participants in cash within thirty (30) days following the effective date of the Change of Control; and

(d)Upon a Change of Control, unless otherwise specifically provided in a written agreement entered into between the Participant and the Company, the Committee shall pay out all Cash-Based Awards and Other Stock-Based Awards.

(e)Subject to the acceleration of vesting of outstanding Options, the Committee, in its discretion, may provide that in the event of a Change of Control pursuant to Section 2.8(a), (b), (c), or (d), no later than ten (10) days after the approval by the shareholders of the Company of such merger, consolidation, reorganization, sale, lease, or exchange or assets or dissolution or such election of directors, or in the event of a Change of Control pursuant to Section 2.8(a), no later than thirty (30) days after the occurrence of such Change of Control, that (i) Options may be exercised in full only for a limited period of time on or before a specified date (before or after such Change of Control) fixed by the Committee, after which specified date all unexercised Options and all rights of the Participants thereunder shall terminate, or (ii) require the mandatory surrender to the Company by selected Participants of some or all of the outstanding Options held by such Participants as of a date, before or after such Change of Control, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay to each Participant an amount of cash per Share equal to the excess, if any of the “Change of Control Value” of the Shares subject to such Option over the Option Price(s) under such Options for such Shares.

(f)For the purpose of Section 17.1(f)(ii), “Change of Control Value” shall equal the amount determined in clause (i), (ii), or (iii), whichever is applicable, as follows: (i) the per Share price offered to shareholders of the Company in any such merger, consolidation, reorganization, sale of assets, or dissolution transaction, (ii) the price per Share offered to shareholders of the Company in any tender offer or exchange offer whereby a Change of Control takes place, or (iii) if such Change of Control occurs other than pursuant to a tender or exchange offer, the Fair Market Value per Share of the Shares in which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to shareholders of the Company in any transaction described in Section 2.8 consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.

Article 18. Amendment, Modification, Suspension, and Termination

18.1Amendment, Modification, Suspension, and Termination. Subject to Section 18.3, the Committee may, at any time and from time to time, alter, amend, modify, suspend, or terminate the Plan and any Award Agreement in whole or in part; provided, however, that, without the prior approval of the Company’s shareholders and except as provided in Sections 4.4 and 6.11 hereof, Options or SARs issued under the Plan will not be repriced, replaced, or regranted through

21

cancellation,or by lowering the Option Price of a previously granted Option or the Grant Price of a previously granted SAR, and no amendment of the Plan shall be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rule.

18.2Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan.

18.3Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary, no termination, amendment, suspension, or modification of the Plan or an Award Agreement shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award.

Article 19. Withholding

19.1Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, the minimum statutory amount to satisfy federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.

19.2Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock and Restricted Stock Units, or upon the achievement of performance goals related to Performance Shares, or any other taxable event arising as a result of an Award granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. All such elections shall be irrevocable, made in writing, and signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

Article 20. Successors

All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

Article 21. General Provisions

21.1Forfeiture Events.

(a)The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction,

22

cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, termination of the Participant’s provision of services to the Company, Affiliate, and/or Subsidiary, violation of material Company, Affiliate, and/or Subsidiary policies, breach of noncompetition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company, its Affiliates, and/or its Subsidiaries.

(b)If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, or if the Participant is one of the persons subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, the Participant shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the twelve-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever just occurred) of the financial document embodying such financial reporting requirement.

21.2Legend. The certificates for Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer of such Shares.

21.3Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural.

21.4Severability.In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

21.5Requirements of Law.The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

21.6Delivery of Title.The Company shall have no obligation to issue or deliver evidence of title for Shares issued under the Plan prior to:

(a)Obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and

(b)Completion of any registration or other qualification of the Shares under any applicable national or foreign law or ruling of any governmental body that the Company determines to be necessary or advisable.

21.7Inability to Obtain Authority.The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be

23

necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

21.8Investment Representations.The Committee may require any person receiving Shares pursuant to an Award under this Plan to represent and warrant in writing that the person is acquiring the Shares for investment and without any present intention to sell or distribute such Shares.

21.9Employees Based Outside of the United States. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company, its Affiliates, and/or its Subsidiaries operate or have Employees or  Directors, the Committee, in its sole discretion, shall have the power and authority to:

(a)Determine which Affiliates and Subsidiaries shall be covered by the Plan;

(b)Determine which Employees and/or Directors outside the United States are eligible to participate in the Plan;

(c)Modify the terms and conditions of any Award granted to Employees and/or Directors outside the United States to comply with applicable foreign laws;

(d)Establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable. Any
subplans and modifications to Plan terms and procedures established under this Section 21.9 by the Committee shall be attached to this Plan document as appendices; and

(e)Take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local government regulatory exemptions or approvals.

Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate applicable law.

21.10Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.

21.11Unfunded Plan.Participants shall have no right, title, or interest whatsoever in or to any investments that the Company, and/or its Subsidiaries, and/or Affiliates may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative, or any other person. To the extent that any person acquires a right to receive payments from the Company, and/or its Subsidiaries, and/or Affiliates under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company, a Subsidiary, or an Affiliate, as the case may be. All payments to be made hereunder shall be paid from the general funds of the Company, a Subsidiary,

24

or an Affiliate, as the case may be and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan.

21.12No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.

21.13Retirement and Welfare Plans. Neither Awards made under the Plan nor Shares or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under the Company’s or any Subsidiary’s or Affiliate’s retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a participant’s benefit.

21.14Nonexclusivity of the Plan. The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.

21.15No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (i) limit, impair, or otherwise affect the Company’s or a Subsidiary’s or an Affiliate’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or, (ii) limit the right or power of the Company or a Subsidiary or an Affiliate to take any action which such entity deems to be necessary or appropriate.

21.16Governing Law. The Plan and each Award Agreement shall be governed by the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of New York, to resolve any and all issues that may arise out of or relate to the Plan or any related Award Agreement.

22.17Indemnification. Each person who is or shall have been a member of the Board, or a Committee appointed by the Board, or an officer of the company to whom authority was delegated in accordance with Section 3.3 shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action take or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgement in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or expense is a result of his or her own willful misconduct or except as expressly provided by statute.

25

The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation of Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

26

EX-10.Z

Exhibit 10(z)

EXECUTION COPY

STOCK PURCHASE AGREEMENT

BY AND AMONG

RGII TECHNOLOGIES, INC., BUYER

AUTOMATED INFORMATION MANAGEMENT, INC.

AND

CYNTHIA F. HARDY, SELLER

April 1, 2004

TABLE OF CONTENTS

1.	DEFINITIONS
2.	PURCHASE AND SALE OF THE COMPANY SHARES
	2.1	Basic Transaction
	2.2	Cash Closing Amount
	2.3	The Closing
	2.4	Determination of Working Capital Adjustment
	2.5	Adjustment to Cash Closing Amount
	2.6	Escrow
	2.7	Purchase Price
3.	REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION
	3.1	Representations and Warranties of the Seller
	3.2	Representations and Warranties of the Buyer
4.	REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY
	4.1	Organization, Qualification, and Corporate Power
	4.2	Capitalization
	4.3	Noncontravention
	4.4	Brokers’ Fees
	4.5	Title to Assets
	4.6	Subsidiaries
	4.7	Financial Statements
	4.8	Events Subsequent to Most Recent Fiscal Year End
	4.9	Undisclosed Liabilities
	4.10	Legal Compliance
	4.11	Tax Matters
	4.12	Real Property
	4.13	Intellectual Property
	4.14	Sufficiency of Assets
	4.15	Contracts
	4.16	Powers of Attorney
	4.17	Insurance
	4.18	Litigation

	4.19	Employees and Contractors
	4.20	Employee Benefits
	4.21	Guaranties
	4.22	Environmental, Health, and Safety Matters
	4.23	Governmental Licenses and Permits
	4.24	Government Contracts
	4.25	Liability for Cost and Pricing Data
	4.26	Notes and Accounts Receivable
	4.27	Organizational Conflicts of Interest
	4.28	Customers and Suppliers
	4.29	Affiliated Transactions
	4.30	Defense Articles, Defense Services and Technical Data
	4.31	Disclosure
	4.32	Bank Accounts
5.	ADDITIONAL AGREEMENTS OF THE PARTIES
	5.1	General
	5.2	Litigation Support
	5.3	Transition
	5.4	Confidentiality
	5.5	Company’s Accountants
6.	CONDITIONS TO OBLIGATION TO CLOSE
	6.1	Conditions to Obligation of the Parties Generally
	6.2	Conditions to Obligation of the Buyer
	6.3	Conditions to Obligation of the Seller
7.	INDEMNIFICATION
	7.1	Indemnification by the Seller
	7.2	Indemnification by the Buyer
	7.3	Supplemental Indemnification by Seller
	7.4	Survival of Representations and Warranties of the Seller
	7.5	Certain Limitations on Indemnification Obligations
	7.6	Defense of Claims
	7.7	Non-Third Party Claims
	7.8	Liability of the Company

ii

	7.9	Tax Treatment
	7.10	Exclusive Remedy
	7.11	No Right of Contribution
	7.12	Set-Off
8.	TAX MATTERS
	8.1	Company Status
	8.2	Post-Closing Tax Returns
	8.3	Transfer Taxes
	8.4	Audits and Contests Regarding Taxes
	8.5	Cooperation on Tax Matters
	8.6	Certain Taxes
	8.7	Purchase Price Allocation to Covenant Not to Compete
	8.8	Buyer Actions Prohibited
	8.9	Amended Tax Returns
9.	FEES RELATING TO TRANSACTION
	9.1	Brokerage Fees
	9.2	Other Fees and Expenses
10.	MISCELLANEOUS
	10.1	Press Releases and Public Announcements
	10.2	No Third-Party Beneficiaries
	10.3	Entire Agreement
	10.4	Succession and Assignment
	10.5	Counterparts
	10.6	Headings
	10.7	Notices
	10.8	Governing Law
	10.9	Amendments and Waivers
	10.10	Severability
	10.11	Expenses
	10.12	Construction
	10.13	Incorporation of Exhibits and Disclosure Schedules
	10.14	Specific Performance
	10.15	Submission to Jurisdiction

iii

10.16	Waiver of Jury Trial
10.17	Waiver of Certain Rights

iv

EXHIBIT LIST
Exhibit A —	Form of Escrow Agreement
Exhibit B —	Financial Statements
Exhibit C —	Form of Employment Agreement
Exhibit D —	Form of Release of Claims
Exhibit E —	Form of Opinion of Counsel to the Seller
Exhibit F —	Form of Confidentiality and Non-Competition Agreement
Exhibit G —	Form of Consulting Agreement
DISCLOSURE SCHEDULES LIST
Schedule 1 — Employee Bonuses
Schedule 4.1 — Officers and Directors
Schedule 4.3 — Non-Contravention
Schedule 4.4 — Brokers’ Fees
Schedule 4.6 — Subsidiaries
Schedule 4.8 — Events Subsequent to Most Recent Fiscal Year End
Schedule 4.9 — Liabilities
Schedule 4.11 — Tax Matters
Schedule 4.12 — Real Property
Schedule 4.13 — Intellectual Property
Schedule 4.15 — Contracts
Schedule 4.17 — Insurance
Schedule 4.18 — Litigation
Schedule 4.19.1 — Employees
Schedule 4.19.2 — Contractors
Schedule 4.19.3 — Company Policies, Rules and Procedures
Schedule 4.20 — Employee Benefits Plans
Schedule 4.22 — Environmental, Health and Safety Matters
Schedule 4.24.1 — Government Contracts
Schedule 4.24.2 — Claims and Protests
Schedule 4.24.3 — Compliance
Schedule 4.24.4 — Violations; Breaches
Schedule 4.24.6 — Default Notices; Terminations
Schedule 4.24.7 — Claims and Disputes
Schedule 4.24.10 — Government Audits
Schedule 4.24.14 — Events or Omissions
Schedule 4.24.15 — Internal Audits
Schedule 4.24.17 — Assignments of Government Contract
Schedule 4.24.18 — Indirect Costs
Schedule 4.24.19 — Government-Furnished Items
Schedule 4.24.20 — Warranties and Guaranties
Schedule 4.24.21 — Facility Security Clearances
Schedule 4.27 — Organizational Conflicts of Interest
Schedule 4.28 — Customers and Suppliers
Schedule 4.29 — Affiliated Transactions
Schedule 4.32 — Bank Accounts

v

Schedule 6.2.12 — Company Obligations

Schedule 6.2.19 — Consents, Permits and Approvals

vi

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement (this “Agreement”), is made as of April 1, 2004, by and among RGII TECHNOLOGIES, INC., a Maryland corporation (the “Buyer”), AUTOMATED INFORMATION MANAGEMENT, INC., a Maryland closely held corporation (the “Company”), and CYNTHIA F. HARDY (“Seller”). The Buyer, the Company and the Seller are referred to collectively herein as the “Parties.”

RECITALS

WHEREAS, the Buyer desires to acquire all of the capital stock of the Company.

WHEREAS, the Seller is the record and beneficial owner of 100% of the issued and outstanding capital stock of the Company, which, as of the date hereof, consists of 1,000 shares of common stock, par value $.10 per share (the “Company Shares”).

WHEREAS, the Buyer desires to acquire and the Seller desires to sell, the Company Shares under the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows.

1.DEFINITIONS. “Actual Working Capital” has the meaning set forth in Section 2.5.1 below.

“Affiliate” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Exchange Act.

“Affiliated Group” means any affiliated group within the meaning of Code §1504(a) or any similar group defined under a similar provision of state, local or foreign law.

“Agreement” has the meaning set forth in the preface above.

“Basket Amount” has the meaning set forth in Section 7.5 below.

“Buyer Party(ies)” means the Buyer, its Affiliates and the officers, directors and representatives of such Persons; provided that (i) the Company shall be a Buyer Party after the Closing and (ii) neither the Seller nor any of the Seller’s Affiliates shall be a Buyer Party at any time.

“Buyer” has the meaning set forth in the preface above.

“Cash Closing Amount” has the meaning set forth in Section 2.2 below.

“Cash Purchase Price” has the meaning set forth in Section 2.5.1 below.

“CHC” means Computer Horizons Corp., the parent of the Buyer.

“Closing Date” has the meaning set forth in Section 2.3 below.

“Closing Payment Certificate” has the meaning set forth in Section 2.4.1 below.

“Closing” has the meaning set forth in Section 2.3 below.

“COBRA” means the requirements of Part 6 of Subtitle B of Title I of ERISA and Code §4980B and of any similar state law.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Shares” has the meaning set forth in the Recitals above.

“Company’s Accountants” means Deloitte & Touche LLP.

“Company” has the meaning set forth in the preface above.

“Confidential Information” means any information concerning the business and affairs of the Company that is not already generally available to the public.

“Contract Disputes Act” has the meaning set forth in Section 4.24.5 below.

“Cost Accounting Standards” means the United States Government Cost Accounting Standards as set forth in 48 C.F.R. 9904.

“Defense Articles” has the meaning set forth in Section 4.30 below.

“Defense Services” has the meaning set forth in Section 4.30 below.

“Determination” has the meaning set forth in Section 2.4.2 below.

“Direct Contract Costs” means, with respect to any period, the aggregate amounts of labor and other direct expenses, including, without limitation, expenses for materials, subcontracts, consultants and travel.

“Disclosure Schedules” has the meaning set forth in Section 3.1 below.

“Employee Benefit Plan” means each “employee benefit plan” (as such term is defined in ERISA §3(3)) and each other employee benefit plan, program or arrangement of any kind that the Company maintains, to which the Company contributes or has any obligation to contribute, or with respect to which the Company has any Liability.

“Employee Pension Benefit Plan” has the meaning set forth in ERISA §3(2).

“Employee Welfare Benefit Plan” has the meaning set forth in ERISA §3(1).

“Encumbrance” means any equity, claim, lien, pledge, option, warrant, charge, demand, easement, security interest, mortgage, deed of trust, right-of-way, restriction, purchase rights, preemptive rights, encumbrance, right of setoff or adverse interest of any kind or character.

2

“Environmental Claim” has the meaning set forth in Section 7.4 below.

“Environmental, Health, and Safety Requirements” shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect.

“ERISA Affiliate” means each entity which is treated as a single employer with the Company for purposes of Code §414(b), (c), (m) and (o).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Claim” has the meaning set forth in Section 7.4 below.

“Escrow Account” shall have the meaning set forth in Section 2.6 below.

“Escrow Agent” shall have the meaning set forth in Section 2.6 below.

“Escrow Amount” shall have the meaning set forth in Section 2.6 below.

“Exchange Act” means the Exchange Act of 1934, as amended.

“FAR” has the meaning set forth in Section 4.24.3 below.

“Fiduciary” has the meaning set forth in ERISA §3(21).

“Financial Statements” has the meaning set forth in Section 4.7 below.

“GAAP” means United States generally accepted accounting principles as in effect from time to time.

“General Claim” has the meaning set forth in Section 7.4 below.

“Government Contract Bid” means any offer, proposal or quote for goods or services to be delivered to or in support of a Governmental Authority under a proposed prime contract or a proposed subcontract (at any tier) under a proposed prime contract.

“Government Contract” means any contract of the Company with a Governmental Authority, including without limitation any blanket purchasing agreement or task order pursuant to such a contract; the term “Government Contract” also includes any subcontract (at any tier) of the Company with another entity that holds either a prime contract with such a Governmental Authority or a subcontract (at any tier) under such a prime contract.

3

“Government-Furnished Items” has the meaning set forth in Section 4.24.19 below.

“Governmental Authority” means any government or political subdivision, whether federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision, or any federal, state, local or foreign court or arbitrator.

“Indebtedness” means without duplication, all indebtedness or other obligation of the Company for borrowed money. For the avoidance of doubt, all deferred rent or other lease obligations set forth on Schedule 4.12 (other than capitalized lease obligations) shall be specifically excluded from this definition of “Indebtedness.”

“Independent Accounting Firm” shall mean PriceWaterhouseCoopers LLP or such other nationally recognized accounting firm having no relationship with the Seller, the Company Buyer and CHC and mutually agreed upon by the Buyer and the Seller.

“Indirect Costs” means any fringe benefits, general and administrative expenses and overhead expenses.

“Insurance Policies” has the meaning set forth in Section 4.17 below.

“Intellectual Property” means: (a) all inventions, all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, divisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, slogans, trade names, corporate names, Internet domain names, and all goodwill associated with any of the foregoing, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including source code, executable code, data, databases and related documentation), and (g) all other proprietary rights.

“IRS” is the Internal Revenue Service of the United States Department of Treasury.

“Employment Agreement” has the meaning set forth in Section 6.2.8 below.

“Knowledge” means actual knowledge and the knowledge which a director, officer and Knowledgeable Employee should have in the reasonable performance of their duties. When used with respect to the Company, “Knowledge” means both (a) the Knowledge of the directors and officers of the Company and (b) the Knowledge of the Knowledgeable Employees.

“Knowledgeable Employees” means each of Seller, Michael Hardy, Bette Burgess, Deon Buffaloe, Gloria Butters and Beverly Jackson.

“Law” means any law, statute, code, ordinance, regulation or rule of any Governmental Authority.

4

“Leased Real Property” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures or other interest in real property held by the Company.

“Leases” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties and other agreements with respect thereto, pursuant to which the Company holds any Leased Real Property, including the right to all security deposits and other amounts and instruments deposited by or on behalf of the Company.

“Liability” means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes.

“License” means any security clearance, permit, license, variance, franchise, order, approval, consent, certificate, registration or other authorization of any foreign, federal, provincial, state and local governments, governmental agencies, judicial authority or regulatory body, and other similar rights.

“Losses” means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, Encumbrances, losses, expenses, and fees, including court costs and reasonable attorneys’ fees and expenses.

“Material Adverse Effect” means, with respect to any Person, such state of facts, event(s), change(s) or effect(s) that had, has or would reasonably be expected to have a material adverse effect on the assets, business, financial condition, results of operations, customer, supplier or employee relations of such Person taken as a whole.

“Material Lease” means any Lease that is material to the business of the Company as presently conducted.

“Most Recent Balance Sheet” means the balance sheet contained within the Most Recent Financial Statements.

“Most Recent Financial Statements” has the meaning set forth in Section 4.7 below.

“Most Recent Fiscal Month End” has the meaning set forth in Section 4.7 below.

“Most Recent Fiscal Year End” has the meaning set forth in Section 4.7 below.

“Multiemployer Plan” has the meaning set forth in ERISA §3(37).

“Non-Compete Agreements” has the meaning set forth in Section 6.2.11 below.

“Order” means any order, judgment, ruling, injunction, assessment, award, decree or writ of any Governmental Authority.

5

“Ordinary Course of Business” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).

“Organizational Conflict of Interest” has the meaning set forth in Section 4.27 below.

“Party” has the meaning set forth in the preface above.

“Permitted Encumbrances” means (a) Encumbrances for Taxes or governmental charges or claims not yet due and payable, (b) statutory Encumbrances of landlords, carriers, warehousemen, mechanics and materialmen and other similar Encumbrances imposed by Law in the Ordinary Course of Business for sums not yet due and payable, and (c) easements, rights-of-way, restrictions and other similar charges or Encumbrances on real property, in each case which do not materially interfere with the ordinary conduct of the business of the Company.

“Person” means an individual, a partnership, a corporation, a limited liability entity, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a Governmental Authority.

“Pre-Closing Period” has the meaning set forth in Section 8.2 below.

“Pre-Closing Taxes” has the meaning set forth in Section 7.3.3 below.

“Prohibited Transaction” has the meaning set forth in ERISA §406 and Code §4975.

“Purchase Price” has the meaning set forth in Section 2.7 below.

“Related Party” has the meaning set forth in Section 4.29 below.

“Related Party Agreement” has the meaning set forth in Section 4.29 below.

“Related Party Obligation” has the meaning set forth in Section 4.29 below.

“Release of Claims” has the meaning set forth in Section 6.2.9 below.

“Securities Act” means the Securities Act of 1933, as amended.

“Seller” has the meaning set forth in the preface above.

“Subsidiary” means any corporation with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors.

“Tax” means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code §59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not.

6

“Tax Asset” means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute that could be carried forward or back to reduce income or franchise Taxes (including, without limitation, deductions and credits related to alternative minimum Taxes) and losses or deductions deferred by the Code or other applicable Law.

“Tax Claims” has the meaning set forth in Section 7.4 below.

“Tax Return” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes filed or required to be filed with a Governmental Authority, including any schedule or attachment thereto, and including any amendment thereof.

“Taxing Authority” means any Governmental Authority (whether federal, state, local, municipal, foreign or otherwise) responsible for the imposition, collection or administration of any Tax.

“Technical Data” has the meaning set forth in Section 4.30 below.

“Transfer Taxes” has the meaning set forth in Section 8.4 below.

“Transaction Documents” means, collectively, this Agreement, the Employment Agreements, the Release of Claims, the Non-Compete Agreement and the other documents and instruments to be executed and or delivered in connection with the transactions contemplated by this Agreement.

“United States Government” means the government of the United States of America, its agencies and instrumentalities.

“Working Capital” means the difference (whether positive or negative) of (a) the current assets of the Company as of the Closing Date, minus (b) the current liabilities of the Company as of the Closing Date, in each case as determined in accordance with GAAP immediately prior to the consummation of the purchase and sale of the Company Shares contemplated hereby. Notwithstanding the foregoing, the Parties intend that “current liabilities” taken into account in computing Working Capital shall include (without limitation) all liabilities for accrued or deferred Taxes allocable to taxable periods or a portion thereof ending on or before the Closing Date, balance sheet reserves for billings in excess of revenues, 401(k) plan withholdings, bonus plan accruals and the amount of transaction expenses, if any, payable after the Closing and not otherwise paid out of the Cash Closing Amount and bonuses, if any, that may become payable to Company employees after Closing as set forth on Schedule 1 hereto.

“Working Capital Threshold” means $1,100,000.

2.PURCHASE AND SALE OF THE COMPANY SHARES.

2.1Basic Transaction.On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Seller, and the Seller agrees to sell to the Buyer, 100% of the issued and outstanding Company Shares for the consideration specified below in this Section 2. The purchase price for the Company Shares is $13,725,000 increased by

7

the amount Actual Working Capital exceeds the Working Capital Threshold and decrease the amount Actual Working Capital is less than the Working Capital Threshold.

2.2Cash Closing Amount.In consideration for the sale by the Seller of the Company Shares to the Buyer, at the Closing, the Buyer shall pay to the Seller $12,725,000 plus the amount by which Working Capital is estimated to exceed the Working Capital Threshold, if applicable, or minus the amount by which the Working Capital Threshold is estimated to exceed Working Capital, if applicable, such estimate as determined in accordance with Section 2.4.1 (together, the “Cash Closing Amount”), by wire transfer of immediately available funds to Seller’s account; and in addition the Buyer shall deposit $1,000,000 into escrow pursuant to Section 2.6 hereof.

2.3The Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Reed Smith LLP, 1301 K Street, N.W., Suite 1100 - East Tower, Washington, DC 20005, commencing at 10:00 a.m. local time on the date of this Agreement or such other date as the Buyer and the Seller may agree (the “Closing Date”) and the Closing shall be deemed to have occurred as of 12:01 a.m. on the Closing Date. At the Closing, (i) the Seller will deliver to the Buyer the various certificates, instruments, and documents referred to in Section 6.2 below, (ii) the Buyer will deliver to the Seller the various certificates, instruments, and documents referred to in Section 6.3 below, (iii) Seller will deliver to the Buyer stock certificates representing all of Seller’s Company Shares, endorsed in blank or accompanied by duly executed assignment documents, (iv) the Buyer will deliver to the Seller the Cash Closing Amount specified in Section 2.2 above and (v) Buyer will deliver the Escrow Amount to the Escrow Agent.

2.4Determination of Working Capital Adjustment.

2.4.1Determination of Estimated Working Capital.Not later than three, nor more than five business days prior to the Closing Date, the Seller shall prepare and deliver to the Buyer a certificate certifying the Seller’s good faith estimate of the Working Capital of the Company as of the Closing Date, and including an estimated unaudited balance sheet of the Company as of the Closing Date and also certifying that as of Closing, Company shall have no long term Indebtedness. Such determination of Working Capital shall be in accordance with GAAP and consistent with the Company’s historical financial statements. As promptly as practicable but not later than one business day prior to the Closing, the Buyer shall identify any adjustments that it believes are required to the certificate delivered by the Seller. If the Seller disputes any such adjustments, the Buyer and the Seller shall use reasonable best efforts to resolve such dispute, after which the Seller shall re-deliver to the Buyer the certificate with such adjustments as the Parties have agreed are appropriate. (The form of certificate finally delivered pursuant to this Section 2.4.1 and acceptable to the Buyer and the Seller is referred to herein as the “Closing Payment Certificate” and shall be used to determine the Cash Closing Amount under Section 2.2.)

2.4.2Determination of Actual Working Capital.Within 45 days after the Closing Date, the Buyer will prepare and deliver to the Seller a certificate, signed by Buyer, certifying the Buyer’s determination of the actual Working Capital of the Company as of the Closing Date, and identifying any adjustments to the Purchase Price as a result of such amounts

8

being greater or less than the amounts set forth on the Closing Payment Certificate. If the Seller does not object to Buyer’s certificate within 30 days after receipt, or accepts such certificate during such 30 day period, the Purchase Price shall be adjusted as set forth in Buyer’s certificate, and payment made in accordance with Section 2.5. If the Seller objects to the Buyer’s certificate, the Seller shall notify the Buyer in writing of such objection within 30 days after the Seller’s receipt thereof (such notice setting forth in reasonable detail the basis for such objection). During such 30 day period, the Buyer shall permit the Seller access to such work papers relating to the preparation of the Buyer’s certificate, as may be reasonably necessary to permit the Seller to review in detail the manner in which the Buyer’s certificate was prepared. The Buyer and the Seller shall thereafter negotiate in good faith to resolve any such objections. If the Buyer and the Seller are unable to resolve all of such differences within twenty (20) calendar days of the Buyer’s receipt of Seller’s objections, the items in dispute will be referred for determination as promptly as practicable to the Independent Accounting Firm, which shall be jointly engaged by the Buyer, on the one hand, and the Seller, on the other hand, pursuant to an engagement letter in customary form which each of the Buyer and the Seller shall execute. If PriceWaterhouseCoopers LLP is unable to serve as the Independent Accounting Firm and the Buyer and the Seller have failed to reach agreement on an Independent Accounting Firm within ten (10) calendar days following the termination of the twenty (20) calendar-day period referred to in the immediately preceding sentence, then the Independent Accounting Firm shall be selected by the American Arbitration Association. The Independent Accounting Firm shall prescribe procedures for resolving the disputed items and in all events shall make a written determination, with respect to such disputed items only, whether and to what extent, if any, the Closing Payment Certificate and the accompanying calculations of the Working Capital and/or Indebtedness of the Company at Closing require adjustment based on the terms and conditions of this Agreement (the “Determination”). The Determination shall be based solely on presentations with respect to such disputed items by the Buyer and the Seller to the Independent Accounting Firm and not on the Independent Accounting Firm’s independent review; provided, that such presentations shall be deemed to include, without limitation, any work papers, records, accounts or similar materials delivered to the Independent Accounting Firm by the Buyer or the Seller in connection with such presentations and any materials delivered to the Independent Accounting Firm in response to requests by the Independent Accounting Firm. Each of the Buyer and the Seller shall use its reasonable best efforts to make its presentation as promptly as practicable following submission to the Independent Accounting Firm of the disputed items, and each such party shall be entitled, as part of its presentation, to respond to the presentation of the other party and any question and requests of the Independent Accounting Firm. The Buyer and the Seller shall instruct the Independent Accounting Firm to deliver the Determination to the Buyer and the Seller no later than thirty (30) calendar days following the date on which the disputed items are referred to the Independent Accounting Firm. In deciding any matter, the Independent Accounting Firm (i) shall be bound by the provisions of this Section 2.4.2, (ii) may not assign a value to any item greater than the greatest value for such item claimed by either the Buyer or the Seller or less than the smallest value for such item claimed by the Buyer or the Seller, and (iii) shall be bound by the express terms, conditions and covenants set forth in this Agreement, including the definition of Working Capital contained herein. In the absence of fraud or manifest error, the Determination shall be conclusive and binding upon the Buyer and the Seller. The Independent Accounting Firm shall consider only those items and amounts in the Buyer’s certificate which the Buyer and the Seller were unable to resolve. The determination of the

9

Independent Accounting Firm shall be final, conclusive, non-appealable and binding upon the Buyer and the Seller for all purposes hereunder. All fees and expenses (including reasonable attorney’s fees and expenses and fees and expenses of the Independent Accounting Firm) incurred in connection with any dispute over the Buyer’s certificate shall be borne by the Parties based on the percentage which the portion of the contested amount not awarded to each Party bears to the amount actually contested by such Party.

2.5Adjustment to Cash Closing Amount.

2.5.1The Working Capital amount determined in accordance with Section 2.4.2 (the “Actual Working Capital”) shall be used to calculate post closing adjustments to the Cash Closing Amount by calculating the difference between $12,725,000, plus the amount by which Actual Working Capital exceeds the Working Capital Threshold, if applicable, or minus the amount by which the Working Capital Threshold exceeds the Actual Working Capital, if applicable (the “Cash Purchase Price”). If the Cash Purchase Price is less than the Cash Closing Amount, then the Seller shall pay to the Buyer an amount equal to such deficiency (plus interest thereon at an annual rate of 4% from the Closing Date to the date of payment).

2.5.2If the Cash Purchase Price is greater than the Cash Closing Amount, then the Buyer shall pay to the Seller an aggregate amount equal to the amount of such excess (plus interest thereon at an annual rate of 4% from the Closing Date to the date of payment).

2.5.3All payments to be made to either the Buyer or the Seller pursuant to this Section 2.5 shall be made by wire transfer of immediately available funds to Seller’s account or Buyer’s account, as applicable, within three (3) business days after the date on which Actual Working Capital is finally determined pursuant to Section 2.4 above.

2.6Escrow.  At the Closing, Buyer shall withhold $1,000,000 (the “Escrow Amount”), from the Seller and shall instead deliver the Escrow Amount to an escrow agent selected by Buyer and reasonably acceptable to Seller (the “Escrow Agent”) for deposit into escrow (the “Escrow Account”). The Escrow Amount shall be held pursuant to the provisions of an escrow agreement in the form of Exhibit A hereto (the “Escrow Agreement”). The Escrow Amount will be available to compensate Buyer for Losses as provided in Sections 7.1 and 7.3. To the extent that there is an Escrow Amount remaining in the Escrow Account which has not been reserved for claims under the Escrow Agreement, such Escrow Amount will be released to the Seller on the earlier of: (i) the date the financial statements of the Company have been audited by an auditor designated by CHC or (ii) March 31, 2005.

2.7Purchase Price.The purchase price for the Company Shares shall be the sum of the Cash Purchase Price plus the Escrow Amount.

3.REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION.

Except for those representations and warranties expressly set forth in this Article 3, Seller makes no other representations or warranties, express or implied, at law or in equity, of any kind or nature whatsoever concerning the organization, business, assets, liabilities and operations of the Company or any other matters.

10

3.1Representations and Warranties of the Seller.            Except as set forth in the attached disclosure schedules delivered by the Seller to the Buyer on the date hereof  (the “Disclosure Schedules”), Seller represents and warrants to the Buyer that the statements contained in this Section 3.1 are correct and complete. The Disclosure Schedules shall be arranged according to the numbered and lettered paragraphs in this Section 3.1, and any disclosure shall qualify (x) the corresponding paragraph in this Section 3.1 and (y) any other paragraph(s) in this Section 3.1 only to the extent that such disclosure clearly states that it also qualifies or applies to such other paragraph(s).

3.1.1Authorization of Transaction.Seller has full power and authority to execute and deliver this Agreement and to perform Seller’s obligations hereunder.  This Agreement constitutes the valid and legally binding obligation of Seller, enforceable in accordance with its terms and conditions, except as enforceability may be limited by applicable equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect affecting the enforcement of creditors’ rights generally. Seller is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order to consummate the transactions contemplated by this Agreement.

3.1.2Noncontravention.               Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which Seller or the Company is subject, (B) violate, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Seller or the Company is a party or by which Seller or the Company is bound or to which any of Seller’s or the Company assets is subject, or (C) result in the imposition or creation of an Encumbrance upon or with respect to the Company Shares.

3.1.3Brokers’ Fees.     Except for Aronson Capital Advisors LLC, the Seller has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated.

3.1.4Ownership of Shares.         Seller holds of record and owns beneficially all one thousand (1,000) of the issued and outstanding Company Shares, free and clear of all Taxes and Encumbrances. At the Closing, Seller represents the Company Shares will be transferred to Buyer or its designated Affiliate, whereupon the transferee will acquire good, valid and marketable title to the Company Shares free and clear of all Encumbrances. Seller is not a party to any option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could require Seller to sell, transfer, or otherwise dispose of any capital stock of the Company. Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of the Company, and there are no issued or outstanding options, warrants, purchase rights, shares, subscription rights, conversion rights, preemptive rights, exchange rights, or other contracts or commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock.

11

3.2Representations and Warranties of the Buyer.Except as set forth in the attached Disclosure Schedules, the Buyer represents and warrants to the Seller that the statements contained in this Section 3.2 are correct and complete. The Disclosure Schedules shall be arranged according to the numbered and lettered paragraphs in this Section 3.2, and any disclosure shall qualify (x) the corresponding paragraph in this Section 3.2 and (y) any other paragraph(s) in this Section 3.2 only to the extent that such disclosure clearly states that it also qualifies or applies to such other paragraph(s).

3.2.1Organization of the Buyer.The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation.

3.2.2Authorization of Transaction.The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions, except as enforceability may be limited by applicable equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect affecting the enforcement of creditors’ rights generally. The Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Authority in order to consummate the transactions contemplated by this Agreement.

3.2.3Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any Governmental Authority to which the Buyer is subject or any provision of its certificate of incorporation or bylaws or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject.

3.2.4Brokers’ Fees. The Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which Seller could become liable or obligated.

4.REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY

Except as set forth in the attached Disclosure Schedules, the Seller hereby represents and warrants to the Buyer that the statements contained in this Section 4 are correct and complete. The Disclosure Schedules shall be arranged according to the numbered and lettered paragraphs in this Section 4, and any disclosure shall qualify (x) the corresponding paragraph in this Section 4 and (y) any other paragraph(s) in this Section 4 only to the extent that such disclosure clearly states that it also qualifies or applies to such other paragraph(s). The Seller and the Company hereby acknowledge that nothing in the Disclosure Schedules shall be deemed adequate to disclose an exception to a representation or warranty made herein, unless the applicable Disclosure Schedule(s) identifies such exception with particularity. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item

12

shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). Except for those representations and warranties expressly set forth in Article 3 and this Article 4, Seller makes no other representations or warranties, express or implied, at law or in equity, of any kind or nature whatsoever concerning the organization, business, assets, liabilities and operations of the Company or any other matters.

4.1Organization, Qualification, and Corporate Power.The Company is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. The Company has all requisite corporate power and authority to own, lease and operate the assets owned, leased and operated by it and to carry on its business as currently being conducted and contemplated top be conducted by it. The Company is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required except where the failure would not have a Material Adverse Effect. Schedule 4.1 identifies the directors and officers of the Company. The Seller and the Company have delivered to the Buyer correct and complete copies of the certificate of incorporation and bylaws of the Company (as amended to date). The minute books (containing the records of meetings of the stockholders, the board of directors, and any committees of the board of directors), the stock certificate books, and the stock record books of the Company are correct, accurate and except as provided on Schedule 4.1, complete in all material respects.

4.2Capitalization.The entire authorized capital stock of the Company consists of 10,000 shares of common stock, $.10 par value per share, of which 1,000 shares are issued and outstanding and 9,000 shares are authorized but unissued. All of the issued and outstanding Company Shares have been duly authorized, are validly issued, fully paid, and nonassessable, free of preemptive rights, and are held of record, and beneficially owned, by the Seller. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, preemptive rights, exchange rights, or other contracts or commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company, nor has the Company committed to issue any of the foregoing. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of the Company.

4.3Noncontravention.  Except as set forth on Schedule 4.3, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, Order, charge, or other restriction of any Governmental Authority to which the Company is subject or any provision of the certificate of incorporation or bylaws of the Company, (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice, report or other filing (whether with a Governmental Authority or other third party) or give rise to any payments or compensation under any agreement, contract, lease, license, instrument, or other arrangement to which the Company is a party or by which it is bound or to which any of its assets is subject (iii) or result in the imposition of any Encumbrance upon any of the Company Shares or the Company’s assets. Except as set forth in Schedule 4.3, neither the Company nor the Seller needs to give any notice to, make any filing with, or obtain any authorization, consent, or approval of

13

any Governmental Authority in order for the Parties to consummate the transactions contemplated by this Agreement.

4.4Brokers’ Fees.Except as set forth on Schedule 4.4, the Company has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement.

4.5Title to Assets. The Company has good and marketable title to, or a valid leasehold interest in, the properties and assets used by it, located on its premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all Encumbrances, excluding Permitted Encumbrances and except for properties and assets disposed of in the Ordinary Course of Business since the date of the Most Recent Balance Sheet.

4.6Subsidiaries.The Corporation has no Subsidiaries. Except as set forth on Schedule 4.6, the Company (i) has never had a Subsidiary and (ii) does not own or hold the right to acquire any shares of stock or any other security or interest in any other Person.

4.7Financial Statements.Attached hereto as Exhibit B are the following Company financial statements (collectively, the “Financial Statements”): (i) audited balance sheets, statements of income, statements of cash flows and changes in stockholders’ equity, as of and for the fiscal years ended December 31, 2001 and December 31, 2002 and December 31, 2003, along with the related notes thereto (the “Most Recent Fiscal Year End”) for the Company; and (ii) unaudited balance sheet and statements of income, changes in stockholders’ equity, and cash flows (the “Most Recent Financial Statements”) as of and for the two months ended February 29, 2004 (the “Most Recent Fiscal Month End”) for the Company. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except that the unaudited interim financial statements will not contain any footnotes, may not contain all adjustments required by GAAP and will be subject to year-end adjustment); present fairly the financial condition, the results of operations, shareholders’ equity and cash flow of the Company in all material respects; are correct and complete; and are consistent with the books and records of the Company.

4.8Events Subsequent to Most Recent Fiscal Year End.Except as set forth on Schedule 4.8, since the Most Recent Fiscal Year End, there has not been any change in the business, financial condition, operations, results of operations, assets, customer, supplier or employee relations (other than changes in general economic conditions) which has had, or is reasonably likely to have, a Material Adverse Effect on the Company or its business as presently conducted. Without limiting the generality of the foregoing, since that date:

4.8.1the Company has not sold, leased, transferred, or assigned any of its assets, tangible or intangible, that are material, either individually or in the aggregate, to the Company’s business, outside the Ordinary Course of Business;

4.8.2the Company has not entered into any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) either involving more than $25,000 or outside the Ordinary Course of Business;

14

4.8.3no party (including the Company) has accelerated, terminated, made material modifications to, or cancelled any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) involving more than $25,000 to which the Company is a party or by which it is bound nor, to the Knowledge of the Seller and the Company, threatened any of the foregoing actions;

4.8.4except for Permitted Encumbrance, the Company has not caused or permitted any Encumbrance to be imposed upon any of its assets, tangible or intangible, that are material, either individually or in the aggregate, to the Company’s business;

4.8.5the Company has not made any capital expenditure (or series of related capital expenditures) either involving more than $10,000 or outside the Ordinary Course of Business;

4.8.6the Company has not made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions);

4.8.7the Company has not issued any note, bond, or other debt security or created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation either involving more than $5,000 singly or $20,000 in the aggregate and has not repaid or returned any note, bond or other debt of the Company;

4.8.8the Company has not incurred, created or otherwise become liable for any Indebtedness and has not delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course of Business;

4.8.9the Company has not amended, cancelled, compromised, waived, or released any right or claim (or series of related rights and claims) either involving more than $10,000 or outside the Ordinary Course of Business and has not accelerated collection of accounts receivable, delayed payment of accounts payable;

4.8.10the Company has not granted any license or sublicense of any rights under or with respect to any Intellectual Property that is material, either individually or in the aggregate, to the Company’s business;

4.8.11there has been no change made or authorized in the certificate of incorporation or bylaws of the Company;

4.8.12the Company has not issued, sold, exchanged, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock;

4.8.13the Company has not declared, set aside, or paid any dividend or made any distribution with respect to its capital stock (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any of its capital stock, or granted any Person any option or other right to acquire any shares of capital stock or other securities of the Company;

15

4.8.14the Company has not experienced any damage, destruction, or loss (whether or not covered by insurance) to property that is material, either individually or in the aggregate, to the Company’s business;

4.8.15the Company has not made any loan to, or entered into any other transaction with, any of its directors, officers, and employees;

4.8.16the Company has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement;

4.8.17other than in the Ordinary Course of business, the Company has not granted any increase in the compensation of any of its directors, officers or employees;

4.8.18the Company has not adopted, amended, modified, or terminated, in any material respect, any bonus, profit sharing, incentive, severance, employee benefit or other plan, contract, or commitment for the benefit of any of its directors, officers, and employees (or taken any such action with respect to any other Employee Benefit Plan);

4.8.19except as set forth on Schedule 4.8, the Company has not entered into or modified any retention, severance or incentive agreement related to the transactions contemplated by this Agreement;

4.8.20the Company has not made any other change in employment terms, compensation or benefits for any of its directors, officers, and employees;

4.8.21the Company has not changed any method or principle of accounting except to the extent required by GAAP or as advised by the Company’s independent accountant;

4.8.22the Company has not made any material Tax election, or settled any Tax liability; and

4.8.23the Company has not committed to or agreed to undertake any of the foregoing.

4.9Undisclosed Liabilities. Except as disclosed on Schedule 4.9, the Company has no Liability (and, to the Knowledge of the Company and the Seller, there is no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand pending or threatened against the Company that would reasonably be expected to give rise to any Liability), except for (i) Liabilities set forth on the Most Recent Balance Sheet, and (ii) Liabilities which have arisen after the Most Recent Fiscal Month End in the Ordinary Course of Business or as a result of the transactions contemplated hereby (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement, or violation of law).

4.10Legal Compliance. Each of the Company and its predecessors and Affiliates has complied with all applicable Laws and Orders, and no action, suit, proceeding, hearing,

16

investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply.

4.11Tax Matters.

4.11.1  The Company has duly and timely filed all Tax Returns required to have been filed by it. All such Tax Returns are true, correct and complete in all respects. Except as set forth in the Disclosure Schedules, all Taxes required to have been paid by the Company (whether or not shown on any Tax Return) have been paid. The Company is not currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by a Taxing Authority in writing (or, to the Knowledge of the Seller or the Company, made in any other manner), for a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Encumbrances on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax.

4.11.2  The Company has complied with all applicable laws regarding payment and withholding of Taxes and has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other Person.

4.11.3  Neither the Seller nor any director or officer (or employee responsible for Tax matters) of the Company expects any Taxing Authority to assess against the Company any additional Taxes with respect to any taxable period for which Tax Returns have been filed by or on behalf of the Company. There is no dispute or claim concerning any Tax Liability of the Company either (A) claimed or raised by any Taxing Authority in writing or (B) as to which the Seller or the Company has Knowledge based upon personal contact with any agent of such Taxing Authority. Schedule 4.11 lists all federal, state, local, and foreign income Tax Returns filed with respect to the Company for taxable periods commencing July 1, 1995 and ended on or before December 31, 2003, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. The Seller and the Company have delivered to the Buyer correct and complete copies of all such federal income Tax Returns, examination reports with respect to such income Tax Returns, and statements of income Taxes assessed against or agreed to by the Company since July 1, 1995 which were not shown on the face of such income Tax Return.

4.11.4  The Company has not executed any agreement waiving any statute of limitations in respect of assessment or collection of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency that has continuing effect, or granted any power of attorney in respect to the Company with respect to any matter related to Taxes which is currently in force. There are no agreements currently in effect between the Company and any Tax Authority with respect to the payment in installments of any tax liability after the Closing Date.

4.11.5  The Company has not filed a consent under Code §341(f) concerning collapsible corporations. The Company has not made any payments, is not obligated to make any payments in connection with the transactions contemplated by this Agreement that would be

17

excess parachute payments within the meaning of Code § 280G. The Company has not been a United States real property holding corporation within the meaning of Code §897(c)(2) during the applicable period specified in Code §897(c)(l)(A)(ii). Except as provided on the Disclosure Schedules, the Company has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code §6662. The Company is not a party to any Tax allocation or sharing agreement. The Company (A) has never been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) and (B) does not have any Liability for the Taxes of any Person (other than the Company) under Treasury Regulation §1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. The Company does not have a “net required payments balance” as defined in Section 7519 of the Code.

4.11.6  The unpaid Taxes of the Company (A) did not, as of the Most Recent Fiscal Month End, exceed the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Most Recent Balance Sheet (rather than in any notes thereto) and (B) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of the Company in filing its Tax Returns.

4.11.7  The Company will not be required to include any item of income in, nor will the Company exclude any item of deduction from, taxable income for any taxable period (or portion thereof) beginning after the Closing Date as a result of any change in method of accounting for a taxable period ending on or prior to the Closing Date under Code §481(c) (or any corresponding or similar provision of state, local or foreign income Tax law). The Company is not a party to any “closing agreement” as described in Code §7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date that would have continuing effect after the Closing Date. The Company has no (A) gain from intercompany transaction which has been deferred pursuant to Treasury Regulations Section 1.1502-13 or any excess loss account described in Treasury Regulations Section 1.1502-13 (or any corresponding or similar provision of state, local or foreign income Tax law) arising in any taxable period or portion thereof ending before the Closing Date; (B) installment sale or open transaction disposition made on or prior to the Closing Date, income from which would be required to be reported by the Company after the Closing Date; or (C) prepaid income amount received on or prior to the Closing Date not required to have been reported in computing taxable income for periods ending on or before the Closing Date, except, in each case, to the extent adequately reserved for in the Most Recent Financial Statement or arising in the Ordinary Course of Business since the Most Recent Fiscal Month End.

4.11.8  The Company has had in effect at all times since July 1, 1999 a valid election under Section 1362(a) of the Code to be treated as an S corporation, and since that date has validly been treated in a similar manner for purposes of the income tax laws of all states in which it has been subject to taxation where analogous treatment is legally available. Neither the Seller nor the Company has taken or omitted to take any action which action or inaction would cause the Company to cease to be treated as an S Corporation for federal and applicable state and local Tax purposes for any period since July 1, 1999.

18

4.12Real Property.

4.12.1     The Company does not own any real property.

4.12.2Schedule 4.12 sets forth the address of each parcel of Leased Real Property, and a true and complete list of all Leases for each such Leased Real Property (including the date and name of the parties to such Lease document). The Company has delivered to the Buyer a true and complete copy of each such Lease document, and in the case of any oral Lease, a written summary of the material terms of such Lease. With respect to each of the Leases which is a Material Lease:

4.12.2.1.such Lease is legal, valid, binding, enforceable and in full force and effect;

4.12.2.2.the transaction contemplated by this Agreement does not require the consent of any other party to such Lease, will not result in a breach of or default under such Lease, and will not otherwise cause such Lease to cease to be legal, valid, binding, enforceable and in full force and effect on identical terms following the Closing;

4.12.2.3.the Company’s possession and quiet enjoyment of the Leased Real Property under such Lease has not been disturbed and, to the Knowledge of the Seller and the Company, there are no disputes with respect to such Lease;

4.12.2.4.neither the Company nor any other party to the Lease is in breach or default under such Lease, and, to the Knowledge of the Seller and the Company, no event has occurred or circumstance exists which, with the delivery of notice, the passage of time or both, would constitute such a breach or default, or permit the termination, modification or acceleration of rent under such Lease;

4.12.2.5.no security deposit or portion thereof deposited with respect to such Lease has been applied in respect of a breach or default under such Lease which has not been redeposited in full;

4.12.2.6.the Company does not owe, nor will it owe in the future, any brokerage commissions or finder’s fees with respect to such Lease;

4.12.2.7.the other party to such Lease is not an affiliate of, and otherwise does not have any economic interest in, the Company;

4.12.2.8.the Company has not subleased, licensed or otherwise granted any Person the right to use or occupy such Leased Real Property or any portion thereof;

4.12.2.9.the Company has not collaterally assigned or granted any other security interest in such Lease or any interest therein; and

19

4.12.2.10.there are no liens or encumbrances on the estate or interest created by such Lease.

4.13Intellectual Property. Schedule 4.13 (i) lists all patents, registrations and applications for registration of Intellectual Property owned by the Company, (ii) lists all trade names, domain names and material unregistered trademarks owned by the Company, (iii) describes all material inventions and material unregistered copyrights owned by the Company, (iv) lists all software developed and/or owned by the Company, and (v) lists all material trade secrets of the Company. The Company owns, free from any Encumbrance, or has a valid, enforceable and fully paid up license or other right to use, all material Intellectual Property used in the business of the Company or necessary to operate the business of the Company as currently conducted. All Intellectual Property owned or used by the Company in the operation of its business as of the date hereof will be owned or available for use by the Company on identical terms and conditions immediately following the Closing. The Company has taken all necessary action, performed all customary acts, and has paid all fees and taxes (to the extent applicable), required to protect and maintain in full force and effect all Intellectual Property owned by the Company. No claim by any third party has been made contesting the validity, enforceability, use or ownership of the Intellectual Property owned or used by the Company, and Seller and Company have no Knowledge of any basis for such claim. Neither the Company nor the Seller has received any notices (including any cease-and -desist letters or offers to license) alleging infringement or misappropriation of any third party Intellectual Property. To the Knowledge of the Company and the Seller, no third party is infringing, misappropriating or otherwise engaging in unauthorized use of the Intellectual Property of the Company. Except as set forth on Schedule 4.13, each current and former employee, consultant and officer of the Company has executed an agreement with the Company requiring such employee, consultant or officer to maintain the confidentiality of the Company’s proprietary information and assign all Intellectual Property developed by such employee, consultant or officer to the Company or its designee. The Company has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of third parties.

4.14Sufficiency of Assets.The Company owns and has good and marketable title, free and clear of Encumbrances, to all of its assets. The Company owns or has a valid leasehold interest in all of the tangible and intangible assets (including, without limitation, all buildings, machinery, equipment, and other tangible assets) necessary for the conduct of its business as presently conducted. Each such tangible asset is free from material defects (patent and latent), has been maintained in accordance with normal industry practice, is in satisfactory operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used.

4.15Contracts.Schedule 4.15 identifies each of the executory contracts, commitments, arrangements, undertakings and other agreements to which the Company is a party (other than Government Contracts and Related Party Agreements, which are set forth separately on Schedule 4.24.1 and Schedule 4.29, respectively):

4.15.1for the lease of personal or real property to or from any Person providing for lease payments in excess of $20,000 per annum;

20

4.15.2for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year, which reasonably would be expected to result in a material loss to the Company, or involve consideration in excess of $20,000;

4.15.3concerning a partnership or joint venture;

4.15.4under which the Company has created, incurred, assumed, or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, in excess of $20,000 or under which it has imposed an Encumbrance on any of its assets, tangible or intangible;

4.15.5concerning confidentiality, noncompetition or which restricts any business by the Company, or the ability to solicit or hire any Person;

4.15.6with respect to any profit sharing, stock option, stock purchase, stock appreciation, deferred compensation, severance, or other plan or arrangement for the benefit of its current or former directors, officers, and employees;

4.15.7any collective bargaining agreement;

4.15.8for the employment of any individual on a full-time, part-time, consulting, or other basis providing annual compensation in excess of $20,000 or providing material severance benefits;

4.15.9under which it has advanced or loaned any amount to any of its directors, officers, and employees outside the Ordinary Course of Business;

4.15.10under which the consequences of a default or termination could reasonably be expected to have a Material Adverse Effect on the Company;

4.15.11the performance of which involves the payment of consideration by the Company in excess of $20,000 per annum;

4.15.12relating to Intellectual Property (other than those related to retail shrinkwrap software licensed by the Company for a total cost of less than $2,000 each instance) including licenses, permits, sublicenses or the development of Intellectual Property; or

4.15.13which is a stock purchase agreement, asset purchase agreement, or other acquisition or divestiture agreement entered into by the Company since its inception.

The Company has delivered to Buyer a true and complete copy of such written contract required to be listed in Schedule 4.15. Neither the Company nor, to the Seller’s Knowledge, any other party to such contract is in breach or default thereunder, and no event has occurred which, with notice or lapse of time or both would constitute a breach or default thereof, or permit termination, modification or acceleration thereunder.

4.16Powers of Attorney.  There are no outstanding powers of attorney executed on behalf of the Company.

21

4.17Insurance.Schedule 4.17 contains a description (including the name of the insurer, the policy number, and the period, amount and scope of coverage) of each insurance policy maintained by the Company with respect to its properties, assets and business (collectively, the “Insurance Policies”). Each Insurance Policy (i) is legal, valid, binding, enforceable and in full force and effect as of the Closing and (ii) will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby. The Company is not in default with respect to its obligations under any Insurance Policy, nor has the Company been denied insurance coverage. Except as set forth on Schedule 4.17, the Company does not have any self-insurance or co-insurance programs. Except as set forth on Schedule 4.17, the reserves set forth on the Most Recent Balance Sheet are adequate to cover all liabilities with respect to any such self-insurance or co-insurance programs including, without limitation, all terminal liabilities. In the three (3) year period ending on the date hereof, the Company has not received any notice from, or on behalf of, any insurance carrier relating to or involving any change in the conditions of insurance, any refusal to issue an insurance policy or non-renewal of a policy, or requiring or suggesting material alteration of any of the Company’s assets, purchase of additional equipment or material modification of any of the Company’s methods of doing business. The Company has not made any claim against an insurance policy as to which the insurer is denying coverage.

4.18Litigation.Except as set forth on Schedule 4.18, there is no action, indictment, arbitration, suit, proceeding or, to the Knowledge of the Seller and the Company, investigation pending against, or to the Knowledge of the Seller and the Company, threatened against or affecting, the Seller or the Company with respect to the Company or the Company’s business as it is presently conducted before any Governmental Authority. The actions, suits and proceedings listed on Schedule 4.18 will not, either individually or in the aggregate, have a Material Adverse Effect on the Company. Except as set forth on Schedule 4.18, neither the Seller nor the Company is in violation of and, to the Knowledge of the Seller and the Company, is not under investigation with respect to and, to the Knowledge of the Seller and the Company, has not been threatened to be charged with or given notice of any violation of, any applicable law, rule, regulation, judgment or Order.

4.19Employees and Contractors.

4.19.1   Schedule 4.19.1  contains a list of all employees of the Company, along with the position, date of hire, annual rate of compensation (or with respect to employees compensated on an hourly or per diem basis, the hourly or per diem rate of compensation), most recent increase (or decrease) in compensation and amount thereof, and estimated or target annual incentive compensation of each such person. None of such employees is a party to a written employment agreement or contract with the Company and each is employed “at will.” Each employee has entered into the Company’s standard form of employee non-disclosure and invention assignment agreement with the Company, a copy of which has been previously delivered to the Buyer. To the Knowledge of the Seller and the Company, no executive, key employee, or group of employees has any plans to terminate employment with the Company. The Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes. The Company has not committed any material unfair labor practice. Neither the Seller nor the Company has any Knowledge of any organizational effort presently

22

being made or threatened by or on behalf of any labor union with respect to employees of the Company.

4.19.2Schedule 4.19.2 contains a list of all independent contractors (excluding government subcontractors) currently engaged by the Company, along with the position, date of retention and rate of remuneration, most recent increase (or decrease) in remuneration and amount thereof, for each such Person. Each such independent contractor has entered with the Company into a written independent contractor agreement, a copy of which has been previously delivered to the Buyer. For the purposes of applicable Law, including without limitation the Code, all independent contractors who are, or within the last six years have been, engaged by the Company are bona fide independent contractors and not employees of the Company.

4.19.3There are no written policies, rules or procedures applicable to employees of the Company other than those set forth in Schedule 4.19.3. True and complete copies of such policies have been delivered to Buyer.

4.19.4The Company is not delinquent in payments to any of its employees for wages, salaries, commissions, bonuses or other direct compensation for services performed by such employees or for reimbursement of expenses.

4.20Employee Benefits.

4.20.1Schedule 4.20 sets forth a complete and correct list of each Employee Benefit Plan.

4.20.2Each Employee Benefit Plan (and each related trust, insurance contract, or fund) has been maintained, funded and administered in accordance with the terms of such Employee Benefit Plan and the terms of any applicable collective bargaining agreement and complies in form and in operation in all material respects with the applicable requirements of ERISA, the Code, and other applicable laws.

4.20.3All required reports and descriptions (including annual reports (IRS Form 5500), summary annual reports, and summary plan descriptions) have been timely filed and/or distributed in accordance with the applicable requirements of ERISA and the Code with respect to each such Employee Benefit Plan. The requirements of COBRA have been met in all material respects with respect to each Employee Benefit Plan which is an Employee Welfare Benefit Plan subject to COBRA.

4.20.4All contributions (including all employer contributions and employee salary reduction contributions) which are due have been made within the time periods prescribed by ERISA and the Code to each Employee Benefit Plan which is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been made to each such Employee Pension Benefit Plan or accrued in accordance with the past custom and practice of the Company. All premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan.

23

4.20.5Each Employee Benefit Plan which is intended to meet the requirements of a “qualified plan” under Code §401 (a) has received a determination from the IRS that such Employee Benefit Plan is so qualified, and nothing has occurred since the date of such determination that could adversely affect the qualified status of any such Employee Benefit Plan. Each such Employee Benefit Plan has been timely amended to comply with the provisions of recent legislation commonly referred to as “GUST” and timely submitted to the IRS for a determination letter that takes such amendments into account.

4.20.6The Seller and the Company have delivered to the Buyer correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the IRS, the most recent annual report (IRS Form 5500, with all applicable attachments), and all related trust agreements, insurance contracts, and other funding arrangements which implement each such Employee Benefit Plan. Except as set forth in Schedule 4.20, each Employee Benefit Plan may be amended, terminated or otherwise discontinued at the will by the Company without liability for such amendment, termination or discontinuance (other than costs of administration and accelerated vesting, as required by law).

4.20.7Neither the Company nor any ERISA Affiliate maintains, sponsors, contributes to, or has any Liability under (or with respect to) any “defined benefit plan” (as defined in Section 3(35) of ERISA), or any Multiemployer Plan, or otherwise has any Liability under Title IV of ERISA. No asset of the Company is subject to any lien under ERISA or the Code.

4.20.8There have been no Prohibited Transactions with respect to any Employee Benefit Plan which would result in liability to the Company. No Fiduciary has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Employee Benefit Plan which would result in any liability to the Company. No action, suit, proceeding, hearing, or investigation with respect to the administration or the investment of the assets of any Employee Benefit Plan (other than routine claims for benefits) is pending or threatened.

4.20.9The Company does not maintain, contribute to or have an obligation to contribute to, or any Liability with respect to, any Employee Welfare Benefit Plan providing medical, health, or life insurance or other welfare-type benefits for current or future retired or terminated directors, officers or employees of the Company (or any spouse or other dependent thereof) other than in accordance with COBRA.

4.21Guaranties. The Company is not a guarantor nor is it otherwise liable for any Liability or obligation (including indebtedness) of any other Person.

4.22Environmental, Health, and Safety Matters.

4.22.1  Each of the Company and its Affiliates has complied and is in compliance in all material respects with all Environmental, Health, and Safety Requirements, including, without limitation, all permits, Licenses and other authorizations that are required pursuant to Environmental, Health, and Safety Requirements for the occupation of its facilities and the

24

operation of its business; a list of all such permits, Licenses and other authorizations is set forth on Schedule 4.22.

4.22.2The Company has not received any written or oral notice, report or other information regarding any actual or alleged material violation of Environmental, Health, and Safety Requirements, or any material liabilities or potential material liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any material investigatory, remedial or corrective obligations, relating to any of them or its facilities arising under Environmental, Health, and Safety Requirements.

4.22.3The Company has not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or that would reasonably be anticipated to give rise to liabilities, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, or any investigatory, remedial or corrective obligations, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Solid Waste Disposal Act, as amended or any other Environmental, Health, and Safety Requirements.

4.22.4Neither this Agreement nor the consummation of the transaction that is the subject of this Agreement will result in any material obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called “transaction-triggered” or “responsible property transfer” Environmental, Health, and Safety Requirements.

4.22.5The Seller and the Company have furnished to the Buyer all environmental audits, reports and other material environmental documents relating to the Company’s, or its affiliates’, past or current properties, facilities or operations, which are in their possession or under their reasonable control.

4.23Governmental Licenses and Permits.The Company owns or possesses all right, title and interest in and to all Licenses which are necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it. The Company is in compliance with the material terms and conditions of such Licenses. After the Closing, it is expected that the Company shall no longer be eligible for Small business status, small disadvantage business status or protégé status. Other than as provided in the preceding sentence, no loss or expiration of any License is pending or, to the Knowledge of the Seller and the Company, threatened or reasonably foreseeable (including, without limitation, as a result of the transactions contemplated hereby) other than expiration in accordance with the terms thereof, which terms do not expire as a result of the consummation of the transactions contemplated hereby.

25

4.24Government Contracts.

4.24.1Part I of Schedule 4.24.1 lists all current Government Contracts active for calendar years 2003 or 2004, and with respect to each such listed Government Contract, Part I of Schedule 4.24.1 accurately lists: (A) the contract name; (B) the award date; (C) the customer; (D) the contract end date; and (E) as applicable, whether the Current Government Contract is premised on the Company’s 8(a) status, small business status, small disadvantaged business status, protégé status, or other preferential status. Attached to Part I of Schedule 4.24.1 is the “contract data sheet” maintained by the Company for each current Government Contract listed on Part I of Schedule 4.24.1 for which the Company is the prime contractor. Part II of Schedule 4.24.1 lists the Company’s current project charge codes, and with respect to each such charge code, Part II of Schedule 4.24.1 accurately lists: (A) the customer; (B) the customer’s contract number corresponding to the charge code; (C) the customer’s order number; (D) the Company’s internal project charge code number; (E) the corresponding project name; (F) the end date; (G) inception to February 29, 2004 funding; (H) inception to February 29, 2004 revenue and (I) the ceiling values of the contract (excluding task orders and blanket purchase agreements). The Company has no Government Contracts that have fixed price task orders or that are billed on a fixed price basis. Part III of Schedule 4.24.1 lists all Government Contract Bids, including task order bids under Current Government Contracts submitted by the Company and for which no award has been made thirty (30) days or more prior to the date of this Agreement, and with respect to each such Government Contract Bid, Part III to Schedule 4.24.1 accurately lists: (1) the customer agency and title; (2) the request for proposal (RFP) number or, if such Government Contract Bid is for a task order under a prime contract, the applicable prime contract number, (3) the date of proposal submission; (4) the expected award date, if known; (5) the estimated period of performance; (6) the estimated value based on the proposal, if any; and (7) except for Government Contract Bids for task orders, whether such Government Contract Bid is premised on the Company’s 8(a) status, small business status, small disadvantaged business status, protégé status, or other preferential status. The Company and the Seller have delivered or made available to Buyer true and complete copies of all Government Contracts (except for task orders pursuant to such Government Contracts) and of all Government Contract Bids and all material documentation related thereto requested by Buyer. The Company has not exceeded the authorized funding (spending level) of any task or task order. Neither the Seller nor the Company has made any representation with regard to the amount or likelihood of any awards under such Government Contract Bids.

4.24.2Except as set forth on Schedule 4.24.2, (A) the Company has not received written notification of cost, schedule, technical or quality problems that could reasonably result in claims against the Company (or successors in interest) by a Governmental Authority, a prime contractor or a higher-tier subcontractor; (B) there are no Government Contracts pursuant to which the Company is, to the Knowledge of the Company and the Seller, reasonably likely in the near future to experience cost, schedule, technical or quality problems that could reasonably result in claims against the Company (or successors in interest) by a Governmental Authority, a prime contractor or a higher-tier subcontractor; (C) to the Knowledge of the Company and the Seller, all of the Government Contracts were legally awarded, are binding on the parties thereto, and are in full force and effect; (D) the Government Contracts are not currently the subject of bid or award protest proceedings, and, to the Knowledge of the Company and the Seller, no such Government Contracts are reasonably likely to become the subject of bid or award protest proceedings; and (E) no Person has notified the Company that any Governmental Authority intends to seek the Company’s agreement to lower rates under any of the Government Contracts

26

or Government Contract Bids, including but not limited to any task order under any Government Contract Bids.

4.24.3Except as set forth on Schedule 4.24.3 and with respect to current Government Contracts active for calendar years 2003 or 2004, (A) the Company has fully complied with all material terms and conditions of each Government Contract and Government Contract Bid to which it is a party; (B) the Company has complied, in all material respects, with all statutory and regulatory requirements, including but not limited to the Service Contract Act, the Procurement Integrity Act, the Federal Procurement and Administrative Services Act, the Federal Acquisition Regulation (“FAR”) and related cost principles and the Cost Accounting Standards, where and as applicable to each of the Government Contracts and Government Contract Bids, (C) the representations, certifications, and warranties made by the Company with respect to the Government Contracts or Government Contract Bids were accurate in all material respects as of their effective date, and the Company has fully complied with all such certifications in all material respects; (D) no termination for default, cure notice or show cause notice has been issued and remains unresolved with respect to any Government Contract or Government Contract Bid, and, to the Knowledge of the Company and the Seller, no event, condition or omission has occurred or exists that would constitute grounds for such action; (E) no past performance evaluation received by the Company with respect to any such Government Contract has set forth a default or other material failure to perform thereunder or termination or default thereof; and (F) to the Knowledge of the Company and the Seller, no money currently due to the Company pertaining to any Government Contract or Government Contract Bid has been withheld or set-off.

4.24.4Except as set forth in Schedule 4.24.4, with respect to the Government Contracts, no Governmental Authority, prime contractor or higher-tier subcontractor under a Government Contract or any other Person has notified the Company of any actual or alleged violation or breach of any statute, regulation, representation, certification, disclosure obligation, contract term, condition, clause, provision or specification that could reasonably be expected to materially affect payments under Government Contracts or adversely affect the award of Government Contracts to the Company in the future.

4.24.5The Company has not taken any action and is not a party to any litigation that could reasonably be expected to give rise to (A) liability under the False Claims Act, (B) a claim for price adjustment under the Truth in Negotiations Act, or (C) any other request for a reduction in the price of any Government Contract, including but not limited to claims based on actual or alleged defective pricing. There exists no basis for a claim of any material liability of the Company by any Governmental Authority as a result of defective cost and pricing data submitted to any Governmental Authority. The Company is not participating in any pending claim and, to the Knowledge of the Company and the Seller, has no interest in any potential claim under the Contract Disputes Act against the United States Government or any prime contractor, subcontractor or vendor arising under or relating to any Government Contract or Government Contract Bid.

4.24.6Except as set forth on Schedule 4.24.6, (A) the Company has not received, during the past five (5) years, any written or, to the Knowledge of the Company and the Seller, any oral, show cause, cure, default or similar notice relating to the Government Contracts; (B) no

27

Government Contract has been terminated for default in the past three (3) years; and (C) the Company has not received, during the past five (5) years, any written or, to the Knowledge of the Company and the Seller, any oral, notice terminating any Government Contract for convenience or indicating an intent to terminate any of the Government Contracts for convenience.

4.24.7Except as set forth on Schedule 4.24.7, the Company has not, during the past five (5) years, received any written, or to the Knowledge of the Company and the Seller, oral, notice of any outstanding claims or contract disputes to which the Company is a party (A) relating to the Government Contracts or Government Contract Bids and involving either a Governmental Authority, any prime contractor, any higher-tier subcontractor, vendor or any third party; and (B) relating to the Government Contracts under the Contract Disputes Act or any other federal statute.

4.24.8Neither the Company nor the Seller has ever been and is not now, suspended, debarred or proposed for suspension or debarment from bidding on any Government Contract. No suspension or debarment actions with respect to Government Contracts have been commenced, or to the Knowledge of the Company and the Sellers, threatened against the Company or any of its officers or employees. To the Knowledge of the Company and the Seller, there is no valid basis for the Company’s or the Seller’s suspension or debarment from bidding on contracts or subcontracts for or with any Governmental Authority.

4.24.9No negative determination of responsibility has been issued against the Company during the past three (3) years with respect to any quotation, bid or proposal for a Government Contract.

4.24.10Except as set forth on Schedule 4.24.10, (A) the Company has not undergone and is not undergoing any audit, inspection, survey or examination of records by any Governmental Authority relating to any Government Contract, (B) the Company has not received written notice of, and to the Knowledge of the Company and the Seller, the Company has not undergone any investigation relating to any Government Contract, and (C) to the Knowledge of the Company and the Seller, no such audit, inspection, investigation, survey or examination of records is threatened. Except as set forth in Schedule 4.24.10, the Company has not, during the past five (5) years, received any official notice that it is or was being specifically audited (other than routine DCAA or similar audits) or investigated by the General Accounting Office, any state or federal agency Inspector General, the contracting officer with respect to any Government Contract or the Department of Justice (including any United States Attorney). The Company has not received any written notice that any audit, review, inspection, investigation, survey or examination of records described in Schedule 4.24.10 has revealed any fact, occurrence or practice which could reasonably be expected to have a Material Adverse Effect on the Company.

4.24.11During the last five (5) years, the Company has not made any voluntary disclosure in writing to any Governmental Authority with respect to any material alleged irregularity, misstatement or omission arising under or relating to a Government Contract or Government Contract Bid.

28

4.24.12The Company has not received any written notice that any, and to the Knowledge of the Company and the Seller, none of the Company’s employees, consultants or agents is (or during the last five (5) years has been) under administrative, civil or criminal investigation or indictment by any Governmental Authority with respect to the conduct of the business of the Company. The Company has not received written notice of any, and to the Knowledge of the Company and the Seller, there is no, pending investigation of any officer, employee or representative of the Company, nor within the last five (5) years has there been any audit or investigation of the Company or any officer, employee or representative of the Company relating to the business of the Company resulting in a material adverse finding with respect to any material alleged irregularity, misstatement or omission arising under or relating to any Government Contract or Government Contract Bid.

4.24.13To the Knowledge of the Company and the Seller, the Company is in compliance in all material respects with all applicable national security obligations, including those specified in the National Industrial Security Program Operating Manual, DOD 5220.22-M (January 1995), and any supplements, amendments or revised editions thereof.

4.24.14Except as set forth on Section 4.24.14, to the Knowledge of the Company and the Seller, there are no events or omissions that would reasonably be expected to result in (A) a material claim against the Company by a Governmental Authority or any prime contractor, subcontractor, vendor, or other third party arising under or relating to any Government Contract or Government Contract Bid, or (B) a material dispute between the Company and a Governmental Authority or any prime contractor, subcontractor, vendor, or other third party arising under or relating to any Government Contract or Government Contract Bid.

4.24.15Except as set forth on Schedule 4.24.15, during the past five (5) years, the Company has undertaken no internal audit of any events or omissions that, at the time of the audit, the Company or the Seller reasonably expected to have a Material Adverse Effect on performance of a Government Contract or Government Contract Bid or a Material Adverse Effect on the Company as a whole. Except as set forth on Schedule 4.24.15, to the Knowledge of the Sellers and the Company, (A) all Government Contract Bids listed on Schedule 4.24.15 were submitted in the Ordinary Course of Business of the Company, (ii) all Government Contract Bids listed on Schedule 4.24.15 were based on assumptions believed by the management of the Company to be reasonable, and (iii) the Company and the Sellers reasonably believe all Government Contract Bids listed on Schedule 4.24.15 are capable of performance by the Company in accordance with the terms and conditions of such Government Contract Bid without a total program loss over the life of such Government Contract (calculated in accordance with the Company’s accounting principles consistently applied).

4.24.16To the Knowledge of the Company and the Seller, no Government Contract, during the past five (5) years, has incurred or currently projects costs overruns in an amount exceeding $25,000. No payment has been made by the Company or, to the Knowledge of the Company and the Seller, by a Person acting on the Company’s behalf, to any Person (other than to any bona fide employee or agent of the Company, as defined in subpart 3.4 of the FAR) which is or was improperly contingent upon the award of any Government Contract or which would otherwise be in violation of any applicable procurement law or regulation or any other Laws.

29

4.24.17Except as set forth on Schedule 4.24.17, the Company has not assigned or otherwise conveyed or transferred, or agreed to assign, to any Person, any Government Contracts, or any account receivable relating thereto, whether a security interest or otherwise.

4.24.18Except as set forth on Schedule 4.24.18, the Company has reached agreement with the cognizant government representatives approving and “closing” all rates, rate schedules and indirect costs charged to Government Contracts for the years 1983 through 2003.

4.24.19Schedule 4.24.19 identifies, as of December 31, 2003, all material personal property, equipment and fixtures loaned, bailed or otherwise furnished to the Company by or on behalf of the United States Government (the “Government-Furnished Items”). To the Knowledge of the Company and the Seller, the Company has complied in all material respects with all of its obligations relating to the Government-Furnished Items and, upon the return thereof to the United States Government in the condition thereof on the date hereof, would have no liability to the United States Government with respect thereto.

4.24.20Except as set forth on Schedule 4.24.20, (A) no written claims, or claims threatened in writing, exist against the Company with respect to express warranties and guarantees contained in Government Contracts on products or services provided by the Company; (B) no such claims of a material nature have been made against the Company in the past 5 years; (C) to the Knowledge of the Company and the Seller, no amendment has been made to any written warranty or guarantee contained in any Government Contract that would reasonably be expected to result in a Material Adverse Effect on the Company; and (D) to the Knowledge of the Company and the Seller, the Company has not taken any action which would reasonably be expected to give any Person a right to make a claim under any written warranty or guarantee contained in any Government Contract.

4.24.21Except to the extent prohibited by applicable Law, Schedule 4.24.21 sets forth all material facility security clearances held by the Company, all employees of the Company who have security clearances and all employees of the Company who have pending requests for security clearances.

4.25Liability for Cost and Pricing Data. To the Knowledge of the Company and the Seller, there exists no basis for a claim of any liability against the Company by any Governmental Authority as a result of defective cost and pricing data submitted to any Governmental Authority, including, without limitation, any such data relating to liabilities accrued on the Company’s books or in their respective financial accounts for deferred compensation to any employees of the Company.

4.26Notes and Accounts Receivable. All notes and accounts receivable of the Company shown on all balance sheets included in the Financial Statements arose from sales actually made or services actually performed in the Ordinary Course of Business of the Company and are subject to no setoffs or counterclaims. To the Knowledge of the Company and the Seller, the billed accounts receivable have been collected or are fully collectible according to their terms in amounts not less than the aggregate amounts thereof carried on the books of the Company.

30

4.27Organizational Conflicts of Interest.Except as set forth on Schedule 4.27, to the knowledge of the Company and the Seller in the past six years, the Company has not had access to non-public information nor provided systems engineering, technical direction, consultation, technical evaluation, source selection services or services of any type, nor prepared specifications or statements of work, nor engaged in any other conduct that would create in any current Governmental Authority procurement for which the Company has submitted a Government Bid an Organizational Conflict of Interest, as defined in Federal Acquisition Regulation 9.501, with the Company.

4.28Customers and Suppliers.

4.28.1Schedule 4.28 identifies the 10 largest customers (by revenue) of the Company (on a consolidated basis) for each of the two most recent fiscal years and sets forth opposite the name of each such customer the percentage of consolidated net revenues attributable to such customer. Schedule 4.28 also identifies any additional customers which the Company reasonably anticipates shall be among the 20 largest customers for the current fiscal year. For purposes of this Section 4.28, “customer” shall mean any contracting entity (without regard to the end user of the goods or services in question).

4.28.2Since the date of the Most Recent Balance Sheet, no material supplier of the Company has indicated that it shall stop, or materially decrease the rate of, supplying materials, products or services to the Company, and to the Company’s and the Seller’s Knowledge no customer listed on Schedule 4.28 has indicated that it shall stop, or materially decrease the rate of, buying materials, products or services from the Company.

4.29Affiliated Transactions.Except as set forth on Schedule 4.29, neither (i) Seller, (ii) any member of Seller’s immediate family (limited to Seller’s spouse and any child by blood or adoption, brother, sister, or parent of Seller or Seller’s spouse), (iii) any of the Seller’s Affiliates (excluding the Company), nor (iv) any officer, director, or person owning beneficially or of record at least 10% of the voting stock of the Company or any other Affiliate of Seller (each, a “Related Party”) (x) is a party to any material agreement, contract, commitment, arrangement, or transaction with the Company or that pertains to the business of the Company, excluding employment or other compensation, non-competition, confidentiality or other similar agreements between the Company and any Person who is an officer, director, or employee of the Company (each an “Related Party Agreement”); or (y) owns, leases, or has any economic or other interest in any asset, tangible or intangible, that is used by the Company in carrying out its business. As of the Closing, there shall be no outstanding or unsatisfied financial obligations of any kind (including, without limitation, inter-company accounts, notes, guarantees, loans, or advances) between the Company on the one hand and a Related Party on the other hand (each a “Related Party Obligation”), except to the extent arising out of the post-Closing performance of a Related Party Agreement that is in writing and is set forth on Schedule 4.29 (and a true and complete copy of which has been provided to the Buyer). The satisfaction, release, termination, or other disposition of a Related Party Obligation shall not have caused, and shall not reasonably be expected to cause, the Company to suffer an Adverse Consequence, except to the extent that such Adverse Consequence is reflected in the Most Recent Financial Statements and does not and will not impose any obligation or other Liability on the Company from and after the Closing.

31

4.30Defense Articles, Defense Services and Technical Data.During the period from inception to the present, the Company has not manufactured or brokered “defense articles,” exported “defense articles” or furnished “defense services” or “technical data” to foreign nationals in the United States or abroad, as those terms are defined in 22 Code of Federal Regulations Sections 120.6, 120.9 and 120.10, respectively.

4.31Disclosure.To the Seller’s knowledge, no representation or warranty by the Seller or the Company contained in this Agreement and no statement of fact contained (i) in the Disclosure Schedules delivered to the Buyer or its representatives pursuant to this Agreement, or (ii) in certificates or other documents, delivered pursuant to this Agreement, by the Company and the Seller to the Buyer or any of its representatives contains any untrue statement of material fact or omits or will knowingly omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading.

4.32Bank Accounts.Schedule 4.32 lists the names and locations of all banks and other financial institutions with which the Company maintains an account (or at which an account is maintained to which the Company has access as to which deposits are made on behalf of the Company), in each case listing the type of account, the account number therefor, and the names of all Persons authorized to draw thereupon or have access thereto and lists the locations of all safe deposit boxes used by the Company.

5.ADDITIONAL AGREEMENTS OF THE PARTIES.

The Parties agree as follows with respect to the period following the Closing.

5.1General.In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 7 below). The Seller acknowledges and agrees that from and after the Closing the Buyer will be entitled to possession of and Seller will provide to Buyer all documents, books, records (including Tax records), agreements, corporate minute books and financial data of any sort relating to the Company; provided that Buyer will provide Seller with reasonable access to all such data, records and information following the Closing.

5.2Litigation Support.In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that existed on or prior to the Closing Date involving the Company, each of the other Parties will cooperate with such Party and such Party’s counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 7 below).

32

5.3Transition.Neither the Seller nor the Company will take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of the Company from maintaining the same business relationships with the Company after the Closing as it maintained with the Company prior to the Closing. The Seller will refer all customer inquiries relating to the business of the Company to the Company from and after the Closing.

5.4Confidentiality.The Seller will treat and hold as confidential all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in Seller’s possession. In the event that Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, Seller will notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 5.4. If, in the absence of a protective order or the receipt of a waiver hereunder, Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, Seller may disclose the Confidential Information to the tribunal; provided, however, that Seller shall use Seller’s reasonable best efforts to obtain, at the request of the Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate. The foregoing provisions shall not apply to any Confidential Information which is generally available to the public immediately prior to the time of disclosure.

5.5Company’s Accountants.The Seller will cooperate with the Buyer, upon the request of the Buyer, in obtaining the consent of the Company’s Accountants to the use by the Buyer of the historical financial statements of the Company in connection with any filing by CHC under the Securities Act or the Exchange Act.

6.CONDITIONS TO OBLIGATION TO CLOSE.

6.1Conditions to Obligation of the Parties Generally.The Parties shall not be obligated to consummate the transactions to be performed by each of them in connection with the Closing if, on the Closing Date, (i) any action, suit, or proceeding shall be pending or threatened before any Governmental Authority wherein an Order or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, or (ii) any Law or Order which would have any of the foregoing effects shall have been enacted or promulgated by any Governmental Authority. Each Party may waive any condition to its obligations specified in this Section 6.1 by execution of a writing so stating at or prior to the Closing.

6.2Conditions to Obligation of the Buyer.The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

33

6.2.1the representations and warranties set forth in Section 3.1 and Section 4 above that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, at and as of the date of this Agreement and the Closing Date (except (x) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date, and (y) for changes permitted by this Agreement);

6.2.2the Seller and the Company shall have performed and complied with all of their covenants hereunder in all material respects through the Closing, except to the extent that such covenants are qualified by terms such as “material” and “Material Adverse Effect,” in which case with respect to such covenants the Seller and the Company shall have performed and complied with such covenants hereunder in all respects through the Closing;

6.2.3no action, suit, or proceeding shall be pending or threatened before any Governmental Authority wherein an Order or charge would (A) affect adversely the right of the Buyer to own the Company Shares and to control the Company, (B) affect adversely the right of the Company to own its assets and to operate its business, (C) prevent consummation of any of the transactions contemplated by this Agreement, or (D) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such Order or charge shall be in effect), nor shall any Law or Order which would have any of the foregoing effects have been enacted or promulgated by any Governmental Authority;

6.2.4no event, change or development shall exist or shall have occurred since the date of this Agreement that has had or is reasonably likely to have a Material Adverse Effect on the Company;

6.2.5the Seller and Company shall have procured all of the necessary Governmental Authority authorizations, consents, orders and approvals;

6.2.6the Seller and the Company shall have delivered to the Buyer a certificate to the effect that each of the conditions specified above in Section 6.2.1 through Section 6.2.5 is satisfied in all respects;

6.2.7the Buyer shall have received letters of resignation from each of the directors of the Company;

6.2.8each of Deon Buffaloe and Bette Burgess shall have entered into an Employment Agreement substantially in the form of Exhibit C attached hereto (the “Employment Agreement”);

6.2.9the Seller and Michael Hardy, on the one hand, and the Company, on the other hand, shall have entered into a limited mutual release substantially in the form of Exhibit D attached hereto (the “Release of Claims”);

6.2.10the Buyer shall have received from counsel to the Seller an opinion in form and substance as set forth in Exhibit E attached hereto, addressed to the Buyer, and dated as of the Closing Date;

34

6.2.11the Seller and Michael Hardy shall have each executed and delivered to Buyer a five-year Confidentiality and Non-Competition Agreement in the form of Exhibit F;

6.2.12the Seller shall deliver to Buyer such documentation that properly evidences the Company is not a lessee and/or guarantor and has no obligations with respect to the vehicle owned by the Seller, as further described on Schedule 6.2.12.

6.2.13the Seller shall have caused the Company to have no long term Indebtedness as of Closing and shall have provided Buyer a certificate to such effect;

6.2.14the Seller shall have executed and delivered the Escrow Agreement;

6.2.15the Seller shall have delivered to Buyer original stock certificates representing the Company Shares and irrevocable stock powers executed by Seller transferring the Company Shares to Buyer;

6.2.16the Seller shall have delivered to Buyer the original corporate record book (minute book) of the Company;

6.2.17the Seller and Company shall have paid the attorneys and accountants to the Seller and Company in full through Closing and shall have delivered to Buyer a certificate to such effect;

6.2.18the Seller and Company shall have terminated all Related Party Agreements and provided Buyer with evidence of such terminations;

6.2.19all consents, permits and approvals from parties to contracts with the Company or with the Seller that are set forth on Schedule 6.2.19 shall have been obtained and be in full force and effect, and the Buyer shall have been furnished with evidence reasonably satisfactory to it that such consents, permits and approvals have been obtained and are in full force and effect;

6.2.20the approval of the Board of Directors of the Company (if required by applicable law) shall have been obtained, and the Buyer shall have been furnished with evidence reasonably satisfactory to it that such approval and any other approvals necessary for the consummation of the transactions contemplated by this Agreement and the other Transaction Documents have been obtained;

6.2.21with respect to each Real Property Lease set forth on Schedule 4.12, the Buyer shall have received any consent of the landlord required under such Real Property Lease in connection with the consummation of the transactions contemplated herein;

6.2.22at the Closing, the Buyer shall received an affidavit from Seller, setting forth such Seller’s name, address and federal tax identification number and stating that Seller is not a “foreign person” within the meaning of Section 1445 of the Code. If, on or before the Closing, the Buyer shall not have received such affidavit, the Purchaser may withhold from the Initial Payment at Closing to the Sellers pursuant hereto such sums as are required to be withheld therefrom under Section 1445 of the Code;

35

6.2.23 all actions to be taken by the Seller and the Company in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Buyer.

The Buyer may waive any condition to its obligations specified in this Section 6.2 by execution of a writing so stating at or prior to the Closing.

6.3Conditions to Obligation of the Seller.The obligations of the Seller to consummate the transactions to be performed by the Seller in connection with the Closing is subject to satisfaction of the following conditions:

6.3.1the representations and warranties set forth in Section 3.2 above that are qualified as to materiality shall be true and correct, and those that are not so qualified shall be true and correct in all material respects, at and as of the date of this Agreement and the Closing Date (except (x) to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date, and (y) for changes permitted by this Agreement);

6.3.2the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing, except to the extent that such covenants are qualified by terms such as “material” and “Material Adverse Effect,” in which case the Buyer shall have performed and complied with all of its covenants hereunder in all respects through the Closing;

6.3.3the Parties shall have received all authorizations, consents, and approvals of Governmental Authorities referred to in Section 3.1.2, Section 3.2.2 and Section 4.3 above;

6.3.4the Buyer shall have delivered to the Seller a certificate to the effect that each of the conditions specified above in Section 6.3.1 through Section 6.3.3 is satisfied in all respects;

6.3.5all actions to be taken by the Buyer in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Seller.

6.3.6Buyer shall have delivered the Cash Closing Amount in accordance with Section 2.2

6.3.7Buyer shall have executed and delivered the Confidentiality and Non-Competition Agreements, by and between the Buyer and each of Seller and Michael Hardy, substantially in the form attached hereto as Exhibit F.

6.3.8Company shall have entered into that certain Release of Claims identified in Section 6.2.9 above.

36

6.3.9The Buyer shall have entered into those certain Employment Agreements identified in Section 6.2.8 above.

6.3.10The Board of Directors of the Buyer shall have authorized and approved this Agreement and the transactions contemplated hereby.

6.3.11Seller shall have caused the Company to deliver to Buyer a certified copy of the Company’s articles of incorporation, and all amendments thereto.

6.3.12The Buyer shall have delivered the Escrow Amount to the Escrow Agent and shall have entered into the Escrow Agreement.

6.3.13Seller shall have caused the Company to obtain and deliver to Buyer a certificate of good standing of the Company from the Maryland Department of Assessments and Taxation a certificate from the Secretaries of State of each jurisdiction in which the Company owns or leases real property or otherwise does business evidencing the Company’s authorization to conduct business as a foreign corporation in such state, dated not earlier than ten (10) days prior to the Closing Date.

The Seller may waive any condition to its obligations specified in this Section 6.3 by execution of a writing so stating at or prior to the Closing.

7.INDEMNIFICATION.

7.1Indemnification by the Seller.The Seller agrees to indemnify, defend and hold harmless the Buyer Parties (and their respective directors, officers, employees, Affiliates, successors and assigns) against, and hold the Buyer Parties harmless from and in respect of, any and all Losses incurred by the Buyer Parties in any and all actions or proceedings between the Buyer Parties and the Seller or between the Buyer Parties and any third party or otherwise) based upon, arising out of, or otherwise in respect of or which are incurred by virtue of or result from (a) (i) the inaccuracy in or breach of any representation or warranty made by the Seller or the Company, or (ii) the non-fulfillment by the Company or the Seller prior to the Closing and by the Seller from and after the Closing, of any unwaived covenant or agreement, in the case of (i) and (ii) above, as contained in this Agreement or in any of the other Transaction Documents or in any document or instrument delivered at the Closing pursuant hereto or thereto or (b) enforcing the Buyer Parties’ indemnification rights provided for hereunder; provided, however, that no indemnification shall be payable under this Section 7.1 to the extent that indemnity is specifically provided for Losses pursuant to any supplemental indemnity pursuant to Section 7.3 of this Agreement.

7.2Indemnification by the Buyer.The Buyer agrees to indemnify the Seller against and hold Seller harmless from and in respect of any and all Losses which are incurred by virtue of or result from (a) (i) the inaccuracy in or breach of any representation or warranty made by Buyer, or (ii) the non-fulfillment or breach of any unwaived covenant or agreement, in each case as made by or on behalf of the Buyer in this Agreement or in any of the other Transaction Documents or in any document or instrument delivered at the Closing pursuant hereto or thereto or (b) enforcing the Seller’s indemnification rights provided for hereunder.

37

7.3Supplemental Indemnification by Seller.

7.3.1Supplemental ERISA Indemnification.Seller agrees to indemnify and hold harmless the Buyer Parties with respect to any Losses incurred by any of the Buyer Parties based upon, arising out of or otherwise in respect of, the Company’s being affiliated prior to the date hereof, directly or indirectly, under Code Section 414 or ERISA Section 4001 or any similar foreign law, with the Seller or any of their Affiliates. In addition, Seller agrees to indemnify and hold harmless the Buyer Parties and Employee Benefit Plans with respect to any and all Losses arising out of or otherwise in respect of (i) any Employee Benefit Plan that is not disclosed on Schedule 4.20 or any violation of any reporting and disclosure rules or regulations, including, without limitation, the failure to timely file any report, schedule, application for determination, or any other information required to be reported, under ERISA or the Code in respect of any Employee Benefit Plan that is not disclosed on Schedule 4.20, (ii) any violation of any reporting and disclosure rules or regulations, including, without limitation, the failure to timely file any report, schedule, application for determination, or any other information required to be reported, under ERISA or the Code in respect of any Employee Benefit Plan that is disclosed on Schedule 4.20 and (iii) any failure to amend, within the time period required under the Code, any Employee Benefit Plan that is a tax-qualified retirement plan to qualify under Section 401(a) of the Code.  Notwithstanding anything to the contrary in Section 7.4, the indemnification obligations set forth in clauses (i) (ii) and (iii) of the second sentence of this Section 7.3.1 shall be treated as ERISA Claims (as defined in Section 7.4) for purposes of the survival provisions of Section 7.4 and shall be subject to the dollar limitations in Section 7.5(i) and (ii).

7.3.2Supplemental Contract Indemnification.Seller agrees to indemnify and hold harmless the Buyer Parties with respect to any Losses incurred by any of the Buyer Parties based upon, arising out of or otherwise in respect of, any government disallowance of incurred Direct Contract Costs and/or Indirect Costs, including, without limitation, any Losses arising out of Defense Contract Audit Agency for any time period prior to the Closing Date. Notwithstanding anything to the contrary in Sections 7.3.2 and 7.5, all indemnification obligations in this Section 7.3.2 shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, shall terminate on March 31, 2006 and shall be subject to the dollar limitations in Sections 7.5(i) and (ii).

7.3.3Supplemental Tax Indemnification.Seller agrees to indemnify the Buyer Parties for any liability for any Taxes imposed on the Company (including without limitation, any underpayment penalties, and any Taxes required to have been withheld from payments to the employees of the Company) pursuant to federal, state, local or foreign law attributable to any periods or portions thereof ending on or before the Closing Date (“Pre-Closing Taxes”) in excess of Taxes which are included as current liabilities for purposes of computing Working Capital. All indemnification obligations set forth in this Section 7.3.3 shall be treated as Tax Claims (as defined in clause (b) of Section 7.4) for purposes of the survival provisions of Section 7.4 and shall not be subject to any dollar limitation, including, without limitation, those set forth in Section 7.5.

7.3.4Supplemental Rate Overruns Indemnification.Seller agrees to indemnify and hold harmless the Buyer Parties with respect to any Losses incurred by any of the Buyer Parties based upon, arising out of or in connection with the Company’s rate overruns for

38

any time period prior to December 31, 2003. Notwithstanding anything to the contrary in Section 7.4 and 7.5, all indemnification obligations in this Section 7.3.6 shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, shall terminate on March 31, 2006 and shall be subject to the dollar limitations described in Section 7.5(i) and (ii).

7.4Survival of Representations and Warranties of the Seller.Notwithstanding any right of the Buyer fully to investigate the affairs of the Company and the Seller and notwithstanding any knowledge of facts determined or determinable by the Buyer pursuant to such investigation or right of investigation, the Buyer has the right to rely fully upon the representations and warranties of each of the Seller and the Company contained in this Agreement. All representations and warranties of the parties hereto contained in this Agreement shall survive the execution and delivery hereof and the Closing hereunder, and, except for the representations and warranties made in Sections 3.1, 3.2, 4.1, 4.2, 4.3 and 4.11 which shall survive without limit, (a) with respect to any General Claim (as defined below), or ERISA Claim, shall terminate on March 31, 2006, (b) with respect to any Tax Claim, shall terminate on the later of (i) sixty (60) days following the date upon which the liability to which any such Tax Claim may relate is barred by all applicable statutes of limitation (including any extension or waiver of such periods) and (ii) sixty (60) days following the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitations (including any extension or waiver of such periods), (c) unless, in the case of clauses (a), (b) and (c) above, the party asserting such claim shall have given notice on or prior to such date, to the party against which such claim is asserted.

As used in this Agreement, the following terms have the following meanings: (a) “General Claim” means any claim (other than a Tax Claim, an ERISA Claim, an Environmental Claim), (b) “Tax Claim” means any claim based upon, arising out of or otherwise in respect of, any inaccuracy in or any breach of any representation or warranty of any Seller or the Company contained in this Agreement related to Taxes, including, without limitation, Section 4.11 and any claim for Losses pursuant to Section 7.3.3, (c) “ERISA Claim” means any claim based upon, arising out of or otherwise in respect of, any inaccuracy in or any breach of any representation or warranty of any Seller or the Company contained in this Agreement related to any Plan, including, without limitation, Section 4.20 and any claim for Losses pursuant to Section 7.3.1, and (d) “Environmental Claim” means any claim based upon, arising out of or otherwise in respect of, any inaccuracy in or any breach of any representation or warranty of any Seller contained in Section 4.22. Except as otherwise expressly provided herein, the covenants and agreements contained in this Agreement shall survive the execution and delivery hereof and the consummation of the transactions contemplated hereby.

7.5Certain Limitations on Indemnification Obligations.The Buyer Parties shall not be entitled to receive any indemnification payments under Sections 7.1 and 7.3:

(i)in connection with the inaccuracy in or breach of any representation or warranty or any other claim, until the aggregate amount of Losses incurred by the Buyer Parties equal $145,000 (the “Deductible Amount”), whereupon the Buyer shall be entitled to receive in full

39

indemnity payments for all such Losses in excess of the Deductible Amount; provided, however, that solely for purposes of determining whether the amount of the Seller’s indemnification obligations exceeds the Deductible Amount, a breach of the Seller’s and the Company’s representations or warranties that gives rise to losses in excess of $25,000 shall be determined without regard to any limitation or qualification as to materiality or Company Material Adverse Effect (or similar concept) set forth in such representation or warranty.

(ii)Other than Tax Claims or as a result of a breach of Section 3.1, the maximum aggregate amount of indemnification to which the Buyer Parties shall be entitled to receive for General Claims, ERISA Claims and Environmental Claims or otherwise shall not exceed $2.8 million.

7.6Defense of Claims.In the case of any claim for indemnification under Section 7.1, 7.2 or 7.3 arising from a claim of a third party (including the IRS or any Governmental Agency), an indemnified party shall give prompt written notice and, subject to the following sentence, in no case later than twenty (20) days after the indemnified party’s receipt of notice of such claim, to the indemnifying party of any claim, suit or demand of which such indemnified party has Knowledge and as to which it may request indemnification hereunder. The failure to give such notice shall not, however, relieve the indemnifying party of its indemnification obligations except to the extent that the indemnifying party is actually harmed thereby. The indemnifying party shall have the right to defend and to direct the defense against any such claim, suit or demand (including, without limitation, ERISA Claims, Tax Claims and claims relating to Sections 7.3.2), at its expense, and with counsel selected by the indemnifying party unless such claim, suit or demand seeks an injunction or other equitable relief against the indemnified party; provided, however, the indemnifying party shall not have the right to defend or direct the defense of any such claim, suit or demand if it refuses to acknowledge fully its obligations to the indemnified party or contests, in whole or in part, its indemnification obligations therefor. If the indemnifying party elects, and is entitled, to compromise or defend such claim, it shall within 30 days (or sooner, if the nature of the claim so requires) notify the indemnified party of its intent to do so, and the indemnified party shall, at the request and expense of the indemnifying party, cooperate in the defense of such claim, suit or demand. If the indemnifying party elects not to compromise or defend such claim, fails to notify the indemnified party of its election as herein provided or refuses (other than in good faith) to acknowledge or contests its obligation to indemnify under this Agreement, the indemnified party may pay, compromise or defend such claim. Except as set forth in the immediately preceding sentence, the indemnifying party shall have no indemnification obligations with respect to any such claim, suit or demand which shall be settled by the indemnified party without the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld or delayed); provided, however, that notwithstanding the foregoing, the indemnified party shall not be required to refrain from paying any claim which has matured by a court judgment or decree, unless an appeal is duly taken therefrom and exercise thereof has been stayed, nor shall it be required to refrain from paying any claim where the delay in paying such claim would result in the foreclosure of a lien upon any of the property or assets then held by the indemnified party or where any delay in payment would cause the indemnified party material economic loss. The indemnifying party’s right to direct the defense shall include the right to compromise or enter

40

into an agreement settling any claim by a third party; provided that no such compromise or settlement shall obligate the indemnified party to agree to any settlement which requires the taking of any action by the indemnified party other than the delivery of a release, except with the consent of the indemnified party (such consent to be withheld or delayed only for a good faith reason). Notwithstanding the indemnifying party’s right to compromise or settle in accordance with the immediately preceding sentence, the indemnifying party may not settle or compromise any claim over the objection of the indemnified party; provided, however, that consent by the indemnified party to settlement or compromise shall not be unreasonably withheld or delayed. The indemnified party shall have the right to participate in the defense of any claim, suit or demand with counsel selected by it subject to the indemnifying party’s right to direct the defense. The fees and disbursements of such counsel shall be at the expense of the indemnified party; provided, however, that, in the case of any claim, suit or demand which seeks injunctive or other equitable relief against the indemnified party, the fees and disbursements of such counsel shall be at the expense of the indemnifying party.

7.7Non-Third Party Claims.Any claim which does not result in a third party claim shall be asserted by a written notice to the other Party or Parties. The recipient of such notice shall have a period of forty-five (45) days after receipt of such notice within which to respond thereto. If the recipient does not respond within such forty-five (45) days, the recipient shall be deemed to have accepted responsibility for the Losses set forth in such notice and shall have no further right to contest the validity of such notice. If the recipient responds within such forty-five (45) days after the receipt of the notice and rejects such claim in whole or in part, the party delivering shall be free to pursue such remedies as may be available to it under contract or applicable law.

7.8Liability of the Company.The Buyer shall not after the Closing make any claim against the Company in respect of any representation, warranty, covenant or any other obligation of the Company to the Buyer hereunder or under any other Transaction Document to which the Company is a party. The Buyer shall not make any claim against Seller in respect of any non-fulfillment after the Closing by the Company of any covenant hereunder or under any other Transaction Document to which the Company is a party. Notwithstanding anything herein to the contrary, the Buyer retains, and nothing contained in this Section 7.8 shall in any way waive or limit, its rights to bring claims against the Seller pursuant to this Article 7.

7.9Tax Treatment.All indemnification payments shall constitute adjustments to the Purchase Price for all Tax purposes, and no party shall take any position inconsistent with such characterization, unless a final determination by any Governmental Authority causes any such amount not to constitute an adjustment to the Purchase Price for Tax purposes.

7.10Exclusive Remedy.The foregoing indemnification provisions in this Section 7 shall be the exclusive remedy from and after the Closing of the Buyer against the Seller and of the Seller against the Buyer for Losses under Sections 7.1, 7.2 and 7.3 or with respect to any other claims relating to this Agreement or the transactions contemplated hereby, provided that nothing contained in this Agreement (i) is intended to waive any claims for fraud or willful misconduct to which a party may be entitled, or shall relieve or limit the liability of any party or any officer or director of such Party from any liability arising out of or resulting from fraud or willful misconduct in connection with the transactions contemplated by this Agreement or in

41

connection with the delivery of any of the documents referred to herein and (ii) is intended to waive any equitable remedies to which a party may be entitled.

7.11No Right of Contribution.The Seller shall have no right to seek contribution from the Company or the Buyer with respect to all or any part of any of the Seller’s indemnification obligations under this Section 7.

7.12Insurance. The Buyer shall first proceed against any insurance that is available with respect to any Losses prior to seeking payment with respect to any indemnification claim for Seller.

7.13Set-Off. Any amounts to which Buyer may be entitled pursuant to the provisions of Sections 7.1 or 7.3 may be set-off by Buyer against the Escrow Amount. Prior to any such set-off, Buyer shall provide in writing notice at least thirty (30) days to Seller describing the amount of and basis for such set-off. The Escrow Amount represented by the proposed set-off shall be suspended until the claim or dispute that is the basis for the proposed set-off is either (i) resolved by the parties in writing or (ii) determined by an arbitration award after which time the proposed set-off shall become effective. Any payment or set-off determined upon resolution of any proposed set-off shall be made within ten (10) days following the resolution or determination of such claim or dispute. If such claim that is the basis for the setoff results in an award or settlement of damages less than the amount of the set-off, then Buyer shall pay Seller the difference between the amount setoff and the award or settlement of damages, plus interest at the rate of four percent (4%) per annum. Interest paid pursuant to this sub-section shall be accrued from the date the scheduled payment was due.

8.TAX MATTERS.

The following provisions shall govern the allocation of responsibility as between the Buyer and the Seller for certain Tax matters following the Closing Date:

8.1Company Status.The Company and the Seller will not, prior to the Closing, revoke the Company’s election to be taxed as an S corporation within the meaning of Code §§1361 and 1362. Prior to the Closing, the Company and the Seller will not take or allow any action that would result in the termination of the Company’s status as a validly electing S corporation within the meaning of Code §§1361 and 1362.

8.2Post-Closing Tax Returns.

8.2.1Preparation of Company Income Tax Returns by Seller.Seller shall direct the Company’s Accountants to prepare all income Tax Returns required to be initially filed by the Company after the Closing Date which relate to taxable periods ending on or before the Closing Date (“Pre-Closing Income Tax Returns”), and shall be responsible for expenses of preparing such Tax Returns. Each such Tax Return shall be prepared in a manner consistent with the prior practice of the Company unless otherwise required by applicable Tax laws. A draft of each such Tax Return shall be provided to Buyer for review and approval at least 30 days prior to the due date for filing such Tax Return. Buyer shall have the right to review and approve such Tax Return prior to the filing of such Tax Return (which approval shall not be unreasonably withheld or delayed). For this purpose, Buyer’s withholding of timely approval of a Tax Return

42

reflecting a reporting position as caused to be prepared by Seller shall be deemed reasonable only if the reporting position proposed by the Seller on such Tax Return does not have a “reasonable basis,” as defined in Code §6662. To the extent permitted by applicable law, Seller shall include any income, gain, loss, deduction or other Tax items for such periods on their Tax Returns in a manner consistent with the Schedule K-1s furnished by the Company to the Seller for such periods.

8.2.2Preparation of Other Company Tax Returns.Except as provided with respect to Pre-Closing Income Tax Returns in Section 8.2.1, Buyer shall properly and accurately prepare (or cause to be prepared) each Tax Return required to be filed by the Company after the Closing Date for a taxable period beginning on or before the Closing Date, and shall be responsible for expenses of preparing such Tax Returns. If any Tax shown as due on any such Tax Return is to be borne by the Seller (taking into account indemnification obligations hereunder and adjustments to the Purchase Price), (A) such Tax Return shall be prepared in a manner consistent with the prior practice of the Company unless otherwise required by applicable Tax laws; (B) a draft of each such Tax Return shall be provided to Seller for review and approval at least 30 days prior to the due date for filing such return (or, if required to be filed within 90 days of the Closing, as soon as possible following the Closing); and (C) Seller shall have the right to review and approve such Tax Return prior to the filing of such Tax Return (which approval shall not be unreasonably withheld or delayed). For this purpose, Seller’s withholding of timely approval of a Tax Return based upon Buyer’s failure to adopt in such Tax Return an alternative reporting position suggested by Seller shall be deemed reasonable if the reporting position proposed by the Seller on such Tax Return has a “reasonable basis,” as defined in Code §6662.

8.2.3Filing of Tax Company Tax Returns and Payment of Taxes.Buyer shall file (or cause to be filed) each Tax Return required to be filed by the Company after the Closing Date for a taxable period beginning on or before the Closing Date, and shall cause to be timely paid all Taxes shown on such Tax Returns; provided that such payment obligation shall not prevent recovery by Buyer of any indemnification to which Buyer may be entitled under Section 7. To the extent that there are insufficient funds then available in the Escrow Account to fully pay such claim for indemnity, the Seller shall reimburse the Buyer for any Taxes of the Company payable with respect to a taxable period ending on or before the Closing Date or allocable to the Pre-Closing Period (as defined below), within fifteen (15) days after payment by Buyer or the Company of such Taxes to the extent of Seller’s obligation to indemnify against such Taxes pursuant to Section 7.3.3 of this Agreement (that is, to the extent of the excess of such Tax over the amount taken into account as a liability in the computation of Closing Working Capital).

8.2.4Closing of Taxable Periods; Allocation of Tax to the Pre-Closing Period.The Parties shall, unless prohibited by applicable law, cause the taxable period of the Company to end as of the close of the Closing Date. Buyer shall not permit the Company to take any actions after Closing on the Closing Date that are out of the Ordinary Course of Business, except as contemplated by this Agreement. For the avoidance of doubt, the Parties hereto agree that the taxable year of the Company, as a subchapter S corporation, shall terminate and end at the end of the day before the Closing Date for federal income Tax purposes (and to the extent applicable, for state and local income Tax purposes as well), and that all items of income, gain,

43

deduction, or loss recognized on or after the Closing Date shall be included by the Company and CHC in CHC’s consolidated federal income tax return (and to the extent applicable, in CHC’s tax return for state and local tax purposes as well). For purposes of this Agreement, Taxes incurred by the Company with respect to a taxable period that includes but does not end on the Closing Date (other than a Taxable period that begins on the Closing Date), shall be allocated to the portion of the taxable period ending on the Closing Date (the “Pre-Closing Period”) (A) except as provided in (B) and (C) below, to the extent feasible, on a specific identification basis, according to the date of the event or transaction giving rise to the Tax, and (B) except as provided in (C) below, with respect to periodically assessed ad valorem Taxes and Taxes not otherwise reasonably allocable to specific identifiable transactions or events or dates, in proportion to the number of days in such taxable period that occur on or before the Closing Date compared to the total number of days in such taxable period, and (C) in the case of any Tax based upon or related to income or receipts, in an amount equal to the Tax which would be payable if the relevant taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practices of the Company. Notwithstanding the foregoing, the Parties agree that income Taxes attributable to the Pre-Closing Period shall include any Tax liability of the Company arising in connection with the Closing (including, without limitation, any Tax relating to distributions of property by the Company to the Seller occurring on the Closing Date) other than in the Ordinary Course of Business.

8.3Transfer Taxes.Notwithstanding Section 8.2 and Section 7.3.3, the Parties agree that all transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest thereon, “Transfer Taxes”) incurred by the Company in connection with this Agreement, shall be borne one-half by the Buyer and one-half by the Seller. Each Party shall prepare at their own expense any Tax Returns relating to Transfer Taxes required to be filed by such Party, and, if required by applicable law, each Party will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation required to be filed by the other Parties. The Party paying any such Transfer Tax in excess of its ratable share shall be reimbursed by the other Party for the appropriate portion of such Tax within fifteen (15) days after notice and evidence of payment is given to the other Party of such payment; provided that reimbursement by the Seller shall be required only to the extent the portion of such Transfer Tax allocable to Seller exceeds the amount taken into account as a liability therefore in the Net Working Capital computation, and further provided that any payment from Seller otherwise required hereunder shall be paid first out of the Escrow Account to the extent thereof.

8.4Audits and Contests Regarding Taxes.Any Party who receives any notice of a pending or threatened Tax audit, assessment, or adjustment relating to the Company, or the Seller with respect to the Company, which may give rise to liability of another Party hereto, shall promptly notify Buyer and Seller within ten (10) business days of the receipt of such notice. The Parties each agree to consult with and to keep the other Parties hereto informed on a regular basis regarding the status of any Tax audit or proceeding to the extent that such audit or proceeding could affect a liability of such other Parties (including indemnity obligations hereunder). Seller shall have the right to represent the Company’s interests in any Tax audit or administrative or judicial proceeding and to employ counsel of Seller’s choice and at Seller’s expense, but reasonably satisfactory to Buyer, but only to the extent such audit or other proceeding pertains to

44

taxable periods ending on or before the Closing Date. Buyer shall have the right to participate in such proceeding at its own expense, and shall be entitled to control the disposition of any issue involved in such proceeding which does not affect a potential liability of Seller. Both Buyer and Seller shall be entitled to represent their own interests in light of their responsibilities (including indemnity obligations) for the related Taxes, at their own expense, in any audit or administrative or judicial proceedings involving a taxable period that includes but does not end on the Closing Date, provided that neither Party shall communicate with representatives of an auditing Taxing Authority on any substantive matter without advising the other Party of the communication in advance, and if oral, providing the other Party an adequate opportunity to and participate in such communication. Notwithstanding the foregoing, Seller shall not agree to any settlement for any taxable period that would effect Tax Liabilities of Buyer or the Company for any taxable period beginning on or after the Closing Date without prior written consent of Buyer. Except as provided in this Section 8.5, the provisions of Article 7 including the provisions therein addressing settlement authority, shall govern the manner in which Tax audit or administrative or judicial proceedings are resolved.

8.5Cooperation on Tax Matters.

8.5.1The Buyer, the Company and the Seller shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns pursuant to this Section 8 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party’s request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and the Seller shall (A) retain all books and records with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by the Buyer or the Seller, any extensions thereof) of the respective taxable periods, and abide by all record retention agreements entered into with any Taxing Authority, and (B) give the other Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Party so requests, the Company or the Seller, as the case may be, shall allow the other Party to take possession of such books and records.

8.5.2The Buyer and the Seller further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, without limitation, with respect to the transactions contemplated hereby).

8.6Purchase Price Allocation to Covenant Not to Compete.The Parties hereby agree that $100,000 of the Purchase Price shall be considered as having been paid for the Seller’s non-competition covenant of Seller.

8.7Buyer Actions Prohibited.The Buyer covenants that it will not and will not cause or permit the Company or any Affiliate of the Buyer to (1) take any action on the Closing Date other than in the Ordinary Course of Business, including, without limitation, the distribution of any dividend or the effectuation of any redemption, that could give rise to any Tax

45

liability or reduce any Tax Asset of either the Company (for a taxable period or portion thereof ending on or before the Closing Date) or the Seller, or give rise to any loss of the Seller, or (2) make any election or deemed election under Section 338 of the Code, or (3) make or change any Tax election, amend any Tax Return or take any Tax position on any Tax Return, take any action, omit to take any action or enter into any transaction, merger or restructuring that ipso facto results in any increase in any Tax liability or any reduction of any Tax Asset of either the Company (for a taxable period or portion thereof ending on or before the Closing Date) or the Seller.

8.8Amended Tax Returns.Except in connection with an audit resolved pursuant to Section 8.5 and Section 7.6 (including consistent correlative adjustments to Tax Returns for non-audited taxable periods), no party may amend a Tax Return filed by any Party with respect to the Company or file or amend any Tax election of the Company, in each case, for a taxable period beginning prior to the Closing Date, without the consent of the other Parties hereto, not to be unreasonably withheld or delayed. Buyer shall, upon request by Seller and at the sole expense of the Seller, cooperate in the preparation of and submission to the proper Taxing Authority of any amended Tax Return which is required to cause such Tax Return to be consistent with adjustments to the Tax Returns of the Company for any other taxable period proposed by any Taxing Authority, or to give effect to an allowable loss carryback or carryover from a taxable period of the Company ending on or before the Closing Date.

9.FEES RELATING TO TRANSACTION.

9.1Brokerage Fees. Except as otherwise set forth herein, the Seller and the Company represent and warrant to the Buyer that no broker, finder, agent or similar intermediary has acted on behalf of the Company or Seller in connection with this Agreement or the transactions contemplated hereby, and that there are no brokerage commissions, finders’ fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with the Company or the Seller, or any action taken by the Company or any of the Seller. The Buyer represents and warrants to the Seller that no broker, finder, agent or similar intermediary has acted on behalf of the Buyer in connection with this Agreement or the transactions contemplated hereby, and that there are no brokerage commissions, finders’ fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with the Buyer or any action taken by the Buyer. Each such party agrees to indemnify and save the other harmless from any claim or demand for commission or other compensation by any broker, finder, agent or similar intermediary claiming to have been employed by or on behalf of such party, and to bear the cost of legal expenses incurred in defending against any such claim.

9.2Other Fees and Expenses.The parties to this Agreement shall bear their respective fees and expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of attorneys, consultants, investment bankers, auditors and other third party advisors incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby. For purposes of clarifying the foregoing, unpaid expenses of the Seller and the Company shall be paid by the Seller out of the proceeds of the sale and not otherwise charged or expensed to, or paid by, the Company.

46

10.MISCELLANEOUS.

10.1Press Releases and Public Announcements.No Party shall issue or cause to be issued any press release or make or cause to be made any public announcement relating to the subject matter of this Agreement without the prior written approval of the Buyer and the Seller; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law (in which case the disclosing Party will advise the other Parties prior to making the disclosure).

10.2No Third-Party Beneficiaries.This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

10.3Entire Agreement.With the exception of that certain confidentiality agreement between the Company and CHC dated November 7, 2003, which shall continue to survive this Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. Without limiting the generality of the foregoing, the Parties agree that the letter agreement dated February 19, 2004, by and between the Company and the Buyer is null and void and of no further effect.

10.4Succession and Assignment.This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of such Party’s rights, interests, or obligations hereunder without the prior written approval of the Buyer and the Seller; provided, however, that the Buyer may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates, (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases the Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder) and (iii) assign any and all of its rights hereunder to and for the benefit of any lender to the Buyer or the Company for the purpose of providing collateral security.

10.5Counterparts.This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

10.6Headings.The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

10.7Notices.All notices, requests, demands, claims, and other communications hereunder shall be in writing and shall be deemed duly given if personally delivered, sent by registered or certified mail, return receipt requested, postage prepaid, or delivered by express courier service or telecopied (with hard copy to follow). Notices, demands, claims and other communications to the Parties shall, unless another address is specified in writing, be sent to the address or telecopy number set forth below:

47

If to the Buyer:	RGII Technologies, Inc.
	1997 Annapolis Exchange Parkway
	Suite 210
	Annapolis, MD 21401
	Attention: President
	Fax: (410) 224-3767
With a copy to:	Reed Smith LLP
	One Riverfront Plaza
	Newark, NJ 07102
	Attention: Gerard S. DiFiore
	Fax: (973) 621-3199
	Computer Horizons Corporation
	49 Old Bloomfield Avenue
	Mountain Lakes, New Jersey 07046-1495
	Attention: General Counsel
	Fax: (973) 402-7986
If to the Seller:	Cynthia F. Hardy
	463 NE 38th Street
	Boca Raton, FL 33431
	Fax:
With a copy to:	Shaw Pittman
	1650 Tysons Boulevard
	McLean, VA 22102-4859
	Attention: Craig E. Chason, Esq.
	Phone: (703) 770-7947
	Fax: (703) 770-7901
If to the Company:	AUTOMATED INFORMATION MANAGEMENT, INC.
	4403 Forbes Boulevard
	Lanham, Maryland 20706
	Attention: President
	Fax:
With a copy to:	RGII Technologies, Inc.
	1997 Annapolis Exchange Parkway
	Suite 210
	Annapolis, MD 21401
	Attention: President
	Fax: (410) 224-3767

Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have

48

been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

10.8Governing Law.This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Maryland without giving effect to any choice or conflict of law provision or rule (whether of the State of Maryland or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York.

10.9Amendments and Waivers.No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

10.10Severability.Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

10.11Expenses.Each of the Buyer, the Seller and the Company will bear such Person’s own costs and expenses (including, without limitation, attorneys’, accountants’, investment bankers and valuation experts’ fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that in the event that the transactions contemplated by this Agreement are consummated, if the Company remains liable on the Closing Date for any unpaid expenses incurred by or on behalf of the Company or the Seller in connection with the transactions contemplated hereby, which expenses have not been fully accounted for in the determination of Working Capital, such expenses shall be deducted from the Company’s working capital in the determination of Working Capital pursuant to Section 2.4.2.

10.12Construction.The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant.

49

10.13Incorporation of Exhibits and Disclosure Schedules.The Exhibits and Disclosure Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

10.14Specific Performance.Each of the Parties acknowledges and agrees that the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the Transaction Documents and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter (subject to the provisions set forth in Section 10.16 below), in addition to any other remedy to which they may be entitled, at law or in equity.

10.15Submission to Jurisdiction.Each of the Parties submits to the jurisdiction of any state or federal court sitting in the State of Maryland, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 10.7 above. Nothing in this Section 10.15, however, shall affect the right of any Party to serve legal process in any other manner permitted by law or at equity. Each Party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity.

10.16Waiver of Jury Trial.EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

10.17Waiver of Certain Rights.By her execution of this Agreement, Seller hereby irrevocably waives, relinquishes and terminates effective as of the Closing Date any and all of Seller’s rights under the Company’s certificate of incorporation or bylaws, or under any agreement with the Company to which Seller is a party or in respect of which Seller may have any rights, including any purchase right, approval right, right of first refusal, or other similar right, with respect to the transactions contemplated by this Agreement, notwithstanding any defects in notice or procedure contained therein; provided that upon termination of this Agreement pursuant to Section 9 of this Agreement prior to Closing, this Section 10.17 shall thereupon become void and of no further force and effect.

[END OF PAGE]

[SIGNATURE PAGE FOLLOWS]

50

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

RGII TECHNOLOGIES, INC.
By:	/s/ Kathryn B. Freeland
	Kathryn B. Freeland, CEO
AUTOMATED INFORMATION MANAGEMENT, INC.
By:	/s/ Cynthia F. Hardy
	Cynthia F. Hardy, President and CEO
SELLER
By:	/s/ Cynthia F. Hardy
	Cynthia F. Hardy, Individually

51

EX-21

Exhibit 21

The Company’s only active subsidiaries are each either wholly owned or majority owned and are included in the consolidated financial statements of the Company.

Their jurisdictions of incorporation are as follows:

Name of Subsidiary	Jurisdiction of Incorporation
Computer Horizons E-Solutions (Europe) Limited	England and Wales
Computer Horizons (Canada) Corp. / Corporation Computer Horizons Canada	Toronto, Canada
Horizons Technologies, Inc.	Delaware
Strategic Outsourcing Services, Inc.	Delaware
CHC/Prince Co., Inc.	New Jersey
G. Triad Development Corp.	New Jersey
Integrated Computer Management, Inc.	New Jersey
CHIMES, Inc.	Delaware
eB Networks, LLC	Delaware
CG Computer Services Corp.	California
Horizon Enterprises, Inc.	Delaware
Spargo Holdings, Inc.	Delaware
Spargo Holdings II, Inc.	Delaware
Chimes (UK) Limited	England and Wales
Chimes Netherlands B.V.	Netherlands
Chimes Servicing Corp.	Delaware
CHC Healthcare Solutions, LLC	Delaware
RG II Technologies, Inc.	Maryland
Global Business Technology Services Private Limited	India
GBTS America, Inc.	Delaware
GBTS America, LLC	Delaware
GBS Holdings Private Limited	Mauritius
CHC Caribbean Solutions, Inc.	Puerto Rico
Automated Information Management, Inc.	Maryland

1

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated March 14, 2005, accompanying the consolidated financial statements and Schedule II and management’s assessment of the effectiveness of internal control over financial reporting included in the Annual Report of Computer Horizons Corp. and Subsidiaries on Form 10-K for the year ended December 31, 2004.  We hereby consent to the incorporation by reference of said reports in the Registration Statements of Computer Horizons Corp. and Subsidiaries on Forms S-3 (File No. 333-33665, effective September 24, 1997, File No. 333-44417, effective February 27, 1998 and File No. 333-48877, effective March 30, 1998), and on Forms S-8 (File No. 033-41726, effective July 16, 1991, File No. 033-59437, effective May 18, 1995, File No. 033-64763, effective December 5, 1995 and File No. 333-60751, effective August 5, 1998,  File No. 333-74579, effective March 17, 1999, and File No. 333-104126, effective March 28, 2003).

/s/ Grant Thornton LLP

GRANT THORNTON LLP

Edison, New Jersey

March 14, 2005

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, WILLIAM J. MURPHY, certify that:

1.I have reviewed this Annual Report on Form 10-K of COMPUTER HORIZONS CORP;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the 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: March 16, 2005

/s/ William J. Murphy

WILLIAM J. MURPHY

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, MICHAEL J. SHEA, certify that:

1.I have reviewed this Annual Report on Form 10-K of COMPUTER HORIZONS CORP;

2.Based on my knowledge, this 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 report;

3.Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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 report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the 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: March 16, 2005

/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,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Annual Report on Form 10-K of Computer Horizons Corp. (the “Company”) for the year ended December 31, 2004 (the “Annual Report”), I, William J. Murphy, Chief Executive Officer of the Company, hereby certify to the best of my knowledge, pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	March 16, 2005	/s/  William J. Murphy
		WILLIAM J. MURPHY
		Chief Executive Officer

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

EX-32.2

Exhibit 32.2

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

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Annual Report on Form 10-K of Computer Horizons Corp. (the “Company”) for the year ended December 31, 2004 (the “Annual Report”), I, Michael J. Shea, Chief Financial Officer of the Company, hereby certify to the best of my knowledge, pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1. the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	March 16, 2005	/s/  Michael J. Shea
		MICHAEL J. SHEA
		Chief Financial Officer

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.