**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

## **FORM 10-QSB**

## ** **

**(Mark One)**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

# **For thequarterly period ended June 30, 2005.**

#  

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                     to                     **

 

## **CommissionFile Number 0-31152**

## ** **

**CRDENTIA CORP.**

(Exact name of small business issuer as specified in its charter)

 
| **Delaware**(State or other jurisdiction of  incorporation or organization) | ** ** | **76-0585701**  (IRS Employer Identification No.) |
|-----------------------------------------------------------------------------|------------|---------------------------------------------------|

 

**14114 Dallas Parkway, Suite 600, Dallas,Texas 75254**

(Address of principal executive offices)

 

**(972) 850-0780**

(Issuer’s telephone number)

 

30,541,694 shares of Common Stock,$.0001 par value, outstanding on July 28, 2005.

 

Transitional Small Business Disclosure Format (check one):  Yes  o    No  ý

 

 

----

 

**CRDENTIA CORP.**

 

Form 10-QSB Quarterly Report

For Quarterly Period Ended June 30, 2005

 

**Table of Contents**

 
| **PART I  — FINANCIAL INFORMATION** |                                                                                                                              | 3      |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
|                                          |                                                                                                                              |   |
| Item  1.                                      | Unaudited  Condensed Consolidated Financial Statements                                                                            |   | 3 |
|                                          |                                                                                                                              |   |   |
|                                          | Unaudited Condensed  Consolidated Balance Sheets at June 30, 2005 and December 31, 2004                                 |   | 3 |
|                                          |                                                                                                                              |   |   |
|                                          | Unaudited Condensed Consolidated  Statements of Operations for the Three Months and Six Months Ended  June 30, 2005 and 2004 |   | 4 |
|                                          |                                                                                                                              |   |   |
|                                          | Unaudited Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 30, 2005 and 2004                   |   | 5 |
|                                          |                                                                                                                              |   |   |
|                                          | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                   |   | 6 |
|                                          |                                                                                                                              |   |   |
| Item 2.                                       | Management’s  Discussion and Analysis or Plan of Operation                                                                   |   | 21 |
|                                          |                                                                                                                              |   |   |
| Item 3.                                       | Controls  and Procedures                                                                                                          |   | 37 |
|                                          |                                                                                                                              |   |
| **PART II  — OTHER INFORMATION**    |                                                                                                                              | 38     |
|                                          |                                                                                                                              |   |
| Item 1.                                       | Legal  Proceedings                                                                                                                |   | 38 |
|                                          |                                                                                                                              |   |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                      |   | 38 |
|                                          |                                                                                                                              |   |   |
| Item 6.                                       | Exhibits                                                                                                                          |   | 38 |
|                                          |                                                                                                                              |   |
| **SIGNATURES**                                |                                                                                                                              | 41     |
|                                               |                                                                                                                                   |        |  |  |

 

2

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**PART I FINANCIAL INFORMATION**

 

**Item 1.  Unaudited Condensed Consolidated FinancialStatements**

 

**CRDENTIACORP.**

**UnauditedCondensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Current assets:                                                                                                                                                                                                                                                |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                     |       | $                       | 471,336    |                        | $          | 362,472 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $99,838 in 2005 and  $114,957 in 2004                                                                                                                                                          |       | 4,283,456               |       | 2,908,403                   |       |
| Unbilled  receivables                                                                                                                                                                                                                                          |       | 661,389                 |       | 303,626                     |       |
| Other current  assets                                                                                                                                                                                                                                          |       | 831,686                 |       | 495,579                     |       |
| Total current  assets                                                                                                                                                                                                                                          |       | 6,247,867               |       | 4,070,080                   |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Property and  equipment, net                                                                                                                                                                                                                                   |       | 376,468                 |       | 293,600                     |       |
| Goodwill                                                                                                                                                                                                                                                       |       | 22,717,026              |       | 12,974,973                  |       |
| Intangible assets,  net                                                                                                                                                                                                                                        |       | 2,494,769               |       | 1,660,717                   |       |
| Other assets                                                                                                                                                                                                                                                   |       | 704,652                 |       | 837,061                     |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                                                                                   |       | $                       | 32,540,782 |                        | $          | 19,836,431 |   |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                                                                                                                                         |       | $                       | 1,183,630  |                        | $          | 2,523,069 |   |
| Accrued  dividends on convertible preferred stock                                                                                                                                                                                                              |       | —                  |       | 1,027,254                   |       |
| Accrued employee  compensation and benefits                                                                                                                                                                                                                    |       | 898,175                 |       | 554,945                     |       |
| Revolving lines  of credit                                                                                                                                                                                                                                     |       | 3,877,824               |       | 2,521,598                   |       |
| Current portion  of note payable to lender, net of discount                                                                                                                                                                                                    |       | —                  |       | 2,049,816                   |       |
| Note payable to  stockholder                                                                                                                                                                                                                                   |       | —                  |       | 400,000                     |       |
| Current portion  of notes payable to sellers                                                                                                                                                                                                                   |       | 844,484                 |       | 184,948                     |       |
| Other current  liabilities                                                                                                                                                                                                                                     |       | 540,803                 |       | 100,017                     |       |
| Subordinated  convertible note, net of discount                                                                                                                                                                                                                |       | 37,500                  |       | 50,000                      |       |
| Total current  liabilities                                                                                                                                                                                                                                     |       | 7,382,416               |       | 9,411,647                   |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Note payable to  lender, less current portion, net of discount                                                                                                                                                                                                 |       | 2,177,366               |       | —                      |       |
| Long term bonus  payable                                                                                                                                                                                                                                       |       | 930,143                 |       | 884,962                     |       |
| Notes payable to  sellers, less current portion                                                                                                                                                                                                                |       | 2,417,798               |       | —                      |       |
| Other long-term  liabilities                                                                                                                                                                                                                                   |       | 21,096                  |       | 33,045                      |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total  liabilities                                                                                                                                                                                                                                             |       | 12,928,819              |       | 10,329,654                  |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                                                                 |       |                    |       |                        |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Convertible  preferred stock, 10,000,000 shares authorized:                                                                                                                                                                                                    |       |                    |       |                        |       |
| Series B  convertible preferred stock $0.0001 par value, no shares outstanding at 2005  and 3,750,000 shares outstanding at 2004 (liquidation preference of $750,000  in 2004)                                                                            |       | —                  |       | 750,000                     |       |
| Series B-1  convertible preferred stock $0.0001 par value, no shares outstanding at 2005  and 93,043 shares outstanding at 2004 (liquidation preference of $5,582,580  in 2004)                                                                           |       | —                  |       | 30,123,400                  |       |
| Series C  convertible preferred stock $0.0001 par value, 183,028 shares outstanding at  2005 and 52,501 shares outstanding at 2004 (liquidation preference of  $54,908,400 in 2005 and $15,750,300 in 2004)                                               |       | 10,023,948              |       | 1,070,510                   |       |
| Series C  preferred stock warrants                                                                                                                                                                                                                        |       | 839,555                 |       | 2,079,910                   |       |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Stockholders’  equity (deficit):                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Common stock,  par value $0.0001, 150,000,000 shares authorized in 2005 and 50,000,000  shares authorized in 2004, 31,610,580 shares issued and 30,534,174 shares  outstanding in 2005 and 14,202,883 shares issued and 13,126,477 shares  outstanding in 2004 |       | 3,161                   |       | 1,420                       |       |
| Additional paid  in capital                                                                                                                                                                                                                                    |       | 112,083,214             |       | 68,447,288                  |       |
| Treasury stock,  1,076,406 shares at cost                                                                                                                                                                                                                      |       | —                  |       | —                      |       |
| Deferred  non-cash stock compensation                                                                                                                                                                                                                          |       | (6,668,412              | )          | (648,746                    | )          |
| Accumulated  deficit                                                                                                                                                                                                                                           |       | (96,669,503             | )          | (92,317,005                 | )          |
| Total  stockholders’ equity (deficit)                                                                                                                                                                                                                     |       | 8,748,460               |       | (24,517,043                 | )          |
|                                                                                                                                                                                                                                                           |       |                    |       |                        |       |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                                                                                                     |       | $                       | 32,540,782 |                        | $          | 19,836,431 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

3

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**CRDENTIA CORP.**

**Unaudited Condensed Consolidated Statements of Operations**

** **
| ** **                                                                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                              | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue from  services                                                                                  |       | $                                    | 9,207,508  |                               | $          | 5,489,946 |   | $ | 14,329,821 |   | $ | 11,707,498 |   |
| Direct operating  expenses                                                                              |       | 7,110,117                            |       | 4,307,653                          |       | 11,158,937 |   | 9,255,370 |   |
| Gross profit                                                                                            |       | 2,097,391                            |       | 1,182,293                          |       | 3,170,884 |   | 2,452,128 |   |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Operating  expenses:                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Selling,  general, and administrative expenses                                                          |       | 2,175,271                            |       | 2,141,755                          |       | 3,891,151 |   | 4,205,679 |   |
| Non-cash stock  based compensation                                                                      |       | 191,488                              |       | 142,808                            |       | 270,334 |   | 159,455 |   |
| Total operating expenses                                                                                |       | 2,366,759                            |       | 2,284,563                          |       | 4,161,485 |   | 4,365,134 |   |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Loss from  operations                                                                                   |       | (269,368                             | )          | (1,102,270                         | )          | (990,601 | ) | (1,913,006 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Interest  expense, net                                                                                  |       | (474,884                             | )          | (547,645                           | )          | (998,918 | ) | (999,109 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Loss before income  taxes                                                                               |       | (744,252                             | )          | (1,649,915                         | )          | (1,989,519 | ) | (2,912,115 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Income tax  expense                                                                                     |       | —                               |       | —                             |       | — |   | — |   |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                                                                                |       | $                                    | (744,252   | )                                  | $          | (1,649,915 | ) | $ | (1,989,519 | ) | $ | (2,912,115 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Deemed dividend  related to beneficial conversion feature on Series A convertible  preferred stock |       | —                               |       | (1,000,000                         | )          | — |   | (1,000,000 | ) |
| Deemed dividend  related to beneficial conversion feature on Series B convertible  preferred stock |       | —                               |       | (1,250,000                         | )          | — |   | (1,250,000 | ) |
| Non-cash  preferred stock dividends                                                                     |       | (200,792                             | )          | —                             |       | (2,362,979 | ) | — |   |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net loss  attributable to common stockholders                                                           |       | $                                    | (945,044   | )                                  | $          | (3,899,915 | ) | $ | (4,352,498 | ) | $ | (5,162,115 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted loss per common share attributable to common stockholders                            |       | $                                    | (0.04      | )                                  | $          | (0.62 | ) | $ | (0.22 | ) | $ | (0.82 | ) |
|                                                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                   |       | 26,714,621                           |       | 6,288,166                          |       | 20,210,893 |   | 6,283,759 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

4

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**CRDENTIACORP.**

**UnauditedCondensed Consolidated Statements of Cash Flows**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Operating  activities**                                                    |       |                               |       |   |   |
| Net loss                                                                     |       | $                                  | (1,989,519 | ) | $ | (2,912,115 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                               |       |   |   |
| Amortization of  subordinated convertible note discounts                     |       | —                             |       | 439,446 |   |
| Amortization of  lender note discounts                                       |       | 127,550                            |       | — |   |
| Amortization of  debt issue costs                                            |       | 145,121                            |       | 73,499 |   |
| Amortization of  long-term bonus payable                                     |       | 45,181                             |       | 40,976 |   |
| Non-cash stock  based expense related to short-term borrowings               |       | 162,500                            |       | — |   |
| Depreciation and  amortization                                               |       | 382,882                            |       | 483,901 |   |
| Bad debt expense                                                             |       | —                             |       | (95,085 | ) |
| Non-cash stock  based compensation                                           |       | 270,334                            |       | 159,455 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions |       |                               |       |   |   |
| Accounts  receivable                                                         |       | (330,206                           | )          | (33,706 | ) |
| Unbilled  receivables                                                        |       | (357,763                           | )          | 64,411 |   |
| Other assets and  liabilities                                                |       | 166,281                            |       | (304,890 | ) |
| Accounts payable  and accrued expenses                                       |       | (1,489,439                         | )          | 350,627 |   |
| Accrued employee  compensation and benefits                                  |       | 375,900                            |       | (74,605 | ) |
| Net cash used in  operating activities                                       |       | (2,491,178                         | )          | (1,808,086 | ) |
|                                                                         |       |                               |       |   |   |
| **Investing  activities**                                                    |       |                               |       |   |   |
| Purchases of  property and equipment                                         |       | (25,907                            | )          | (127,887 | ) |
| Cash paid for  acquisition of subsidiaries, net of cash received             |       | (4,939,180                         | )          | (43,089 | ) |
| Other                                                                        |       | 9,505                              |       | 51,163 |   |
| Net cash used in  investing activities                                       |       | (4,955,582                         | )          | (119,813 | ) |
|                                                                         |       |                               |       |   |   |
| **Financing  activities**                                                    |       |                               |       |   |   |
| Issuance of  preferred stock                                                 |       | —                             |       | 2,250,000 |   |
| Exercise of  warrants for Series C preferred stock, net of expenses     |       | 7,713,083                          |       | — |   |
| Net increase  (decrease) in revolving lines of credit                        |       | 414,836                            |       | (2,871,890 | ) |
| Repayment of  subordinated convertible note                                  |       | (12,500                            | )          | — |   |
| Proceeds from  notes payable to majority stockholder                         |       | 1,050,000                          |       | — |   |
| Repayment of  notes payable to majority stockholder                          |       | (1,450,000                         | )          | — |   |
| Proceeds from  notes payable to lender                                       |       | —                             |       | 2,767,527 |   |
| Repayment of  note payable to lender                                         |       | —                             |       | (835,356 | ) |
| Repayment of notes  payable to sellers                                       |       | (138,156                           | )          | (506,448 | ) |
| Debt issuance  costs                                                         |       | (21,639                            | )          | (258,648 | ) |
| Net cash  provided by financing activities                                   |       | 7,555,624                          |       | 545,185 |   |
|                                                                         |       |                               |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 108,864                            |       | (1,382,714 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 362,472                            |       | 1,469,076 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                  | 471,336    |   | $ | 86,362 |   |

 

The accompanying notes are anintegral part of these unaudited condensed consolidated financial statements.

 

5

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**CRDENTIA CORP.NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2005**

 

**Note 1.  Organization and Summaryof Significant Accounting Policies**

 

Organization

 

Crdentia Corp(the “Company”), a Delaware corporation, is a provider of healthcare staffingservices in the United States.  Suchservices include travel nursing, per diem staffing, contractual clinicalservices and private duty home health care. The Company considers theseservices to be one segment. Each of these services relate solely to providinghealthcare staffing to customers and the Company utilizes common procedures,processes and similar methods of identifying and serving these customers.

 

At thebeginning of 2003, the Company was a development stage company with nocommercial operations. During that year, the Company pursued its operationalplan of acquiring companies in the healthcare staffing field and completed theacquisition of four operating companies. The companies acquired in 2003 — BakerAnderson Christie, Inc., New Age Nurses, Inc., Nurses Network, Inc.,and PSR Nurses, Ltd. (through the acquisition of PSR Nurses Holdings Corp. andPSR Nurse Recruiting, Inc., which hold the limited partner and generalpartner interests in PSR Nurses, Ltd.) — provide the foundation for futuregrowth. During 2004, the Company completed the acquisitions of Arizona HomeHealth Care/Private Duty, Inc. and Care Pros Staffing, Inc. On March 29,2005, the Company acquiredTravMed USA, Inc.and Health Industry Professionals, LLC. On May 4, 2005, the Companyacquired Prime Staff, LP and Mint Medical Staffing Odessa.

 

Theaccompanying financial statements include the results of the wholly-ownedsubsidiaries discussed above from their respective dates of acquisition.  All intercompany transactions have beeneliminated in consolidation.

 

Basisof Presentation

 

Theaccompanying unaudited financial data as of and for the three and six monthsended June 30, 2005 and 2004 have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. These unaudited condensed consolidated financialstatements should be read in conjunction with the audited financial statementsand the notes thereto included in the Company’s annual Report on Form 10-KSBfor the year ended December 31, 2004.

 

In the opinionof management, all adjustments (which include only normal recurringadjustments) necessary to present fairly the financial position, results ofoperations, and cash flows as of and for the three and six months ended June 30,2005 have been made. The results of operations for the six months ended June 30,2005 are not necessarily indicative of the operating results for the full year.

 

6

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Liquidity

 

The Company generated anet loss of $1,989,519 for the six months ended June 30, 2005 and usedcash in operations of $2,491,178 during the first six months of 2005.  Additionally, although the Company ended thefirst six months of 2005 with a working capital deficit of $1.1 million, theCompany was able to secure additional funding during 2004 and the first twoquarters of 2005 to finance its operations as it continues to execute itsbusiness plan to acquire and grow companies involved in healthcarestaffing.  As discussed in Note 8, in March 2005the Company’s majority stockholder exercised warrants to purchase 108,333shares of Series C Convertible Preferred Stock providing $6.4 million tothe Company.  Also, as discussed in Note8, in May 2005 the Company’s majority stockholder exercised warrants topurchase 22,187 shares of Series C Convertible Preferred Stock providing$1.3 million to the Company.  Theinfusion of $7.7 million into the Company enabled it to acquire additionalcompanies and to retire certain liabilities. Also, following the threeacquisitions discussed in Note 2, the Company increased its borrowings underits accounts receivable line, but at June 30, 2005, there is no additionalborrowing availability under this line. In August 2005, additional short-term funding of $300,000 in theform of an over-advance on the accounts receivable line was secured from BridgeHealthcare Finance, LLC.  The Companywill need to raise additional funds before calendar year end 2005 or pursueother strategic options to fund operations or to allow the Company to executeits business plan.

 

Thereis no assurance that the Company will be able to raise the amount of debt orequity capital required to meet its objectives. If additional debt or equity capital is not readily available, theCompany will be forced to scale back its acquisition activities and itsoperations until income exceeds expenses. This would result in an overall slowdown of the Company’s development.

 

Stock-BasedCompensation

 

As permitted underthe provisions of Statement of Financial Accounting Standard (SFAS) No. 123,*Accounting for Stock-Based Compensation*,the Company continues to account for employee stock-based transactions under Accounting PrinciplesBoard Opinion (APB) No. 25, *Accounting for StockIssued to Employees*. However, SFAS 123 requires the Company todisclose pro forma net loss and loss per share as if the fair value method hadbeen adopted.  Under the fair valuemethod, compensation cost is measured at the grant date based on the fair valueof the award and is recognized over the service period, which is usually thevesting period.  For non-employees, costis also measured at the grant date, using the fair value method, but is actuallyrecognized in the financial statements over the vesting period or immediatelyif no further services are required.

 

If the Companyhad elected the fair value method of accounting for employee stock-basedcompensation, compensation cost would be accrued at the estimated fair value ofthe stock award grants over the service period, regardless of later changes instock prices and price volatility.  Thedate of grant fair values for options granted have been estimated based on theBlack-Scholes pricing model.

 

7

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The tablebelow shows net loss per share attributable to common stockholders for thethree and six months ended June 30, 2005 and 2004 as if the Company hadelected the fair value method of accounting for stock options.

 
| ** **                                                                                                                | ** ** | **Three   Months   Ended   June 30,  2005** | ** ** | **Three   Months   Ended   June 30,  2004** | ** ** | **Six   Months   Ended   June 30,  2005** | ** ** | **Six   Months   Ended   June 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
|                                                                                                                      |       |                                             |       |                                             |       |                                           |       |                                           |       |
| Net loss  attributable to common stockholders as reported                                                                 |       | $                                                | (945,044   | )                                                | $          | (3,899,915                                     | )          | $                                              | (4,352,498 | ) | $ | (5,162,115 | ) |
| Add: stock-based  employee compensation in reported net loss, net of related tax effects                                  |       | 191,488                                          |       | 142,808                                          |       | 270,334                                        |       | 159,455                                        |       |
|                                                                                                                      |       |                                             |       |                                             |       |                                           |       |                                           |       |
| Deduct:  stock-based employee compensation determined under fair value method for all  awards, net of related tax effects |       | (232,789                                         | )          | (134,546                                         | )          | (325,023                                       | )          | (208,090                                       | )          |
|                                                                                                                      |       |                                             |       |                                             |       |                                           |       |                                           |       |
| Proforma net  loss attributable to common stockholders, as adjusted                                                       |       | $                                                | (986,345   | )                                                | $          | (3,891,653                                     | )          | $                                              | (4,407,187 | ) | $ | (5,210,750 | ) |
|                                                                                                                      |       |                                             |       |                                             |       |                                           |       |                                           |       |
| Loss per share  attributable to common stockholders:                                                                      |       |                                             |       |                                             |       |                                           |       |                                           |       |
| Basic and  diluted, as reported                                                                                           |       | $                                                | (.04       | )                                                | $          | (.62                                           | )          | $                                              | (.21       | ) | $ | (.82 | ) |
| Basic and  diluted, as adjusted                                                                                           |       | $                                                | (.04       | )                                                | $          | (.62                                           | )          | $                                              | (.21       | ) | $ | (.83 | ) |

 

EarningsPer Share

 

Basic pershare data has been computed on the loss attributable to common stockholdersfor each period divided by the weighted average number of shares of commonstock outstanding for each period (excluding the restricted common stock issuedto certain officers in May 2005 as discussed in Note 9).   Diluted earnings per common share includeboth the weighted average number of common shares and any common shareequivalents such as convertible securities, options or warrants in thecalculation.  As the Company recorded netlosses for the three months and six months ended June 30, 2005 and 2004,common share equivalents outstanding would be anti-dilutive, and as such, havenot been included in diluted weighted average shares outstanding.  Common share equivalents that were excludedin the June 30, 2005 calculations totaled 41,616,024.

 

NewAccounting Pronouncements

 

On December 16, 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123 (revised 2004), *Share-Based Payment*,which is a revision of SFAS No. 123, *Accounting for*

 

8

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*Stock-Based Compensation*. Statement 123R supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  Generally, the approach in Statement 123R issimilar to the approach described in Statement 123.  However, Statement 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer analternative.  The Company expects toadopt Statement 123R on January 1, 2006.

 

The Company is evaluating the impact of adopting SFAS 123R and expectsthat it will record non-cash stock compensation expense.  The adoption of SFAS 123R is not expected tohave a significant effect on the Company’s financial condition or cash flowsbut is expected to have an effect on the company’s results of operations.  The future impact of the adoption of SFAS123R cannot be predicted at this time because it will depend on the levels ofshare-based payments granted by the Company in the future.  However, had the Company adopted SFAS 123R inprior periods, the impact of the standard would have approximated the impact ofSFAS 123 as described in the pro forma net loss attributable to commonstockholders included in the Stock-Based Compensation policy footnote.

 

**Note 2. Acquisitions**

 

TravMed USA, Inc.

 

OnMarch 29, 2005, the Company acquired TravMed USA, Inc. (“TravMed”) inexchange for $3,215,490 in cash, $3,215,490 in notes payable, and $103,261 ofnet acquisition costs. The primary purpose of the acquisition was to enable theCompany to expand its market share in the nurse staffing industry. Thefollowing table summarizes the assets acquired and liabilities assumed as ofthe closing date:

 

| Tangible assets  acquired           |   | $         | 1,189,471 |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Customer related  intangible assets |   | 492,000   |      |
| Goodwill                            |   | 5,894,160 |      |
| Total assets  acquired              |   | 7,575,631 |      |
| Liabilities assumed                 |   | 1,041,390 |      |
| Net assets  acquired                |   | $         | 6,534,241 |   |

 

Theacquisition was accounted for using the purchase method of accounting. Customerrelated intangible assets will be amortized over their estimated useful life offive years.  The purchase price allocatedto customer relationships was determined by management’s estimate based on aconsistent model for all acquisitions developed by a professional valuationgroup.  Goodwill represents the excess ofmerger consideration over the fair value of assets acquired. The Company willbe required to issue shares of its Common Stock to the former stockholders ofTravMed should its results of operations exceed performance standardsestablished in the merger agreement.  Thegoodwill acquired may not be amortized for federal income tax purposes.

 

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Health Industry Professionals, LLC

 

On March 29, 2005, the Company acquired Health Industry Professionals, LLC (HIP) in exchange for $1,350,900 in cash, 1,283,684 shares of the Company’s Common Stock valued at $2,601,600, (determined by the average of $2.03 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date),  and $78,695 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing market.  The following table summarizes the assets acquired and liabilities assumed as of the closing date:

 

| Tangible assets  acquired           |   | $         | 44,000    |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Customer related  intangible assets |   | 342,000   |      |
| Goodwill                            |   | 3,695,195 |      |
| Total assets  acquired              |   | 4,081,195 |      |
| Liabilities  assumed                |   | 50,000    |      |
| Net assets  acquired                |   | $         | 4,031,195 |   |

 

The acquisition was accounted for using the purchase method of accounting.  Customer related intangible assets will be amortized over their estimated useful life of five years.  The purchase price allocated to customer relationships was determined by management’s estimate based on a consistent model for all acquisitions developed by a professional valuation group.  Goodwill represents the excess of merger consideration over the fair value of assets acquired. The Company will be required to issue shares of its Common Stock to the former stockholders of HIP should its results of operations exceed performance standards established in the merger agreement.****The goodwill acquired may not be amortized for federal income tax purposes.

 

Prime Staff, LP and Mint Medical Staffing Odessa

 

On May 4, 2005, the Company acquired Prime Staff, LP and Mint Medical Staffing Odessa in exchange for $150,000 in cash, 165,042 shares of the Company’s Common Stock valued at $287,264 (determined by the average of $1.74 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date),  and $49,400 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing market.  The following table summarizes the assets acquired and liabilities assumed as of the closing date:

 

| Tangible assets  acquired           |   | $       | 33,400  |   |
|-------------------------------------|--------|---------|---------|--------|
| Customer related  intangible assets |   | 292,000 |    |
| Goodwill                            |   | 161,264 |    |
| Total assets  acquired              |   | 486,664 |    |
| Liabilities  assumed                |   | —  |    |
| Net assets  acquired                |   | $       | 486,664 |   |

 

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The acquisition was accounted for using the purchase method of accounting.  Customer related intangible assets will be amortized over their estimated useful life of five years.  The purchase price allocated to customer relationships was determined by management’s estimate based on a consistent model for all acquisitions developed by a professional valuation group.  Goodwill represents the excess of merger consideration over the fair value of assets acquired.  The goodwill acquired may not be amortized for federal income tax purposes.

 

Unaudited Pro Forma Summary Information

 

The following unauditedpro forma summary approximates the consolidated results of operations as if allacquisitions (including 2004 acquisitions) had occurred as of the beginning ofeach period presented, after giving effect to certain adjustments, includingamortization of specifically identifiable intangibles and interestexpense.  The pro forma financialinformation does not purport to be indicative of the results of operations thatwould have occurred had the transactions taken place at the beginning of theperiods presented or of future results of operations.

 
| ** **                                                                       | ** ** | **Three Months   Ended   June 30,  2005** | ** ** | **Three Months   Ended   June 30,  2004** | ** ** | **Six Months   Ended   June 30,  2005** | ** ** | **Six Months   Ended   June 30,  2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Revenue from  services                                                           |       | $                                              | 9,908,813  |                                           | $          | 13,960,672                                   |       | $                                            | 20,614,942 |   | $ | 28,648,953 |   |
|                                                                             |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Net loss                                                                         |       | (770,170                                       | )          | (1,267,116                                     | )          | (1,723,356                                   | )          | (2,147,117                                   | )          |
|                                                                             |       |                                           |       |                                           |       |                                         |       |                                         |       |
| Net loss  attributable to common stockholders                                    |       | (970,962                                       | )          | (3,517,116                                     | )          | (4,086,335                                   | )          | (4,397,117                                   | )          |
| Basic and  diluted net loss per common share attributable to common stockholders |       | (.04                                           | )          | (.44                                           | )          | (.20                                         | )          | (.55                                         | )          |
| Weighted-average  shares of common stock outstanding (basic and diluted)         |       | 26,776,285                                     |       | 7,936,892                                      |       | 20,940,980                                   |       | 7,932,485                                    |       |
|                                                                                  |            |                                                |            |                                                |            |                                              |            |                                              |            |  |  |  |  |

 

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**Note 3.  Accounts Payable andAccrued Expenses**

 

Accounts payable and accrued expenses consist of the following:

 

| ** **       | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------|------------|-------------------------|------------|-----------------------------|------------|
|             |       |                    |       |                        |       |
| Accounts payable |       | $                       | 565,815    |                        | $          | 1,815,778 |   |
| Accrued expenses |       | 617,815                 |       | 707,291                     |       |
|             |       |                    |       |                        |       |
|             |       | $                       | 1,183,630  |                        | $          | 2,523,069 |   |

 

**Note 4.  Revolving Line of Credit**

 

On June 16, 2004, the Company entered into a Loan and SecurityAgreement with Bridge Healthcare Finance, LLC, pursuant to which the Companyobtained a revolving credit facility up to $15,000,000 (the “Loan”).  During the first quarter of 2005, therevolving line of credit facility was reduced to $10,000,000 permitting theCompany to lower its effective interest rate through lower unused line fees.  The Loan has a term of three years and bearsinterest at a rate equal to the greater of three percent (3.0%) per annum overthe prime rate or nine and one-half percent (9.5%) per annum (9.5% at June 30,2005).  Interest is payable monthly.  Accounts receivable serves as security forthe Loan and the Loan is subject to certain financial and reportingcovenants.  Customer payments are used torepay the advances on the credit facility after deducting charges for interestexpense, unused line and account management fees.  Except in certain limited circumstances, theLoan cannot be prepaid in full without the Company incurring a significantprepayment penalty.  The financialcovenants are for the maintenance of minimum tangible net worth, minimum debtservice coverage ratios, minimum EBITDA, maximum capital expenditure limits andmaximum operating lease obligations.* *In May 2005, the covenantswere restructured and, at June 30, 2005, the Company was in compliancewith the restructured covenants.  TheLoan includes events of default (with grace periods as applicable) and providesthat, upon the occurrence of certain events of default, payment of all amountspayable under the Loan, including the principal amount of, and accrued intereston, the Loan may be accelerated.  Thereare also cross default provisions between the Loan and the Term Loan discussedin note 5.  The outstanding balance onthe Loan is $3,877,824 at June 30, 2005, which represents the totalavailability under the line relative to the amount of receivables outstandingat that date

 

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**Note 5.  Notes Payable to Lender**

 

Pursuant to a loanagreement dated August 31, 2004, the Company obtained a term loan creditfacility (“Term Loan”) in the amount up to $10,000,000 from Bridge OpportunityFinance, LLC, an affiliate of Bridge Healthcare Finance, LLC. The Company mayobtain loans under the agreement to fund permitted acquisitions.  Any loans obtained under the Term Loan aredue and payable in full on August 31, 2007 and bear interest at the rateof fifteen and one-quarter percent (15.25%) per annum.  Interest is payable monthly.  The Term Loan is secured by all assets of theCompany.  On August 31, 2004, theCompany received proceeds from the Term Loan of $2,697,802 for the acquisitionsof Arizona Home Health Care/Private Duty, Inc. and Care Pros Staffing, Inc.  To date, this is the only advance receivedunder the Term Loan and no principal payments have been made by the Company toreduce this amount.

 

The Term Loan providesthat the Company shall issue warrants to purchase shares of Common Stock to thelender up to 12% of the Company’s overall capitalization on the date ofborrowing. On August 31, 2004, the Company issued warrants to purchase905,758 shares of Common Stock at a price of $3.15 per share in connection withthe first borrowing under the credit facility. As a result, the Term Loan has been recorded net of a discount of$810,000 which represents the estimated fair market value related to thewarrants at the date of issuance.  Thediscount is being amortized to interest expense over the life of the Term Loan.

 

Exceptin certain limited circumstances, the Term Loan cannot be prepaid in fullwithout the Company incurring a significant prepayment penalty.  The Term Loan also contains certain financialcovenants, including the maintenance of minimum tangible net worth, minimumdebt service coverage ratios, minimum EBITDA, maximum capital expenditurelimits and maximum operating lease obligations. At March 31, 2005, theCompany was out of compliance with certain financial covenants of the TermLoan, for which a waiver was received from the lender. In May 2005, thecovenants were restructured and, at June 30, 2005, the Company was incompliance with the restructured covenants. The Term Loan includes events ofdefault (with grace periods as applicable) and provides that, upon theoccurrence of certain events of default, payment of all amounts payable underthe Term Loan, including the principal amount of, and accrued interest on, theTerm Loan may be accelerated.  There arealso cross default provisions between the Term Loan and the Loan.

 

**Note 6.  Notes Payable toStockholders**

 

On November 29, 2004, MedCap Partners L.P., the Company’smajority stockholder, loaned the Company $400,000 for working capitalpurposes.  During the first quarter of2005, the Company borrowed an additional $1,050,000 from the majoritystockholder for working capital purposes. The notes required interest at 5% and were payable on demand.  These notes plus accrued interest were repaidon March 29, 2005.  As an incentiveto the majority stockholder to provide the working capital until acquisitionswere consummated in the first quarter of 2005, the Company issued 77,751 sharesof common stock to the majority stockholder at an average

 

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market value of$2.09 per share.  The related expense of$162,500 was recorded as interest expense in the accompanying statement ofoperations during the first quarter of 2005.

 

**Note 7.  Notes Payable to Sellers**

 

Aspartial consideration for the acquisition of TravMed USA, Inc. on March 29,2005, the Company issued unsecured subordinated notes to the former TravMedstockholders in the total amount of $3,215,490. The notes are three-yearconvertible notes bearing interest at 7.75%. Monthly interest payments are required for the first six months followedby principal and interest payments the next thirty months to fully repay thedebt.

 

TheCompany also has notes payable to the former stockholders of Care Pros Staffing, Inc.of $46,792 at June 30, 2005.

 

**Note 8.   Convertible PreferredStock**

 

Convertible Preferred Stock Issued and Outstanding

 

The Company is authorized toissue 10,000,000 shares of preferred stock at a par value of $0.0001. At June 30,2005 and December 31, 2004 there are shares issued and outstandingconsisting of the following:

 
| ** **                                   | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **Shares   Issued**    | ** ** | **Shares   Outstanding**   | ** ** | **Shares   Issued** | ** ** | **Shares   Outstanding** | ** ** |
|                                         |       |                   |       |                       |       |   |   |   |   |
| Series B  Convertible Preferred Stock   |       | —                 |       | —                     |       | 6,250,000 |   | 3,750,000 |   |
| Series B-1  Convertible Preferred Stock |       | —                 |       | —                     |       | 97,582 |   | 93,043 |   |
| Series C  Convertible Preferred Stock   |       | 183,028                |       | 183,028                    |       | 52,501 |   | 52,501 |   |

 

 

The conversion price of all Convertible Preferred Stock is subject toappropriate adjustment in the event of stock splits, stock dividends, reversestock splits, capital reorganizations, recapitalizations, reclassifications,and similar occurrences, as well as the issuance of Common Stock inconsideration of an amount less than the then effective conversion price.

 

All Convertible Preferred Shares issued and outstanding are convertiblecurrently at the option of the holder. The Company has evaluated the potentialeffect of any beneficial conversion terms related to convertible instruments.As a result, the convertible instruments may have a carrying amount thatdiffers significantly from its redemption amount. In such cases, the differencebetween the carrying amount and the redemption amount (limited to the actualproceeds received) is recorded as a beneficial conversion feature and deductedas a deemed dividend in determining net loss attributable to commonstockholders. The table below summarizes the redemption requirements andbeneficial conversion of the Convertible Preferred Shares outstanding as of June 30,2005:

 

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| **Series of   Convertible   Preferred Stock** | ** ** | **Shares   Outstanding** | ** ** | **Carrying   Amount** | ** ** | **Common Shares   Issuable   Upon   Conversion** | ** ** | **Beneficial   Conversion   Recorded at   Issuance** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|------------------------------------------------------|------------|
|                                               |       |                     |       |                  |       |                                             |       |                                                 |       |
| C                                                  |       | 183,028                  |       | $                     | 10,001,379 |                                             | 18,302,800 |                                                 | $          | 1,070,510 |   |
|                                                    |            |                          |            |                       |            |                                                  |            |                                                      |            |  |  |

 

Series B Convertible Preferred Stock (Series B)

 

Theholder of the Series B is entitled to receive a quarterly dividend in anamount equal to .00833 shares of Common Stock for each share of outstanding Series Bheld by them. In the event of any liquidation or winding up of the Company, theholder of the Series B shares will be entitled to receive in preference tothe holders of Common Stock, and any other series of Preferred Stock, an amountequal to the amount of their purchase price. The Series B is convertibleat the option of the holder into common shares at an initial conversion ratioof one share of Common Stock for three shares of Series B.  The conversion ratio upon voluntaryconversion is subject to adjustment under certain circumstances.  Unless previously voluntarily converted priorto such time the Series B shares will be automatically converted intoCommon Stock at a conversion ratio of one share of Common Stock for threeshares of Series B upon the earlier of the closing of an underwrittenpublic offering of Common Stock pursuant to a registration statement under theSecurities Act of 1933, as amended, with aggregate net proceeds of at least $25million, or the date specified by written consent or agreement of the holdersof a majority of the then outstanding shares of Series B.

 

OnJune 16, 2004, the Company issued 6,250,000 shares of Series B at aper share price of $0.20 to MedCap Partners L.P.  The Company recorded a deemed dividend due tothe beneficial conversion price of $1,250,000 which represents the lesser ofthe proceeds or the beneficial conversion feature of $3.2 million.

 

OnSeptember 30, 2004 the Board of Directors declared a dividend anddistribution to the Series B holder. The dividend and distributionconsisted of quarterly dividends that were payable on September 30, 2004for shares not converted and quarterly dividends that were payable on  September 30, 2004, December 31,2004, March 31, 2005 and June 30, 2005 for 2,500,000 Series Bshares converted into Common Stock. As a result, 114,583 shares of Common Stockwere issued on September 30, 2004 related to the dividend anddistribution.  On March 22, 2005,the Board of Directors declared a dividend to the Series B holder.  The dividend consisted of quarterly dividendsthat were payable on December 31, 2004 which had an estimated fair valueof $81,218 and quarterly dividends that were payable on March 31, 2005which had an estimated fair value of $59,375. The dividends were paid through the issuance of 62,488 shares of commonstock during March 2005.

 

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OnSeptember 30, 2004, the holder voluntarily converted 2,500,000 shares of Series Binto 833,333 shares of Common Stock.   OnMarch 29, 2005, the holder voluntarily converted 3,750,000 shares of Series Binto 1,250,000 shares of Common Stock.

 

Series B-1 Convertible Preferred Stock (Series B-1)

 

The holders of the Series B-1are entitled to receive a quarterly dividend in an amount equal to 2.5 sharesof Common Stock for each share of outstanding Series B-1 held by them. Ifany dividend is declared on the Common Stock, the holders of the Series B-1will be entitled to receive dividends out of the legally available funds as ifeach share of Series B-1 had been converted to Common Stock. The holdersof the Series B-1 have the right, at the option of the holder at any time,to convert shares of the Series B-1 into shares of the Company’s CommonStock at an initial conversion ratio of one hundred shares of Common Stock foreach one share of Series B-1. The Series B-1 is convertible at the option of the holder intocommon shares at an initial conversion ratio of one hundred shares of CommonStock for each share of Series B-1. The conversion ratio upon voluntary conversion is subject to adjustmentunder certain circumstances.  Unlesspreviously voluntarily converted prior to such time the Series B-1 shareswill be automatically converted into Common Stock at an initial conversionratio of one hundred shares of Common Stock for each share of Series B-1upon the earlier of the closing of an underwritten public offering of CommonStock pursuant to a registration statement under the Securities Act of 1933, asamended, with aggregate net proceeds of at least $25 million, or the datespecified by written consent or agreement of the holders of a majority of thethen outstanding shares of Series B-1.

 

On August 9, 2004,the Company issued 3,750 shares of Series B-1 Convertible Preferred Stockat a per share price of $60 to an investor for cash proceeds of $225,000.  The Company recorded a deemed dividend due to the beneficial conversionprice of $225,000 which represents the lesser of the proceeds or the beneficialconversion feature of $937,500.

 

Also on August 9,2004, the Company issued 4,166 shares of Series B-1 Convertible PreferredStock at a per share price of $60 to the Company’s Chairman and Chief ExecutiveOfficer for cash proceeds of $249,960. The Company recorded a deemed dividend due to the beneficial conversionprice of $249,960 which represents the lesser of the proceeds or the beneficialconversion feature of $1.0 million.

 

On August 9, 2004,the Company issued 29,990 shares of Series B-1 Convertible PreferredStock, issued 40,822 shares of Common Stock and paid approximately $225,000 incash in exchange for the cancellation of all the outstanding principal andaccrued and unpaid interest under certain promissory notes (Seller Notes) thatwere issued in 2003 in connection with the purchase of certain subsidiaries.

 

On September 30,2004, the Company issued 12,642 shares of Series B-1 Convertible PreferredStock in exchange for the conversion of $758,640 in outstanding principal plusaccrued and unpaid interest under certain Convertible Subordinated PromissoryNotes (Notes) issued in 2003.

 

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Theholders of such Notes included the Company’s Chairman and Chief ExecutiveOfficer, a member of the Company’s Board of Directors and an entity whosemanaging member is also on the Company’s Board of Directors. The Companyrecorded a deemed dividend due to the beneficial conversion price of $758,640which represents the lesser of the cancelled principal and accrued interest orthe beneficial conversion feature of $3.7 million.

 

On August 31, 2004,the Company issued MedCap Partners L.P. a warrant to purchase 6,000 shares of Series B-1Convertible Preferred Stock for $60 per share for five years.  These warrants have not been exercised at June 30,2005.

 

On September 30,2004, the Board ofDirectors declared a dividend and distribution to the Series B-1 holders.The dividend and distribution consisted of quarterly dividends that werepayable on September 30, 2004 for shares not converted and a distributionequal to the dividends that would have been payable on September 30, 2004,December 31, 2004, March 31, 2005 and June 30, 2005 to thoseshareholders electing early conversion of their 4,112 shares of Series B-1into Common Stock.  As a result, 157,203shares of Common Stock were issued on September 30, 2004 related to thedividend and distribution.  On March 22,2005, the Board of Directors declared a dividend to the Series B-1holders.  The dividend consisted ofquarterly dividends that were payable on December 31, 2004 which had anestimated fair value of $604,780, and quarterly dividends that were payable on March 31,2005 which had an estimated fair value of $441,940.  The dividends were paid through the issuanceof 465,208 shares of common stock during March 2005.

 

OnSeptember 30, 2004, certain holders of 4,112 shares of Series B-1converted their shares into 411,200 shares of Common Stock.  On October 19, 2004, a holder of 427shares of Series B-1 converted his shares into 42,700 shares of common stock.

 

OnNovember 10, 2004, the Company entered into an agreement to convertapproximately $2.7 million of Seller Notes and accrued interest to Series B-1Convertible Preferred Stock.

 

On December 16***,*** 2004, the Company issued 1,582shares of Series B-1 Convertible Preferred Stock at a per share price of$60 to investors for cash proceeds of $94,920. The Companyrecorded a deemed dividend due to the beneficial conversion price of $94,920which represents the lesser of the proceeds or the beneficial conversionfeature of $447,962.

 

On March 29, 2005,holders of all of the Convertible Preferred Series B-1 voluntarilyconverted their 93,043 shares of preferred Series B-1 into 9,304,300shares of Common Stock.

 

Series CConvertible Preferred Stock (Series C)

 

The holders ofSeries C are entitled to receive, when declared by the Board of Directors,a dividend on each quarter end beginning September 30, 2004 and ending December 31,2005 in an amount equal to 2.5 shares of Common Stock for each share ofoutstanding Series C held by them. In the event of any liquidation orwinding up of the Company, the holders of the Series C will be entitled toreceive in preference to the holders of Common Stock an amount equal to five

 

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times theirinitial purchase price plus any declared but unpaid dividends and any remainingliquidation proceeds will thereafter be distributed on a pro rata basis to theholders of the Company’s Common Stock and any other series of Preferred Stock expresslyentitled to participate in such distribution. Assuming exercise of all of the warrants to purchase shares of Series CPreferred Stock, upon a liquidation or winding up of the Company, the holdersof Series C Preferred Stock would be entitled to receive approximately$92,000,000 prior to the payment of any amounts to the holders of other equitysecurities.  The Series C isconvertible at the option of the holder into common shares at an initialconversion ratio of one hundred shares of Common Stock for each share of Series C.  The conversion ratio upon voluntaryconversion is subject to adjustment under certain circumstances.  Unless previously voluntarily converted priorto such time, the Series C will be automatically converted into CommonStock at an initial conversion ratio of one hundred shares of Common Stock foreach share of Series C upon the earlier of (i) the closing of anunderwritten public offering of our Common Stock pursuant to a registrationstatement under the Securities Act of 1933, as amended, with aggregate netproceeds of at least $25 million, or (ii) the date specified by writtenconsent or agreement of the holders of a majority of the then outstandingshares of Series C. The description of the foregoing rights, preferencesand privileges of the Series C is qualified in its entirety by theCertificate of Designations, Preferences and Rights of Series C filed withthe Secretary of State of the State of Delaware on August 31, 2004.

 

Warrants toPurchase Convertible Preferred Stock

 

As of June 30, 2005,warrants to purchase Convertible Preferred Stock are outstanding as follows:

 
| **Series of Convertible  Preferred Stock** | ** ** | **Warrants** | ** ** | **Exercise Price  Per share** | ** ** |
|-------------------------------------------------|------------|--------------|------------|-------------------------------|------------|
|                                            |       |         |       |                          |       |
| B-1                                             |       | 6,000        |       | $                             | 60         |   |
| C                                               |       | 124,077      |       | $                             | 60         |   |

 

On March 29,2005, 108,333 of the Series C warrants were exercised providing proceeds,net of issue costs, of $6,435,687.  On May 2,2005, 22,187 of the Series C warrants were exercised providing netproceeds of $1,277,396.  Dividends accrueon warrants but are payable only upon exercise. Accordingly, dividends declared for the quarters September 30,2004, December 31, 2004 and March 31, 2005 became payable on thewarrants exercised at March 31, 2005, with an estimated fair value of $1,411,464.  These dividends were paid in March 2005through the issuance of 705,732 shares of common stock.  Dividends relative to the 22,187 warrantsexercised in May 2005 amounted to $200,792 and were paid in the secondquarter of 2005 through the issuance of 110,935 shares of common stock.

 

**Note 9.  Common Stock**

 

The Company is authorized to issue 150,000,000 shares of common stockat a par value of $0.0001.  Theauthorized shares were increased in January 2005 from 50,000,000 shares.

 

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In connection with an agreement, 250,000 shares of Common Stock weredelivered by parties to the agreement, to an escrow agent.  These shares will be released from escrow asfollows:  (i) beginning on July 1,2004 and continuing on the first day of each month through and including June 1,2005, the Company, or its assignee, shall pay $31,250 to the escrow agent, andthe escrow agent shall cause 10,417 shares to be transferred to the Company orits assignee; and (ii) beginning on July 1, 2005 and continuing onthe first day of each month through and including June 1, 2006, theCompany, or its assignee, shall pay $46,875 to the escrow agent, and the escrowagent shall cause 10,417 shares to be released to the Company or itsassignee.  The escrow agent shalldistribute funds received from the Company, or its assignee, to thestockholders who are parties to the Stock Purchase Agreement. For July, 2004,through December, 2004, the Company assigned its right to purchase under theStock Purchase Agreement to an existing shareholder.  Neither the Company nor its assigneepurchased shares subsequent to December, 2004, and, in accordance with theagreement, the transfer agent was authorized to return all remaining shares tothe parties who initially tendered their shares to the escrow agent.

 

On May 31, 2005, the Company granted 3,700,000 shares ofrestricted stock to four of its officers. The restricted stock has been valued at $6,290,000, which represents thetrading value of the stock as quoted on the OTC Bulletin Board on May 31,2005.  All shares of restricted stockvest in five years or earlier in the event the average daily trading volume forthe Company’s common stock reaches specified levels or in certain othercircumstances.  The $6,290,000 value hasbeen reflected as common stock issued and outstanding with an offsetting amountincluded in the equity section as deferred non-cash stockcompensation.  The deferred non-cashstock compensation amount is being amortized monthly over the five yearexpected vesting period of the restricted stock grant.  The President’s restricted stock grant of900,000 shares is subject to forfeiture of 300,000 shares per quarter for thesecond, third and fourth quarters of 2005 if certain revenue and EBITDA targetsare not achieved.  The second quartertargets were not achieved, but forfeiture has not yet been reflected since theachievement of targets is ultimately measured on a cumulative basis through December 31,2005.  The remaining grants are notsubject to forfeiture except in the event grantee’s continuous service isterminated for any reason, other than death or disability prior to the 5th aniversary of the grant date.  Non-cash stock based compensation in theaccompanying statement of operations for the second quarter and six monthsended June 30, 2005 includes $104,833 related to this grant.

 

In May 2005, the Board of Directors approved the grant of optionsto key employees to purchase 831,050 shares of the Company’s common stock underthe 2004 option plan at $1.70 per share (fair market value on the date ofgrant).  The options vest 25% after oneyear and monthly thereafter on a straight-line basis over three years.  The options expire in ten years.

 

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**Note 10.  Supplemental Disclosureto the Cash Flow Statement**

 
| ** **                                                                           | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                                                 |       |                    |       |                    |       |
| Supplemental  cash flow disclosures:                                                 |       |                    |       |                    |       |
| Cash paid for  interest                                                              |       | $                       | 438,706    |                    | $          | 338,729 |   |
| Cash paid for  income taxes                                                          |       | —                  |       | —                  |       |
|                                                                                 |       |                    |       |                    |       |
| Non-cash  investing and financing activities:                                        |       |                    |       |                    |       |
| Conversion of  preferred stock into common stock                                     |       | 30,873,400              |       | —                  |       |
| Issuance of the  following in connection with acquisitions:                          |       |                    |       |                    |       |
| Common stock  issued                                                                 |       | 2,888,864               |       | —                  |       |
| Revolving credit  line assumed                                                       |       | 941,390                 |       | —                  |       |
| Notes payable  issued                                                                |       | 3,215,490               |       | —                  |       |
| Common stock  issued as payment of preferred stock dividends                         |       | 3,390,233               |       | —                  |       |
| Common stock  issued associated with working capital loans from majority stockholder |       | 162,500                 |       | —                  |       |
|                                                                                      |            |                         |            |                         |            |  |  |

 

**Note 11.  Subsequent Events**

 

InAugust 2005, Bridge Healthcare Finance, LLC made a $300,000 creditline available to the Company in the form of an over-advance on the Company’sLoan discussed in Note 4.  The line ofcredit will be used as necessary to pay certain remaining amounts due onacquisitions completed in March, 2005. The line accrues interest at 9.5%. One-third of the line must be repaid in 90 days and the remainder in 180days.  As additional consideration forthe line, the Company is required to pay a monthly fee of $7,500 for the first90 days and $5,000 per month thereafter. The maturity date of the related Loan discussed in Note 4 is beingextended for an additional year.  Theprepayment penalty discussed in Note 4 is applicable for the one-year extensionperiod except in the event of a change in control of the Company.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

 

*This report contains forward-looking statements.  These statements relate to future events orour future financial performance.  Insome cases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“potential” or “continue,” the negative of such terms or other comparableterminology.  These statements are onlypredictions.  Actual events or resultsmay differ materially.*

 

*Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements.  Moreover, neither we, nor any other person,assume responsibility for the accuracy and completeness of the forward-lookingstatements.  We are under no obligationto update any of the forward-looking statements after the filing of thisQuarterly Report to conform such statements to actual results or to changes inour expectations.*

 

*The following discussion of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and the related notes and other financial information appearingelsewhere in this Quarterly Report. Readers are also urged to carefully reviewand consider the various disclosures made by us which attempt to adviseinterested parties of the factors which affect our business, including withoutlimitation the disclosures made under the caption “Management’s Discussion andAnalysis or Plan of Operation,” under the caption “Risk Factors,” and theaudited consolidated financial statements and related notes included in ourAnnual Report on Form 10-KSB for the year ended December 31, 2004,previously filed with the Securities and Exchange Commission.*

 

**OVERVIEW**

 

We are a provider of healthcare staffing services,focusing on the areas of travel nursing, per diem staffing, contractualclinical services, and private duty home care. Our travel nurses are recruited domestically as well as internationally,and placed on temporary assignments at healthcare facilities across the UnitedStates.  Our per diem nurses are localnurses placed at healthcare facilities on short-term assignments.  Our contractual clinical services groupprovides complete clinical management and staffing for healthcare facilitiesand our private duty home care group provides nursing case management andstaffing for skilled and non-skilled care in the home. We consider thedifferent services described above to be one segment as each of these servicesrelate solely to providing healthcare staffing to customers that are healthcareproviders and utilize similar distribution methods, common procedures, processesand similar methods of identifying and serving these customers.

 

During 2003, we pursued our operational plan ofacquiring companies in the healthcare staffing field and completed acquisitionsof four companies. In 2004, we purchased two additional companies, in the firstquarter of 2005 purchased two additional companies and in the second quarter of2005 purchased one additional company.  Wehave contracted with more than 1500 healthcare facilities across 49 U.S. statesand the District of Columbia.

 

The companies we acquired in 2003 — Baker AndersonChristie, Inc., New Age Nurses, Inc., Nurses Network, Inc., and PSRNurses, Ltd. (through our acquisition of PSR Nurses Holdings Corp. and PSRNurse Recruiting, Inc., which hold the limited partner and general partnerinterests in PSR Nurses, Ltd.) — provide the foundation for our continuedgrowth.  During 2003 we began operatingthe acquired companies, combining the various back offices and support staffand began streamlining the operations.  Wecontinued our acquisition program in 2004 and acquired Care Pros Staffing, Inc.and Arizona Home Health Care/Private Duty, Inc.  On March 29, 2005, we acquired TravMedUSA, Inc. and Health Industry Professionals, LLC.  On May 4, 2005, we acquired PrimeStaff,LP and Mint Medical Staffing Odessa.

 

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Although we have raised $8 million to date in 2005,we will need to raise an additional $500,000 to $1 million during the nexttwelve months to satisfy debt service requirements and other working capitalneeds.  If additional capital is notreadily available, we will be forced to scale back our operations until ourincome exceeds our expenses or pursue other strategic alternatives.

 

Following the May 4, 2005 acquisition, in thenear term, we do not plan to continue to pursue additional acquisitions until wehave completely integrated the three 2005 acquisitions.

 

We have achieved a number of significant successesfrom inception through the second quarter of 2005:

 

•                  Wehave raised over $15 million through issuance of convertible preferred stock andover $3 million in debt financing, net of debt issuance costs.

•                  Wehave acquired four companies in 2003, two companies in 2004, two companies inthe first quarter of 2005, and one company in the second quarter of 2005.

•                  Wehave reorganized our travel business in 2004 to eliminate redundancies and toeliminate over $1.5 million in costs on an annual basis.

•                  Wehave converted debt to convertible preferred stock and convertible preferredstock to common stock with an ultimate benefit of eliminating certain debtservice costs and increasing stockholders’ equity.

 

In addition to noteworthy successes, the followingare a number of challenges and management’s plan as to how these challenges maybe addressed:

 

 
| **Challenges**                                                                                                                                                                                                                                                          | ** ** | **Management’s Plan**                                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| We have experienced a decline in revenue in 2004 and 2005 related to  the loss of certain larger customers and soft demand for temporary nurses on  an industry-wide basis. We need to find ways to attract and retain hospital  clients.                               |       | We are hiring experienced management and business development  personnel to complement existing management in our efforts to grow the travel  business. We also have acquired additional travel business as part of our  acquisition program and will use the management talent from this acquisition  to explore new ways to expand the travel business and to gain access to new  clients. |
|                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| Access to international nurses has been limited following the Federal  Government’s overhaul of the immigration system. We expect annual limits on  the immigration of workers from the Philippines, China, and India to the  Unites States in the next two years. |       | For the near future, we intend to focus our attention on domestic  nurses and enhance our recruitment efforts relative to domestic nurses. We  are attempting to extract value from the pipeline of nurse candidates in the  Philippines.                                                                                                                                                    |
|                                                                                                                                                                                                                                                                    |       |                                                                                                                                                                                                                                                                                                                                                                                         |
| We have not maintained targeted gross profit levels of 23%  to 24%.                                                                                                                                                                                                |       | We are installing new operating software to assist us in more  effectively managing gross profits by nurse and by healthcare facility. We  also are vigorously managing professional liability insurance costs, workers  compensation insurance costs, and housing and travel costs related to the  travel nurse business.                                                                   |

 

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| We need to continue to find ways to attract and retain quality  nurses.                                                                                                                                                                                                                                                    |   | In addition to keeping nurse compensation competitive, we have  implemented a stock ownership program for nurses as an innovative way to  attract and retain nurses.                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                             |
| We need to overcome corporate overhead costs that are  disproportionately high relative to our revenue base. Costs related to SEC  reporting and compliance with Sarbanes-Oxley are high, and we expect costs to  increase as we comply with new rules applicable in the future.                                      |   | We have completed three acquisitions in 2005 to enable us to spread  corporate overhead costs over a larger volume of business, and are in the  process of integrating these recent acquisitions into our Company. We also  have undertaken an exhaustive expense cutting program to ensure that  corporate costs are minimized. |
|                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                             |
| We need to continue to raise money to fund acquisitions.                                                                                                                                                                                                                                                                   |   | We are forecasting that the acquisitions in the first and second  quarters of 2005 will permit us to improve operating cash flow in the third  and fourth quarters of 2005, which we anticipate will assist us in raising  additional funding.                                                                                   |
|                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                             |
| We need to continue to identify quality acquisition targets.                                                                                                                                                                                                                                                               |   | We have a considerable depth of management and considerable  experience in locating and qualifying excellent acquisition candidates. We  intend to continue our efforts in this area.                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                       |   |                                                                                                                                                                                                                                                                                                                             |
| Our Convertible Series C Preferred Stock has a significant  liquidation preference in excess of $92 million (assuming exercise of all Series C  warrants), such that all proceeds from a sale of the company for less than  that amount would be distributed solely to the holders of Series C Preferred  Stock. |   | We have two options to address this situation. This liquidation  preference will cease to exist if we can successfully consummate a public  offering of at least $25 million or obtain the consent of a majority of our Series C  Preferred stockholders to convert to common.                                              |

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

During the next twelve months, we intend to grow thebusinesses acquired and to further expand our operations through acquisitions.Our goal was to acquire at least three companies in 2005, generally in theareas of travel nursing, per diem staffing and private duty home care.  As we acquire companies, we expect to realizeimmediate savings in their operations as we integrate them into our operationsand as we decrease their general and administrative costs by merging their backoffice and support operation into ours.

 

In June 2004, we obtained a $15 millionrevolving line of credit facility from Bridge Healthcare Finance, LLC (reducedto $10 million in March 2005).  In August 2004,we obtained a $10 million term loan credit facility from Bridge OpportunityFinance, LLC.  Bridge OpportunityFinance, LLC is an affiliate of Bridge Healthcare Finance, LLC.  We had $2,521,598 and $3,877,824 outstandingat December 31, 2004 and June 30, 2005, respectively, under ourrevolving line of credit facility and $2,697,802 of principal  (after adding back the discount) of term loanoutstanding at December 31, 2004 and June 30, 2005.  Agreements for both the revolving line ofcredit facility and the term loan facility contain financial covenants for themaintenance of minimum net worth, minimum EBITDA, maximum capital expenditurelimits and maximum operating lease obligations. At March 31, 2005, we were out of compliance with financialcovenants in both agreements, for which waivers were received from the lenders.  In May 2005 we were successful inrenegotiating covenants related to both the revolving line of credit facilityand the term loan and, at June 30,

 

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2005,were in compliance with the revised covenants. Accordingly, the term loan has been classified as a long-term obligationat June 30, 2005.  Failure tosatisfy these covenants would severely restrict or eliminate our ability toobtain cash.

 

We generated a net loss of $1,989,519 for the sixmonths ended June 30, 2005 and used cash in operations of $2,491,178during the six months ended June 30, 2005. Additionally, although we ended the first six months of 2005 with aworking capital deficit of $1.1 million, we have been able to secure additionalfunding.  In March 2005 our majoritystockholder exercised warrants to purchase 108,333 shares of Series CConvertible Preferred Stock providing $6.4 million to us.  In May 2005 our majority stockholderexercised warrants to purchase 22,187 shares of Series C ConvertiblePreferred Stock providing $1.3 million to us. The infusion of $7.7 million enabled us to acquire additional companiesand to retire certain liabilities.  In August 2005,additional short-term funding of $300,000 in the form of an over-advance on ouraccounts receivable was secured from Bridge Healthcare Finance, LLC.  Although we have raised $8 million to date in2005, we will need to raise an additional $1 million to $2 million during thenext twelve months to satisfy debt service requirements and other working capitalneeds.  There is no assurance that wewill be able to raise the amount of debt or equity capital required to meet ourobjectives. Our challenging financial circumstances may make the terms,conditions and cost of any available capital relatively unfavorable.  If additional debt or equity capital is notreadily available, we will be forced to scale back our acquisition activitiesand our operations until our income exceeds our expenses.  This would result in an overall slowdown ofour development.  Our short-term need forcapital may force us to consider and potentially pursue our strategic optionssooner than we might have otherwise desired.

 

Our capital commitments for the next twelve monthsare minimal as our business does not require the purchase of plants, factories,extensive capital equipment or inventory.

 

**CRITICAL ACCOUNTING POLICIES AND MANAGEMENT JUDGEMENT**

 

The preparation of the financial statements inaccordance with accounting principles generally accepted in the United Statesof America requires us to make judgments, estimates, and assumptions regarding uncertaintiesthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities, and the reported amounts of revenues andexpenses. Areas that require significant judgments, estimates, and assumptionsinclude the assignment of fair values upon acquisition of goodwill and otherintangible assets, testing for impairment of long-lived assets and valuation ofthe stock used to consummate our acquisitions. We use historical experience,qualified independent consultants and all available information to make thesejudgments and estimates, and actual results will inevitably differ from thoseestimates and assumptions that are used to prepare the company’s financialstatements at any given time.

 

**Accounts Receivable**

 

Accounts receivable are reduced by an allowance fordoubtful accounts that provides a reserve with respect to those accounts forwhich revenue was recognized but which management subsequently determines thatpayment is not expected to be received. We analyze the balances of accounts receivable to ensure that therecorded amounts properly reflect the amounts expected to be collected.  This analysis involves the application ofvarying percentages to each accounts receivable category based on the age ofthe uncollectible accounts receivable. The amount ultimately recorded as the reserve is determined aftermanagement also analyzes the collectibility of specific large or problematicaccounts on an individual basis, as well as the overall business climate andother factors.  Our estimate of thepercentage of uncollectible accounts may change from time to time and any suchchange could have a material impact on our financial condition and results ofoperations.

 

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**Purchase Accounting, Goodwill and Intangible Assets**

 

All business acquisitions have been accounted forusing the purchase method of accounting and, accordingly, the statements ofoperations include the results of each acquired business since the date ofacquisition.  The assets acquired andliabilities assumed are recorded at their estimated fair value as determined bymanagement and supported in some cases by an independent third-party valuation. We finalize the allocation of thepurchase price to the fair value of the assets acquired and liabilities assumedwhen we obtain information sufficient to complete the allocation, but in anycase, within one year after acquisition.

 

Goodwill arising from the acquisitions of businessesis recorded as the excess of the purchase price over the estimated fair valueof the net assets of the businesses acquired. Statement of Financial Accounting Standards No. 142 (“Goodwill andOther Intangible Assets”) provides that goodwill is to be tested for impairmentannually or more frequently if circumstances indicate potentialimpairment.  Consistent with thisstandard, we will review goodwill, as well as other intangible assets andlong-term assets, for impairment annually or more frequently as warranted, andif circumstances indicate that the recorded value of any such other asset isimpaired, such asset is written down to its new, lower fair value.  If any item of goodwill or such other assetis determined to be impaired, an impairment loss would be recognized equal to theamount by which the recorded value exceeds the estimated fair market value.

 

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**RESULTS OFOPERATIONS**

 

The following condensed financial information includesCrdentia Corp. plus the results of operations of all companies acquired fromtheir respective dates of acquisition (in thousands).

 
| ** **                                    | ** ** | **For the three months** | ** ** | **For the six months**  | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **ended June 30,**  | ** ** | **ended June 30,** | ** ** |
| ** **                                    | ** ** | **2005**                 | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Revenue from  services                        |       | $                        | 9,208      |                    | $          | 5,490 |   | $ | 14,330 |   | $ | 11,707 |   |
| Direct  operating expenses                    |       | 7,110                    |       | 4,308                   |       | 11,159 |   | 9,255 |   |
| Gross profit                                  |       | 2,098                    |       | 1,182                   |       | 3,171 |   | 2,452 |   |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Operating  expenses:                          |       |                     |       |                    |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 2,175                    |       | 2,141                   |       | 3,891 |   | 4,206 |   |
| Non-cash  stock based compensation            |       | 192                      |       | 143                     |       | 271 |   | 159 |   |
| Total  operating expenses                     |       | 2,367                    |       | 2,284                   |       | 4,162 |   | 4,365 |   |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Loss from  operations                         |       | (269                     | )          | (1,102                  | )          | (991 | ) | (1,913 | ) |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Interest  expense, net                        |       | (475                     | )          | (548                    | )          | (999 | ) | (999 | ) |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Loss before  income taxes                     |       | (744                     | )          | (1,650                  | )          | (1,990 | ) | (2,912 | ) |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Income tax  expense                           |       | —                   |       | —                  |       | — |   | — |   |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Net loss                                      |       | (744                     | )          | (1,650                  | )          | (1,990 | ) | (2,912 | ) |
|                                          |       |                     |       |                    |       |   |   |   |   |
| Deemed  dividends                             |       | —                   |       | (2,250                  | )          | — |   | (2,250 | ) |
| Non-cash  preferred stock dividends           |       | (201                     | )          | —                  |       | (2,363 | ) | — |   |
| Net loss  attributable to common stockholders |       | $                        | (945       | )                       | $          | (3,900 | ) | $ | (4,353 | ) | $ | (5,162 | ) |

 

***Three months ended June 30, 2005 compared tothe three months ended June 30, 2004***

 

Revenues in the second quarter of 2005 were $9,208,000compared to revenues of $5,490,000 in the second quarter of 2004.  Revenues have increased in the second quarterof 2005 compared to the second quarter of 2004 due to acquisitions in August 2004and March and May of 2005. However, the loss of certain larger customers in 2004 and 2005 and thesoft demand experienced in the industry offset a significant portion of theincrease in revenue due to acquisitions. In the second quarter of 2005 approximately 43% (69% in the secondquarter of 2004) of our revenue was derived from the placement of travel nurseson assignment, typically 13 weeks in length. Such assignments generally involve temporary relocation to thegeographic area of the assignment.  Inthe second quarter of 2005, we also provided per diem nurses to satisfy thevery short-term needs of healthcare facilities. Per diem services provided  48% ofour revenue in the second quarter of 2005 (15% in the second quarter of 2004).  Per diem revenue became a larger portion ofour revenue in the second quarter of 2005 compared to the second quarter of2004 because of our acquisition of per diem businesses in the third quarter of2004.  The remaining amount of ourrevenue in the second quarter of 2005 and 2004 came from providing clinicalmanagement and staffing to healthcare

 

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facilitiesand private duty homecare.  During thesecond quarter of 2005 and 2004, most of our customers were acute carehospitals located throughout the continental United States.

 

Our overall gross profit in the second quarter of2005 was $2,098,000 or 22.8% of revenues compared to $1,182,000 or 21.5% ofrevenues in the second quarter of 2004. Our gross profit is the differencebetween the revenue we realize when we bill our customers for the services ofour healthcare professionals and our direct operating costs, which include thecost of the healthcare professionals and the related housing and travel costs,certain employment related taxes and workers compensation insurance coverage.  The gross profit percentage in the secondquarter of 2005 has improved reflecting higher gross profits reported by our2004 and 2005 acquisitions.

 

Our selling, general and administrative costs were $2,175,000******or 23.6% of revenues in the secondquarter of 2005 compared to $2,141,000 or 39.0%******ofrevenues in the second quarter of 2004. Selling, general and administrative expenses are comprised primarily ofpersonnel costs, legal and audit fees related to being a public company andvarious other office and administrative expenses.  Selling, general and administrative costs as apercentage of revenue are down in the second quarter of 2005 following theelimination of redundant costs in our travel business in October 2004.  Also, the dollar amount of selling, generaland administrative costs has remained constant even though revenue hasincreased indicating that we have been able to effectively achieve economies ofscale with a larger revenue base.

 

Interest costs decreased from $548,000 in the secondquarter of 2004 to $475,000 in the second quarter of 2005 which decreasereflects lower overall rates on the new debt facilities we obtained in 2004(which were restructured in the first quarter of 2005).

 

Deemed dividends were 2,250,000 in the secondquarter of 2004.  The deemed dividendsrelate to beneficial conversion features of our Series A and Series Bconvertible preferred stock.

 

The non-cash preferred stock dividends in the secondquarter of 2005 are cumulative common stock dividends declared for December 31,2004 and March 31, 2005 related to the warrants exercised on May 2,2005 for 22,187 shares of Series C convertible preferred stock.  The common stock dividends on the warrantsare payable once the warrants are exercised.

 

***Six months ended June 30, 2005 compared to thesix months ended June 30, 2004***

 

Revenues for the first six months of 2005 were$14,330,000 compared to revenues of $11,707,000 for the first six months of2004.  Revenues have increased in thefirst six months of 2005 compared to the first six months of 2004 due toacquisitions in August 2004 and March and May of 2005.  However, the loss of certain larger customersin 2004 and 2005 and the soft demand experienced in the industry offset asignificant portion of the increase in revenue due to acquisitions.  In the first six months of 2005 approximately37% (72% in the first six months of 2004) of our revenue was derived from theplacement of travel nurses on assignment, typically 13 weeks in length.  Such assignments generally involve temporaryrelocation to the geographic area of the assignment.  In the first six months of 2005, we alsoprovided per diem nurses to satisfy the very short-term needs of healthcarefacilities.  Per diem services provided50% of our revenue for the first six months of 2005 (14% in the first sixmonths of 2004).  Per diem revenue becamea larger portion of our revenue in the first six months of 2005 compared to thefirst six months of 2004 because of our acquisition of per diem businesses inthe third quarter of 2004.  The remainingamount of our revenue in the first six months of 2005 and 2004 came fromproviding clinical management and staffing to healthcare facilities and privateduty homecare.  During the first sixmonths of 2005 and 2004, most of our customers were acute care hospitalslocated throughout the continental United States.

 

Our overall gross profit in the first six months of2005 was $3,171,000 or 22.1% of revenues compared to $2,452,000 or 20.9% ofrevenues in the first six months of 2004. Our gross profit is the

 

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differencebetween the revenue we realize when we bill our customers for the services ofour healthcare professionals and our direct operating costs, which include thecost of the healthcare professionals and the related housing and travel costs,certain employment related taxes and workers compensation insurancecoverage.  The gross profit percentage inthe first six months of 2005 has improved reflecting higher gross profitsreported by our 2004 and 2005 acquisitions.

 

Our selling, general and administrative costs were$3,891,000******or 27.2% of revenues in thefirst six months of 2005 compared to $4,206,000 or 35.9%******ofrevenues in the first six months of 2004. Selling, general and administrative expenses are comprised primarily ofpersonnel costs, legal and audit fees related to being a public company andvarious other office and administrative expenses.  Selling, general and administrative costs asa percentage of revenue are down in the first six months of 2005 following theelimination of redundant costs in our travel business in October 2004.  Also, the dollar amount of selling, generaland administrative costs has decreased even though revenue has increasedindicating that we have been able to effectively achieve economies of scalewith a larger revenue base.

 

Interest costs were $999,000 in both the first sixmonths of 2005 and 2004.  Higher levelsof borrowing related to our acquisitions in March and May 2005increased interest costs which were offset by lower overall rates on the newdebt facilities we obtained in 2004 (which were restructured in the firstquarter of 2005).

 

Deemed dividends were 2,250,000 in the first sixmonths of 2004.  The deemed dividendsrelate to beneficial conversion features of our Series A and Series Bconvertible preferred stock.

 

The non-cash preferred stock dividends in the firstsix months of 2005 relate to common stock dividends declared by the Board ofDirectors on our Series B, Series B-1 and Series C convertiblepreferred stock as well as cumulative common stock dividends declared for September 30,2004, December 31, 2004 and March 31, 2005 related to the warrantsexercised on March 29, 2005 for 108,333 shares of Series Cconvertible preferred stock and cumulative common stock dividends declared for December 31,2004 and March 31, 2005 related to the warrants exercised on May 2,2005 for 22,187 shares of Series C convertible preferred stock.  The common stock dividends on the warrantsare payable once the warrants are exercised.

 

**Risk Factors**

 

We were formed in November 1997, and commencedoperations on August 7, 2003 following our acquisition of Baker AndersonChristie, Inc.  Any investment inour Common Stock involves a high degree of risk.  You should consider carefully the followinginformation about these risks, together with the other information contained inthis report, before you decide to buy our Common Stock.  The risks and uncertainties described beloware not the only ones we face. Additional risks and uncertainties not presently known to us or that wecurrently deem immaterial may also impair our operations.  If any of the following risks actually occur,our business would likely suffer and our results could differ materially fromthose expressed in any forward-looking statements contained in this reportincluding those contained in the section captioned “Management’sDiscussion and Analysis or Plan of Operation” under Item 2.  In such case, the trading price of our CommonStock could decline, and you may lose all or part of the money you paid to buyour Common Stock.

 

**If we fail to raise additional capital in the near future, our businesswill fail.**

 

We have limited cash resources and will needto raise additional capital through public or private financings or otherarrangements in order to meet current commitments and continue development ofour business.  We cannot assure you thatadditional capital will be available to us when needed, if at all, or, ifavailable, will be obtained on terms attractive to us.  Our failure to raise additional capital whenneeded could cause us to cease our operations.

 

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We have financed our operations sinceinception primarily through the private placement of equity and debt securitiesand loan facilities.  Although ourmanagement recognizes the need to raise funds in the near future, there can beno assurance that we will be successful in consummating any fundraisingtransaction, or if we do consummate such a transaction, that its terms andconditions will not require us to give investors warrants or other valuablerights to purchase additional interest in our company, or be otherwiseunfavorable to us.  Among other things,the agreements under which we issued some of our existing securities include,and any securities that we may issue in the future may also include, terms thatcould impede our ability to raise additional funding.  The issuance of additional securities couldimpose additional restrictions on how we operate and finance our business.  In addition, our current debt financingarrangements involve significant interest expense and restrictive covenantsthat limit our operations.

 

**We may face difficultiesintegrating our acquisitions into our operations and our acquisitions may beunsuccessful, involve significant cash expenditures or expose us to unforeseenliabilities.**

 

Wecontinually evaluate opportunities to acquire healthcare staffing companiesthat complement or enhance our business and frequently have preliminaryacquisition discussions with some of these companies. In addition, beginning inAugust 2003 and through May 2005 we acquired eight businesses.

 

Theseacquisitions involve numerous risks, including:

 

•  potentialloss of revenues following the acquisition;

 

•  difficulties integrating acquired personneland distinct cultures into our business;

 

•  difficulties integrating acquired companiesinto our operating, financial planning and financial reporting systems;

 

•  diversion of management attention fromexisting operations; and

 

• assumption of liabilities and exposure to unforeseen liabilities ofacquired companies, including liabilities for their failure to comply with healthcareregulations.

 

Theseacquisitions may also involve significant cash expenditures, debt incurrenceand integration expenses that could seriously harm our financial condition andresults of operations. We may fail to achieve expected efficiencies and synergies.Any acquisition may ultimately have a negative impact on our business andfinancial condition.

 

**Our Series C Convertible Preferred Stock has a significantliquidation preference.**

 

As of August 1, 2005, we had (i) 183,028shares of Series C Preferred Stock outstanding and (ii) warrants (the“Warrants”) to purchase 124,077 shares of Series C Preferred Stockoutstanding.  We anticipate sellingadditional shares of Series C Preferred Stock and issuing additionalwarrants to purchase shares of Series C Preferred Stock.  Each share of Series C Preferred stockis convertible into one hundred (100) shares of our common Stock.  In the event of any liquidation or winding upof our company, the holders of the Series C Preferred Stock will beentitled to receive, in preference to the holders of our other equitysecurities, an amount equal to five times the original purchase price pershare, or $300 per share, plus any dividends declared on the Series CConvertible Preferred Stock but not paid. Assuming the exercise of all outstanding Warrants, upon a liquidation orwinding up of our company the holders of our Series C Preferred Stockwould be entitled to receive approximately $92,000,000 prior to the payment ofany

 

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amounts to the holders of our other equity securities.  As a result, upon a liquidation or winding upof the Company, there may not be sufficient proceeds, following the payment ofthe Series C liquidation preference described above, to make any distributionto the holders of our other equity securities.

 

**There is a lack of an active public market for our Common Stock, andthe trading price of our common stock is subject to volatility.**

 

The quotation of shares of our Common Stockon the OTC Bulletin Board began on June 3, 2003.  There can be no assurance, however, that amarket will develop or continue for our Common Stock.  Our Common Stock may be thinly traded, iftraded at all, even if we achieve full operation and generate significantrevenue and is likely to experience significant price fluctuations.  In addition, our stock is defined as a “pennystock” under Rule 3a51-1 adopted by the Securities and Exchange Commissionunder the Securities Exchange Act of 1934, as amended. In general, a “penny stock”includes securities of companies which are not listed on the principal stockexchanges or the National Association of Securities Dealers Automated QuotationSystem (“NASDAQ”) or National Market System (“NASDAQ NMS”) and have a bid pricein the market of less than $5.00; and companies with net tangible assets ofless than $2,000,000 ($5,000,000 if the issuer has been in continuous operationfor less than three years), or which have recorded revenues of less than$6,000,000 in the last three years.  “Pennystocks” are subject to rule 15g-9, which imposes additional sales practicerequirements on broker-dealers that sell such securities to persons other thanestablished customers and “accredited investors” (generally, individuals withnet worth in excess of $1,000,000 or annual incomes exceeding $200,000, or$300,000 together with their spouses, or individuals who are officers ordirectors of the issuer of the securities). For transactions covered by Rule 15g-9,a broker-dealer must make a special suitability determination for the purchaserand have received the purchaser’s written consent to the transaction prior tosale. Consequently, this rule may adversely affect the ability ofbroker-dealers to sell our Common Stock, and therefore, may adversely affect theability of our stockholders to sell Common Stock in the public market.

 

The trading price of our common stock islikely to be subject to wide fluctuations. Factors affecting the trading price of our common stock may include:

 

•                  Variationsin our financial results;

 

•                  Announcementsof innovations, new solutions, strategic alliances or significant agreements byus or by our competitors;

 

•                  Recruitmentor departure of key personnel;

 

•                  Changesin estimates of our financial results or changes in the recommendations of anysecurities analysts that elect to follow our common stock;

 

•                  Marketconditions in our industry, the industries of our customers and the economy asa whole; and

 

•                  Salesof substantial amounts of our common stock, or the perception that substantialamounts of our common stock will be sold, by our existing stockholders in thepublic market.

 

**Our need to raise additional capital in the future could have adilutive effect on your investment.**

 

We will need to raise additionalcapital.  One possibility for raisingadditional capital is the public or private sale of our Common Stock orsecurities convertible into or exercisable for our Common Stock.

 

If we sell additional shares of our CommonStock, such sales will further dilute the percentage of our equity that ourexisting stockholders own.  In addition,our recent private placement financings have

 

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involved the issuance of securities at a price per share thatrepresented a discount to the trading prices listed for our Common Stock on theOTC Bulletin Board and it is possible that we will close future privateplacements involving the issuance of securities at a discount to prevailingtrading prices.  Depending upon the priceper share of securities that we sell in the future, a stockholder’s interest inus will be further diluted by any adjustments to the number of shares and theapplicable exercise price required pursuant to the terms of the agreementsunder which we previously issued securities. No assurance can be given that previous or future investors, finders orplacement agents will not claim that they are entitled to additionalanti-dilution adjustments or dispute our calculation of any such adjustments.  Any such claim or dispute could require us toincur material costs and expenses regardless of the resolution and, if resolvedunfavorably to us, to effect dilutive securities issuances or adjustments topreviously issued securities.  Inaddition, future financings may include provisions requiring us to makeadditional payments to the investors if we fail to obtain or maintain theeffectiveness of SEC registration statements by specified dates or take otherspecified action.  Our ability to meetthese requirements may depend on actions by regulators and other third parties,over which we will have no control. These provisions may require us to make payments or issue additionaldilutive securities, or could lead to costly and disruptive disputes.  In addition, these provisions could require usto record additional non-cash expenses.

 

**Our credit facility imposes significant expenses and restrictivecovenants upon us.**

 

In June 2004 we obtained a $15 millionrevolving credit facility, which was reduced in 2005 to $10 million, (the “RevolvingFacility”) from Bridge Healthcare Finance, LLC. In August 2004 we obtained a $10 million term loan credit facilityfrom Bridge Opportunity Finance, LLC (the “Term Facility” and together with theRevolving Facility, the “Credit Facility”). Bridge Opportunity Finance, LLC is an affiliate of Bridge HealthcareFinance, LLC.

 

The Credit Facility involves significant interestexpenses and other fees.  In addition,except in certain limited circumstances, the Credit Facility cannot be pre-paidin full without us incurring a significant pre-payment penalty.

 

The Credit Facility imposes various restrictions onour activities with out the consent of the lenders, including a prohibition onfundamental changes to us or our direct or indirect subsidiaries (includingcertain consolidations, mergers and sales and transfer of assets, andlimitations on our ability or any of our direct or indirect subsidiaries togrant liens upon our property or assets). In addition, under the Credit Facility we must meet certain net worth, earningsand debt service coverage requirements. The Credit Facility includes events of default (with grace periods, asapplicable) and provides that, upon the occurrence of certain events ofdefault, payment of all amounts payable under the Credit Facility, includingthe principal amount of, and accrued interest on, the Credit Facility may beaccelerated.  In addition, upon theoccurrence of certain insolvency or bankruptcy related events of default, allamounts payable under the Credit Facility, including the principal amount of,and accrued interest on, the Credit Facility shall automatically becomeimmediately due and payable.

 

The expenses and restrictions associated with theCredit Facility have the effect of limiting our operations.  In addition, our failure to pay requiredinterest expenses and other fees or to meet restrictions under the CreditFacility would have a material adverse affect on us.

 

**MedCap Partners L.P. controls a majority of our outstanding capitalstock, and this may delay or prevent change of control of our company oradversely affect our stock price.**

 

MedCap Partners L.P. controls approximately 52%of our outstanding capital stock, on a fully diluted as-converted basis.  As a result, MedCap is able to exercisecontrol over matters requiring stockholder approval, such as the election ofdirectors and the approval of significant corporate transactions.  These types of transactions includetransactions involving an actual or potential change of control of our

 

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company or other transactions that the non-controlling stockholders maydeem to be in their best interests and in which such stockholders could receivea premium for their shares.  C. FredToney, a member or our Board of Directors, is the managing member of MedCapManagement & Research LLC, the general partner of MedCap Partners L.P.

 

**The ability to attract and retain highly qualified personnel to operateand manage our operations is extremely important and our failure to do so couldadversely affect us.**

 

Presently, we are dependent upon the personalefforts of our management team.  The lossof any of our officers or directors could have a material adverse effect uponour business and future prospects.  We donot presently have key-person life insurance upon the life of any of ourofficers or directors. Additionally, as we continue our planned expansion ofcommercial operations, we will require the services of additional skilledpersonnel.  There can be no assurancethat we can attract persons with the requisite skills and training to meet ourfuture needs or, even if such persons are available, that they can be hired onterms favorable to us.

 

**We have had a short operating history.**

 

We wereformed in November 1997 and commenced operations on August 7, 2003with our acquisition of Baker Anderson Christie, Inc.  We are a “start-up” operation and subject toall the risks inherent in a new business venture, many of which are beyond ourcontrol, including the ability to implement successful operations, lack ofcapital to finance acquisitions and failure to achieve market acceptance.  In addition, as a start-up venture we willface significant competition from many companies virtually all of which are larger,better financed and have significantly greater market recognition than us.

 

**The successful implementation of our business strategy depends upon theability of our management to monitor and control costs.**

 

Withrespect to our planned operations, management cannot accurately project or giveany assurance with respect to our ability to control development and operatingcosts and/or expenses in the future. Consequently, as we expand our commercial operations, management may notbe able to control costs and expenses adequately, and such operations maygenerate losses.

 

**We may become subject to governmental regulations and oversight, whichcould adversely affect our ability to continue or expand our business strategy.**

 

Althoughour operations are currently not subject to any significant governmentregulations, it is possible that, in the future, such regulations may belegislated. Although we cannot predict the extent of any such futureregulations, a possibility exists that future or unforeseen changes may have anadverse impact upon our ability to continue or expand our operations aspresently planned.

 

**If we are unable to attract qualified nursesand healthcare professionals for our healthcare staffing business, our businesscould be negatively impacted.**

 

We relysignificantly on our ability to attract and retain nurses and healthcareprofessionals who possess the skills, experience and licenses necessary to meetthe requirements of our hospital and healthcare facility clients. We competefor healthcare staffing personnel with other temporary healthcare staffingcompanies and with hospitals and healthcare facilities. We must continuallyevaluate and expand our temporary healthcare professional network to keep pacewith our hospital and healthcare facility clients’ needs. Currently, there is ashortage of qualified nurses in most areas of the United States, competitionfor nursing personnel is increasing, and salaries and benefits have risen. Wemay be unable to continue to

 

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increase the number oftemporary healthcare professionals that we recruit, decreasing the potentialfor growth of our business. Our ability to attract and retain temporaryhealthcare professionals depends on several factors, including our ability toprovide temporary healthcare professionals with assignments that they view asattractive and to provide them with competitive benefits and wages. We cannotassure you that we will be successful in any of these areas. The cost ofattracting temporary healthcare professionals and providing them withattractive benefit packages may be higher than we anticipate and, as a result,if we are unable to pass these costs on to our hospital and healthcare facilityclients, our losses could increase. Moreover, if we are unable to attract andretain temporary healthcare professionals, the quality of our services to ourhospital and healthcare facility clients may decline and, as a result, we couldlose clients.

 

**The temporary staffing industry is highlycompetitive and the success and future growth of our business depend upon ourability to remain competitive in obtaining and retaining temporary staffingclients.**

 

Thetemporary staffing industry is highly competitive and fragmented, with limitedbarriers to entry. We compete in national, regional and local markets withfull-service agencies and in regional and local markets with specializedtemporary staffing agencies. Some of our competitors include AMN HealthcareServices, Inc., Cross Country, Inc., Medical Staffing NetworkHoldings, Inc. and On Assignment, Inc. All of these companies havesignificantly greater marketing and financial resources than we do. Our abilityto attract and retain clients is based on the value of the service we deliver,which in turn depends principally on the speed with which we fill assignmentsand the appropriateness of the match based on clients’ requirements and theskills and experience of our temporary employees. Our ability to attractskilled, experienced temporary professionals is based on our ability to paycompetitive wages, to provide competitive benefits, to provide multiple,continuous assignments and thereby increase the retention rate of theseemployees. To the extent that competitors seek to gain or retain market shareby reducing prices or increasing marketing expenditures, we could lose revenuesand our margins could decline, which could seriously harm our operating resultsand cause the trading price of our stock to decline. As we expand into newgeographic markets, our success will depend in part on our ability to gainmarket share from competitors. We expect competition for clients to increase inthe future, and the success and growth of our business depend on our ability toremain competitive.

 

**Our business depends uponour continued ability to secure and fill new orders from our hospital andhealthcare facility clients, because we do not have long-term agreements orexclusive contracts with them.**

 

Wegenerally do not have long-term agreements or exclusive guaranteed ordercontracts with our hospital and healthcare facility clients. The success of ourbusiness depends upon our ability to continually secure new orders fromhospitals and other healthcare facilities and to fill those orders with ourtemporary healthcare professionals. Our hospital and healthcare facilityclients are free to place orders with our competitors and may choose to usetemporary healthcare professionals that our competitors offer them. Therefore,we must maintain positive relationships with our hospital and healthcarefacility clients. If we fail to maintain positive relationships with ourhospital and healthcare facility clients, we may be unable to generate newtemporary healthcare professional orders and our business may be adverselyaffected.

 

**Fluctuations in patientoccupancy at our clients’ hospitals and healthcare facilities may adverselyaffect the demand for our services and therefore the profitability of ourbusiness.**

 

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Demand forour temporary healthcare staffing services is significantly affected by thegeneral level of patient occupancy at our hospital and healthcare clients’facilities. When occupancy increases, hospitals and other healthcare facilitiesoften add temporary employees before full-time employees are hired. Asoccupancy decreases, hospitals and other healthcare facilities typically reducetheir use of temporary employees before undertaking layoffs of their regularemployees. In addition, we may experience more competitive pricing pressureduring periods of occupancy downturn. Occupancy at our clients’ hospitals andhealthcare facilities also fluctuates due to the seasonality of some electiveprocedures. We are unable to predict the level of patient occupancy at anyparticular time and its effect on our revenues and earnings.

 

**Healthcare reform couldnegatively impact our business opportunities, revenues and margins.**

 

The U.S.government has undertaken efforts to control increasing healthcare coststhrough legislation, regulation and voluntary agreements with medical careproviders and drug companies. In the recent past, the U.S. Congress hasconsidered several comprehensive healthcare reform proposals. The proposalswere generally intended to expand healthcare coverage for the uninsured andreduce the growth of total healthcare expenditures. While the U.S. Congress didnot adopt any comprehensive reform proposals, members of Congress may raisesimilar proposals in the future. If any of these proposals are approved,hospitals and other healthcare facilities may react by spending less onhealthcare staffing, including nurses. If this were to occur, we would havefewer business opportunities, which could seriously harm our business.

 

Stategovernments have also attempted to control increasing healthcare costs. Forexample, the state of Massachusetts has recently implemented a regulation thatlimits the hourly rate payable to temporary nursing agencies for registerednurses, licensed practical nurses and certified nurses’ aides. The state ofMinnesota has also implemented a statute that limits the amount that nursingagencies may charge nursing homes. Other states have also proposed legislationthat would limit the amounts that temporary staffing companies may charge. Anysuch current or proposed laws could seriously harm our business, revenues andmargins.

 

Furthermore,third party payers, such as health maintenance organizations, increasinglychallenge the prices charged for medical care. Failure by hospitals and otherhealthcare facilities to obtain full reimbursement from those third partypayers could reduce the demand or the price paid for our staffing services.

 

**We operate in a regulated industry and changes inregulations or violations of regulations may result in increased costs orsanctions that could reduce our revenues and profitability.**

 

Thehealthcare industry is subject to extensive and complex federal and state lawsand regulations related to professional licensure, conduct of operations,payment for services and payment for referrals. If we fail to comply with thelaws and regulations that are directly applicable to our business, we couldsuffer civil and/or criminal penalties or be subject to injunctions or ceaseand desist orders.

 

Ourbusiness is generally not subject to the extensive and complex laws that applyto our hospital and healthcare facility clients, including laws related toMedicare, Medicaid and other federal and state healthcare programs. However,these laws and regulations could indirectly affect the demand or the pricespaid for our services. For example, our hospital and healthcare facilityclients could suffer civil or criminal penalties or be excluded fromparticipating in Medicare, Medicaid and other healthcare programs if they failto comply with the laws and regulations applicable to their businesses. Inaddition, our hospital and healthcare facility clients could receive reducedreimbursements, or be excluded from coverage, because of a change in the ratesor conditions set by federal or state governments. In turn, violations of or changesto these laws and regulations that adversely affect our hospital and healthcarefacility clients could also adversely affect the prices that these clients arewilling or able to pay for our services.

 

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Inaddition, improper actions by our employees and other service providers maysubject us to regulatory and litigation risk.

 

**Competition for acquisition opportunities may restrict our futuregrowth by limiting our ability to make acquisitions at reasonable valuations.**

 

Ourbusiness strategy includes increasing our market share and presence in thetemporary healthcare staffing industry through strategic acquisitions ofcompanies that complement or enhance our business. We have historically facedcompetition for acquisitions. In the future, such competition could limit ourability to grow by acquisitions or could raise the prices of acquisitions andmake them less attractive to us.

 

**Significant legal actions could subject us tosubstantial uninsured liabilities.**

 

In recentyears, healthcare providers have become subject to an increasing number oflegal actions alleging malpractice, product liability or related legaltheories. Many of these actions involve large claims and significant defensecosts. In addition, we may be subject to claims related to torts or crimescommitted by our employees or temporary healthcare professionals. In someinstances, we are required to indemnify our clients against some or all ofthese risks. A failure of any of our employees or healthcare professionals toobserve our policies and guidelines intended to reduce these risks, relevantclient policies and guidelines or applicable federal, state or local laws, rules andregulations could result in negative publicity, payment of fines or otherdamages. Our professional malpractice liability insurance and general liabilityinsurance coverage may not cover all claims against us or continue to beavailable to us at a reasonable cost. If we are unable to maintain adequateinsurance coverage or if our insurers deny coverage we may be exposed tosubstantial liabilities.

 

**We may be legally liable for damages resultingfrom our hospital and healthcare facility clients’ mistreatment of ourhealthcare personnel.**

 

Because weare in the business of placing our temporary healthcare professionals in theworkplaces of other companies, we are subject to possible claims by ourtemporary healthcare professionals alleging discrimination, sexual harassment,negligence and other similar activities by our hospital and healthcare facilityclients. The cost of defending such claims, even if groundless, could besubstantial and the associated negative publicity could adversely affect ourability to attract and retain qualified healthcare professionals in the future.

 

**Execution of our business strategy and growthof our business are substantially dependent upon our ability to attract,develop and retain qualified and skilled sales personnel.**

 

Executionof our business strategy and continued growth of our business are substantiallydependent upon our ability to attract, develop and retain qualified and skilledsales personnel who engage in selling and business development for ourservices. The available pool of qualified sales personnel candidates islimited. We commit substantial resources to the recruitment, training,development and operational support of our sales personnel. There can be noassurance that we will be able to recruit, develop and retain qualified salespersonnel in sufficient numbers or that our sales personnel will achieveproductivity levels sufficient to enable growth of our business. Failure toattract and retain productive sales personnel could adversely affect ourbusiness, financial condition and results of operations.

 

**We have a substantial amount of goodwill andother intangible assets on our balance sheet. Our level of goodwill and otherintangible assets may have the effect of decreasing our earnings or increasingour losses.**

 

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As of June 30,2005, we had $25.2 million of goodwill and other unamortized intangible assetson our balance sheet, which represents the excess of the total purchase priceof our acquisitions over the fair value of the net assets acquired.  At June 30, 2005, goodwill and otherintangible assets represented 77% of our total assets.

 

In July 2001,the Financial Accounting Standards Board issued SFAS No. 141, *Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*.SFAS No. 141 requires that the purchase method of accounting be used forall business combinations initiated after June 30, 2001, as well as allpurchase method business combinations completed after June 30, 2001. SFAS No. 142requires that, subsequent to January 1, 2002, goodwill not be amortizedbut rather that it be reviewed annually for impairment. In the event impairmentis identified, a charge to earnings would be recorded. We have adopted theprovisions of SFAS No. 141 and SFAS No. 142. Although it does notaffect our cash flow, an impairment charge of goodwill to earnings has theeffect of decreasing our earnings or increasing our losses, as the case may be.If we are required to write down a substantial amount of goodwill, our stockprice could be adversely affected.

 

**Demand for medical staffing services issignificantly affected by the general level of economic activity andunemployment in the United States.**

 

Wheneconomic activity increases, temporary employees are often added beforefull-time employees are hired. However, as economic activity slows, manycompanies, including our hospital and healthcare facility clients, reduce theiruse of temporary employees before laying off full-time employees. In addition,we may experience more competitive pricing pressure during periods of economicdownturn. Therefore, any significant economic downturn could have a materialadverse impact on our financial position and results of operations

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime

 

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periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement including our Chief Executive Officer and our Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives and managementis required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

 

As required by Rule 13a-15(b) under theExchange Act, we conducted an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based upon the foregoingevaluation, our principal executive officer and our principal financial officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level as of the end of the fiscal period covered by thisreport.

 

There has been no change in our internal controlsover financial reporting during our most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrols over financial reporting.

 

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## ***PART II. OTHER INFORMATION***

 

**Item 1.****                    LegalProceedings**

 

None.

 

**Item 2.****                    UnregisteredSales of Equity Securities and Use of Proceeds**

 

In connection with the exercise of outstanding warrants to purchaseshares of Series C Preferred Stock, on May 2, 2005 we issued 22,187shares of Series C Preferred Stock at a cash price per share of $60.00 toMedCap Partners L.P.  The issuance of theshares of Series C Preferred Stock was made pursuant to an exemption fromregistration provided by Section 4(2) of the Securities Act of 1933,as amended (the “Securities Act”), and/or Regulation D promulgated under theSecurities Act.

 

**Item 6.****                    Exhibits**

 

(a)                                  Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.3                  |       | Equity Purchase Agreement, dated as of May 4,  2005, by and among Crdentia Corp., CRDE Corp., GHS Acquisition Corporation,  Prime Staff, Inc., Prime Staff GP, LLC, Mint Medical, LLC, Mint Medical  GP, LLC and the equity owners of Prime Staff, Inc., Prime Staff GP, LLC,  Mint Medical, LLC, and Mint Medical GP, LLC. Certain schedules and exhibits  referenced in the Agreement and Plan of Reorganization have been omitted in  accordance with Item 601(b)(2) of Regulation S-B. A copy of the omitted schedule and/or  exhibit will be furnished supplementally to the Securities and Exchange  Commission upon request. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1(2)               |       | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2(3)               |       | Certificate of Amendment to Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.3(4)               |       | Certificate of Amendment to Restated Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.4(4)               |       | Certificate of Correction of Certificate of Amendment to Restated  Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.5(4)               |       | Certificate of Correction of Certificate of Amendment to Restated  Certificate of Incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.6(2)               |       | Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.7(5)               |       | Certificate of Designations, Preferences and Rights of Series A  Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.8(6)               |       | Certificate of Amendment of Certificate of Designations, Preferences  and Rights of Series A Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.9(7)               |       | Certificate of Designations, Preferences and Rights of Series B  Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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| 3.10(8)   |   | Certificate of Correction of Certificate of Designations, Preferences  and Rights of Series B Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.77(9)   |   | Certificate of Designations, Preferences and Rights of Series B-1  Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.12(10)  |   | Certificate of Correction of Certificate of Designations, Preferences  and Rights of Series B-1 Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.13(11)  |   | Certificate of Designations, Preferences and Rights of Series C  Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.14(10)  |   | Certificate of Correction of Certificate of Designations, Preferences  and Rights of Series C Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.15(12)  |   | Certificate of Amendment to Amended and Restated Certificate of  Incorporation of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.16(13)  |   | Certificate of Amendment of Certificate of Designations, Preferences  and Rights of Series C Preferred Stock of Crdentia Corp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.34     |   | Second Amended and Restated Loan and  Security Agreement – Revolving Loans, dated May 16, 2005 by and among  Crdentia Corp., Baker Anderson Christie, Inc., Nurses Network, Inc.,  New Age Staffing, Inc., PSR Nurses, Ltd., PSR Nurse Recruiting, Inc.,  PSR Nurses Holdings Corp., CRDE Corp., Arizona Home Health Care/Private Duty, Inc.,  Care Pros Staffing, Inc., HIP Holding, Inc., Health Industry  Professionals, L.L.C., Travmed USA, Inc., Prime Staff, LP, Mint Medical  Staffing Odessa, LP, GHS Acquisition Corporation and Bridge Healthcare Finance,  LLC. |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.35     |   | Amended and Restated Loan and Security  Agreement – Term Loan, dated May 16, 2005 by and among Crdentia Corp.,  Baker Anderson Christie, Inc., Nurses Network, Inc., New Age  Staffing, Inc., PSR Nurses, Ltd., PSR Nurse Recruiting, Inc., PSR  Nurses Holdings Corp., CRDE Corp., Arizona Home Health Care/Private Duty, Inc.,  Care Pros Staffing, Inc., HIP Holding, Inc., Health Industry  Professionals, L.L.C., Travmed USA, Inc., Prime Staff, LP, Mint Medical  Staffing Odessa, LP, GHS Acquisition Corporation and Bridge Opportunity  Finance, LLC.             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.36(15) |   | Executive Employment Agreement dated May 31,  2005 by and between Crdentia Corp. and James J. TerBeest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.37(15) |   | Notice of Restricted Stock Bonus Award and  Restricted Stock Bonus Agreement dated May 31, 2005 by and between  Crdentia Corp. and James D. Durham.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.38(15) |   | Notice of Restricted Stock Bonus Award and  Restricted Stock Bonus Agreement dated May 31, 2005 by and between  Crdentia Corp. and Pamela G. Atherton.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.39(15) |   | Notice of Restricted Stock Bonus Award and  Restricted Stock Bonus Agreement dated May 31, 2005 by and between  Crdentia Corp. and James J. TerBeest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.40(15) |   | Notice of Restricted Stock Bonus Award and  Restricted Stock Bonus Agreement dated May 31, 2005 by and between  Crdentia Corp. and Vicki L. Smith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1      |   | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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| 31.2   |   | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| 32.1   |   | Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley act of 2002. |
|   |   |                                                                                                      |
| 32.2   |   | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley act of 2002. |

 

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(2)                                  Filed with a Current Report on Form 8-Kdated August 22, 2002.

(3)                                  Filed with a Quarterly Report on Form 10-QSBdated August 12, 2003.

(4)                                  Filed with an amended Current Report on Form 8-K/Adated June 28, 2004.

(5)                                  Filed with a Current Report on Form 8-Kdated December 30, 2003.

(6)                                  Filed with a Current Report on Form 8-Kdated February 20, 2004.

(7)                                  Filed with a Current Report on Form 8-Kdated June 22, 2004.

(8)                                  Filed with an amended Current Report on Form 8-K/Adated October 10, 2004.

(9)                                  Filed with a Current Report on Form 8-Kdated August 24, 2004.

(10)                            Filed with an amended Current Report on Form 8-K/Adated October 10, 2004.

(11)                            Filed with a Current Report on Form 8-Kdated September 7, 2004.

(12)                            Filed with a Current Report on Form 8-Kdated January 1, 2005.

(13)                            Filed with a Current Report on Form 8-Kdated March 21, 2005.

(15)                            Filed with a Current Report on Form 8-Kdated May 31, 2005.

 

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## ***SIGNATURES***

 

In accordance with the requirements of Section 13 of 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed in its behalf by the undersigned, thereunto duly authorized.

 
| Date: August 15, 2005 | By:    | /S/ James D. Durham                  |   |
|----------------------------|--------|--------------------------------------|--------|
|                       |   | James D. Durham                      |
|                       |   | Chairman and Chief Executive Officer |
|                       |   |
| Date: August 15, 2005 | By:    | /S/ James J. TerBeest                |   |
|                       |   | James J. TerBeest                    |
|                       |   | Chief Financial Officer              |
|                            |        |                                      |        |  |  |

 

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