SEC Filing | Hill International, Inc.

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For The Nine Months Ended September 30, 2006

(Dollars in thousands, except per share data)

(Unaudited)

		Page
PART I:	FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements (unaudited)	3

	Condensed Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and October 1, 2005 (unaudited)	4

	Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and October 1, 2005 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3	Quantitative and Qualitative Disclosures of Market Risk	50

Item 4	Controls and Procedures	50

PART II:	OTHER INFORMATION	51

Item 1	Legal Proceedings	52

Item 1A	Risk Factors	52

Item 2	Unregistered Sales of Entity Securities and Use of Funds	52

Item 3	Defaults Upon Senior Securities	52

Item 4	Submission of Matters to a Vote of Security Holders.	52

Item 5	Other Information	52

Item 6	Exhibits	52

Signatures		54

Index to Exhibits		55

PART I: FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2006			2005
		(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	3,900		$	2,716
Cash-restricted		5,481			1,040
Accounts receivable, less allowance for doubtful accounts of $3,092 and $845		60,268			27,623
Accounts receivable-affiliate		453			611
Prepaid expenses and other current assets		3,474			1,361
Total current assets		73,576			33,351
Property and equipment - net		5,670			2,842
Cash - restricted		3,151			2,169
Retainage receivable, less allowance for doubtful accounts of $98 and $88		804			964
Cost in excess of net assets acquired		18,311			148
Deferred income taxes		-			451
Investment in affiliate		656			393
Other assets		557			405
Total assets	$	102,725		$	40,723
Liabilities and Stockholders’ Equity
Current liabilities:
Due to bank	$	14		$	190
Current maturities of long-term debt		6,866			10,156
Current maturities of capital lease obligations		302			186
Accounts payable and accrued expenses		37,616			13,757
Deferred tax liabilities		65			2,136
Income taxes payable		3,267			1,923
Other current liabilities		3,941			3,359
Total current liabilities		52,071			31,707
Long-term debt, net of current maturities		1,455			-
Capital lease obligations, net of current maturities		195			32
Retainage payable		3,453			877
Deferred income taxes		151			-
Minority interest		253			-
Other liabilities		3,803			1,948
Total liabilities		61,381			34,564
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value; 1,000,000 shares authorized, none issued		—			—
Common stock, $.0001 par value; 75,000,000 shares authorized, 22,826,100 shares issued and 22,300,148 shares outstanding at September 30, 2006; 30,000,000 shares authorized, 15,624,000 shares issued and 11,760,000 shares outstanding at December 31, 2005		2			1
Additional paid-in capital		36,691			2,009
Retained earnings		11,472			5,582
Accumulated other comprehensive loss		(168	)		(25	)
		47,997			7,567
Less treasury stock of 525,952 and 3,864,000 shares at cost at September 30, 2006 and December 31, 2005		(2,788	)		(583	)
Stock held in escrow of 729,391 shares at September 30, 2006		(3,865	)		—
Due from stockholder		—			(825	)
Total stockholders' equity		41,344			6,159
Total liabilities and stockholders’ equity	$	102,725		$	40,723

See accompanying notes to condensed consolidated financial statements.

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005

Revenue	$	49,866		$	29,765		$	130,156		$	80,372
Reimbursable expenses		15,837			8,415			42,778			21,427
Revenue, less reimbursable expenses		34,029			21,350			87,378			58,945
Direct expenses		18,774			10,931			48,611			30,981
Gross profit		15,255			10,419			38,767			27,964

Operating expenses (income)
Selling, general and administrative expenses		11,892			7,684			31,317			22,644
Equity in affiliate		(331	)		(274	)		(533	)		(559	)

Operating income		3,694			3,009			7,983			5,879

Interest (income) expense, net		(36	)		148			345			419

Minority interest		13			-			13			-

Income before provision for income taxes		3,717			2,861			7,625			5,460

Provision for income taxes		806			1,057			1,735			2,015

Net income	$	2,911		$	1,804		$	5,890		$	3,445

Basic net income per share	$	0.13		$	0.16		$	0.38		$	0.30
Basic weighted average shares outstanding		22,284			11,586			15,504			11,586

Diluted net income per share	$	0.12		$	0.14		$	0.35		$	0.25
Diluted weighted average shares outstanding		23,513			13,105			16,931			13,749

See accompanying notes to condensed consolidated financial statements.

	Common Stock					Additional Paid in			Retained		Accumulated Other Comprehensive			Treasury Stock						Shares Held in Escrow					Due from			Total Stockholders’
	Shares			Amount		Capital			Earnings		(Loss) Income			Shares			Amount			Shares		Amount			stockholder			Equity
Balances at December 31, 2005		15,624		$	1	$	2,009		$	5,582	$	(25	)		3,864		$	(583	)		-	$	-		$	(825	)	$	6,159
Advances to stockholders		-			-		-			-		-			-			-			-		-			(183	)		(183	)
Repayment of advances to stockholders		-			-		-			-		-			-			-			-		-			1,008			1,008
Retirement of treasury shares		(3,864	)		-		(583	)		-		-			(3,864	)		583			-		-			-			-
Exercise of employee stock options		2,740			-		-			-		-			-			-			-		-			-			-
Shares held in escrow for indemnification by shareholders		-			-		-			-		-			-			-			729		(3,865	)		-			(3,865	)
Purchase of shares for employees income tax withholdings		-			-		-			-		-			526			(2,788	)		-		-			-			(2,788	)
Issuance of common stock in connection with reverse acquisition of Arpeggio, net of acquisition cost		8,300			1		34,118			-		-			-			-			-		-			-			34,119
Shares converted on vote against merger		(4	)		-		(24	)		-		-			-			-			-		-			-			(24	)
Stock based compensation expense		-			-		59			-		-			-			-			-		-			-			59
Stock issued to Board of Directors		30			-		155			-		-			-			-			-		-			-			155
Tax benefit from stock plan		-			-		957			-		-			-			-			-		-			-			957
Net income		-			-		-			5,890		-			-			-			-		-			-			5,890
Foreign currency translation adjustment		-			-		-			-		(143	)		-			-			-		-			-			(143	)
Balances at September 30, 2006		22,826		$	2	$	36,691		$	11,472	$	(168	)		526		$	(2,788	)		729	$	(3,865	)	$	-		$	41,344

See accompanying notes to condensed consolidated financial statements.

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2006 and October 1, 2005

(Dollars in thousands)

(Unaudited)

	September 30,			October 1,
	2006			2005
Cash flows from operating activities:
Net income	$	5,890		$	3,445
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation		887			547
Amortization		145			114
Equity in affiliate		(533	)		(559	)
Provision for bad debts		840			495
Deferred tax (benefit) provision		(833	)		252
Stock based compensation		59			191
Tax benefit from stock plan		957			—
Stock issued to Board of Directors		77			—
(Increase) decrease in assets,
Accounts receivable		(20,304	)		(7,396	)
Accounts receivable-related party		158			361
Other accounts receivable		—			223
Prepaid expenses and other current assets		(605	)		(318	)
Retainage receivable		160			(4	)
Other assets		(152	)		(42	)
Increase (decrease) in liabilities
Accounts payable and accrued expenses		3,730			1,217
Income taxes payable		744			2,018
Deferred revenue		—			(75	)
Other current liabilities, primarily advance payments from clients		(3,301	)		542
Minority interest		13			—
Retainage payable		2,576			—
Other liabilities		(41	)		(118	)
Total adjustments		(15,423	)		(2,552	)
Net cash flow (used in) provided by operating activities		(9,533	)		893
Cash flows from investing activities:
Purchase of acquisitions, net of cash acquired		(10,444	)		—
Restricted cash		(3,350	)		—
Payments for purchase of property and equipment		(1,411	)		(694	)
Net cash flows used in investing activities		(15,205	)		(694	)
Cash flows from financing activities:
Distributions from affiliate		269			618
Due to bank		(176	)		141
Proceeds from long-term debt		2,801			—
Payments on long-term debt		(12,757	)		(4	)
Net proceeds on revolving loan borrowings		1,174			126
Advances to stockholder		(183	)		(14	)
Repayments from stockholder		1,008			—
Proceeds from issuance of common stock in merger, net of acquisition costs		34,095			—
Payment on capital lease obligations		(166	)		(269	)
Net cash flow provided by financing activities		26,065			598
Effect of exchange rate changes on cash		(143	)		(49	)
Net increase in cash and cash equivalents		1,184			748
Cash and cash equivalents - beginning of period		2,716			802
Cash and cash equivalents - end of period	$	3,900		$	1,550

See accompanying notes to condensed consolidated financial statements.

HILL INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1— Basis of Presentation

Arpeggio Acquisition Corporation

Arpeggio Acquisition Corporation (“Arpeggio”) was incorporated in Delaware on April 2, 2004 as a blank check company, the objective of which was to acquire an operating business in the United States or Canada. The Company’s initial stockholders purchased 1,500,000 common shares, $.0001 par value, for $25,000 on April 2, 2004.

On June 30, 2004, Arpeggio consummated an Initial Public Offering (“Offering”) and raised net proceeds of $36,772,000. Arpeggio sold 6,800,000 units (“Units”) in the Offering, which included 800,000 Units subject to the underwriters’ over allotment option. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants (“Warrants”) as described in Note 13. An amount of $36,666,000 (which included accrued interest of $6,000) as of December 31, 2005, was being held in an interest bearing trust account (“Trust Fund”) until the earlier of (i) the consummation of its first Business Combination or (ii) the liquidation of Arpeggio. The remaining net proceeds (not held in trust) have been used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

Merger and Accounting Treatment

On June 28, 2006, Arpeggio consummated a merger with Hill International, Inc., a Delaware corporation ("Hill"), in which Hill merged with and into Arpeggio pursuant to an Agreement and Plan of Merger dated December 5, 2005, as amended (the "Merger Agreement"), among Arpeggio, Hill and certain stockholders of Hill. Pursuant to the Merger Agreement, Hill stockholders party to the merger agreement and other persons who exercised options to purchase common stock of Hill prior to the closing of the merger, in exchange for all of the securities of Hill outstanding immediately prior to the merger, received from Arpeggio 14,500,000 shares of Arpeggio’s common stock. Immediately following the merger, the stockholders of Hill owned approximately 63.6% of the total issued and outstanding Arpeggio common stock. Twelve percent (12%) or 1,740,000 of the 14,500,000 shares of Arpeggio common stock being issued to the Hill stockholders at the time of the merger were placed into escrow to secure the indemnity rights of Arpeggio under the Merger Agreement and are governed by the terms of an escrow agreement. One Arpeggio shareholder, owning 3,900 shares of Arpeggio common stock, voted against the merger and requested to receive the pro rata share of cash in the Trust Fund. The combined company remitted to that shareholder approximately $24,000 in exchange for his shares.

The Merger Agreement also provides for Hill’s then stockholders to receive up to an additional 6,600,000 shares of the combined company’s common stock, contingent upon the combined company attaining certain earnings targets.

In connection with the approval of the above described transaction, the Arpeggio stockholders adopted, among other matters, the following:

An amendment to the Certificate of Incorporation of Arpeggio to change the name of Arpeggio from Arpeggio Acquisition Corporation to Hill International, Inc.;

An amendment to the Certificate of Incorporation of Arpeggio to increase the number of authorized shares of Arpeggio common stock from 30,000,000 to 75,000,000; and

The 2006 Employee Stock Option Plan, which reserves 1,140,000 shares of common stock for issuance in accordance with the plan's terms.

Upon the Closing, Arpeggio changed its name to Hill International, Inc. and is hereinafter referred to as the "Company."

Upon consummation of the merger, approximately $37,500,000 was released from trust to be used by the combined company. After payments totaling approximately $3,400,000 for professional fees and other costs related to the merger, the net proceeds amounted to approximately $34,100,000. In connection with the merger, the Company incurred approximately $105,000 of acquisition costs as of December 31, 2005, which were recorded within “other assets” in the accompanying Consolidated Balance Sheet. The total direct and incremental costs of approximately $3,400,000 incurred by the Company in connection with the merger were reflected as a reduction to additional paid-in capital as of the effective date of the merger.

The merger was accounted for under the purchase method of accounting as a reverse acquisition in accordance with accounting principles generally accepted in the United States for accounting and financial reporting purposes. Under this method of accounting, Arpeggio was treated as the “acquired” company for financial reporting purposes. In accordance with guidance applicable to these circumstances, this merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the merger was treated as the equivalent of Hill issuing stock for the net monetary assets of Arpeggio, accompanied by a recapitalization. All historical share and per share amounts have been retroactively adjusted to give effect to the reverse acquisition of Hill and related recapitalization.

Note 2 - Acquisitions

James R. Knowles (Holdings) PLC

On August 31, 2006, Hill International S.A., a wholly-owned subsidiary of the Company, acquired approximately 96.5% of the outstanding shares of James R. Knowles (Holdings) PLC, (“Knowles”) a construction and engineering industry claims consulting and dispute resolution company with 36 offices worldwide, headquartered in Daresbury, United Kingdom, for a price of 33 pence (or approximately $0.62 at the exchange rate current as of the date of the acquisition) per share in cash. The consideration paid by Hill International S.A. for 96.5% of the outstanding shares of Knowles was approximately $13,000,000 excluding direct acquisition costs. Under applicable law, Hill International S.A. is entitled to compulsorily acquire the remaining 3.5% of the outstanding shares of Knowles at the same purchase price per share. Hill International S.A. intends to acquire those shares as soon as practicable at that purchase price.

The following table sets forth the determination of the consideration paid for Knowles at the date of acquisition:

( in thousands)
Cash	$	13,017
Other direct acquisition costs		947
Total purchase price	$	13,964

The transaction was accounted for as a purchase and, accordingly, the preliminary purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. Independent consultants have been engaged to conduct a detailed valuation using the guidance as set forth in Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations”, to assist management with the final determination of fair value of the intangible assets and goodwill acquired in the acquisition. The purchase price allocation is, therefore, preliminary and may be adjusted for up to one year after the acquisition.

The following table sets forth the preliminary allocation of the purchase price:

(in thousands)
Total purchase price	$	13,964
Less assets acquired:
Cash		(2,892	)
Accounts receivable		(11,978	)
Other current assets		(1,791	)
Long - term assets		(3,522	)
Total assets acquired		(20,183	)

Liabilities assumed		23,283

Cost in excess of net assets acquired	$	17,064

The operating results for Knowles are included in the accompanying Condensed Consolidated Statements of Operations from the date of the acquisition.

The following unaudited pro forma information assumes the Knowles acquisition had occurred on January 2, 2005. The pro forma information, as presented below, is not necessarily indicative of the results that would have been obtained had the Knowles acquisition occurred on January 2, 2005, nor is it necessarily indicative of the Company's future results:

	Three Months Ended					Nine Months Ended
(in thousands)	September 30, 2006			October 1, 2005		September 30, 2006			October 1, 2005
Total revenues	$	58,321		$	43,219	$	166,940		$	120,992
Net income (loss)	$	(5,813	)	$	1,625	$	(3,947	)	$	3,259
Earnings per share, basic and diluted	$	(0.26	)	$	0.16	$	(0.25	)	$	0.25

The pro forma net income (loss) reflects the following items:

adjustments to depreciation and interest expense arising from the recording of a liability for conditional asset retirement costs associated with the future expiration of certain real estate operating leases in which Knowles is the lessee, in accordance with Financial Accounting Standards Board Interpretation No. 47, Conditional Asset Retirement Obligations.

ii.

the related income tax effects of the above items based upon a pro forma effective income tax rate.

The Pickavance Group Ltd.

On January 23, 2006, Hill International (UK) Ltd. (“Hill UK”), a wholly owned subsidiary of the Company, purchased all of the outstanding common stock of The Pickavance Group Ltd. (“Pickavance”) from the existing shareholders of Pickavance. The results of Pickavance’s operations from January 23, 2006 are included in the Company’s consolidated statements of operations. The Pickavance acquisition is not a material business combination to the Company’s operations.

The present value of the anticipated payments was calculated by discounting back to the acquisition date the future payments using an 8% imputed interest cost (the Company’s approximate average borrowing cost at the acquisition date). The discounted price was then converted into U.S. dollars using an exchange rate of approximately $1.78/₤1, the exchange rate on the date of the acquisition.

The purchase price of the outstanding stock, not including liabilities assumed, was in the form of future payments as follows:

Date Paid / Payable	Amount in British Pounds		Discounted Value		U.S. Dollar Equivalent
February 1, 2006	£	153	£	153	$	273
January 1, 2007		70		65		116
February 1, 2007		154		142		253
February 1, 2008		315		269		479
February 1, 2009		315		248		442
Total	£	1,007	£	877	$	1,563

The net assets acquired and liabilities assumed were as follows in U.S. dollars:

(in thousands)
Cash	$	165
Accounts receivable, net		772
Prepaid expenses		71
Property, plant and equipment, net		160
Total tangible assets		1,168

Accounts payable		555
Other liabilities		34
Total liabilities assumed		589

Net assets acquired	$	579

Purchase price	$	1,563
Net assets acquired		579
Costs in excess of net assets acquired		984
Associated deferred taxes		295
Total intangible assets	$	1,279

Pending a final valuation, cost in excess of net assets acquired will be identified as goodwill and contractual and non-contractual customer relationships upon completion of the valuation.

Note 3 - Summary of Significant Accounting Policies

Operations

The Company is a professional services firm providing program management, project management, construction management and construction claims services worldwide. Revenue from international services was approximately 53.0% and 36.8 % of total revenue for the three-month periods ended September 30, 2006 and October 1, 2005, respectively and 49.4% and 36.2% of total revenue for the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.

General

The accompanying unaudited interim Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States and the interim financial statement rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements. The interim operating results are not necessarily indicative of the results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements. The Consolidated Financial Statements included in this Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report on Form 10-Q and included together with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Fiscal Year 2005 Audited Financial Statements included in the Definitive Proxy Statement dated on June 5, 2006 filed on June 6, 2006.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The estimates affecting the consolidated financial statements that are particularly significant include revenue recognition, recoverability of long-lived assets, income taxes, allowance for doubtful accounts and commitments and contingencies.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Accounting Periods

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to December 31. The three months ended September 30, 2006 began on July 2, 2006 and the nine months ended September 30, 2006 began on January 1, 2006. The three months ended October 1, 2005 began on July 3, 2005 and the nine months ended October 1, 2005 began on January 2, 2005. Each three-month period includes 13 weeks and each nine-month period includes 39 weeks.

Share-Based Compensation

On January 2, 2005 the Company adopted SFAS No. 123(R), “Share-Based Payment,” using the “Modified Prospective Application Method” which requires that compensation cost be recorded, as earned, for all unvested stock options outstanding at the beginning of the first quarter of adoption of SFAS No. 123(R). As a result of adopting SFAS No. 123(R), the Company’s compensation expense was approximately $59,000 ($45,000 net of taxes) for both the three and nine months ended September 30, 2006, as compared to $191,000 ($119,000 net of taxes) for the nine months ended October 1, 2005. There was no compensation expense for the three months ended October 1, 2005. The compensation cost is recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. The Company’s Condensed Consolidated Financial Statements of prior fiscal years do not reflect any restated amounts. No modifications were made to outstanding options prior to the adoption of SFAS No. 123(R). The Company used the Black-Scholes option pricing model to measure the estimated fair value of the options under SFAS No. 123(R). The Company did not change the quantity, type or payment arrangements of any share-based payment programs. Since the modified prospective application method was used there was no cumulative effect adjustment upon the adoption of SFAS No. 123(R). The Company’s policy is to use newly issued shares to satisfy the exercise of stock options.

Earnings per Share

Basic net income (loss) per share is determined by dividing net income (loss) available to stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential increase in the weighted average number of common shares used in the basic income (loss) per share calculation for the weighted average number of common shares that would be issued if all options outstanding during the year had been exercised using the treasury stock method.

Dilutive stock options increased average common shares outstanding by approximately 1,200,000 and 1,500,000 shares for the three months ended September 30, 2006 and October 1, 2005, respectively and by approximately 1,400,000 and 2,200,000 shares for the nine months ended September 30, 2006 and October 1, 2005, respectively.

Options to purchase 25,000 shares of the Company’s common stock were not included in the calculation of common shares outstanding for the three months ended September 30, 2006 because they were anti-dilutive.

Warrants to purchase 13,600,000 shares of the Company’s common stock increased average common shares outstanding by approximately 1,200,000 shares for the three months ended September 30, 2006 and were not included in the calculation of common shares outstanding for the nine months ended September 30, 2006 because they were anti-dilutive.

Recent Accounting Pronouncements

FASB Interpretation No. 48

In July 2006 the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in the consolidated financial statements the impact of a tax provision that is more likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 will be effective for the Company as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.

FASB Interpretation No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial statements.

Comprehensive Income (Loss)

Comprehensive income (loss), as defined, includes all changes to equity except those resulting from investments by or distribution to owners and consists of a foreign currency translation adjustment.

Components of other comprehensive income (loss) for the three and nine month periods ended September 30, 2006 and October 1, 2005 are as follows:

	Three-Months Ended						Nine-Months Ended
(in thousands)	September 30, 2006			October 1, 2005			September 30, 2006			October 1, 2005
Net income		2,911			1,804			5,890			3,445
Foreign currency adjustment (loss) income		(133	)		204			(185	)		(78	)
Income tax benefit (expense)		29			(75	)		42			29
Net foreign currency adjustment		(104	)		129			(143	)		(49	)
Total Comprehensive Income	$	2,807		$	1,933		$	5,747		$	3,396

Note 4 - Receivables

	September 30,			December 31,
(in thousands)	2006			2005
Billed	$	56,752		$	25,630
Retainage, current portion		3,194			663
Unbilled		3,414			2,175
		63,360			28,468
Less allowance for doubtful accounts		(3,092	)		(845	)
	$	60,268		$	27,623

Unbilled receivables primarily represent revenue earned on contracts, which the Company is contractually precluded from billing until predetermined future dates.

Included in billed receivables are $2,100,000 and $2,700,000 of amounts due from various branches of the U.S. Government and $10,700,000 and $3,900,000 of receivables from foreign governments at September 30, 2006 and December 31, 2005, respectively.

Note 5 - Prepaid Expenses and Other Current Assets

	September 30,		December 31,
(in thousands)	2006		2005
Prepaid subcontractor fees	$	406	$	445
Prepaid insurance		733		241
Prepaid rent		811		188
Employee advances		153		227
Professional fees		242		-
Other assets		1,129		260
Total	$	3,474	$	1,361

Prepaid subcontractor fees represent advance payments from clients remitted to subcontractors in advance of future services being performed.

Note 6 - Property and Equipment

	September 30,			December 31,
(in thousands)	2006			2005
Furniture and equipment	$	3,189		$	1,790
Leasehold improvements		442			241
Computer equipment and software		4,938			2,918
Automobiles		95			—
		8,664			4,949
Less accumulated depreciation		(2,994	)		(2,107	)
Property and equipment, net	$	5,670		$	2,842

Depreciation expense of $373,000 and $181,000 was recorded for the three months ended September 30, 2006 and October 1, 2005, respectively, and $887,000 and $547,000 was recorded for the nine months ended September 30, 2006 and October 1, 2005, respectively. Depreciation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

Assets recorded under capital leases include furniture and equipment, computer equipment and computer software totaling $994,000 and $817,000 as of September 30, 2006 and December 31, 2005, respectively. Related accumulated depreciation was approximately $365,000 and $324,000 as of September 30, 2006 and December 31, 2005, respectively.

Note 7 - Cost in Excess of Net Assets Acquired

The following table summarizes the Company’s cost in excess of net assets acquired as of September 30, 2006 and December 31, 2005:

	September 30, 2006				December 31, 2005
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
(in thousands)
Acquired contract rights	$	2,139	$	2,104	$	2,139	$	1,991
Knowles cost in excess of net assets acquired		17,064		-		-		-
Pickavance cost in excess of net assets acquired		1,279		32		-		-
Total	$	20,482	$	2,136	$	2,139	$	1,991

Intangible assets, net		18,346				148
Foreign currency adjustment		(35)				-
Intangible assets, net	$	18,311			$	148

The Company plans to finalize the fair value of the cost in excess of net assets acquired in connection with both the Knowles and Pickavance acquisitions during the fourth quarter of 2006.

Amortization expense related to cost in excess of net assets acquired totaled $38,000 for the three months ended September 30, 2006 and October 1, 2005, respectively, and totaled $145,000 and $114,000 for the nine months ended September 30, 2006 and October 1, 2005, respectively.

Note 8 -Advance Payments from Clients

In certain instances the Company may collect advance payments from clients for future services. As the services are performed these advance payments are recognized as revenue. The balance of advance payments from clients was $2,400,000 and $3,300,000 at September 30, 2006 and December 31, 2005, respectively, and is included in “other current liabilities” on the Condensed Consolidated Balance Sheets.

Note 9-Long-term Debt

	September 30, 2006		December 31, 2005
	(in thousands)
Revolving credit loan payable to Merrill Lynch up to $9,750,000, with interest rates at December 31, 2005 of 3.25% plus the one-month LIBOR 4.38% at December 31, 2005, collateralized by certain assets of the Company and guaranteed by the principal stockholder. The loan was repaid in June 2006.	$	—	$	9,637

Revolving credit loan payable to Egnatia Bank up to 1,000,000 Euros ($1,269,000), with interest rates at September 30, 2006 and December 31, 2005 of 2.5% plus the Egnatia Bank prime base rate of 6.75% and 5.5%, as of September 30, 2006 and December 31, 2005, respectively, collateralized by certain assets of the Company. The maturity date of July 15, 2006 was extended to March 16, 2007 in July 2006.		165		157

Revolving credit loan payable to National Bank of Abu Dhabi up to 5,000,000 AED ($1,400,000), with interest rates of 2% plus the 3 month EIBOR rate (5.5% and 4.6% at September 30, 2006 and December 31, 2005, respectively), collateralized by certain assets of the Company. The maturity date is November 15, 2006.		30		362

Revolving credit loan payable to Barclays Bank up to £2,250,000 ($4,223,000), with interest rate of 2% plus the Bank of England rate (4.75% at September 30, 2006). The maturity date is December 1, 2006. The loan balance at September 30, 2006 exceeded the loan commitment amount and was subsequently reduced to within the credit limit in the first week of October 2006.		4,661		—

Revolving credit loan payable to National Bank of Abu Dhabi, up to 2,000,000 AED ($544,000) with interest rate of 2% plus the 3 month EIBOR rate (5.5% at September 30, 2006). The maturity date is January 1, 2007. The loan balance at September 30, 2006 exceeded the loan commitment amount and was subsequently reduced to within the credit limit in the first week of October 2006.		550		—

Revolving credit loan payable to First National Bank up to $400,000, with interest rate of 8.75% at September 30, 2006. The maturity date is December 31, 2006.		400		—

Revolving credit loan payable to Bank of Scotland up to £100,000 ($188,000), with interest rate of 2% plus the Bank of Scotland rate (4.75 % at September 30, 2006). The maturity date is December 31, 2006.		150		—

Various other notes payable with interest rates ranging from 6.69% to 7.8% as of September 30, 2006, collateralized by the related financed equipment.		974		—

Note payable for Pickavance acquisition with an original issue discount of $231,000 at an imputed interest rate of 8% including foreign currency adjustment of approximately $126,000		1,391		—
		8,321		10,156
Less current maturities		6,866		10,156
Long-term debt, net of current maturities	$	1,455	$	—

Note 10-Noncash Investing and Financing Activities

On March 24, 2006, options to purchase 482,767 shares of the Company’s common stock with an exercise price of $0.37 per share and options to purchase 48,277 shares of the Company’s common stock with an exercise price of $0.53 per share were exercised on a cashless basis when the fair market value was $5.47 resulting in the Company issuing 493,465 shares of its common stock.

On June 28, 2006 options to purchase 2,838,669 shares of the Company’s common stock with exercise prices ranging from $0.37 to $3.08 were exercised on a cashless basis resulting in the issuance of 2,246,852 shares of the Company’s stock. The March 24, 2006 and June 28, 2006 exercises resulted in 3,369,713 options exercised, 629,396 shares surrendered and 2,740,317 shares issued. The Company agreed to withhold its common stock due to certain option holders, including the Company’s Chief Operating Officer and Senior Vice President of Finance, and to remit to the proper taxing authorities’ payment for income taxes due on the exercise of options. The total amount due to the taxing authorities was approximately $2,800,000 of which $128,000 remains and is included in “accounts payable and accrued expenses” in the Condensed Consolidated Balance Sheet as of September 30, 2006. The Company withheld common stock from it's option holders, which it has recorded as treasury stock 525,952 shares of its common stock.

The Company also entered into an agreement whereby the option holders and other Company shareholders agreed to escrow 1,450,000 shares to indemnify the Company against identified litigation claims in excess of amounts recorded at September 30, 2005 and other indemnifications. As of September 30, 2006 the Company had specifically identified judgments and awards totaling $3,865,000 as described in Note 19 and accordingly, approximately 729,000 shares in escrow have been reserved for these claims. The $3,865,000 is included in “accounts payable and accrued expenses” and “shares held in escrow” in the contra equity section of the Condensed Consolidated Balance Sheets. See Notes 1 and 19 for further information.

On August 16, 2006, the Company issued 30,000 shares to its non-employee directors as partial compensation for services as directors on the Company’s Board through the next annual stockholders meeting of the Company. The Company recorded an expense of $78,000 as directors’ compensation in general and administrative expense and an amount of $77,000 included in prepaid expenses and other current assets.

	Nine-Months Ended
(in thousands)	September 30, 2006			October 1, 2005
Supplemental disclosures:
Interest paid	$	513		$	442
Income taxes paid	$	303		$	243
Tangible assets acquired	$	1,168
Intangible assets acquired		1,279
Associated deferred taxes		(295	)
Note payable at acquisition		(1,563	)
Liabilities assumed	$	589

Note 11- Investment in Affiliate

Investment in affiliate reflects ownership by the Company of 33.33% of the members’ equity of Stanley Baker Hill, LLC (“SBH”).

Stanley Baker Hill, LLC is a joint venture formed in February 2004 between Stanley Consultants, Inc. Michael Baker, Jr. and Hill. SBH provides various architect-engineer services in Iraq. SBH has a contract for an indefinite delivery and indefinite quantity for construction management and general architect-engineer services for facilities in Iraq with the US Army of Corps of Engineers Transatlantic Program Center.

Summary information of the affiliate follows:

(in thousands)	September 30, 2006		December 31, 2005
Current assets	$	4,467	$	3,650
Current liabilities		2,513		2,467
Working capital		1,954		1,183
Property and equipment, net		22		5
Members’ equity	$	1,976	$	1,188

	Three Months Ended				Nine Months Ended
	September 30, 2006		October 1, 2005		September 30, 2006		October 1, 2005
(in thousands)
Sales	$	5,241	$	3,770	$	12,572	$	9,970
Net income	$	993	$	822	$	1,598	$	1,677
Summary information of the Company’s ownership interest is as follows:
Equity in affiliate	$	331	$	274	$	533	$	559
Undistributed earnings included in consolidated retained earnings	$	331	$	274	$	655	$	559
Distributions from affiliate	$	-	$	-	$	270	$	618

Accounts Receivable - Affiliate

At September 30, 2006 and December 31, 2005 the Company reported receivables totaling $453,000 and $611,000, respectively, from SBH for work performed by the Company as a subcontractor to SBH. Such amounts were payable in accordance with the subcontract agreement between the Company and SBH.

Revenue Earned by the Company

Revenue from SBH pursuant to such subcontract agreement for the three-month periods ended September 30, 2006 and 2005 was $1,300,000 and $781,000, respectively and $2,600,000 and $2,500,000 for the nine-month periods ended September 30, 2006 and 2005, respectively.

Note 12 -Stock Options

On August 16, 2006, five-year options to purchase 5,000 shares of the Company's common stock were granted to each of the five non-employee members of the Company's Board of Directors. The options have an exercise price of $5.22 and are immediately vested and exercisable. The total value of the options was computed under the Black-Scholes method using a volatility rate of 44.1% and a risk-free interest rate of 4.81%. The value of the options of $59,000 has been recorded as directors’ compensation expense in general and administrative expense for the quarter ended September 30, 2006.

A summary of the status and changes of the stock options under the Company’s stock option plan as of September 30, 2006 and for the nine months then ended is as follows:

	Shares			Weighted-Average Exercise Price
Outstanding at December 31, 2005		3,417,990		$	1.02
Granted		25,000			5.22
Exercised		(3,369,713	)		.99
Forfeited		(48,277	)		3.08
Outstanding at September 30, 2006		25,000		$	5.22
Vested and exercisable at September 30, 2006		25,000		$	5.22

Note 13 -Warrants

The Company has 13,600,000 Redeemable Common Stock Purchase Warrants (the “Warrants”) issued and outstanding. Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing on June 28, 2006 (the completion of the Hill and Arpeggio merger) and expiring on June 23, 2008 (four years from the effective date of Arpeggio’s Offering). The Warrants are redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.

In connection with the Offering, Arpeggio issued an option for $100 to the representative of the underwriters to purchase 300,000 Units at an exercise price of $9.90 per Unit. The warrants underlying such Units are exercisable at $6.25 per share. The option expires in June 2009.

Note 14 -Due from Stockholder

From time to time the Company made cash advances to its principal stockholder. These advances were non-interest bearing, had no set repayment term and were classified in Stockholders’ Equity in the Condensed Consolidated Balance Sheets. The entire amount due from the Company’s principal stockholder of $1,008,000 was repaid to the Company on April 21, 2006. The Company has adopted a policy that no longer allows executive officers advances or loans.

Note 15 - Selling, General and Administrative Expenses

Legal expenses related to an investment transaction (the Tickets.com litigation) for the three and nine months ended September 30, 2006 and October 1, 2005 of $175,000 and $409,000 were included in “selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations. Such litigation was concluded in April 2004 resulting in an award against the Company and an entity controlled by the Chief Executive Officer of the Company (“the Other Defendant”) for court costs plus interest of approximately $575,000. The Chief Executive Officer and the Other Defendant have made full payment of this amount in October 2006. Accordingly, no amount has been provided for by the Company for this matter in the accompanying financial statements.

Also included in “selling, general and administrative expenses” in the Condensed Consolidated Statements of Operations is bad debt expense of $408,000 and $171,000 for the three-month periods ended September 30, 2006 and October 1, 2005, respectively and of $840,000 and $495,000 for the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.

Note 16 - Income Taxes

The effective tax rates for the three months ended September 30, 2006 and October 1, 2005 are 22% and 37% respectively and 23% and 37%, respectively for the nine months ended September 30, 2006 and October 1, 2005. The effective rate for the three and nine months ended September 30, 2006 is lower than in previous periods because a greater portion of the Company’s profit in the three and nine months ended September 30, 2006 came from foreign operations which are taxed at lower rates.

Note 17 -Business Segment Information

The Company’s business segments reflect how executive management makes resource decisions and assesses its performance. The Company bases these decisions on the type of services provided (Project Management and Construction Claims services) and secondarily by their geography (United States, Europe and Middle East).

The Project Management segment provides extensive construction and project management services to construction owners worldwide. Such services include program management, project management, construction management, project management oversight, staff augmentation, management consulting and estimating services.

The Construction Claims segment provides such services as claims consulting, litigation support, expert witness testimony, cost and damages assessment and delay and disruption analysis to clients worldwide.

The Company evaluates the performance of its segments primarily on operating income before corporate overhead allocations and income taxes.

For purposes of business segment information the assets, revenue and operating income for Knowles as of September 30, 2006 and for the month of September 2006 have been included in the Construction Claims business segment and the geographic region of Europe. The assets, revenue, and operating income of Knowles outside of Europe during the one month ended September 30, 2006 was immaterial.

The following tables reflect the required disclosures (in thousands) for the Company’s reportable segments:

(in thousands)
Revenue and Income from Operations
Three months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)

Project Management
Revenue	$	40,457	$	25,337
Income from operations pre-Corporate overhead allocation		4,531		3,905
Equity in affiliate		331		274
Less: Corporate overhead allocation		1,905		1,534
Operating income	$	2,957	$	2,645

Construction Claims
Revenue	$	9,409	$	4,428
Income from operations pre-Corporate overhead allocation		702		911
Less: Corporate overhead allocation		363		383
Operating income	$	339	$	528

Total Reportable Segments
Revenue	$	49,866	$	29,765
Income from operations pre-Corporate overhead allocation		5,233		4,816
Equity in affiliate		331		274
Less: Corporate overhead allocation		2,268		1,917
Operating income		3,296		3,173
Excess of corporate overhead allocations over (under) actual expenses		398		(164	)
Total Company - Operating income	$	3,694	$	3,009


(in thousands)
Depreciation and Amortization Expense
For the three-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)

Project Management	$	156	$	151
Construction Claim Services		192		41
Subtotal -Segments		348		192
Corporate		62		27
Total	$	410	$	219

(in thousands)
Revenue and Income from Operations
Nine months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)

Project Management
Revenue	$	111,317	$	69,306
Income from operations pre-Corporate overhead allocation		12,385		10,205
Equity in affiliate		533		559
Less: Corporate overhead allocation		5,817		4,694
Operating income	$	7,101	$	6,070

Construction Claims
Revenue	$	18,839	$	11,066
Income from operations pre-Corporate overhead allocation		1,881		1,562
Less: Corporate overhead allocation		1,108		1,173
Operating income (loss)	$	773	$	389

Total Reportable Segments
Revenue	$	130,156	$	80,372
Income from operations pre-Corporate overhead allocation		14,266		11,767
Equity in affiliate		533		559
Less: Corporate overhead allocation		6,925		5,867
Operating income		7,874		6,459
Excess of corporate overhead allocations over (under) actual expenses		109		(580	)
Total Company - Operating income	$	7,983	$	5,879


(in thousands)
Depreciation and Amortization Expense

For the nine-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
Project Management	$	504	$	389
Construction Claim Services		357		115
Subtotal -Segments		861		504
Corporate		171		157
Total	$	1,032	$	660

(in thousands) Total Assets As Of:	September 30, 2006		December 31, 2005
	(unaudited)		(audited)
United States	$	28,986	$	21,346
Europe		54,286		7,075
Middle East		19,453		12,302
Total	$	102,725	$	40,723

(in thousands)
The Company’s enterprise-wide disclosures are as follows:

Total Revenue By Service Type
For the three-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
Project Management	$	40,457	$	25,337
Construction Claims		9,409		4,428
Total	$	49,866	$	29,765

(in thousands)
Total Revenue By Geographic Region

For the three-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
United States	$	23,415	$	18,812
Europe		11,307		3,149
Middle East		15,144		7,804
Total	$	49,866	$	29,765


(in thousands)
Total Revenue By Client Type

For the three-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
U.S. federal government	$	4,394	$	4,038
State, local and quasi-governmental agencies		14,321		12,022
Foreign governments		8,547		4,409
Private sector		22,604		9,296
Total	$	49,866	$	29,765

(in thousands)
Total Revenue By Service Type

For the nine-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
Project Management	$	111,317	$	69,306
Construction Claims		18,839		11,066
Total	$	130,156	$	80,372

(in thousands)
Total Revenue By Geographic Region

For the nine-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
United States	$	65,945	$	51,241
Europe		22,105		10,227
Middle East		42,106		18,904
Total	$	130,156	$	80,372

(in thousands)
Total Revenue By Client Type

For the nine-months ended:	September 30, 2006		October 1, 2005
	(unaudited)		(unaudited)
U.S. federal government	$	12,499	$	13,784
State, local and quasi-governmental agencies		41,305		29,305
Foreign governments		21,343		14,439
Private sector		55,009		22,844
Total	$	130,156	$	80,372

(in thousands)
Property, Plant and Equipment, Net by Geographic Location

As of:	September 30, 2006		December 31, 2005
	(unaudited)		(audited)
United States	$	1,813	$	1,832
Europe		2,847		283
Middle East		1,010		727
Total	$	5,670	$	2,842

Note 18 -Concentrations

The Company has two clients that collectively account for a total of 29% of total revenue, and 17% of revenue less reimbursable expenses (“RLRE”), for the three-month period ended September 30, 2006 and one client that accounted for 20% of total revenue and 4% of RLRE, during the three-month period ended October 1, 2005.

The Company has two clients that collectively account for 31% of total revenue, and 18.6% of RLRE, for the nine-month period ended September 30, 2006 and one client that accounted for 14% of total revenue and 3% of RLRE, during the nine-month period ended October 1, 2005.

The Company has no clients that account for at least 10% of accounts receivable at September 30, 2006 and one client that accounted for 15% of accounts receivable as of December 31, 2005.

The Company has several contracts with U.S. federal government agencies that account for 9% and 14% of total revenue during the three-month periods ended September 30, 2006 and October 1, 2005, respectively.

The Company has several contracts with U.S. federal government agencies that account for 10% and 17% of total revenue during the nine-month periods ended September 30, 2006 and October 1, 2005, respectively.

Note 19-Commitments and Contingencies

Litigation

On September 23, 1996, William Hughes General Contractors, Inc. (“Hughes”) filed a complaint in the Superior Court of New Jersey, Law Division, Gloucester County, against the Monroe Township Board of Education, the Company and other parties, alleging breach of contract and other causes of action in connection with its performance of a construction project for Monroe Township, seeking in excess of $3,500,000 in damages. Monroe Township, which had terminated Hughes from the construction project prior to the commencement of the litigation on the basis of Hughes’ performance, made a cross claim against the Company and other parties for contribution and indemnification. Monroe Township is seeking approximately $89,000 in damages from the Company, in addition to an indemnification for Hughes’ claims. In relation to the Hughes claims, a claim was made against the Company by Fidelity and Deposit Company of Maryland (“F&D”). F&D is claiming damages in the range of $425,000 to $470,000. The F&D claim is being defended by the New Jersey Professional Liability Insurance Guarantee Association (NJPLIGA) and losses are covered up to $300,000. The Company believes that the claims of Hughes, Monroe Township and F&D are without merit.

On September 22, 1999, Wartsila NSD North America, Inc. filed a complaint against the Company in the United States District Court for the District of New Jersey. Wartsila alleged negligence, breach of contract and fraud against the Company in connection with plaintiff’s hiring of a former Company employee and sought damages in excess of $7,300,000. A jury verdict was rendered on March 6, 2006. The jury found that the Company was negligent and breached the contract with plaintiff but that the Company did not commit fraud. The jury established damages at $2,000,000. The Company filed a Motion to Mold the Verdict and to Enter Judgment consistent with the parties’ contract which contains a limitation of liability clause which limits the Company’s liability, absent fraud, to direct damages. On March 28, 2006, the Court entered judgment in the case on the jury’s verdict in the amount of $2,000,000 plus pre-judgment interest, but the Court stayed enforcement of that judgment pending the decision on the Company’s Motion to Mold the Verdict. In connection with the Arpeggio and Hill merger described in Note 1 to the Condensed Consolidated Financial Statements, stockholders of the pre-merger Hill International, Inc. have escrowed a total 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters. Liability in this matter in excess of amounts accrued as of September 30, 2005 will be satisfied from such escrowed shares. Following the satisfaction of its indemnification claims arising out of this matter, the Company intends to maintain such shares as treasury stock. On June 28, 2006 the Court denied the Company’s motion and the Company subsequently filed a Notice of Appeal on July 26, 2006 with the Third Circuit Court of Appeals. The Company has posted a letter of credit securing the judgment and pre- and post-judgment interest in the amount of $3,350,000 secured by cash collateral and included in “cash-restricted” on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2006. The Company also recorded a corresponding accrued liability in the amount of $3,350,000 included in “accrued liabilities” on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2006. See Note 10. From the shares held in escrow, shares totaling 632,075 representing $3,335,000 has been allocated to the Company for satisfaction of the judgment and will be placed in treasury stock once the judgment is paid.

On April 27, 1999, Dirk Epperson and Betty Schneider filed a complaint in the United States District Court of Connecticut against the Company seeking to enforce against the Company and others a default judgment against HAESI Software, Inc. (“HAESI”) in the approximate amount of $423,000. Plaintiff alleged that the Company was the alter ego of HAESI and is liable for its debts and that the Company engaged in a fraudulent transfer of HAESI to a third party. The court dismissed the fraudulent conveyance case and on December 12, 2005 the Second Circuit denied plaintiffs’ appeal of the dismissal. On March 21, 2006, the plaintiff filed a Petition for Writ of Certiorari with the United States Supreme Court which was denied on May 22, 2006. The Company believes that the plaintiffs’ remaining claim is without merit.

On May 28, 2004, Sims Group, Inc. (“Sims”) filed a Demand for Arbitration with the American Arbitration Association alleging breach of contract against the Company. The plaintiff was a subcontractor to the Company and sought the alleged contract balance owed of $1,300,000. The Company filed a counterclaim on July 2, 2004 alleging fraud and breach of contract. This matter was arbitrated during April 2006 and an arbitration award was issued on June 28, 2006 awarding Sims $1,250,000 plus costs of $33,000. The Company had accrued a liability of $772,000 related to this matter prior to September 30 2005. In connection with the Arpeggio and Hill merger described in Note 1 to the Consolidated Financial Statements, stockholders of the pre-merger Hill International, Inc. have escrowed 1,450,000 shares of the Company’s stock to satisfy non-tax indemnification claims by the Company arising out of this and certain other matters. Liability in this matter in excess of amounts accrued as of September 30, 2005 will be satisfied from such escrowed shares. Following the satisfaction of its indemnification claims arising out of this matter, the Company intends to maintain such shares as treasury stock. In October 2006, the Company made a payment of $1,300,000 to claimant to satisfy this matter. See Notes 1 and 10. From the shares held in escrow, shares totaling 97,316 representing $515,777 has been allocated to the Company for satisfaction of the judgment and will be placed in treasury stock once the judgment is paid.

Litigation related to an investment made by the Company (the “Tickets.com litigation”) was concluded in April 2004 and resulted in an award against the Company and R4 Holdings, LLC (“R4”) for legal court costs plus interest of approximately $575,000. R4 is 100% owned and controlled by Irvin E. Richter, the Company’s Chief Executive Officer. The Company and R4 appealed this ruling and on June 20, 2006 the appeal was denied. R4 and Mr. Richter have made full payment of this amount in October 2006.

General Litigation

From time to time, the Company is a defendant or plaintiff in various legal actions which arise in the normal course of business. As such the Company is required to assess the likelihood of any adverse