**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10 - Q**

 

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| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |       | **For the  quarterly period ended April 2, 2006**                                                                                                                                                                                                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| **or**     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | **For the  transition period from                                to                            ** |

 

**Commission file number 000-20831**

 

**REMEDYTEMP, INC.**

**(Exact Name of Registrant as Specified in Its Charter)**

 

| **California**                           | ** ** | **95-2890471**      |
|------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of          |       | (I.R.S. Employer    |
| Incorporation or Organization)           |       | Identification No.) |
| ** **                               | ** ** | ** **          |
| **101 Enterprise**                       |       |                |
| **Aliso Viejo, California**              | ** ** | **92656**           |
| (Address of Principal Executive Offices) |       | (Zip Code)          |

 

Registrant’s Telephone Number, Including Area Code:**(949) 425-7600**

 

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Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

Indicate by check markwhether the Registrant a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large Accelerated Filer £ |   | Accelerated Filer ý |   | Non-Accelerated Filer £ |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes £ No ý

 

As of May 1, 2006 theRegistrant had 8,983,296 shares of Class A Common Stock and 798,188 shares ofClass B Common Stock outstanding.

 

 

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**RemedyTemp, inc.**

 

**INDEX**

 
| ** **                                                                                                        | **Page No.** |
|-------------------------------------------------------------------------------------------------------------------|--------------|
| **PART I — FINANCIAL INFORMATION**                                                                           |         |
| Item 1. Financial Statements  (unaudited)                                                                         |         |
| Consolidated Balance Sheets as of  April 2, 2006 and October 2, 2005                                              | 3            |
| Consolidated Statements of  Operations for the three and six fiscal months ended April 2, 2006 and April  3, 2005 | 4            |
| Consolidated Statements of  Cash Flows for the six fiscal months ended April 2, 2006 and April 3, 2005            | 5            |
| Condensed Notes to  Consolidated Financial Statements                                                             | 6            |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 19           |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                               | 33           |
| Item 4. Controls  and Procedures                                                                                  | 33           |
| **PART II—OTHER  INFORMATION**                                                                               |         |
| Item 1. Legal  Proceedings                                                                                        | 34           |
| Item  1A. Risk Factors                                                                                            | *            |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                              | *            |
| Item  3. Defaults Upon Senior Securities                                                                          | *            |
| Item  4. Submission of Matters to a Vote of Security Holders                                                      | *            |
| Item  5. Other Information                                                                                        | *            |
| Item 6. Exhibits                                                                                                  | 36           |
| **SIGNATURES**                                                                                                    | 39           |

 

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*****No information provided due toinapplicability of item.

 

2

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**RemedyTemp, inc.**

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                                                                                                          | ** ** | **April 2, 2006** | ** ** | **October 2, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| **ASSETS**                                                                                                                                                          |       |                        |       |                          |       |
| Current assets:                                                                                                                                                     |       |                        |       |                          |       |
| Cash and cash equivalents                                                                                                                                           |       | $                           | 26,828     |                          | $          | 24,768 |   |
| Investments (Note 3)                                                                                                                                                |       | 69                          |       | 68                            |       |
| Restricted investments (Note 3)                                                                                                                                     |       | 4,245                       |       | 3,771                         |       |
| Accounts receivable, net of allowance for  doubtful accounts of $894 and $905, respectively                                                                         |       | 60,582                      |       | 60,787                        |       |
| Prepaid expenses and other current assets                                                                                                                           |       | 7,319                       |       | 7,406                         |       |
| Prepaid workers’ compensation insurance                                                                                                                        |       | —                      |       | 2,396                         |       |
| Total current assets                                                                                                                                                |       | 99,043                      |       | 99,196                        |       |
| Fixed assets, net                                                                                                                                                   |       | 9,361                       |       | 9,696                         |       |
| Restricted cash and investments (Note 3)                                                                                                                            |       | 23,243                      |       | 22,890                        |       |
| Other assets                                                                                                                                                        |       | 87                          |       | 88                            |       |
| Intangible assets, net of accumulated  amortization of $1,516 and $1,244, respectively                                                                              |       | 1,468                       |       | 1,730                         |       |
| Goodwill (Note 4)                                                                                                                                                   |       | 4,483                       |       | 4,483                         |       |
| Total Assets                                                                                                                                                        |       | $                           | 137,685    |                          | $          | 138,083 |   |
|                                                                                                                                                                |       |                        |       |                          |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                      |       |                        |       |                          |       |
| Current liabilities:                                                                                                                                                |       |                        |       |                          |       |
| Accounts payable                                                                                                                                                    |       | $                           | 1,711      |                          | $          | 1,275 |   |
| Accrued workers’ compensation, current  portion (Note 5)                                                                                                       |       | 13,885                      |       | 14,526                        |       |
| Accrued payroll, benefits and related costs                                                                                                                         |       | 17,863                      |       | 17,979                        |       |
| Accrued licensees’ share of gross profit                                                                                                                       |       | 2,262                       |       | 2,630                         |       |
| Other accrued expenses                                                                                                                                              |       | 6,422                       |       | 7,834                         |       |
| Total current liabilities                                                                                                                                           |       | 42,143                      |       | 44,244                        |       |
|                                                                                                                                                                |       |                        |       |                          |       |
| Other liabilities (Note 5)                                                                                                                                          |       | 30,508                      |       | 32,300                        |       |
| Total liabilities                                                                                                                                                   |       | 72,651                      |       | 76,544                        |       |
|                                                                                                                                                                |       |                        |       |                          |       |
| Commitments and contingent liabilities  (Note 7)                                                                                                                    |       |                        |       |                          |       |
|                                                                                                                                                                |       |                        |       |                          |       |
| Shareholders’ equity:                                                                                                                                          |       |                        |       |                          |       |
| Preferred Stock, $0.01 par value;  authorized 5,000 shares; none outstanding                                                                                        |       | —                      |       | —                        |       |
| Class A Common Stock, $0.01 par value;  authorized 50,000 shares; 8,983 and 8,813 shares issued and outstanding at  April 2, 2006 and October 2, 2005, respectively |       | 89                          |       | 88                            |       |
| Class B Non-Voting Common Stock, $0.01 par  value; authorized 4,530 shares; 798 shares issued and outstanding at April 2,  2006 and October 2, 2005                 |       | 8                           |       | 8                             |       |
| Additional paid-in capital                                                                                                                                          |       | 40,262                      |       | 41,824                        |       |
| Unearned compensation                                                                                                                                               |       | —                      |       | (2,382                        | )          |
| Accumulated other comprehensive loss                                                                                                                                |       | (149                        | )          | (129                          | )          |
| Retained earnings                                                                                                                                                   |       | 24,815                      |       | 22,130                        |       |
| Total shareholders’ equity                                                                                                                                     |       | 65,034                      |       | 61,539                        |       |
| Total Liabilities and Shareholders’ Equity                                                                                                                     |       | $                           | 137,685    |                          | $          | 138,083 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**RemedyTemp, Inc.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                                      | ** ** | **Three Months Ended** | ** **   | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|--------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **April 2, 2006**      | ** **   | **April 3, 2005**    | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| Company-owned office revenues                                                         |       | $                                |  75,791 |                           | $          |  77,335 |   | $ |  158,254 |   | $ |  165,963 |   |
| Licensed franchise revenues                                                                     |       | 48,455                           |         | 47,623                         |       | 99,602 |   | 96,029 |   |
| Franchise royalties and initial franchise  fees                                                 |       | 373                              |         | 305                            |       | 759 |   | 627 |   |
| Total revenues                                                                                  |       | 124,619                          |         | 125,263                        |       | 258,615 |   | 262,619 |   |
| Cost of Company-owned office revenues  (exclusive of depreciation and amortization shown below) |       | 58,927                           |         | 62,162                         |       | 123,089 |   | 133,983 |   |
| Cost of licensed franchise revenues  (exclusive of depreciation and amortization shown below)   |       | 38,687                           |         | 38,269                         |       | 79,431 |   | 77,013 |   |
| Licensees’ share of gross profit                                                           |       | 6,619                            |         | 6,392                          |       | 13,697 |   | 12,860 |   |
| Selling and administrative expenses                                                             |       | 18,922                           |         | 19,314                         |       | 37,217 |   | 38,662 |   |
| CIGA litigation                                                                                 |       | 64                               |         | 40                             |       | 193 |   | 138 |   |
| Depreciation and amortization                                                                   |       | 1,165                            |         | 1,190                          |       | 2,371 |   | 2,554 |   |
| Income (loss) from operations                                                                   |       | 235                              |         | (2,104                         | )          | 2,617 |   | (2,591 | ) |
| Other income (expense):                                                                         |       |                             |         |                           |       |   |   |   |   |
| Interest expense                                                                                |       | (357                             | )            | (178                           | )          | (544 | ) | (306 | ) |
| Interest income                                                                                 |       | 475                              |         | 274                            |       | 811 |   | 533 |   |
| Other, net                                                                                      |       | 417                              |         | 128                            |       | 787 |   | 499 |   |
| Income (loss) before income taxes                                                               |       | 770                              |         | (1,880                         | )          | 3,671 |   | (1,865 | ) |
| Provision for (benefit from) income taxes                                                       |       | 202                              |         | (499                           | )          | 986 |   | (462 | ) |
| Net income (loss)                                                                               |       | $                                | 568          |                           | $          | (1,381 | ) | $ | 2,685 |   | $ | (1,403 | ) |
|                                                                                            |       |                             |         |                           |       |   |   |   |   |
| Net income (loss) per share – basic                                                        |       | $                                | 0.06         |                           | $          | (0.15 | ) | $ | 0.30 |   | $ | (0.16 | ) |
| Net income (loss) per share – diluted                                                      |       | $                                | 0.06         |                           | $          | (0.15 | ) | $ | 0.28 |   | $ | (0.16 | ) |
|                                                                                            |       |                             |         |                           |       |   |   |   |   |
| Weighted average shares – basic                                                            |       | 9,068                            |         | 9,043                          |       | 9,067 |   | 9,038 |   |
| Weighted average shares – diluted                                                          |       | 9,538                            |         | 9,043                          |       | 9,465 |   | 9,038 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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**RemedyTemp, Inc.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **April 2, 2006**    | ** ** | **April 3, 2005** | ** ** |
| Cash flows from operating activities:                                              |       |                           |       |   |   |
| Net income (loss)                                                                  |       | $                              | 2,685      |   | $ | (1,403 | ) |
| Adjustments to reconcile net income (loss)  to net cash from operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 2,370                          |       | 2,554 |   |
| Provision for losses on accounts receivable                                        |       | 224                            |       | 49 |   |
| Stock-based compensation expense                                                   |       | 810                            |       | 712 |   |
| Deferred taxes                                                                     |       | 19                             |       | — |   |
| Gain on sale of securities                                                         |       | (2                             | )          | — |   |
| Interest on available-for-sales investments                                        |       | (346                           | )          | — |   |
| Changes in assets and liabilities:                                                 |       |                           |       |   |   |
| Trading investments                                                                |       | (474                           | )          | (382 | ) |
| Accounts receivable                                                                |       | (19                            | )          | 6,713 |   |
| Prepaid expenses and other current assets                                          |       | 2,543                          |       | 1,867 |   |
| Other assets                                                                       |       | 1                              |       | 184 |   |
| Accounts payable                                                                   |       | 436                            |       | (2,840 | ) |
| Accrued workers’ compensation                                                 |       | (2,433                         | )          | 2,314 |   |
| Accrued payroll, benefits and related costs                                        |       | (116                           | )          | (1,857 | ) |
| Accrued licensees’ share of gross profit                                      |       | (368                           | )          | (545 | ) |
| Other accrued expenses                                                             |       | (1,468                         | )          | (745 | ) |
| Net cash provided by operating activities                                          |       | 3,862                          |       | 6,621 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from investing activities:                                              |       |                           |       |   |   |
| Purchase of fixed assets                                                           |       | (1,824                         | )          | (1,659 | ) |
| Purchase of available-for-sale investments                                         |       | (245                           | )          | (2,342 | ) |
| Proceeds from maturity of  available-for-sale investments                          |       | —                         |       | 4,000 |   |
| Restricted cash and investments                                                    |       | 256                            |       | 14,114 |   |
| Purchase of intangible assets                                                      |       | (10                            | )          | (875 | ) |
| Net cash (used in) provided by investing  activities                               |       | (1,823                         | )          | 13,238 |   |
|                                                                               |       |                           |       |   |   |
| Cash flows from financing activities:                                              |       |                           |       |   |   |
| Proceeds from Employee Stock Purchase Plan  activity                               |       | 58                             |       | 94 |   |
| Net cash provided by financing activities                                          |       | 58                             |       | 94 |   |
|                                                                               |       |                           |       |   |   |
| Effect of exchange rate changes in cash                                            |       | (37                            | )          | 33 |   |
| Net increase in cash and cash equivalents                                          |       | 2,060                          |       | 19,986 |   |
|                                                                               |       |                           |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 24,768                         |       | 6,891 |   |
| Cash and cash equivalents at end of period                                         |       | $                              | 26,828     |   | $ | 26,877 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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**RemedyTemp, Inc.**

 

**1.Description of business and summary of significant accounting policies**

 

***Description of business***

 

RemedyTemp, Inc.’s (the “Company”or “Remedy”) principal business is providing temporary personnel to industrial,service and technology companies, professional organizations and governmentalagencies nationwide.

 

The Company has two classesof Common Stock outstanding: Class A Common Stock, which has all voting andother rights normally associated with Common Stock; and Class B Common Stock,which is identical to the Class A Common Stock in all respects except that theClass B Common Stock has no voting rights other than with respect to certainamendments of the Company’s Amended and Restated Articles of Incorporation,certain mergers and as otherwise required by law. The Class B Common Stockautomatically converts into Class A Common Stock on a share-for-share basisupon the earlier of (i) a transfer to a non-affiliate of the holder thereof ina public offering pursuant to an effective registration statement or Rule 144promulgated under the Securities Act of 1933, as amended, (ii) the death or legalincapacity of Robert E. McDonough, Sr., or (iii) the tenth anniversary of thecompletion of the Company’s initial public offering (the “Offering”) on July16, 1996.

 

***Basis of presentation***

 

The consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries. These financial statements have been prepared in conformity withgenerally accepted accounting principles in the United States of America andpursuant to the rules and regulations of the Securities and Exchange Commission(the “SEC”). In the opinion of management, the accompanying consolidatedfinancial statements contain all material adjustments (consisting of normalrecurring adjustments) necessary to fairly state the financial position of theCompany as of April 2, 2006, and its results of operations for the thirteen andtwenty-six weeks ended April 2, 2006, and April 3, 2005, and cash flows for thetwenty-six weeks ended April 2, 2006 and April 3, 2005. All intercompanyaccounts and transactions have been eliminated in consolidation. As permittedunder the applicable rules and regulations of the SEC, these financialstatements do not include all disclosures and footnotes normally included withthe annual consolidated financial statements and, accordingly, should be readin conjunction with the consolidated financial statements, and the notesthereto, included in the Company’s Annual Report on Form 10-K filed with theSEC on December 16, 2005 for the fiscal year ended October 2, 2005. The resultsof operations for the three and six fiscal months ended April 2, 2006 may notbe indicative of the results of operations that can be expected for the fullyear.

 

***Fiscal quarters***

 

The Company’s currentquarter ended April 2, 2006 consisted of thirteen weeks. The remaining quartersof fiscal year 2006 include thirteen weeks and will end on July 2, 2006 andOctober 1, 2006. The first quarter of fiscal year 2006, ended January 1, 2006,included thriteen weeks.

 

***Use of estimates in the preparation of consolidated financial statements***

 

The preparation ofconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting periods. Actual results could differ fromthose estimates. Significant estimates made in the preparation of theconsolidated financial statements include revenue recognition, allowance fordoubtful accounts, deferred taxes, estimates to assess the recoverability ofintangible and long-lived assets, goodwill impairment, accounting forstock-based compensation, workers’ compensation reserves, contingencies andlitigation reserves.

 

6

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***Reclassifications***

 

Certain amounts in the prioryears’ consolidated financial statements have been reclassified to conform tothe current year presentation. At April 3, 2005, the Company reclassified itsinvestments in auction rate securities from cash and cash equivalents toshort-term investments for the current and all prior periods. Correspondingadjustments to the Consolidated Statement of Cash Flows of the Company for thefiscal year ended October 2, 2005 have been made to reflect the gross purchasesand sales of these securities as investing activities rather than as acomponent of cash and cash equivalents. The change in classification does notaffect cash flows from operations or from financing activities for any periodpreviously reported in the Consolidated Statements of Cash Flows, nor does itaffect net income (loss) for any period previously reported in the ConsolidatedStatements of Operations. The reclassification had no impact on the purchasesof investments and increased proceeds of investments by $4,000 on theConsolidated Statement of Cash Flows for the six months ended April 3, 2005.The Company had no auction rate securities at April 2, 2006.

 

**2.Accounting for stock-based compensation**

 

Effective October 3, 2005,the Company adopted Statement of Financial Accounting Standard (“SFAS”) No.123(R) (revised 2004), *Share-Based Payment,*using the modified prospective application transition method. As a result ofthe Company’s decision to accelerate the vesting of certain stock options inthe fourth quarter of fiscal year 2005, the adoption of SFAS No. 123(R) did nothave a significant impact on our financial position, results of operations orcash flows.

 

The following tableillustrates, for the three months and six months ended April 3, 2005, theeffect on net loss and net loss per share had compensation expense for theemployee stock-based plans been recorded based on the fair value method usingthe Black-Scholes option pricing model under SFAS No. 123, *Accountingfor Stock-Based Compensation*, as amended:

 
| ** **                                                                                     | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                     | ** ** | **April 3, 2005**  | ** ** | **April 3, 2005** | ** ** |
| Net loss, as reported                                                                          |       | $                            | (1,381     | )                           | $          | (1,403 | ) |
| Deduct: total stock-based compensation  expense determined under fair value method, net of tax |       | (449                         | )          | (893                        | )          |
| Net loss, as adjusted                                                                          |       | $                            | (1,830     | )                           | $          | (2,296 | ) |
| Basic and diluted net loss per share:                                                          |       |                         |       |                        |       |
| As reported                                                                                    |       | $                            | (0.15      | )                           | $          | (0.16 | ) |
| As adjusted                                                                                    |       | $                            | (0.20      | )                           | $          | (0.25 | ) |

 

The following table setsforth the components of stock-based compensation expense included in net income(loss):

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **April 2, 2006**      | ** ** | **April 3, 2005**    | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| Restricted stock-based compensation expense          |       | $                                | 380        |                           | $          | 338 |   | $ | 734 |   | $ | 676 |   |
| Board of Directors stock-based compensation  expense |       | 19                               |       | 17                             |       | 38 |   | 36 |   |
| Redwood stock-based compensation expense             |       | —                           |       | —                         |       | 2 |   | — |   |
| Options stock-based compensation expense             |       | 9                                |       | —                         |       | 36 |   | — |   |
| Total                                                |       | $                                | 408        |                           | $          | 355 |   | $ | 810 |   | $ | 712 |   |

 

Stock-based compensationexpense is included in selling and administrative expenses in the Company’sConsolidated Statements of Operations. The total unrecognized stock-basedcompensation expense to be recognized in future periods, estimated using theBlack-Scholes option pricing model, will be approximately $32.

 

The tax benefit related tothe options granted during the three and six months ended April 2, 2006 andApril 3, 2005 would generally be recorded at the Company’s combined federal andstate statutory rate of approximately 40%. However, due to the full valuationallowance on the deferred tax assets, expenses related to stock-basedcompensation arrangements have not resulted in any decrease in the provisionfor income taxes.

 

7

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**3.Investments**

 

The Company accounts for itsinvestments in accordance with SFAS No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. At the timeof sale, the cost of mutual fund investments are determined using the averagecost method and fixed income securities cost is based upon specificidentification. All investments are carried at fair value. The followingpresents the classification of the Company’s investments:

 
| ** **                                                       | ** ** | **April 2, 2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                       | ** ** | **Adjusted  Cost**          | ** ** | **Gross  Unrealized  Gains  (Losses)** | ** ** | **Fair Value** | ** ** |
| **Available-for-sale investments:**                              |       |                        |       |   |   |   |   |
| U.S. government securities                                       |       | $                           | 22,655     |   | $ | (283 | ) | $ | 22,372 |   |
| Mutual funds                                                     |       | 68                          |       | 1 |   | 69 |   |
| Total available-for-sale investments                             |       | $                           | 22,723     |   | $ | (282 | ) | $ | 22,441 |   |
|                                                             |       |                        |       |   |   |   |   |
| **Classified as:**                                               |       |                        |       |   |   |   |   |
| Available-for-sale                                               |       |                        |       |   |   | $ | 22,441 |   |
| Trading (deferred compensation plan)                             |       |                        |       |   |   | 4,245 |   |
| Cash and cash equivalents                                        |       |                        |       |   |   | 674 |   |
| Accrued interest receivable                                      |       |                        |       |   |   | 197 |   |
| Total                                                            |       |                        |       |   |   | $ | 27,557 |   |
|                                                             |       |                        |       |   |   |   |   |
| **Reported as:**                                                 |       |                        |       |   |   |   |   |
| Investments                                                      |       |                        |       |   |   | $ | 69 |   |
| Restricted investments, short-term  (deferred compensation plan) |       |                        |       |   |   | 4,245 |   |
| Restricted cash and investments, long-term                       |       |                        |       |   |   | 23,243 |   |
| Total                                                            |       |                        |       |   |   | $ | 27,557 |   |

 
| ** **                                                       | ** ** | **October 2, 2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Adjusted  Cost**            | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
| **Available-for-sale investments:**                              |       |                          |       |   |   |   |   |
| U.S. government securities                                       |       | $                             | 22,409     |   | $ | (301 | ) | $ | 22,108 |   |
| Mutual funds                                                     |       | 68                            |       | — |   | 68 |   |
| Total available-for-sale investments                             |       | $                             | 22,477     |   | $ | (301 | ) | $ | 22,176 |   |
|                                                             |       |                          |       |   |   |   |   |
| **Classified as:**                                               |       |                          |       |   |   |   |   |
| Available-for-sale                                               |       |                          |       |   |   | $ | 22,176 |   |
| Trading (deferred compensation plan)                             |       |                          |       |   |   | 3,771 |   |
| Cash and cash equivalents                                        |       |                          |       |   |   | 591 |   |
| Accrued interest receivable                                      |       |                          |       |   |   | 191 |   |
| Total                                                            |       |                          |       |   |   | $ | 26,729 |   |
|                                                             |       |                          |       |   |   |   |   |
| **Reported as:**                                                 |       |                          |       |   |   |   |   |
| Investments                                                      |       |                          |       |   |   | $ | 68 |   |
| Restricted investments, short-term  (deferred compensation plan) |       |                          |       |   |   | 3,771 |   |
| Restricted cash and investments, long-term                       |       |                          |       |   |   | 22,890 |   |
| Total                                                            |       |                          |       |   |   | $ | 26,729 |   |

 

Unrealized gains (losses)from available-for-sale securities are included in accumulated othercomprehensive loss within shareholders’ equity. There were no realized gains(losses) related to the Company’s available-for-sale securities for the threeand six months ended April 2, 2006 and April 3, 2005.

 

8

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Holding gains (losses) ontrading securities are offset by the change in the deferred compensationliability, which is included in selling and administrative expenses in theConsolidated Statements of Operations. The following table presents the netholding gains (losses) related to the Company’s trading securities:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **April 2,  2006**          | ** ** | **April 3,  2005**        | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
| Net holding gains (losses) |       | $                                | 220        |                           | $          | (51 | ) | $ | 303 |   | $ | 140 |   |
|                            |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

The following tablesummarizes the fair value and gross unrealized losses related to the Company’savailable-for-sale securities that have been in a continuous net unrealizedloss position for the length of time indicated as of April 2, 2006:

 
| ** **                    | ** ** | **Less than 12 Months** | ** ** | **Greater than 12 Months** | ** ** | **Total**       | ** ** |
|-------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|
| ** **                    | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Loss**                      | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| Available-for-sale securities |       | $                                      | 12,374     |                                      | $          | (93             | )          | $ | 10,067 |   | $ | (189 | ) | $ | 22,441 |   | $ | (282 | ) |
|                               |            |                                        |            |                                           |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company periodicallyreviews its investment portfolio to determine if any investment isother-than-temporarily impaired due to changes in credit risk or otherpotential valuation concerns. At April 2, 2006, the Company believes that itsinvestments are not impaired. While certain available-for-sale debt securitieshave fair values that are below cost, the Company believes that it is probablethat principal and interest will be collected in accordance with contractualterms and that the decline in market value is due to changes in interest ratesand not due to increased credit risk. The cost and estimated fair value ofavailable-for-sale fixed income securities at April 2, 2006 and October 2,2005, by contractual maturity, were as follows:

 
| ** **                         | ** ** | **April 2, 2006** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Cost Basis**         | ** ** | **Fair Value** | ** ** |
| Due within one year                |       | $                           | 12,468     |   | $ | 12,374 |   |
| Due after one year through 3 years |       | 10,255                      |       | 10,067 |   |
| Total                              |       | $                           | 22,723     |   | $ | 22,441 |   |

 
| ** **                         | ** ** | **October 2, 2005** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Cost Basis**           | ** ** | **Fair Value** | ** ** |
| Due within one year                |       | $                             | 7,968      |   | $ | 7,892 |   |
| Due after one year through 3 years |       | 14,509                        |       | 14,284 |   |
| Total                              |       | $                             | 22,477     |   | $ | 22,176 |   |

 

**4. Goodwilland other intangible assets**

 

In accordance with SFAS No.142, *Goodwill and Intangible Assets*,goodwill is tested for impairment at the reporting unit level on an annualbasis in the Company’s fourth fiscal quarter or more frequently if indicatorsof impairment exist. Reporting units are determined based on geographicgroupings of Company-owned offices. The performance of the test involves atwo-step process. The first step of the impairment test involves comparing thefair value of the Company’s reporting units with the reporting unit’s carryingamount, including goodwill. The fair value of reporting units is generallydetermined using the income approach. If the carrying amount of a reportingunit exceeds the reporting unit’s fair value, the second step of the goodwillimpairment test is performed to determine the amount of any impairment loss.The second step of the goodwill impairment test involves comparing the impliedfair value of the reporting unit’s goodwill with the carrying amount of thatgoodwill.

 

The following tablesummarizes the activity in goodwill: 

 
| ** **                                                            | ** ** | **April 2,  2006** | ** ** | **October 2,  2005** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                            | ** ** | ** **              | ** ** | ** **                | ** ** |
| Beginning balance                                                     |       | $                       | 4,483      |                      | $          | 3,703 |   |
| Goodwill recorded in connection with  contingent consideration earned |       | —                  |       | 875                       |       |
| Impairment charges                                                    |       | —                  |       | (95                       | )          |
| Ending balance                                                        |       | $                       | 4,483      |                      | $          | 4,483 |   |

 

9

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At April 2, 2006, goodwillconsists of purchased franchise operations, which include operations in Texas,Tennessee, Michigan and Pennsylvania. During fiscal year 2005, the Companyclosed its Wilmington, Delaware office and recognized an impairment charge of$64. This office was closed as a result of non-performance. In addition, theCompany turned over its Ohio reporting unit to a franchisee for future grossmargin splits. The Company recognized an impairment charge of $31 during fiscalyear 2005 related to the Ohio reporting unit. No indicators of impairment existfor the six months ended April 2, 2006.

 

**5. Workers’ Compensation**

 

The Company provides workers’compensation insurance to its temporary associates and colleagues. EffectiveApril 1, 2001 and for workers’ compensation claims originating in the majorityof states (referred to as non-monopolistic states), the Company has contractedwith independent, third-party carriers for workers’ compensation insurance andclaims administration. Each annual contract covers all workers’ compensationclaim costs greater than a specified deductible amount on a “per occurrence”basis. The Company is self-insured for its deductible liability ($250 perindividual claim incurred from April 1, 2001 to March 31, 2002 and $500 for allsubsequent periods). The insurance carrier is responsible for incrementallosses in excess of the applicable deductible amount.

 

The Company establishes areserve for the estimated remaining deductible portion of its workers’compensation claims, representing the estimated ultimate cost of claims andrelated expenses that have been reported but not settled, and that have beenincurred but not reported. The estimated ultimate cost of a claim is determinedby applying actuarially determined loss development factors to current claimsinformation. These development factors are determined based upon a detailedactuarial analysis of historical claims experience of both the Company and thestaffing industry. The Company periodically updates the actuarial analysissupporting the development factors utilized and revises those developmentfactors, as necessary. Adjustments to the claims reserve are recorded toexpense or income in the years in which they occur. The estimated remainingdeductible liability under the aforementioned contracts is $36,322 and $38,281at April 2, 2006 and October 2, 2005, respectively. The Company recorded $11,807and $11,974 of the workers’ compensation liability as current and $24,515 and$26,307 as non-current at April 2, 2006 and October 2, 2005, respectively. Forthe three and six months ended April 2, 2006, the Company’s workers’compensation expense was adjusted by $1,100 and $2,000, respectively, as aresult of favorable claim frequency and severity trends confirmed in the mostrecent actuarial reports.

 

The Company also has anaggregate $2,078 and $2,552 current liability recorded at April 2, 2006 andOctober 2, 2005, respectively, for amounts due to various state funds relatedto workers’ compensation. The following table presents the current andlong-term classification of the Company’s workers’ compensation liability,accrued California Insurance Guarantee Association (“CIGA”) litigation (seediscussion of CIGA below) and other liabilities:

 
| ** **                                                               | ** ** | **April 2,  2006** | ** ** | **October 2,  2005** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **Current**                                                              |       |                    |       |                      |       |
| Liability for various state funds and  previous guaranteed cost policies |       | $                       | 2,078      |                      | $          | 2,552 |   |
| Accrued workers’ compensation                                       |       | 11,807                  |       | 11,974                    |       |
| Accrued workers’ compensation                                       |       | $                       | 13,885     |                      | $          | 14,526 |   |
|                                                                     |       |                    |       |                      |       |
| **Long-term**                                                            |       |                    |       |                      |       |
| Other liabilities                                                        |       | $                       | 116        |                      | $          | 116 |   |
| Accrued CIGA litigation                                                  |       | 5,877                   |       | 5,877                     |       |
| Accrued workers’ compensation                                       |       | 24,515                  |       | 26,307                    |       |
| Other liabilities                                                        |       | $                       | 30,508     |                      | $          | 32,300 |   |

 

The Company is contractuallyrequired to collateralize its remaining obligation under each of these workers’compensation insurance contracts through the use of irrevocable letters ofcredit, pledged cash and securities or a combination thereof. The level andtype of collateral required for each policy year is determined by the insurancecarrier at the inception of the policy year and may be modified periodically.As of April 2, 2006, the Company had outstanding letters of credit of $31,438and pledged cash and securities of $23,243 as collateral for these obligations.The pledged cash and securities are restricted and cannot be used for general corporatepurposes while the Company’s remaining obligations under the workers’compensation program are outstanding. At the Company’s discretion and to theextent available, other forms of collateral may be substituted for the pledgedcash and

 

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securities. The Company has classified these pledged cash andsecurities as restricted in the accompanying consolidated balance sheets.

 

From July 22, 1997 throughMarch 31, 2001, the Company had a fully insured workers’ compensation programwith Reliance National Insurance Company (“Reliance”). The annual premium forthis program was based upon actual payroll costs multiplied by a fixed rate.Each year, the Company prepaid the premium based upon estimated payroll levelsand an adjustment was subsequently made for differences between the estimatedand actual amounts. Subsequent to March 31, 2001 (the end of Company’s finalpolicy year with Reliance), Reliance became insolvent and was subsequentlyliquidated. The Company is currently in litigation with the CIGA regardingfinancial responsibility for all remaining open claims under the Relianceworkers’ compensation program. The Company recorded a $5,877 charge tooperating income during the fourth quarter of fiscal 2004 as a result of theOctober 2004 Court of Appeal’s decision (See Note 7).

 

**6. Shareholders’ Equity**

 

***Earnings per share calculation***

 

The Company is required todisclose basic and diluted earnings per share (“EPS”) in accordance with SFASNo. 128, *Earnings Per Share.*BasicEPS is calculated using net income (loss) divided by the weighted averagenumber of common shares outstanding during the period. Diluted EPS iscalculated in the same manner as basic EPS except that the weighted averagenumber of common shares is increased to include the number of additional commonshares that would have been outstanding if the potential dilutive commonshares, such as options, had been exercised and restricted shares had vested.

 

Potential common shares(including applicable outstanding options and restricted shares of 785 and1,254 for the three months ended April 2, 2006 and April 3, 2005, respectively,and 817 and 1,249 for the six months then ended, respectively) have beenexcluded from the calculation of diluted shares because the effect of theirinclusion would be anti-dilutive.

 

The table below sets forththe computation of basic and diluted earnings per share:

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **April 2,  2006**          | ** ** | **April 3,  2005**        | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
| **Numerator:**                                              |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                           |       | $                                | 568        |                           | $          | (1,381 | ) | $ | 2,685 |   | $ | (1,403 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| **Denominator:**                                            |       |                             |       |                           |       |   |   |   |   |
| Weighted-average number of shares, basic                    |       | 9,068                            |       | 9,043                          |       | 9,067 |   | 9,038 |   |
| Effect of dilutive securities                               |       | 470                              |       | —                         |       | 398 |   | — |   |
| Weighted-average number of shares —  assuming dilution |       | 9,538                            |       | 9,043                          |       | 9,465 |   | 9,038 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| **Net income (loss) per share — basic**                |       | $                                | 0.06       |                           | $          | (0.15 | ) | $ | 0.30 |   | $ | (0.16 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| **Net income (loss) per share — diluted**              |       | $                                | 0.06       |                           | $          | (0.15 | ) | $ | 0.28 |   | $ | (0.16 | ) |

 

For the threeand six months ended April 2, 2006, the total exercise proceeds for stockoptions that are in-the-money are $1,000 and $194, respectively.

 

***Accumulated other comprehensive loss***

 

The components ofaccumulated other comprehensive income (loss) is as follows:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **April 2,  2006**          | ** ** | **October 2,  2005** | ** ** |
| Accumulated unrealized loss on investments |       | $                                | (282       | ) | $ | (301 | ) |
| Accumulated translation adjustments        |       | 133                              |       | 172 |   |
| Total accumulated other comprehensive loss |       | $                                | (149       | ) | $ | (129 | ) |

 

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***Phantom Stock Plan***

 

The Company created aPhantom Stock Plan (“the Plan”) to entice certain individuals to participate inthe start-up of the Company’s RemX® specialty business unit. ThePlan was designed to reward the participants based upon a mimimum of five fullyears of RemX® operations. The value of the phantom shares will bedetermined based on the performance of the divisions and the Company’s earningsmultiple. The performance period consists of an investment period and avaluation period, with the investment period measured over a 48 month term andthe valuation period measured during the fiscal year following the investmentperiod. The investment period for RemX® Financial Staffing and RemX®OfficeStaff began on December 31, 2001, and the investment period forRemX® IT Staffing began on July 28, 2003. At the end of thesubsequent fiscal year, the phantom shares will be valued; 25% of the awardwill be paid out and the remaining award will be paid out annually at 25% peryear over the next 3 years. Participants must be employed by the Company toreceive payment (except under certain conditions following a change in control)and the amount earned will be paid out in cash or 50% cash and stock at theCompany’s election. During fiscal year 2005, the Company determined that theprobability of certain performance in the Plan would likely be met based uponthe current and expected performance of the RemX® specialty businessunit. Accordingly, the Company recorded a total accrual of $182 and $76 atApril 2, 2006 and October 2, 2005, respectively. Until the final measurementdate is reached, the Company will reassess the expense accrual on a quarterlybasis and changes in the estimate of the expense accrual will be accounted foras cumulative catch-up adjustments.

 

***Stock Incentive Plan***

 

The Company’s 1996 StockIncentive Plan, as amended (the “Incentive Plan”), provides for the grant ofstock-based awards, including incentive stock options, non-qualified stockoptions, restricted stock and stock appreciation rights, among others, to keyemployees and members of the Company’s Board of Directors. A total of 1,800shares have been reserved for issuance under the Incentive Plan, and as ofApril 2, 2006, approximately 273 shares were available for future grants.Options granted to employees typically may be exercised within ten years fromthe grant date and are exercisable in installments determined by theLeadership, Development and Compensation Committee of the Board of Directors.Options granted to non-employee, non-officer directors prior to the Offeringwere immediately exercisable. Option grants to non-employee, non-officerdirectors subsequent to the Offering are typically 50% exercisable immediatelyand 50% exercisable upon the date of the next annual shareholders meeting.

 

The following tablesummarizes the activity relating to all stock and option plans, exclusive ofthe restricted stock grants:

 
| ** **                  | ** ** | **Incentive Plan Options** | ** ** | **Stock Purchase Plan**         | ** ** | **Options Outside  Incentive Plan** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **Shares**                           | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Shares**                                    | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| Outstanding October 2, 2005 |       | 670.5                                |       | $                                         | 14.47      |                                          | —     |   | $ | — |   | — |   | $ | — |   |
| Granted                     |       | 7.5                                  |       | $                                         | 9.76       |                                          | 5.0        |   | $ | 11.64 |   | — |   | $ | — |   |
| Forfeited                   |       | (33.5                                | )          | $                                         | 12.32      |                                          | —     |   | $ | — |   | — |   | $ | — |   |
| Exercised                   |       | (2.1                                 | )          | $                                         | 8.26       |                                          | (5.0       | ) | $ | 11.64 |   | — |   | $ | — |   |
| Outstanding April 2, 2006   |       | 642.4                                |       | $                                         | 14.53      |                                          | —     |   | $ | — |   | — |   | $ | — |   |

 

The Company received $18 incash proceeds for the exercise of 2.1 stock options with no tax benefitrealized for tax deductions. The intrinsic value for the total stock optionsexercised during the three months ended April 2, 2006 was zero.

 

The following tablesummarizes the number of exercisable options outstanding at their weightedaverage price at April 2, 2006 and October 2, 2005:

 
| ** **              | ** ** | **Shares** | ** ** | **Weighted-vg.  Price** | ** **  |
|-------------------------|------------|------------|------------|-------------------------|-------------|
| April 2, 2006 |       | 634.9      |       | $                       |  14.59 |   |
| October 2, 2005         |       | 660.1      |       | $                       | 14.53       |   |

 

The total aggregateintrinsic value of stock options outstanding and exercisable at April 2, 2006was zero, as the fair value of share awards are below the exercise price of thetotal outstanding and exercisable stock option grants.

 

12

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The following tablesummarizes information about stock options outstanding at April 2, 2006:

 
| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                               | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Shares  Outstanding**      | ** ** | **Weighted-Average  Remaining Life  (in years)** | ** ** | **Weighted-Average  Price** | ** ** | **Shares  Exercisable** | ** ** | **Weighted-Average  Price** | ** ** |
| $7.00 - $10.00          |       | 73.9                         |       | 9.1                                                        |       | $ | 9.25 |   | 71.4 |   | $ | 9.30 |   |
| $10.01 - $13.00         |       | 208.9                        |       | 4.6                                                        |       | $ | 12.13 |   | 203.9 |   | $ | 12.17 |   |
| $13.01 - $16.00         |       | 226.8                        |       | 4.3                                                        |       | $ | 14.77 |   | 226.8 |   | $ | 14.77 |   |
| $16.01 - $20.00         |       | 55.0                         |       | 3.4                                                        |       | $ | 17.58 |   | 55.0 |   | $ | 17.58 |   |
| $20.01 - $25.00         |       | 67.8                         |       | 2.2                                                        |       | $ | 22.69 |   | 67.8 |   | $ | 22.69 |   |
| $25.01 - $30.00         |       | 10.0                         |       | 2.0                                                        |       | $ | 26.19 |   | 10.0 |   | $ | 26.19 |   |

 

The fair value of eachoption grant has been estimated on the date of grant using the Black-Scholesoption pricing model with the following weighted-average assumptions for thegrants at April 2, 2006 and October 2, 2005:

 
| ** **                 | ** ** | **April 2,** | ** ** | **October 2,** | ** ** |
|----------------------------|------------|-------------------|------------|---------------------|------------|
| **Assumptions**            | ** ** | **2006**          | ** ** | **2005**            | ** ** |
| Dividend Yield             |       | 0.0               | %          | 0.0                 | %          |
| Risk-Free Interest         |       | 4.75              | %          | 4.04                | %          |
| Volatility                 |       | 44.9              | %          | 46.0                | %          |
| Expected Life (Years)      |       | 5.9               |       | 5.6                 |       |
| Weighted Average Per Share |       | $                 | 4.95       |                | $          | 4.84 |   |
|                            |            |                   |            |                     |            |  |  |

 

The Company has not and doesnot expect to pay dividends, therefore, no specific dividend yield is utilizedunder the Black-Scholes option pricing model. The risk-free interest rateassumption is based upon observed interest rates appropriate for the term ofthe Company’s employees’ stock option grants. The volatility assumption used tovalue option grants is based exclusively on the Company’s historical availableclosing stock price information. The Company can rely exclusively on thishistorical information if (1) the Company has no reason to believe that itsfuture volatility over the expected or contractual term is likely to differfrom the past, (2) the computation of historical volatility uses a simpleaverage calculation method, (3) a sequential period of historical data at leastequals the expected or contractual term of the share options is used and (4) areasonably sufficient number of price observations are used. The expected lifeof employee stock options represents the historical weighted-average period thestock options are expected to remain outstanding and is a derived output of theBlack-Scholes option pricing model. The expected life of employees’ stockoption grants are impacted by all of the underlying assumptions used in theCompany’s model. The Black-Scholes option pricing model assumes that employees’exercise behavior is a function of the options’ remaining contractual life andthe extent to which the option is in-the-money. The Black-Scholes optionpricing model estimates the probability of exercise as a function of these twovariables based on the history of exercises and cancellations of past optiongrants made by the Company.

 

**Restrictedstock awards**

 

At April 2, 2006, theCompany had 653 shares of restricted Class A Common Stock issued andoutstanding. The Leadership, Development and Compensation Committee of theBoard of Directors approved the issuance of 108 shares of restricted Class ACommon Stock (the “Restricted Stock”) under the Company’s Incentive Plan duringthe first three months of fiscal 2006. No shares were approved and issuedduring the three months ended April 2, 2006 and the fiscal year ended October2, 2005. The Restricted Stock has no purchase price and generally vests in fullafter five years. All unvested Restricted Stock is forfeited upon voluntarytermination or termination for cause. After retirement or involuntarytermination for other than cause, 20% vests one year from the grant date withthe remaining unvested shares vesting at 1.66% each month thereafter. Unearnedcompensation, based upon the fair value of the Company’s Class A Common Stockonthe respective grant dates, is amortized and charged to operations over thefive-year vesting period on a straight-line basis. Compensation expense of $380and $734 was included in operations for the three and six months ended April 2,2006 compared to $338 and $676 for the same period in fiscal year 2005. Uponadoption of SFAS No. 123(R) on October 3, 2005, the Company reclassifiedunearned compensation into additional paid in capital to conform presentationto current guidance under SFAS No. 123(R).

 

The following tablesummarizes the activity relating to restricted stock for the six months endedApril 2, 2006:

 
| ** **                   | ** ** | **Restricted Stock** | ** ** |
|------------------------------|------------|----------------------|------------|
| ** **                   | ** ** | **Shares**           | ** ** |
| Outstanding  October 2, 2005 |       | 545.0                |       |
| Granted                      |       | 110.5                |       |
| Forfeited                    |       | (2.5                 | )          |
| Outstanding  April 2, 2006   |       | 653.0                |       |

 

**7.Commitments and contingent liabilities**

 

***Litigation***

 

*LindsayWelch-Hess v. Remedy Temporary Services, Inc.*

 

Commencing in March 2003,the Company was sued in an action entitled Lindsay Welch-Hess v. RemedyTemporary Services, Inc. in San Diego Superior Court. The complaint soughtdamages under various employment tort claims, including sexual harassment andretaliation stemming from a four-day employment relationship. The complaintalso sought damages for unpaid wages under the California Labor Code. Theplaintiff later amended the complaint to assert class claims for unpaid wageswith respect to certain aspects of the application process. The complaintasserted additional class claims alleging failure to compensate personsassigned to one of Remedy’s clients.

 

In November 2004, the Courtcertified a class consisting of all persons in California who, since October1999, have applied to the Company for placement in a temporary job, regardlessof whether they were ever placed in a temporary assignment by the Company (the “Remedyclass”). The Court certified a second class consisting of all persons inCalifornia who, since October 1999, were hourly employees hired by Remedy andassigned to a particular

 

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client (the “training class”). On February 11, 2005, the Company filedtwo motions for summary judgment related to the Remedy class and the trainingclass.

 

On May 31, 2005, the Courtdenied, in part, the Company’s motion for summary judgment related to theRemedy class, which allowed a portion of that class to pursue the claim forunpaid compensation. On June 27, 2005, the Company filed a writ in Division Oneof the Fourth Appellate District seeking an order vacating the denial of Remedy’ssummary judgment motion related to the Remedy class. On September 27, 2005, theCourt of Appeal denied the writ. Subsequently, the Company filed a Petition forReview before the California Supreme Court, which was summarily denied.

 

On July 27, 2005, plaintiffsfiled an appeal challenging the following two court orders relating to theRemedy class: (1) the order denying class certification for failure to paywages upon termination/resignation; and (2) the portion of the trial court’sruling on Remedy’s motion for summary judgment, which excluded from classmembership individuals who completed Remedy’s application process but neverworked for Remedy. This appeal is pending.

 

On July 29, 2005, the Courtgranted Remedy’s motion for summary judgment related to the training class andallowed plaintiffs to recover attorneys’ fees. Plaintiffs filed a motion forreconsideration on various issues, which was denied.

 

On September 27, 2005,plaintiffs filed an appeal challenging the following two court orders relatingto the training class: (1) the order denying class certification for failure topay wages upon termination/resignation; and (2) the portion of the trial court’sruling on Remedy’s summary judgment, which held that all training class membershad been properly paid. The appeal is pending.

 

On March 3, 2006, the trialcourt granted the Company’s request for leave to renew its motion for summaryjudgment relating to the Remedy class. The hearing on the Company’s renewedmotion for summary judgment is set to be heard on June 16, 2006.

 

The Company intends tovigorously defend this case. At this time, the Company has not estimated anaccrual for this matter because the probability of an unfavorable outcomecannot currently be reasonably estimated.

 

*CIGA*

 

In early 2002, as a resultof the liquidation of Remedy’s former workers’ compensation insurance carrier,Reliance, CIGA began making efforts to join some of the Company’s clients andtheir workers’ compensation insurance carriers (collectively, “Clients”) inpending workers’ compensation claims filed by Remedy employees. At the time ofthese injuries, from July 22, 1997 through March 31, 2001, Remedy was coveredby workers’ compensation policies issued by Reliance. The Company believes thatunder California law, CIGA is responsible for Reliance’s outstandingliabilities. On April 5, 2002, the California Workers’ Compensation AppealsBoard ( the “WCAB”), at Remedy’s request, consolidated the various workers’ compensationclaims in which CIGA sought to join Remedy’s Clients, and agreed to stayproceedings on those claims pending resolution of the issue of CIGA’sobligations to satisfy Reliance’s obligations to Remedy’s employees. The WCABselected a single test case from the consolidated pending cases in which todecide whether CIGA is responsible for the claims of Remedy’s employees, or canshift such responsibility to the Clients. The trial occurred on September 20,2002. The WCAB Administrative Law Judge ruled in favor of CIGA, thus allowingthe pending workers’ compensation matters to proceed against the Clients.Remedy then filed a motion for reconsideration of the Administrative Law Judge’sdecision by the entire WCAB. On March 28, 2003, the WCAB affirmed the ruling ofthe Administrative Law Judge.

 

Thereafter, in May 2003, theCompany filed a petition for writ of review of the WCAB’s decision in theCalifornia Court of Appeal. The WCAB continued the “stay” in effect since April5, 2002, thus preventing CIGA from proceeding until the writ proceeding wasconcluded. In January 2004, the Court of Appeal granted the Company’s petitionand undertook to review the WCAB’s decision. The Court of Appeal heard oralargument in the matter on July 9, 2004.

 

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On October 20, 2004, theCourt of Appeal affirmed the WCAB’s decision. On November 18, 2004, the Courtof Appeal granted the Company’s petition for rehearing and requested additionalbriefing on this matter. The Court of Appeal heard oral argument on April 15,2005. On July 25, 2005, the Court of Appeal issued its decision finding thatCIGA should not be dismissed and that the insurance held by Remedy’s Client didnot provide other available insurance for the workers’ compensation claim. CIGAappealed this decision with the California Supreme Court. In October 2005, theCalifornia Supreme Court declined to hear the appeal and sent the matter backto the WCAB with instructions to enforce the Court of Appeal’s decision.

 

On October 25, 2005, Remedyfiled a request for order seeking to dismiss Remedy, its Clients and theirinsurance companies from the individual WCAB cases and joining CIGA as adefendant. On November 7, 2005, CIGA filed objections to the request for dismissal.On December 13, 2005, the Company filed a reply. A hearing date has not beenset.

 

Despite the Court of Appeal’sdecision, in the event of a final unfavorable outcome, Remedy may be obligatedto reimburse certain Clients and believes that it would consider reimbursementof other Clients for actual losses incurred as a result of unfavorable rulingsin these matters. If Remedy is unsuccessful in dismissing Remedy’s Clients fromthese matters and if these Clients or their insurance carriers become obligatedto respond to the claims of Remedy’s employees, the Company believes that thedirect financial exposure to Remedy becomes a function of the ultimate losseson the claims and the impact of such claims, if any, on the Clients’ insurancecoverage, potentially including, but not limited to, the Clients’responsibility for any deductibles or retentions under their own workers’compensation insurance. The Company has received data from the Third PartyAdministrator (“TPA”) handling the claims for CIGA. Such data indicates claimsof approximately $32,903 as of April 2, 2006. The losses incurred to daterepresent amounts paid to date by the trustee and the remaining claim reserveson open files.

 

In the fourth quarter offiscal year 2004, the Company recorded a $5,877 charge to operating incomerelated to the CIGA case. The Company does not currently expect to adjust thereserve until final resolution of the case. This amount represents the Company’sestimate on the basis of a review of known information and was established forcosts associated with the indemnification of certain Clients for losses theymay suffer as a result of final unfavorable outcomes. The information reviewedincluded customer contracts, review of the loss run received from the TPAhandling the claims, actuarial development of the reported claim losses,estimates of customer insurance coverage and other applicable information. Theamount of the charge is, therefore, subject to change as more informationbecomes available to the Company. In the event of a final unfavorable outcome,the Company may also choose to reimburse certain Clients that did not enterinto contracts with the Company or whose contracts may not have includedindemnification language. These costs will be treated as period costs and willbe charged to the consolidated statements of operations in the periodmanagement decides to make any “goodwill” payments to Clients. Management’scurrent estimate of future “goodwill” payments is a range of $2,000 to $3,000.This estimate is subject to change.

 

***Other litigation***

 

From time to time, theCompany becomes a party to other litigation incidental to its business andoperations. The Company maintains insurance coverage that management believesis reasonable and prudent for the business risks that the Company faces. Basedon current available information, management does not believe the Company isparty to any other legal proceedings that are likely to have a material adverseeffect on its business, financial condition, cash flows or results ofoperations.

 

***Other contingency***

 

In late 2003, the Companywas notified that it may have underpaid certain payroll-related tax liabilitiesby approximately $2,000 for the period from January 1, 2003 through September30, 2003. Based on its evaluations and after consultation with outside counsel,the Company believes that the methodology the Company used to calculate thesetaxes was in compliance with applicable law. The Company is currently workingwith outside counsel to resolve these matters. As of April 2, 2006, the Companyhas accrued $983 in connection with the potential settlement of thesepayroll-related tax matters.

 

InMarch 2006, the Company was notified of an assessment for additional payrolltax liabilities in the State of Tennessee for the period July 1, 2003 throughJune 30, 2004. This assessment results from the Company’s

 

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acquisition of our licensed franchiseoperation in Tennessee during fiscal year 2003. As of April 2, 2006, theCompany has accrued $683 related to the assessment.

 

**8. Line ofcredit**

 

The Credit Agreement withBank of America commencing December 1, 2004 (“Credit Agreement”) provides forborrowings up to $50,000 with a provision permitting the Company to increasethe aggregate amount of borrowings to $60,000. The Company has granted asecurity interest to Bank of America in all its existing and future assets. TheCredit Agreement will expire on December 1, 2006. The Company expects to amendthe Credit Agreement on or before the expiration date. The Credit Agreementbears interest on outstanding borrowings equal to LIBOR plus 1.75% to 2.75%based upon the Company’s earnings before interest, taxes, depreciation andamortization (“EBITDA”) or prime rate plus 0.00% to 0.50% based on EBITDA. TheCompany is also required to pay monthly fees of 0.25% per annum on the unusedportion of the line of credit and monthly fees of 0.75% or 1.50% per annum onoutstanding letters of credit based on a pricing matrix. The Credit Agreementrequires the Company to comply with a minimum EBITDA covenant, which will notgo into effect unless the Company’s total liquidity drops below $15,000.Liquidity is defined by the Credit Agreement as unrestricted domestic cash plusexcess borrowing availability. The Company is in compliance with all financialcovenants as prescribed in the Credit Agreement at April 2, 2006.

 

The Company has noborrowings outstanding as of April 2, 2006 and October 2, 2005. The Company hadoutstanding letters of credit totaling $31,438 and $36,538 at April 2, 2006 andOctober 2, 2005, respectively, to collateralize its remaining workers’compensation deductible liability (See Note 5).

 

**9. Incometaxes**

 

An income tax provision of$986 was recorded for the six months ended April 2, 2006, compared to an incometax benefit of $462 for the six months ended April 3, 2005. The Company’soverall annual effective tax rate of 27.0% for fiscal year 2006 differs fromthe statutory rate due as a result of the Company having a full valuationallowance against the deferred tax asset and reflects the expected current yearfederal and state tax liabilities. The effective tax rate of 24.8% for thesecond quarter of fiscal 2005 differs from the statutory rate due to therespective current period valuation allowance against the deferred tax asset.The estimated annual effective tax rate is revised quarterly based upon actualoperating results, the tax credits earned to date, as well as current annualprojections. The cumulative impact of any change in the estimated annualeffective tax rate is recognized in the period the change in estimate occurs.

 

**10.Business segment and geographic information**

 

Subsequent to the fiscalyear ended October 2, 2005, the Company has started analyzing its business intwo segments: Specialty and Commercial. In turn, these segments provideservices to the industrial, clerical, professional and information technologybusiness sectors.

 

The Company’s reportablesegments have been determined based on the nature of the services offered toclients and are comprised of the following: the Specialty segment includes theTalent MagnetTM and RemX® business units and the Commercial segmentincludes light industrial and franchise business units. Certain expenses andincome, such as corporate and other, depreciation and amortization, interestand other are not allocated to each segment. The supporting offices areorganized into eight divisions managed by an Operational Vice President andother regional staff who provide operational support for the offices in theirregions. Company-owned offices are organized into different matrices based upongeographic location and/or service offerings. Each matrix has an office managerwho is accountable for the day-to-day operations and profitability of the officeswithin that matrix. All segment revenues are derived from external customers.

 

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Selected financialinformation for the Company’s reportable segments as of the three and sixmonths ended April 2, 2006 and April 3, 2005 are as follows:

 
| ** **                            | ** ** | **Specialty** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|---------------|------------|----------------|------------|-----------|------------|
| **Three months ended April 2, 2006**  |       |          |       |           |       |      |       |
| Service revenues                      |       | $             | 22,034     |           | $          | 97,951    |       | $ | 119,985 |   |
| Direct-hire and other revenues        |       | 3,306         |       | 1,328          |       | 4,634     |       |
| Total revenues                        |       | $             | 25,340     |           | $          | 99,279    |       | $ | 124,619 |   |
|                                  |       |          |       |           |       |      |       |
| Segment income from operations        |       | $             | 560        |           | $          | 6,622     |       | $ | 7,182 |   |
|                                  |       |          |       |           |       |      |       |
| **Three months ended April 3, 2005**  |       |          |       |           |       |      |       |
| Service revenues                      |       | $             | 23,481     |           | $          | 98,558    |       | $ | 122,039 |   |
| Direct-hire and other revenues        |       | 2,331         |       | 893            |       | 3,224     |       |
| Total revenues                        |       | $             | 25,812     |           | $          | 99,451    |       | $ | 125,263 |   |
|                                  |       |          |       |           |       |      |       |
| Segment income from operations        |       | $             | (317       | )              | $          | 5,936     |       | $ | 5,619 |   |
|                                  |       |          |       |           |       |      |       |
| **Six months ended April 2, 2006**    |       |          |       |           |       |      |       |
| Service revenues                      |       | $             | 45,151     |           | $          | 205,002   |       | $ | 250,153 |   |
| Direct-hire and other revenues        |       | 5,772         |       | 2,690          |       | 8,462     |       |
| Total revenues                        |       | $             | 50,923     |           | $          | 207,692   |       | $ | 258,615 |   |
|                                  |       |          |       |           |       |      |       |
| Segment income from operations        |       | $             | 1,435      |           | $          | 15,282    |       | $ | 16,717 |   |
|                                  |       |          |       |           |       |      |       |
| **Six months ended April 3, 2005**    |       |          |       |           |       |      |       |
| Service revenues                      |       | $             | 48,143     |           | $          | 208,276   |       | $ | 256,419 |   |
| Direct-hire and other revenues        |       | 4,473         |       | 1,727          |       | 6,200     |       |
| Total revenues                        |       | $             | 52,616     |           | $          | 210,003   |       | $ | 262,619 |   |
|                                  |       |          |       |           |       |      |       |
| Segment (loss) income from operations |       | $             | (141       | )              | $          | 12,964    |       | $ | 12,823 |   |

 

The following reconcilessegment income to consolidated income from continuing operations before incometaxes and segment assets to consolidated assets:

 
| ** **                                            | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **April 2, 2006**                        | ** ** | **April 3, 2005**                      | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| Total income from operations for reportable  segments |       | $                                                  | 7,182      |                                             | $          | 5,619 |   | $ | 16,717 |   | $ | 12,823 |   |
| Unallocated amounts:                                  |       |                                               |       |                                             |       |   |   |   |   |
| Corporate and other expenses                          |       | 6,039                                              |       | 6,787                                            |       | 12,235 |   | 13,414 |   |
| Depreciation and amortization                         |       | 908                                                |       | 935                                              |       | 1,865 |   | 2,000 |   |
| Other income (expense):                               |       |                                               |       |                                             |       |   |   |   |   |
| Interest expense                                      |       | (357                                               | )          | (178                                             | )          | (544 | ) | (306 | ) |
| Interest income                                       |       | 475                                                |       | 273                                              |       | 811 |   | 533 |   |
| Other, net                                            |       | 417                                                |       | 128                                              |       | 787 |   | 499 |   |
| Income before income taxes                            |       | $                                                  | 770        |                                             | $          | (1,880 | ) | $ | 3,671 |   | $ | (1,865 | ) |

 
| ** **                           | ** ** | **April 2, 2006** | ** ** | **October 2, 2005** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| Total identifiable assets            |       |                        |       |                          |       |
| Total assets for reportable segments |       | $                           | 74,020     |                          | $          | 71,724 |   |
| Assets held at Corporate             |       | 57,714                      |       | 60,146                        |       |
| Total assets                         |       | $                           | 131,734    |                          | $          | 131,870 |   |

 

The Company’s revenues fromcontinuing operations are generated, and the Company’s assets are held,substantially in the United States.

 

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**11. Newaccounting pronouncements**

 

In June 2005, the FASBissued SFAS No. 154, *Accounting Changes andError**Corrections*.SFAS No. 154 replaced APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and is effectivefor fiscal years beginning after December 15, 2005. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. We do notexpect the adoption of SFAS No. 154 to have a material impact on ourconsolidated financial statements.

 

In November 2005, the FASBissued FASB Staff Position (FSP) FAS 115-1 and FAS 124-1,*The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments*(FSP 115-1), which provides guidance on determining when investments in certaindebt and equity securities are considered impaired, whether that impairment isother-than-temporary, and on measuring such impairment loss. FSP 115-1 alsoincludes accounting considerations subsequent to the recognition of another-than temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. FSP 115-1 is required to be applied to reporting periods beginningafter December 15, 2005 and is required to be adopted by the Company forthis quarter fiscal 2006. We do not believe its adoption will have a materialimpact on our consolidated financial position, results of operations or cashflows.

 

**12. Subsequent Event**

 

The Company has entered intoan Agreement and Plan of Merger, dated as of May 10, 2006 (the “Merger Agreement”), with KoosharemCorporation, a California corporation (“Parent”),and RT acquisition Corp., a Delaware corporation and wholly owned subsidiary ofParent (“Merger Sub”), pursuantto which Merger Sub will be merged with and into Remedy, with Remedy continuingafter the merger as the surviving corporation and a wholly owned subsidiary ofParent (the “Merger”). Parent isthe holding company of Select Personnel Services, Inc., a Californiacorporation based in Santa Barbara, California. The Company’s board ofdirectors has unanimously approved the adoption of the Merger Agreement and theMerger.  Pursuant to the Merger Agreement, upon consummation of theMerger: (1) each issued and outstanding share of the Class A common stockand Class B common stock of Remedy (other than shares owned by Remedy, Parent,Merger Sub or any wholly owned subsidiary of Remedy, Parent or Merger Sub, orby any shareholders who are entitled to and who properly exercise dissenters’rights under California law) will be cancelled and converted into the right toreceive $17.00 (the “MergerConsideration”); and (2) each Remedy stock option, whether or not thenexercisable or vested, will be cancelled and converted into the right to receivean amount in cash (subject to applicable withholding taxes) equal to theexcess, if any, of the Merger Consideration over the per share exercise orpurchase price of such Remedy stock option, times the number of sharesunderlying the Remedy stock option.  The Company, on the one hand, andParent and Merger Sub, on the other hand, have made customary representations,warranties, covenants and agreements in the Merger Agreement. Consummation of the Merger is subject to various customary conditions, including,among others, the requisite approval by our shareholders, the lack of any legalimpediment to the Merger, the receipt by the parties of required regulatoryapprovals, and the receipt by Parent and Merger Sub of financing.  Theparties expect the transaction to be consummated during our fourth fiscalquarter ending October 1, 2006.

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS****OF OPERATIONS**

 

*Inaddition to historical information, management’s discussion and**analysisand other statements contained elsewhere in this Quarterly Report on**Form 10-Q include certain forward-lookingstatements, including, but not**limitedto, those related to the growth and strategies, future operating**results and financial positionof the Company as wellas economic and market events and trends. All forward-looking statements madeby the Company, including such**statementsherein, include material risks and uncertainties and are subject to**change based on factors beyond the control of theCompany (certain, but not all,  of such**statements may be identified by the use ofwords such as “anticipate,” “believe,”**“estimate,” “intend,” “plan,” “expect,” “will,” or “future” or the useof the future tense). Accordingly, the**Company’s actual results may differ materially from those expressed orimplied**in any suchforward-looking statements as a result of various factors,**including, without limitation, the success of certaincost reduction efforts,**the continuedperformance of the RemX® specialty business unit, the Company’s**ability to realize improvements in the months ahead,changes in general or**localeconomic conditions that could impact the Company’s expected financial**results, the availability of sufficientpersonnel, various costs relating to**temporary workers and personnel, including but not limited to workers’**compensation and state unemployment rates,the Company’s ability to expand its**salescapacity and channels, to open new points of distribution and expand in**core geographic markets and to attract andretain clients and franchisees/licensees,**the outcome of litigation, software integration and implementation, theapplication**of deferred taxassets and other factors described below and elsewhere herein**and in the Company’s filings with the Securities andExchange Commission**regardingrisks affecting the Company’s financial condition and results of**operations. Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof. The Company does not undertake to publicly update or revise its**forward-looking statements even ifexperience or future changes make it clear**that any projected results expressed or impliedtherein will not be realized.**Thefollowing should be read in conjunction with the Consolidated Financial**Statements of the Company and Notes thereinfiled on Form 10-K on December 16,**2005.*

 

(Unlessotherwise noted, all dollar amounts are in thousands)

 

**Company Overview**

 

RemedyTemp, Inc. is anational provider of clerical, light industrial, information technology andfinancial temporary staffing and direct-hire services to Fortune 1000companies, as well as, small and mid-size local and regional companies,including manufacturing, service, retail, banking and governmental agencies.The Company provides its services in 35 states, and the District of Columbiathrough a network of 230 offices, of which 132 are Company-owned and 98 areindependently managed franchises.

 

The Company providestemporary personnel and direct-hire services in the following two segments:Commercial and Specialty. These segments provide services to the Clerical,Industrial, Professional and Information Technology business sectors. The salesand delivery functions for our clients are concentrated in and through ourfield offices. Our headquarters provide support services to our field officesin areas such as human resources, risk management, legal, marketing, andnational sales initiatives, in addition to the traditional “back office”support services such as payroll, billing, accounting, tax, and dataprocessing, which are highly centralized.

 

**TraditionalFranchise**

 

Under the Company’straditional franchise agreements, the franchisee pays all lease and working capitalcosts relating to its office, including funding payroll and collecting clients’accounts. Generally, the franchisee pays the Company an initial franchise feeand continuing franchise fees, or royalties, at a standard rate of 7.0% of itsgross billings. Franchisees that have renewed their franchise agreement couldqualify for a reduced rate (ranging from 5.5% - 6.5%) based on gross billings.Additionally, a discounted rate is utilized with national accounts for whichthe Company’s fee is reduced. The average royalty rate was 6.2% for the sixmonths ended April 2, 2006. The Company processes payroll and invoices clients,and the franchisee employs all management staff and temporary personnelaffiliated with its office. The Company no longer offers this form of franchiseagreement.

 

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**LicensedFranchise**

 

Under the Company’s licensedfranchise agreements, the licensee pays the Company an initial franchise feeand pays all lease and operating costs relating to its office. The licenseeemploys all management staff affiliated with its office, but the Companyemploys all temporary personnel affiliated with the licensed franchise office,handles invoicing and collection of clients’ accounts and generally remits tothe licensed franchisee 60% - 70% of the office’s gross profit. The Company’sshare of the licensee’s gross profit, representing the continuing franchisefees, is generally not less than 7.5% of the licensed franchisee’s grossbillings. However, the Company’s share of the licensees’ gross profit isdecreased for (i) national accounts for which the Company’s fee is reduced tocompensate for lower gross margins, (ii) sales incentive programs and (iii)licensees that have renewed their franchise agreement and qualify for a reducedrate (ranging from 6.0% - 7.0%) based on gross revenues. For the six monthsended April 2, 2006, the Company’s average share of licensee’s gross revenueswas 6.5%. The percentage of gross profit paid to the licensee is generally basedon the level of hours billed during the contract year. The Company adopted anew form of licensed franchise agreement in December 2005. The new licensedfranchise agreement will be used with new licensees and certain existinglicensees who decide to convert to the new agreement.

 

**Executive Summary**

 

The staffing industry is ahighly competitive industry, which has contributed to significant pricecompetition and lower margins as major staffing companies have attempted tomaintain or gain market share. Although it is likely that the pressure onmargins will continue throughout fiscal 2006, the Company believes its focus onincreasing its business mix with specialty staffing services and itsdirect-hire business will help mitigate the impact of the downward trend onmargins throughout the industry. The demand for temporary staffing has alsocontinued to grow as demonstrated in recent surveys by the American StaffingAssociation (“ASA”). According to ASA, new record highs were set for staffingindustry employment and sales in the third quarter (currently the most recentavailable statistics) of calendar 2005. The third quarter’s numbers surpassedthe industry’s previous peak, set in the second quarter of 2005. While the paceof industry employment and sales increases has slowed over the past twoquarters when compared with the same period in 2004, the industry continues toexpand and has now posted 12 consecutive quarters of positive year-over-yeargrowth. Management continues to be encouraged by the recent economic data, aswell as the steady job growth in the staffing industry.

 

With respect to long-termpositive prospects, the staffing industry has always been inherently difficultto forecast due to its dependence on economic factors and the strength of thelabor market. The Company has, however, developed a forecasting tool jointlywith the A. Gary Anderson Center for Economic Research at Chapman University.The Quarterly Labor Forecast Report, which is based upon Bureau of LaborStatistics (the “BLS”) and other economic factors, helps to predict totaldemand for temporary labor. The Company has been utilizing this tool forseveral years and has recently begun to publish the results on a quarterlybasis.

 

**Highlights**

 

The sections that followthis overview discuss and refer to critical accounting estimates and recentpronouncements, the Company’s results of operations and important aspects ofits liquidity and capital resources. Set forth below are what we believe to beimportant highlights of our results of operations and our positioning for thefuture. Such highlights should be considered in the context of all of thediscussions herein and in conjunction with the consolidated financialstatements herein. We believe such highlights are as follows:

 

•**            **RemX*®*achieved $13,499 in total revenues for the three months ended April 2,2006, compared to $11,360 for the three months ended April 3, 2005, the highestquarterly revenues in this business unit’s history.

 

•**            **Direct-hire revenues continued growth intothe second quarter of fiscal year 2006, recording the second highest amount ofgrowth in the Company’s history, with sequential growth of 24% from the firstquarter of fiscal year 2006 and growth of 46% over the second quarter of fiscalyear 2005.

 

•**            **Total cost of revenues for the three monthsended April 2, 2006 improved with cost of revenues being favorable by 2.8%.

 

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•**            **Selling and administrative expenses for thethree and six months ended April 2, 2006 decreased to 15.2% and 14.4% ofrevenues, respectively, compared to the three and six months ended April 3,2005 of 15.4% and 14.7%, respectively.

 

•**            **Income before income taxes for the three andsix months ended April 2, 2006 were $770 and $3,671, respectively, a significantimprovement over the three and six months ended April 3, 2005 loss beforeincome taxes of $1,880 and $1,865, respectively.

 

•**            **We believe that the quality of accountsreceivable, the Company’s primary operating asset, continues to be consistent,with days sales outstanding (“DSO”) at 43.5 and 42.3 days and an allowance fordoubtful accounts as a percentage of gross accounts receivable of 1.5% and 2.2%at April 2, 2006 and April 3, 2005, respectively.

 

**CriticalAccounting Policies and Estimates**

 

The discussions and analysesof the Company’s consolidated financial condition and results of operationswere based on the Company’s consolidated financial statements, which have beenprepared in conformity with accounting principles generally accepted in the UnitedStates of America. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of any contingent assets and liabilitiesat the financial statement date and reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, the Company’s managementreviews and evaluates these estimates and assumptions, including those thatrelate to revenue recognition, allowance for doubtful accounts, deferred taxes,estimates to assess the recoverability of intangible and long-lived assets,goodwill impairment, workers’ compensation reserves, contingencies andlitigation reserves. These estimates are based on historical experience and avariety of other assumptions that management believes to be reasonable underthe circumstances. Actual results could differ from these estimates underdifferent assumptions or conditions.

 

Management believes thefollowing critical accounting policies are those most significantly affected bythe judgment, estimates and/or assumptions used in the preparation of Remedy’sconsolidated financial statements.

 

*RevenueRecognition*— TheCompany generates revenues from the sale of temporary staffing and direct-hireservices by its Company-owned and licensed franchise operations and fromroyalties on sales of such services by its traditional franchise operations.Temporary staffing revenues and the related labor costs and payroll taxes arerecorded in the period in which the services are performed. Direct-hirerevenues are recognized when the direct-hire candidate begins full-timeemployment. Sales allowances are established to estimate losses due to placedcandidates not remaining employed with customers during the Company’sdirect-hire guarantee period, typically 30 to 100 days. These losses havehistorically been insignificant to the Company’s overall results of operations.

 

The Company accounts for therevenues and the related direct costs of its franchise arrangements inaccordance with Emerging Issues Task Force (“EITF”) 99-19, *Reporting Revenue Gross as a Principal versus Net asan Agent*. The Company is required to assess whether it acts as aprincipal in its transactions or as an agent acting on the behalf of others.Where the Company is the principal in a transaction and has the risks andrewards of ownership, the transaction is recorded gross in the incomestatement, and where the Company acts merely as an agent, only the net feesearned are recorded in the income statement. Under the Company’s “traditional”franchise agreement, the franchisee has the direct contractual relationshipwith clients, holds title to the related customer receivables and is the legalemployer of the temporary employees. Accordingly, the Company does not includethe revenues and direct expenses from these transactions in its incomestatement and only records the royalty fee earned. Alternatively, under theCompany’s “licensed” franchise agreements, the Company has the directcontractual relationship with clients, holds title to the related customerreceivables and is the legal employer of the temporary employees. As theCompany retains the risks and rewards of ownership (such as the liability forthe cost of temporary personnel and the risk of loss for collection), therevenues and direct expenses of its licensed franchise operations are includedin the Company’s results of operations. The Company remits to each licensedfranchisee a portion of the gross margin generated by its office(s).

 

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*AccountsReceivable*— TheCompany provides an allowance for doubtful accounts on accounts receivable forestimated losses resulting from the inability of the clients to make requiredpayments. The allowance is based upon management’s analysis of historicalwrite-off levels, current economic trends, routine assessment of clients’financial strength and any other known factors impacting collectibility. If thefinancial condition of the Company’s clients were to deteriorate, which mayresult in the impairment of their ability to make payments, additionalallowances may be required. The Company’s estimates are influenced by thefollowing considerations: (i) the large number of clients and their dispersionacross wide geographic areas, (ii) the fact that no single customer accountsfor 10% or more of total revenues and (iii) continuing credit evaluation ofclients’ financial conditions.

 

*Workers’Compensation Costs*—The Company maintains reserves for workers’ compensation obligations usingactuarial methods to estimate the remaining undiscounted liability for thedeductible portion of all claims, including those incurred but not reported.This process includes establishing loss development factors, based on thehistorical claims experience of the Company and the industry, and applyingthose factors to current claims information to derive an estimate of theCompany’s ultimate claims liability. The calculated ultimate liability is thenreduced by cumulative claims payments to determine the required reserve.Management evaluates the reserve, and the underlying assumptions regularly,throughout the year, and makes adjustments as needed. While management believesthat the recorded amounts are adequate, there can be no assurance that changesto management’s estimates will not occur due to limitations inherent in theestimation process.

 

*Goodwilland Other Intangible Assets*— The Company accounts for goodwill and other intangible assets underthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142,*Goodwill and Other Intangible Assets*.SFAS No. 142 applies to goodwill and intangible assets that are not amortized.SFAS No. 142 requires goodwill to no longer be amortized but instead be subjectto an impairment test at least annually or if events or circumstances changethat may reduce the fair value of the reporting unit below its book value.Reporting units are determined based on geographic groupings of Company-ownedoffices. Intangible assets with finite lives continue to be amortized overtheir estimated useful lives.

 

*OtherLong-Lived Assets*—The Company accounts for other long-lived assets under the provision of SFASNo. 144, *Accounting for the Impairment orDisposal of**Long-Lived Assets*.In accordance with SFAS No. 144, the Company assesses the fair value andrecoverability of its long-lived assets including intangible assets subject toamortization, whenever events and circumstances indicate the carrying value ofan asset may not be recoverable from estimated undiscounted future cash flowsexpected to result from its use and eventual disposition. In doing so, theCompany makes assumptions and estimates regarding future cash flows and otherfactors. The fair value of the long-lived assets is dependent upon theforecasted performance of the Company’s business and the overall economicenvironment. When it determines that the carrying value of the long-livedassets may not be recoverable, it measures impairment based upon a forecasteddiscounted cash flow method. If these forecasts are not met, the Company mayhave to record additional impairment charges not previously recognized. Thecharges, if any, are included in depreciation and amortization in theaccompanying Consolidated Statements of Operations.

 

*IncomeTaxes*— In preparingthe Company’s consolidated financial statements, management estimates theCompany’s income taxes in each of the taxing jurisdictions in which itoperates. This includes estimating the Company’s actual current tax expense togetherwith any temporary differences resulting from the different treatment ofcertain items, such as the timing for recognizing revenues and expenses, fortax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included in the Company’s Consolidated BalanceSheets.

 

Deferred tax assets andliabilities are determined based on temporary differences between income andexpenses reported for financial reporting and tax reporting. The Company isrequired to record a valuation allowance to reduce its deferred tax assets tothe amount that it believes is more likely than not to be realized. Inassessing the need for a valuation allowance, the Company considers allpositive and negative evidence, including scheduled reversals of deferred taxliabilities, projected future taxable income, tax planning strategies andrecent financial performance. The Company had been profitable through the firstfiscal quarter of 2003; however, continued market softness and significant increasesin workers’ compensation costs resulted in significant losses in fiscal years2003 and 2004, with the losses narrowing in fiscal year 2005. The Company hasreturned to profitability starting in the fourth quarter of fiscal year 2005.

 

22

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As a result of the Company’scumulative losses, management concluded that a full valuation allowance wasappropriate at April 2, 2006 and at October 2, 2005. While the Company expectsto be profitable in fiscal year 2006, in view of the historical losses, thereis no assurance that there will be sufficient future taxable income to realizethe benefit of the deferred tax asset. If, after future assessments of therealizability of the deferred tax assets, the Company determines that a lesserallowance is required, it would record a reduction to income tax expense andthe valuation allowance in the period of such determination. There is apossibility that the Company could release all or a portion of its valuationallowances sometime during fiscal year 2006 provided that the profitabilityforecasted for that period meets or exceeds budget and if profitability isreasonably expected to be sustained in the future.

 

*Contingenciesand Litigation —*Thereare various claims, lawsuits and pending actions against the Company incidentto its operations. If a loss arising from these actions is probable and can bereasonably estimated, the Company must record the amount of the estimatedliability. As additional information becomes available, management willcontinue assessing any potential liability related to these actions and mayneed to revise its estimates.

 

**Results ofOperations**

 

*For theThree and Six Months Ended April 2, 2006 Compared to the Three and Six MonthsEnded April 3, 2005*

 
| ** **                                                                                      | ** ** | **For the Three Months Ended** | ** ** | **% of Respective Revenues** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **April 2, 2006**              | ** ** | **April 3, 2005**            | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| Company-owned office revenues                                                                   |       | $                              | 75,791     |                         | $          | 77,335 |   |   |   |   |   |
| Licensed franchise revenues                                                                     |       | 48,455                         |       | 47,623                       |       |   |   |   |   |
| Franchise royalties and initial franchise  fees                                                 |       | 373                            |       | 305                          |       |   |   |   |   |
| Total revenues                                                                                  |       | 124,619                        |       | 125,263                      |       | 100.0 | % | 100.0 | % |
| Cost of Company-owned office revenues  (exclusive of depreciation and amortization shown below) |       | 58,927                         |       | 62,162                       |       | 77.7 | % | 80.4 | % |
| Cost of licensed franchise revenues  (exclusive of depreciation and amortization shown below)   |       | 38,687                         |       | 38,269                       |       | 79.8 | % | 80.4 | % |
| Licensees’ share of gross profit                                                           |       | 6,619                          |       | 6,392                        |       | 5.3 | % | 5.1 | % |
| Selling and administrative expenses                                                             |       | 18,922                         |       | 19,314                       |       | 15.2 | % | 15.4 | % |
| CIGA litigation                                                                                 |       | 64                             |       | 40                           |       | 0.1 | % | 0.1 | % |
| Depreciation and amortization                                                                   |       | 1,165                          |       | 1,190                        |       | 0.9 | % | 1.0 | % |
| Income (loss) from operations                                                                   |       | $                              | 235        |                         | $          | (2,104 | ) |   |   |   |   |

 

23

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| ** **                                                                                      | ** ** | **For the Six Months Ended** | ** ** | **% of Respective Revenues** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **April 2, 2006**            | ** ** | **April 3, 2005**            | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| Company-owned office revenues                                                                   |       | $                            | 158,254    |                         | $          | 165,963 |   |   |   |   |   |
| Licensed franchise revenues                                                                     |       | 99,602                       |       | 96,029                       |       |   |   |   |   |
| Franchise royalties and initial franchise  fees                                                 |       | 759                          |       | 627                          |       |   |   |   |   |
| Total revenues                                                                                  |       | 258,615                      |       | 262,619                      |       | 100.0 | % | 100.0 | % |
| Cost of Company-owned office revenues  (exclusive of depreciation and amortization shown below) |       | 123,089                      |       | 133,983                      |       | 77.8 | % | 80.7 | % |
| Cost of licensed franchise revenues  (exclusive of depreciation and amortization shown below)   |       | 79,431                       |       | 77,013                       |       | 79.7 | % | 80.2 | % |
| Licensees’ share of gross profit                                                           |       | 13,697                       |       | 12,860                       |       | 5.3 | % | 4.9 | % |
| Selling and administrative expenses                                                             |       | 37,217                       |       | 38,662                       |       | 14.4 | % | 14.7 | % |
| CIGA litigation                                                                                 |       | 193                          |       | 138                          |       | 0.1 | % | 0.1 | % |
| Depreciation and amortization                                                                   |       | 2,371                        |       | 2,554                        |       | 0.9 | % | 1.0 | % |
| Income (loss) from operations                                                                   |       | $                            | 2,617      |                         | $          | (2,591 | ) |   |   |   |   |

 

**Revenue**

 
| ** **                                      | ** ** | **For the Three Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **April 2, 2006**              | ** ** | **April 3, 2005**           | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Company-owned  office revenues                  |       | $                              | 75,791     |                        | $          | 77,335 |   | $ | (1,544 | ) | (2.0 | )% |
| Licensed  franchise revenues                    |       | 48,455                         |       | 47,623                      |       | 832 |   | 1.7 | % |
| Franchise  royalties and initial franchise fees |       | 373                            |       | 305                         |       | 68 |   | 22.3 | % |
| Total revenues                                  |       | $                              | 124,619    |                        | $          | 125,263 |   | $ | (644 | ) | (0.5 | )% |

 
| ** **                                      | ** ** | **For the Six Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **April 2, 2006**            | ** ** | **April 3, 2005**           | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Company-owned  office revenues                  |       | $                            | 158,254    |                        | $          | 165,963 |   | $ | (7,709 | ) | (4.6 | )% |
| Licensed  franchise revenues                    |       | 99,602                       |       | 96,029                      |       | 3,573 |   | 3.7 | % |
| Franchise  royalties and initial franchise fees |       | 759                          |       | 627                         |       | 132 |   | 21.1 | % |
| Total revenues                                  |       | $                            | 258,615    |                        | $          | 262,619 |   | $ | (4,004 | ) | (1.5 | )% |

 

24

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•**            **The mix between Company-owned, licensedfranchise and franchise royalty revenues shifted with Company-owned revenuesaccounting for 60.8% and 61.2% of total revenues for the three and six monthsended April 2, 2006, respectively, compared to 61.2% and 63.2% for the threeand six months ended April 3, 2005, respectively.

 

•**            **Company-owned revenues decreased 2.0% and4.6% for the three and six months ended April 2, 2006, compared to the three andsix months ended April 3, 2005. The decrease is primarily attributable to theresidual effect of decisions taken during fiscal year 2005 to eliminate certainhigher risk and lower margin business, principally in California, that did notmeet the Company’s strategic directives. Partially offsetting this was theCompany’s RemX® specialty staffing unit, which generated a $2,139increase in revenues to $13,499 for the three months ended April 2, 2006,compared to the same period in the prior year.

 

•**            **For the three andsix months ended April 2, 2006, licensed franchise revenues increased $832 or1.7% and $3,573 or 3.7%, respectively, due to an increase in direct-hirerevenues, the addition of several new customers and increased revenues fromexisting customers.

 

•**            **For the three and six months ended April 2,2006, total direct-hire revenues accounted for 3.4% and 3.0%, respectively, oftotal revenues, up from 1.1 and 0.9 percentage points for the same period inthe prior year.

 

•**            **Revenues generated in California decreased to36.7% and 37.4% of total revenues for the three and six months ended April 2,2006, respectively, compared to 39.4% and 41.4% for the three and six monthsended April 3, 2005, respectively.

 

The following tablesummarizes the Company’s segment revenues:

 
| ** **              | ** ** | **For the Three Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|-------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Commercial              |       | $                              | 99,279     |                        | $          | 99,451 |   | $ | (172 | ) | (0.2 | )% |
| Specialty               |       | 25,340                         |       | 25,812                      |       | (472 | ) | (1.8 | )% |
| Total  segment revenues |       | $                              | 124,619    |                        | $          | 125,263 |   | $ | (644 | ) | (0.5 | )% |

 
| ** **              | ** ** | **For the Six Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **April 2,  2006**           | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Commercial              |       | $                            | 207,692    |                        | $          | 210,003 |   | $ | (2,311 | ) | (1.1 | )% |
| Specialty               |       | 50,923                       |       | 52,616                      |       | (1,693 | ) | (3.2 | )% |
| Total  segment revenues |       | $                            | 258,615    |                        | $          | 262,619 |   | $ | (4,004 | ) | (1.5 | )% |

 

•**            **For the threemonths ended April 2, 2006,****the 0.2% decrease in Commercial revenuesreflects the impact of selectively reducing higher risk and lower marginbusinesses within the Company-owned light industrial business unit of thesegment during mid and late fiscal year 2005.

 

•**            **For the three months ended April 2, 2006, the1.8% decrease in revenues from the Specialty segment is due to the impact ofclosing underperforming offices in mid and late fiscal year 2005 in preparationfor organizing the start up of the Talent MagnetTM business unit, partiallyoffset by 19% growth from the RemX® business unit over the sameperiod in the prior year. Direct-hire revenues from Talent MagnetTM grew by 90% forthe three months ended April 2, 2006, compared to the same period in the prioryear.

 

•**            **For the six monthsended April 2, 2006,****the 1.1% decrease in Commercial revenuesreflects the impact of selectively reducing higher risk and lower marginbusiness within the Company-owned light industrial business unit of the segmentduring mid and late fiscal year 2005. Partially offsetting this decrease areincreases noted above in the licensed franchise business unit and increased direct-hirerevenues.

 

•**            **For the six months ended April 2, 2006, the3.2% decrease in revenues from the Specialty segment is due to the impact ofclosing underperforming offices in mid and late fiscal year 2005 in preparationfor organizing the start up of the Talent MagnetTM business unit, partiallyoffset by 21% growth from the RemX® business 

 

25

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unit over the same period inthe prior year. Direct-hire revenues from Talent MagnetTM grew by 81% for the sixmonths ended April 2, 2006, compared to the same period in the prior year.

 

**Cost ofRevenues (exclusive of depreciation and amortization)**

 

 
| ** **                             | ** ** | **For the Three Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Cost of  Company-owned office revenues |       | $                              | 58,927     |                        | $          | 62,162 |   | $ | 3,235 |   | 5.2 | % |
| Cost of  licensed franchise revenues   |       | 38,687                         |       | 38,269                      |       | (418 | ) | (1.1 | )% |
| Total cost of revenues                 |       | $                              | 97,614     |                        | $          | 100,431 |   | $ | 2,817 |   | 2.8 | % |

 
| ** **                             | ** ** | **For the Six Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **April 2,  2006**           | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Cost of  Company-owned office revenues |       | $                            | 123,089    |                        | $          | 133,983 |   | $ | 10,894 |   | 8.1 | % |
| Cost of  licensed franchise revenues   |       | 79,431                       |       | 77,013                      |       | (2,418 | ) | (3.1 | )% |
| Total cost of revenues                 |       | $                            | 202,520    |                        | $          | 210,996 |   | $ | 8,476 |   | 4.0 | % |

 

•**            **Total Company-owned and licensed franchisecost of revenues consisted of payroll wages and other expenses related totemporary associates and as a percentage of total revenues were 78.3% and 80.2%for the three months ended April 2, 2006 and April 3, 2005, respectively. The 1.9percentage point improvement is the result of a 1.2 percentage point increaseattributable to the Company’s decrease in workers’ compensation expense; partiallyoffset by the negative impact of other burdens, equating to 0.3 percentagepoints; 0.1 percentage point increase due to pricing and mix efforts; and a 0.9percentage point increase as a result of a $1,300 increase in direct-hirerevenues, whereby the Company earns a fee for placing an associate in adirect-hire position. Direct-hire revenues as a percentage of total revenuesincreased to 3.4% for the three months ended April 2, 2006, compared to 2.3%for the three months ended April 3, 2005.

 

•**            **Cost of Company-owned revenues as a percent ofrespective revenues was 77.7% and 80.4% for the three months ended April 2,2006 and April 3, 2005, respectively. The 2.7 percentage point decrease in costof Company-owned office revenues is primarily attributable to a decrease inworkers’ compensation expense, which contributed 2.1 percentage points. Withinthe decreased workers’ compensation expense, was an adjustment of 1.5 percentagepoints or $1,100 as a result of favorable claim frequency and severity trendsconfirmed in the most recent actuarial reports, in particular within the stateof California. Additionally, direct-hire business contributed 1.2 percentagepoints, while higher burden deducted 0.6 percentage points largely due to anassessment for additional payroll tax liabilities in the state of Tennesseefrom the Company’s acquisition of our licensed franchise operation inTennessee.

 

•**            **Total Company-owned and licensed franchisecost of revenues consisted of payroll wages and other expenses related totemporary associates and as a percentage of total revenues were 78.3% and 80.3%for the six months ended April 2, 2006 and April 3, 2005, respectively. The 2.0percentage point improvement is the result of a 1.3 percentage point increaseattributable to the Company’s decrease in workers’ compensation expense partiallyoffset by the negative impact of other burdens, equating to 0.1 percentagepoints; a 0.1 percentage point increase due to pricing and mix efforts and a 0.7percentage point increase as a result of increased direct-hire revenues,whereby the Company earns a fee for placing an associate in a direct-hireposition. Direct-hire revenues as a percentage of total revenues increased 3.0%for the six months ended April 2, 2006, compared to 2.1% for the six monthsended April 3, 2005.

 

•**            **Cost of Company-owned revenues as a percent ofrespective revenues was 77.8% and 80.7% for the six months ended April 2, 2006and April 3, 2005, respectively. The 2.9 percentage point decrease in cost of Company-ownedoffice revenues is primarily attributable to a decrease in workers’compensation expense, which contributed 2.1 percentage points. Within thedecreased workers’ compensation expense was an adjustment of 1.3 percentagepoints or $2,000 as a result of favorable claim frequency and severity trendsconfirmed in the most recent actuarial reports, in particular within the stateof California. Additionally, improved pricing and mix contributed 0.2 percentagepoints, while direct-hire business contributed 0.8 percentage points; while higherburden deducted 0.2 percentage points of the increase.

 

26

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•**            **The increase in cost of licensed franchiserevenues is consistent with the 1.7% and 3.7% increase in licensed franchiserevenues for the three and six months ended April 2, 2006 respectively over thesame periods in prior years.

 

The following tablesummarizes the Company’s segment gross profit (exclusive of depreciation andamortization):

 
| ** **                                                               | ** ** | **For the Three Months Ended** | ** ** | **% of Segment Revenue** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                                                               | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005**       | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
| Commercial                                                               |       | $                              | 18,390     |                     | $          | 17,194 |   | 18.5 | % | 17.3 | % |
| Specialty                                                                |       | 8,615                          |       | 7,638                    |       | 34.0 | % | 29.6 | % |
| Total segment gross profit (exclusive of  depreciation and amortization) |       | $                              | 27,005     |                     | $          | 24,832 |   | 21.7 | % | 19.8 | % |

 
| ** **                                                               | ** ** | **For the Six Months Ended** | ** ** | **% of Segment Revenue** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                                               | ** ** | **April 2,  2006**           | ** ** | **April 3,  2005**       | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
| Commercial                                                               |       | $                            | 39,157     |                     | $          | 36,085 |   | 18.9 | % | 17.2 | % |
| Specialty                                                                |       | 16,938                       |       | 15,538                   |       | 33.3 | % | 29.5 | % |
| Total segment gross profit (exclusive of  depreciation and amortization) |       | $                            | 56,095     |                     | $          | 51,623 |   | 21.7 | % | 19.7 | % |

 

•**            **For the threemonths ended April 2, 2006,****the 1.2 percentage point increase in the Commercialsegment’s gross margin reflects the impact of selectively reducing higher riskand lower margin businesses within the Company-owned light industrial businessunit of the segment during mid and late fiscal year 2005.

 

•**            **For the three months ended April 2, 2006, the4.4 percentage point increase in the Specialty segment’s gross margin is due tothe impact of closing underperforming offices in mid and late fiscal year 2005in preparation for organizing the start up of the Talent MagnetTM business unit,in addition to 19% growth from the RemX® business unit over the sameperiod in the prior year. Direct-hire revenues from the Specialty segment grewby 43% for the three months ended April 2, 2006 compared to the same period inthe prior year.

 

•**            **For the six monthsended April 2, 2006,****the 1.7 percentage point increase in the Commercialsegment’s gross margin reflects the impact of selectively reducing higher riskand lower margin business within the Company-owned light industrial businessunit of the segment during mid and late fiscal year 2005. Partially offsettingthis decrease are increases noted above in the licensed franchise business unitand increased direct-hire revenues.

 

•**            **For the six months ended April 2, 2006, the 3.8percentage point increase in the Specialty segment’s gross margin is due to theimpact of closing underperforming offices in mid and late fiscal year 2005 inpreparation for organizing the start up of the Talent MagnetTM business unit, inaddition to 21% growth from the RemX® business unit over the sameperiod in the prior year. Direct-hire revenues from the Specialty segment grewby 30% for the six months ended April 2, 2006 compared to the same period inthe prior year.

 

**OperatingExpenses**

 
| ** **                             | ** ** | **For the Three Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Licensees’  share of gross profit |       | $                              | 6,619      |                        | $          | 6,392 |   | $ | (227 | ) | (3.6 | )% |
| Selling and  administrative expenses   |       | 18,922                         |       | 19,314                      |       | 392 |   | 2.0 | % |
| CIGA  litigation                       |       | 64                             |       | 40                          |       | (24 | ) | (60.0 | )% |
| Depreciation  and amortization         |       | 1,165                          |       | 1,190                       |       | 25 |   | 2.1 | % |
| Total operating expenses               |       | $                              | 26,770     |                        | $          | 26,936 |   | $ | 166 |   | 0.6 | % |

 
| ** **                             | ** ** | **For the Six Months Ended** | ** ** | **Favorable (Unfavorable)** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **April 2,  2006**           | ** ** | **April 3,  2005**          | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Licensees’  share of gross profit |       | $                            | 13,697     |                        | $          | 12,860 |   | $ | (837 | ) | (6.5 | )% |
| Selling and  administrative expenses   |       | 37,217                       |       | 38,662                      |       | 1,445 |   | 3.7 | % |
| CIGA  litigation                       |       | 193                          |       | 138                         |       | (55 | ) | (39.9 | )% |
| Depreciation  and amortization         |       | 2,371                        |       | 2,554                       |       | 183 |   | 7.2 | % |
| Total operating expenses               |       | $                            | 53,478     |                        | $          | 54,214 |   | $ | 736 |   | 1.4 | % |

 

27

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•**            **Licensees’ share of gross profit representsthe net payments to licensed franchisees based upon a percentage of profit orrevenues generated by the licensed franchise operation after deducting certainoperating expenses. The increase in licensees’ share of gross profit isconsistent with the increase in licensed franchise revenues and cost oflicensed franchise revenues. Licensees’ share of gross profit as a percentageof licensed gross profit for the three months ended April 2, 2006 decreased to 67.7%from 68.3% compared to the the same period in prior year. Conversely, thelicensees’ share of gross profit as a percentage of licensed gross profit forthe six month ended April 2, 2006 increased to 67.9% from 67.6% compared to thesame period in prior year.

 

The following table summarizesthe significant changes in selling and administrative and CIGA litigation expensesfor the three months ended April 2, 2006 compared to the three fiscal monthsended April 3, 2005:

 
| ** **                                    | ** ** | **Favorable (Unfavorable)** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Consolidated  Change**    | ** ** | **Specialty** | ** ** | **Commercial** | ** ** | **Other*** | ** ** |
| Colleague  salary & related taxes         |       | $                           | 457        |   | $ | 272 |   | $ | (70 | ) | $ | 255 |   |
| Profit  sharing                               |       | (1,117                      | )          | (530 | ) | (116 | ) | (471 | ) |
| Colleague  travel and business conferences    |       | 61                          |       | 20 |   | 9 |   | 32 |   |
| Telephone  and data lines                     |       | 267                         |       | 65 |   | 53 |   | 149 |   |
| Outside  Services                             |       | 672                         |       | 13 |   | (1 | ) | 660 |   |
| Corporate  allocation                         |       | —                      |       | 343 |   | (1,813 | ) | 1,470 |   |
| Legal fees                                    |       | 149                         |       | 5 |   | 1 |   | 143 |   |
| Other  selling & administrative           |       | (121                        | )          | 30 |   | (196 | ) | 45 |   |
| Total change  in selling & administrative |       | $                           | 368        |   | $ | 218 |   | $ | (2,133 | ) | $ | 2,283 |   |

 

The following tablesummarizes the significant changes in selling and administrative and CIGAlitigation expenses for the six months ended April 2, 2006 compared to the sixfiscal months ended April 3, 2005:

 
| ** **                                    | ** ** | **Favorable (Unfavorable)** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Consolidated  Change**    | ** ** | **Specialty** | ** ** | **Commercial** | ** ** | **Other*** | ** ** |
| Colleague  salary & related taxes         |       | $                           | 1,393      |   | $ | 701 |   | $ | 163 |   | $ | 529 |   |
| Profit  sharing                               |       | (1,408                      | )          | (980 | ) | (47 | ) | (381 | ) |
| Colleague  travel and business conferences    |       | 229                         |       | 109 |   | 49 |   | 71 |   |
| Telephone  and data lines                     |       | 145                         |       | 1 |   | — |   | 144 |   |
| Outside  Services                             |       | 627                         |       | 15 |   | (9 | ) | 621 |   |
| Corporate  allocation                         |       | —                      |       | 860 |   | (3,049 | ) | 2,189 |   |
| Legal fees                                    |       | 262                         |       | (3 | ) | 2 |   | 263 |   |
| Other  selling & administrative           |       | 142                         |       | 270 |   | (268 | ) | 140 |   |
| Total change  in selling & administrative |       | $                           | 1,390      |   | $ | 973 |   | $ | (3,159 | ) | $ | 3,576 |   |

 

----

*            Other Offices categoryincludes the corporate office.

 

•**            **Selling and administrative expenses as apercentage of total revenues were 15.2% and 14.5% for the three and six monthsended April 2, 2006, respectively, compared to 15.4% and 14.7% for the three andsix months ended April 3, 2005, respectively. The primary factor contributingto the net decrease was colleague salary and related taxes, which decreased $457and $1,393 for the three and six months ended April 2, 2006, compared to thecorresponding period in prior year, resulting primarily from a reduction inheadcount.

 

•**            **The $1,117 and 1,408 increase in profitsharing for the three and six months ended April 2, 2006, respectively, comparedto the three and six months ended April 3, 2005, is due to the increase indirect-hire revenues and improved overall financial performance.

 

•**            **The $672 and $627 decrease in outsideservices for the three and six months ended April 2, 2006, respectively,compared to the three and six months ended April 3, 2005, is a result of corporateoverhead cost reduction programs.

 

28

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•**            **The $25 and $183 decrease in depreciation andamortization for the three and six months ended April 2, 2006, respectively, comparedto the three and six months ended April 3, 2005, is due to an increase in fullydepreciated fixed assets at April 2, 2006 compared to April 3, 2005.

 

**OperatingIncome**

 

Income from operations improved$2,339 to an operating profit of $235 for the three months ended April 2, 2006from an operating loss of $2,104 for the three months ended April 3, 2005. Incomefrom operations improved $5,208 to an operating profit of $2,617 for the sixmonths ended April 2, 2006 from an operating loss of $2,591 for the six monthsended April 3, 2005. Improvement in the Company’s operating income is due tothe increase in direct-hire revenues and gross margin improvement. The reductionin corporate wages also contributed to the improved operating profits.

 

The following tablesummarizes the operating margins of the Company’s segments:

 
| ** ** | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|------------|------------|--------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **April 2,  2006**             | ** ** | **April 3,  2005**           | ** ** | **April 2,  2006** | ** ** | **April 3,  2005** | ** ** |
| Commercial |       | 6.7                            | %          | 6.0                          | %          | 7.4 | % | 6.2 | % |
| Specialty  |       | 2.2                            | %          | (1.2                         | )%         | 2.8 | % | (0.3 | )% |

 

•**            **The Commercial segment operating marginsimproved within both the light industrial and licensed franchise business unitsfor the three and six months ended April 2, 2006, compared with the same periodsin the prior year. The main drivers to the improvement were lower workers’compensation costs in the amount of a 8.6% decrease and the favorable impact ofincreased direct-hire revenues within both business units.

 

•**            **The Specialty segment showed furtheroperating margin improvement for the three and six months ended April 2, 2006,compared with the same periods in prior year. This percentage improvement wasattributable to both the Talent MagnetTM business unit’s improved results afterclosure of underperforming offices in fiscal year 2005 and the impact ofincreased direct-hire volume as well as the RemX® business unit’scontinued growth.

 

Income tax provision of $202and $986 as recorded for the three and six months ended April 2, 2006,respectively, compared to income tax benefit of $499 and $462 for the three andsix months ended April 3, 2005, respectively. The Company’s overall annualeffective tax rate of 27.0% for fiscal year 2006 differs from the statutoryrate due as a result of the Company having a full valuation allowance againstthe deferred tax asset and reflects the expected current year federal and statetax liabilities. The effective tax rate of 24.8% for the second quarter of fiscal2005 differs from the statutory rate due to the respective current periodvaluation allowance against the deferred tax asset. The estimated annualeffective tax rate is revised quarterly based upon actual operating results,the tax credits earned to date, as well as current annual projections. Thecumulative impact of any change in the estimated annual effective tax rate isrecognized in the period the change in estimate occurs.

 

The Company generated netincome for the three and six months ended April 2, 2006 of $568 and $2,685,respectively, compared to a net loss for the three and six months ended April3, 2005 of $1,381 and $1,403, respectively.

 

**Liquidityand Capital Resources**

 

The Company’s balance sheetincludes $54,385 in cash and investments as of April 2, 2006 (includingrestricted cash and investments discussed below) and the Company continues tohave no debt, although significant letters of credit are outstanding.Historically, the Company has financed its operations through cash generated byoperating activities and its credit facility, as necessary. Generally, theCompany’s principal uses of cashare working capital needs and capital expenditures (including managementinformation system initiatives and direct office openings) and franchiseacquisitions.

 

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The following tablesummarizes the Company’s cash and investments and letters of credit at April 2,2006 and October 2, 2005:

 
| ** **                                              | ** ** | **April 2, 2006** | ** ** | **October 2, 2005** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|---------------------|------------|
| Cash and  cash equivalents                              |       | $                 | 26,828     |                | $          | 24,768 |   |
| Investments                                             |       | 69                |       | 68                  |       |
| Deferred compensation  investments                      |       | 4,245             |       | 3,771               |       |
|                                                    |       |              |       |                |       |
| Total cash  and investments — current              |       | 31,142            |       | 28,607              |       |
|                                                    |       |              |       |                |       |
| Total  restricted cash and investments — long-term |       | 23,243            |       | 22,890              |       |
| Total cash  and investments                             |       | $                 | 54,385     |                | $          | 51,497 |   |
|                                                    |       |              |       |                |       |
| Letters of  credit                                      |       | $                 | 31,438     |                | $          | 36,538 |   |

 

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Cash flows from operating,investing and financing activities, as reflected in the accompanyingconsolidated statements of cash flows, are summarized below:

 
| ** **                                        | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **April 2, 2006**            | ** ** | **April 3, 2005** | ** ** |
| Cash  provided by (used in):                      |       |                         |       |   |   |
| Operating activities                              |       | $                            | 3,862      |   | $ | 6,621 |   |
| Investing activities                              |       | (1,823                       | )          | 13,238 |   |
| Financing activities                              |       | 58                           |       | 94 |   |
| Effect of exchange rate on cash                   |       | (37                          | )          | 33 |   |
| Net increase  in cash and cash equivalents        |       | 2,060                        |       | 19,986 |   |
| Cash and  cash equivalents at beginning of period |       | 24,768                       |       | 6,891 |   |
| Cash and  cash equivalents at end of period       |       | $                            | 26,828     |   | $ | 26,877 |   |

 

•**            **Cash flows from operating activities,compared to the preceding year, were primarily impacted by the timing ofreceivables collections, the timing of payroll disbursements (includingincentive compensation payments), as well as the timing of vendor payments. Thenature of the Company’s business requires payment of wages to its temporaryassociates on a weekly basis, while payments from clients are generallyreceived 30 to 45 days after the related billing.

 

•**            **Cash (used in) provided by investingactivities was $(1,823) and $13,238 for the six months ended April 2, 2006 and April3, 2005, respectively. During the six months ended April 2, 2006, cash used ininvesting activities was primarily related to capital expenditures, whichconsisted of cash used for purchases of fixed assets, including informationsystems development costs. Net cash outflows related to available-for-saleinvestments were $245 for the six months ended April 2, 2006, compared to $2,342of cash outflows in the six months ended April 3, 2005. During the six monthsended April 2, 2005, cash provided by investing activities was primarilyrelated to the sale of the Company’s securities, partially offset by purchasesof fixed assets and investments as well as the final contingent paymentrelating to the Tennessee aquisition. The Company continues to invest incomputer-based technologies and anticipates approximately $1,800 in relatedcapital expenditures for the remaining six months of fiscal 2006.

 

•**            **During the six months ended April 2,2006 and April 3, 2005, cash provided by financing activities primarily resultedfrom the issuance of the Company’s Class A Common Stock issued through theEmployee Stock Purchase Plan.

 

Cash and cash equivalents increased$2,060 from the prior year as a result of the timing of payroll disbursementsand vendor payments and the Company’s timely collection of accounts receivablesat April 2, 2006.

 

As discussed in Note 5 tothe condensed notes to consolidated financial statements, the Company providesworkers’ compensation insurance to its temporary associates and colleagues. TheCompany establishes a reserve for the deductible portion of itsworkers’ compensation claims using actuarialestimates of the ultimate cost of claims and related expenses that have beenreported, but not settled and that have been incurred, but not reported. Theestimated remaining deductible liability under the aforementioned contracts asof April 2, 2006 is approximately $36,322, of which, $11,807 is recorded ascurrent and $24,515 is recorded as non-current in the Consolidated BalanceSheets. The Company also has an aggregate of $2,078 recorded as a currentliability at April 2, 2006 for amounts due to various state funds related toworkers’ compensation.

 

The Company is contractuallyrequired to collateralize its obligation under each of these workers’ compensationinsurance contracts through the use of irrevocable letters of credit, pledgedcash and securities or a combination thereof. The level and type of collateralrequired for each policy year is determined by the insurance carrier at theinception of the policy year and may be modified periodically. The Company hadoutstanding letters of credit totaling $31,438 and $36,538 as of April 2, 2006and October 2, 2005, respectively. At April 2, 2006, the Company had $14,182available under its lines of credit. The Company believes that this amount plusthe letter of credit reductions for previous year programs will be sufficientfor the new insurance policy.

 

The Credit Agreement withBank of America, commencing December 1, 2004, provides for borrowings up to$50,000 with a provision permitting the Company to increase the aggregateamount of borrowings to $60,000. The Company has granted a security interest toBank of America in all of its existing and future assets. The Credit 

 

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Agreement will expire on December 1, 2006. The Credit Agreement bearsinterest equal to LIBOR plus 1.75% to 2.75% based upon the Company’s EBITDA orBank of America’s prime rate plus 0.00% to 0.50% based on EBITDA. The Companyis also required to pay monthly fees of 0.25% per annum on the unused portionof the line of credit and monthly fees of 0.75% to 1.50% per annum onoutstanding letters of credit based on a pricing matrix. The Credit Agreementrequires the Company to comply with a minimum EBITDA covenant which will not gointo effect unless the Company’s total liquidity drops below $15,000. Liquidityis defined by the Credit Agreement as unrestricted domestic cash plus excessborrowing availability. The Company is in compliance with all financialcovenants as prescribed in the Credit Agreement at April 2, 2006.

 

The Company had noborrowings outstanding as of April 2, 2006 and October 2, 2005.

 

As discussed in Part II,Item 1, Legal Proceedings and Note 7 to the condensed notes to consolidatedfinancial statements, the Company recorded a $5,877 charge during the fourthquarter of fiscal year 2004 for the costs of indemnifying certain clients forlosses they may suffer as a result of an October 2004 decision by theCalifornia Court of Appeal. This charge is based upon various estimates and issubject to change as more information becomes available to the Company. TheCompany may also choose to reimburse clients that did not enter into contractswith the Company or whose contracts may not have included indemnificationlanguage. These costs will be treated as period costs and will be charged tothe consolidated statements of operations in the period management decides tomake any “goodwill” payments to clients. Management’s current estimate offuture “goodwill” payments is a range of $2,000 to $3,000. This estimate issubject to change.

 

The Company has in effect auniversal shelf registration statement on Form S-3 filed with the Securitiesand Exchange Commission (“SEC”). The universal shelf registration statementpermits the Company to sell, in one or more public offerings, shares of itsClass A common stock, shares of preferred stock, debt securities, depositoryshares and/or warrants, or any combination of such securities, for proceeds inan aggregate amount of up to $30,000. Specific terms and prices will bedetermined at the time of any offering and included in a related prospectussupplement to be filed with the SEC. To date no securities have been issuedpursuant to the universal shelf registration statement.

 

On November 18, 2003, theCompany was notified by the State of California Employment DevelopmentDepartment (the “EDD”) that the Company allegedly underpaid its stateunemployment insurance tax by approximately $2,000 for the period January 1,2003 through September 30, 2003. Based on its evaluations and after consulationwith outside counsel, the Company believes that its methodology in calculatingits state unemployment insurance tax is in compliance with all applicable laws.As of April 2, 2006, the Company has accrued $983 in connection with thepotential settlement of these payroll-related tax matters.

 

InMarch 2006, the Company was notified of an assessment for additional payrolltax liabilities in the State of Tennessee for the period July 1, 2003 throughJune 30, 2004. This assessment results from the Company’s acquisition of ourlicensed franchise operation in Tennessee during fiscal year 2003. As of April2, 2006, the Company has accrued $683 related to the assessment.

 

From time to time, theCompany may selectively purchase licensed and traditional franchise offices incertain territories with the intent of expanding the Company’s market presencein such regions. The Company may continue evaluating certain strategic acquisitionswhich may have an impact on liquidity depending on the size of the acquisition.

 

The Company believes thatits current and expected levels of working capital and lines of credits atApril 2, 2006 are adequate to support present operations and to fund futuregrowth and business opportunities for the foreseeable future. Should it benecessary, the Company may issue securities under its effective Form S-3registration statement.

 

**Off-BalanceSheet Arrangements**

 

The Company has nooff-balance sheet arrangements as defined in Regulation S-K 303(a) (4) (ii).

 

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**ContractualObligations**

 

The Company has nosignificant contractual obligations not fully recorded in the ConsolidatedBalance Sheets or fully disclosed in the Condensed Notes to ConsolidatedFinancial Statements. The Company’s estimated workers’ compensation obligation,which represents the remaining deductible liability under the Company’s currentworkers’ compensation contracts, decreased $2,069 to $36,322 at April 2, 2006,compared to $38,391 at October 2, 2005.

 

### **Critical AccountingPolicies and Estimates**

 

The accounting policies thathave the greatest impact on our financial condition and results of operationsand that require the most judgment are those relating to revenue recognition,allowance for doubtful accounts, deferred taxes, estimates to assess therecoverability of intangible and long-lived assets, goodwill impairment, accountingfor stock-based compensation workers’ compensation reserves, contingencies andlitigation reserves. These policies are described in further detail in ourAnnual Report on Form 10-K for the year ended October 2, 2005.

 

**Seasonality**

 

The Company’s quarterlyoperating results are affected by the number of billing days in the quarter andthe seasonality of its clients’ businesses. The first fiscal quarter hashistorically been relatively strong as a result of manufacturing and retailemphasis on holiday sales. Historically, the second fiscal quarter shows adecline in comparable revenues from the first fiscal quarter. Revenue growthhas historically accelerated in each of the third and fourth fiscal quarters asmanufacturers, retailers and service businesses increase their level ofbusiness activity.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company is exposed tomarket risk resulting from changes in interest rates and equity prices and, toa lesser extent, foreign currency rates. Under its current policy, the Companydoes not engage in speculative or leveraged transactions to manage exposure tomarket risk. There were no material changes to the disclosures made in Item 7Ain the Company’s Annual Report on Form 10-K for the year ended October 2, 2005regarding quantitative and qualitative disclosures about market risk.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of April 2, 2006, underthe supervision and with the participation of the Company’s management,including the Company’s principal executive officer and principal financialofficer, the Company carried out an evaluation of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e). These disclosurecontrols and procedures are designed to provide reasonable assurance that theinformation required to be disclosed by the Company in its periodic reportswith the SEC is recorded, processed, summarized and reported within the timeperiods specified by the SEC’s rules and forms, and that the information isaccumulated and communicated to the Company’s management, including theprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure. The design of anydisclosure controls and procedures also is based in part on certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential future conditions.

 

Based upon their evaluation,the principal executive officer and principal financial officer concluded thatthe Company’s disclosure controls and procedures are effective at thereasonable assurance level.

 

**Changes inInternal Control over Financial Reporting**

 

There have been no changesin the Company’s internal control over financial reporting during the fiscalquarter ended April 2, 2006, that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

*LindsayWelch-Hess v. Remedy Temporary Services, Inc.*

 

Commencing in March 2003,the Company was sued in an action entitled Lindsay Welch-Hess v. RemedyTemporary Services, Inc. in San Diego Superior Court. The complaint soughtdamages under various employment tort claims, including sexual harassment andretaliation stemming from a four-day employment relationship. The complaintalso sought damages for unpaid wages under the California Labor Code. Theplaintiff later amended the complaint to assert class claims for unpaid wageswith respect to certain aspects of the application process. The complaintasserted additional class claims alleging failure to compensate personsassigned to one of Remedy’s clients.

 

In November 2004, the Courtcertified a class consisting of all persons in California who, since October1999, have applied to the Company for placement in a temporary job, regardlessof whether they were ever placed in a temporary assignment by the Company (the “Remedyclass”). The Court certified a second class consisting of all persons inCalifornia who, since October 1999, were hourly employees hired by Remedy andassigned to a particular client (the “training class”). On February 11, 2005,the Company filed two motions for summary judgment related to the Remedy classand the training class.

 

On May 31, 2005, the Courtdenied, in part, the Company’s motion for summary judgment related to theRemedy class, which allowed a portion of that class to pursue the claim forunpaid compensation. On June 27, 2005, the Company filed a writ in Division Oneof the Fourth Appellate District seeking an order vacating the denial of Remedy’ssummary judgment motion related to the Remedy class. On September 27, 2005, theCourt of Appeal denied the writ. Subsequently, the Company filed a Petition forReview before the California Supreme Court, which was summarily denied.

 

On July 27, 2005, plaintiffsfiled an appeal challenging the following two court orders relating to theRemedy class: (1) the order denying class certification for failure to paywages upon termination/resignation; and (2) the portion of the trial court’sruling on Remedy’s motion for summary judgment, which excluded from classmembership individuals who completed Remedy’s application process but neverworked for Remedy. The appeal is pending.

 

On July 29, 2005, the Courtgranted Remedy’s motion for summary judgment related to the training class andallowed plaintiffs to recover attorneys’ fees. Plaintiffs filed a motion forreconsideration on various issues, which was denied.

 

On September 27, 2005,plaintiffs filed an appeal challenging the following two court orders relatingto the training class: (1) the order denying class certification as to thetenth cause of action (failure to pay wages upon termination/resignation); and(2) the portion of the trial court’s ruling on Remedy’s summary judgment, whichheld that all training class members had been properly paid. The appeal ispending.

 

Significantly, on March 3,2006, the trial court granted the Company’s request for leave to renew itsmotion for summary judgment relating to the Remedy class. The hearing on theCompany’s renewed motion for summary judgment is set to be heard on June 16,2006.

 

The Company intends tovigorously defend this case. At this time, the Company has not estimated anaccrual for this matter because the probability of an unfavorable outcomecannot currently be reasonably estimated.

 

*CIGA*

 

In early 2002, as a resultof the liquidation of Remedy’s former workers’ compensation insurance carrier,Reliance National Insurance Company (“Reliance”), the California InsuranceGuarantee Association (“CIGA”) began making efforts to join some of the Company’sclients and their workers’ compensation insurance carriers (collectively, “Clients”),in pending workers’ compensation claims filed by Remedy employees. At the timeof these 

 

34

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injuries, from July 22, 1997 through March 31, 2001, Remedy was coveredby workers’ compensation policies issued by Reliance. The Company believes thatunder California law, CIGA is responsible for Reliance’s outstandingliabilities. On April 5, 2002, the California Workers’ Compensation AppealsBoard (“WCAB”), at Remedy’s request, consolidated the various workers’compensation claims in which CIGA sought to join Remedy’s Clients, and agreedto stay proceedings on those claims pending resolution of the issue of CIGA’sobligations to satisfy Reliance’s obligations to Remedy’s employees. The WCABselected a single test case from the consolidated pending cases in which todecide whether CIGA is responsible for the claims of Remedy’s employees, or canshift such responsibility to the Clients. The trial occurred on September 20,2002. The WCAB Administrative Law Judge ruled in favor of CIGA, thus allowingthe pending workers’ compensation matters to proceed against the Clients.Remedy then filed a motion for reconsideration of the Administrative Law Judge’sdecision by the entire WCAB. On March 28, 2003, the WCAB affirmed the ruling ofthe Administrative Law Judge.

 

Thereafter, in May 2003, theCompany filed a petition for writ of review of the WCAB’s decision in theCalifornia Court of Appeal. The WCAB continued the “stay” in effect since April5, 2002, thus preventing CIGA from proceeding until the writ proceeding wasconcluded. In January 2004, the Court of Appeal granted the Company’s petitionand undertook to review the WCAB’s decision. The Court of Appeal heard oralargument in the matter on July 9, 2004.

 

On October 20, 2004, theCourt of Appeal affirmed the WCAB’s decision. On November 18, 2004, the Courtof Appeal granted the Company’s petition for rehearing and requested additionalbriefing on this matter. The Court of Appeal heard oral argument on April 15,2005. On July 25, 2005, the Court of Appeal issued its decision finding thatCIGA should not be dismissed and that the insurance held by Remedy’s Client didnot provide other available insurance for the workers’ compensation claim. CIGAappealed this decision with the California Supreme Court. In October 2005, theCalifornia Supreme Court declined to hear the appeal and sent the matter backto the WCAB with instructions to enforce the Court of Appeal’s decision.

 

On October 25, 2005, Remedyfiled a request for order seeking to dismiss Remedy, its Clients and theirinsurance companies from the individual WCAB cases and joining CIGA as a defendant.On November 7, 2005, CIGA filed objections to the request for dismissal. OnDecember 13, 2005, the Company filed a reply. A hearing date has not been set.

 

Despite the Court of Appeal’sdecision, in the event of a final unfavorable outcome, Remedy may be obligatedto reimburse certain Clients and believes that it would consider reimbursementof other Clients for actual losses incurred as a result of unfavorable rulingsin these matters. If Remedy is unsuccessful in dismissing Remedy’s Clients fromthese matters, and if these Clients or their insurance carriers becomeobligated to respond to the claims of Remedy’s employees, the Company believesthat the direct financial exposure to Remedy becomes a function of the ultimatelosses on the claims and the impact of such claims, if any, on the Clients’insurance coverage, potentially including but not limited to the Clients’responsibility for any deductibles or retentions under their own workers’compensation insurance. The Company has received data from the Third PartyAdministrator (“TPA”) handling the claims for CIGA. Such data indicates claimsof approximately $32,903 as of April 2, 2006. The losses incurred to daterepresent amounts paid to date by the trustee and the remaining claim reserveson open files.

 

In the fourth quarter offiscal year 2004, the Company recorded a $5,877 charge to operating incomerelated to the CIGA case. The Company does not currently expect to adjust thereserve until final resolution of the case. This amount represents the Company’sestimate on the basis of a review of known information and was established forcosts associated with the indemnification of certain Clients for losses theymay suffer as a result of final unfavorable outcomes. The information reviewedincluded customer contracts, review of the loss run received from the TPAhandling the claims, actuarial development of the reported claim losses,estimates of customer insurance coverage, and other applicable information. Theamount of the charge is, therefore, subject to change as more informationbecomes available to the Company. In the event of a final unfavorable outcome,the Company may also choose to reimburse certain Clients that did not enterinto contracts with the Company or whose contracts may not have includedindemnification language. These costs will be treated as period costs and willbe charged to the consolidated statements of operations in the periodmanagement decides to make any “goodwill” payments to Clients. Management’scurrent estimate of future “goodwill” payments is a range of $2,000 to $3,000.This estimate is subject to change.

 

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***Other Litigation***

 

From time to time, theCompany becomes a party to other litigation incidental to its business andoperations. The Company maintains insurance coverage that management believesis reasonable and prudent for the business risks that the Company faces. Basedon current available information, management does not believe the Company isparty to any other legal proceedings that are likely to have a material adverseeffect on its business, financial condition, cash flows or results ofoperations.

 

***Other Contingency***

 

In late 2003, the Companywas notified that it may have underpaid certain payroll-related tax liabilitiesby approximately $2,000 for the period from January 1, 2003 through September30, 2003. Based on its evaluations and after consultation with outside counsel,the Company believes that the methodology the Company used to calculate thesetaxes was in compliance with applicable law. The Company is currently workingwith outside counsel to resolve these matters. As of April 2, 2006 and October2, 2005, the Company has accrued $983 in connection with the potentialsettlement of these payroll-related tax matters.

 

InMarch 2006, the Company was notified of an assessment for additional payrolltax liabilities in the State of Tennessee for the period July 1, 2003 throughJune 30, 2004. This assessment results from the Company’s acquisition of ourlicensed franchise operation in Tennessee during fiscal year 2003. As of April2, 2006, the Company has accrued $683 related to the assessment.

 

**ITEM 6.EXHIBITS**

 

Set forth below is a list ofthe exhibits included as part of this Quarterly Report:

 
| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 3.1              |       |            | Amended and Restated  Articles of Incorporation of the Company(a) |
| 3.2              |       |            | Amended and Restated  Bylaws of the Company(e) |
| 4.1              |       |            | Specimen Stock  Certificate(a) |
| 4.2              |       |            | Shareholder Rights  Agreement(a) |
| 10.1             |       |            | *Robert E. McDonough, Sr.  Amended and Restated Employment Agreement(f) |
| 10.2             |       |            | *Paul W. Mikos Employment  Agreement, as amended(g) |
| 10.3             |       |            | *Robert E. McDonough, Sr.  Amendment No. 1 to Amended and Restated Employment Agreement(i) |
| 10.7             |       |            | *Deferred Compensation  Agreement for Alan M. Purdy(a) |
| 10.9             |       |            | Form of Indemnification  Agreement entered into by RemedyTemp, Inc. and each of its directors and  certain executive officers(a) |
| 10.11            |       |            | *Amended and Restated  RemedyTemp, Inc. 1996 Stock Incentive Plan (effective as of January 1,  2005)(cc) |
| 10.12            |       |            | *Amended and Restated  RemedyTemp, Inc. 1996 Employee Stock Purchase Plan (effective as of September  26, 2005)(z) |
| 10.13            |       |            | Form of Franchising  Agreement for Licensed Offices(k) |
| 10.14            |       |            | Form of Franchising  Agreement for Franchised Offices(a) |
| 10.15            |       |            | Form of Licensing  Agreement for IntelliSearch(a) |
| 10.18            |       |            | *Additional Deferred  Compensation Agreement for Alan M. Purdy(b) |
| 10.19            |       |            | Lease Agreement between  RemedyTemp, Inc. and Parker-Summit, LLC(c) |
| 10.22            |       |            | *RemedyTemp, Inc. Deferred  Compensation Plan (effective as of January 1, 2005)(cc) |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 10.23            |       |            | *Amended and Restated  Employment Agreement for Greg Palmer(m) |
| 10.24            |       |            | *1998 RemedyTemp, Inc.  Amended and Restated Deferred Compensation and Stock Ownership Plan for  Outside Directors (effective as of January 1, 2005)(cc) |
| 10.25            |       |            | Form of Licensing  Agreement for i/Search 2000®(e) |
| 10.27            |       |            | *Paul W. Mikos Severance  Agreement and General Release(j) |
| 10.28            |       |            | *Gunnar B. Gooding  Employment and Severance Letter(l) |
| 10.29            |       |            | *Cosmas N. Lykos  Employment and Severance Letter(l) |
| 10.30            |       |            | *Alan M. Purdy Retirement  Agreement and General Release(n) |
| 10.31            |       |            | *Monty Houdeshell  Employment Letter(o) |
| 10.34            |       |            | Amendment No. 2 to the  Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC(q) |
| 10.36            |       |            | Business Loan Agreement  between Bank of America N.A. and RemedyTemp, Inc.(s) |
| 10.37            |       |            | Amended and Restated  Credit Agreement between Bank of America, N.A. and Remedy Temp, Inc.(t) |
| 10.38            |       |            | *Robert E. McDonough, Sr.  Amendment No. 2 to Amended and Restated Employment Agreement(u) |
| 10.39            |       |            | *Short-term Incentive  Bonus Plan for Fiscal 2005(v) |
| 10.40            |       |            | *Amended Agreement with  Janet Hawkins(w) |
| 10.41            |       |            | *Deferred Compensation  Plan for Greg Palmer(cc) |
| 10.42            |       |            | *Form of Change in Control  Severance Agreement(x) |
| 10.43            |       |            | *Amendment to Amended and  Restated Employment Agreement for Greg Palmer(y) |
| 10.44            |       |            | *Short-Term Incentive  Bonus Plan for Fiscal 2006(aa) |
| 10.45            |       |            | *Form of Lock-Up Agreement  with certain executive officers(bb) |
| 10.46            |       |            | Summary of Compensation  Arrangements for Named Executive Officers and Directors(cc) |
| 10.47            |       |            | Form of Franchising  Agreement for Licensed Offices (effective January 1, 2006)(dd) |
| 10.48            |       |            | Form of Early Renewal  Addendum for Existing Licensees (effective January 1, 2006)(dd) |
| 10.49            |       |            | Form of Software License  Agreement for Licensees (effective January 1, 2006)(dd) |
| 31.1             |       |            | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2             |       |            | Chief Administrative  Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 32               |       |            | Chief Executive Officer  and Chief Administrative Officer Certifications Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |

 

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*                     Indicates a management contract or a compensatoryplan, contract or arrangement.

 

(a)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Registration Statement on Form S-1 (Reg. No. 333-4276), as amended.

 

(b)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended December 29, 1996.

 

(c)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 30, 1997.

 

(d)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 28, 1997.

 

(e)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 27, 1998.

 

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(f)                Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Reports on Form 10-Q for thequarterly period ended December 27, 1998.

 

(g)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Reports on Form 10-Q for thequarterly period ended June 27, 1999 (original agreement) and for the quarterlyperiod ended December 31, 2000 (amendment).

 

(h)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended March 28, 1999.

 

(i)                 Incorporated by reference to exhibit number10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly periodended December 31, 2000.

 

(j)                 Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended April 1, 2001.

 

(k)              Incorporated by reference to the exhibit of samenumber to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended July 1, 2001.

 

(l)                 Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 30, 2001.

 

(m)           Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Report on Form 10-Q for the quarterly period endedDecember 30, 2001.

 

(n)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 30, 2002.

 

(o)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 29, 2002.

 

(p)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended June 29, 2003.

 

(q)             Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 28, 2003.

 

(r)                Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 28, 2004.

 

(s)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 28, 2004.

 

(t)                Incorporated by reference to the exhibit ofsame number to Registrant’s Current Report on Form 8-K filed on December 3,2004.

 

(u)             Incorporated by reference to the exhibit ofsame number to Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended January 2, 2005.

 

(v)             Incorporated by reference to Item 1.01 of theRegistrant’s Current Report on Form 8-K filed on February 1, 2005.

 

(w)           Incorporated by reference to Item 10.1 of the Registrant’s CurrentReport on Form 8-K filed on May 9, 2005.

 

(x)               Incorporated by reference to Exhibit 10.1 toRegistrant’s Current Report on Form 8-K filed on April 22, 2005.

 

(y)             Incorporated by reference to Exhibit 10.2 toRegistrant’s Current Report on Form 8-K filed on April 22, 2005.

 

(z)               Incorporated by reference to Exhibit 10.2 toRegistrant’s Current Report on Form 8-K filed on September 27, 2005.

 

(aa)      Incorporated by reference to Item 1.01 of the Registrant’s Current Reporton Form 8-K filed on September 23, 2005.

 

(bb)      Incorporated by reference to Exhibit 10.1 of the Registrant’s CurrentReport on Form 8-K filed on September 27, 2005.

 

(cc)      Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended October 2,2005.

 

(dd)Incorporated by reference to the exhibit of same number to Registrant’sQuarterly Report on Form 10-Q for the quarterly period ended January 1, 2006.

 

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**SIGNATURES**

 

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

 
|         | REMEDYTEMP, INC.                            |
|--------------|---------------------------------------------|
|         |                                        |
| May 12, 2006 | /s/ GREG D. PALMER                          |   |
|         | Greg D. Palmer, President  and Chief        |
|         | Executive Officer                           |
|         |                                        |
| May 12, 2006 | /s/ MONTY A. HOUDESHELL                     |   |
|         | Monty A. Houdeshell,  Senior Vice           |
|         | President Chief  Administrative Officer and |
|         | Corporate Secretary                         |
|         | (Principal Financial  Officer)              |
|         |                                        |
| May 12, 2006 | /s/ JOHN D. SWANCOAT                        |   |
|         | John D. Swancoat, Vice  President and       |
|         | Controller                                  |
|         | (Principal  Accounting Officer)             |
|              |                                             |  |  |

 

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**Exhibit Index**

 
| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 3.1              |       |            | Amended and Restated  Articles of Incorporation of the Company(a) |
| 3.2              |       |            | Amended and Restated  Bylaws of the Company(e) |
| 4.1              |       |            | Specimen Stock  Certificate(a) |
| 4.2              |       |            | Shareholder Rights  Agreement(a) |
| 10.1             |       |            | *Robert E. McDonough, Sr.  Amended and Restated Employment Agreement(f) |
| 10.2             |       |            | *Paul W. Mikos Employment  Agreement, as amended(g) |
| 10.3             |       |            | *Robert E. McDonough, Sr.  Amendment No. 1 to Amended and Restated Employment Agreement(i) |
| 10.7             |       |            | *Deferred Compensation  Agreement for Alan M. Purdy(a) |
| 10.9             |       |            | Form of Indemnification  Agreement entered into by RemedyTemp, Inc. and each of its directors and  certain executive officers(a) |
| 10.11            |       |            | *Amended and Restated  RemedyTemp, Inc. 1996 Stock Incentive Plan (effective as of January 1,  2005)(cc) |
| 10.12            |       |            | *Amended and Restated  RemedyTemp, Inc. 1996 Employee Stock Purchase Plan (effective as of September  26, 2005)(z) |
| 10.13            |       |            | Form of Franchising  Agreement for Licensed Offices(k) |
| 10.14            |       |            | Form of Franchising  Agreement for Franchised Offices(a) |
| 10.15            |       |            | Form of Licensing  Agreement for IntelliSearch(a) |
| 10.18            |       |            | *Additional Deferred  Compensation Agreement for Alan M. Purdy(b) |
| 10.19            |       |            | Lease Agreement between  RemedyTemp, Inc. and Parker-Summit, LLC(c) |
| 10.22            |       |            | *RemedyTemp, Inc. Deferred  Compensation Plan (effective as of January 1, 2005)(cc) |
| 10.23            |       |            | *Amended and Restated  Employment Agreement for Greg Palmer(m) |
| 10.24            |       |            | *1998 RemedyTemp, Inc.  Amended and Restated Deferred Compensation and Stock Ownership Plan for  Outside Directors (effective as of January 1, 2005)(cc) |
| 10.25            |       |            | Form of Licensing  Agreement for i/Search 2000®(e) |
| 10.27            |       |            | *Paul W. Mikos Severance  Agreement and General Release(j) |
| 10.28            |       |            | *Gunnar B. Gooding  Employment and Severance Letter(l) |
| 10.29            |       |            | *Cosmas N. Lykos  Employment and Severance Letter(l) |
| 10.30            |       |            | *Alan M. Purdy Retirement  Agreement and General Release(n) |
| 10.31            |       |            | *Monty Houdeshell  Employment Letter(o) |
| 10.34            |       |            | Amendment No. 2 to the  Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC(q) |
| 10.36            |       |            | Business Loan Agreement  between Bank of America N.A. and RemedyTemp, Inc.(s) |
| 10.37            |       |            | Amended and Restated  Credit Agreement between Bank of America, N.A. and Remedy Temp, Inc.(t) |
| 10.38            |       |            | *Robert E. McDonough, Sr.  Amendment No. 2 to Amended and Restated Employment Agreement(u) |
| 10.39            |       |            | *Short-term Incentive  Bonus Plan for Fiscal 2005(v) |
| 10.40            |       |            | *Amended Agreement with  Janet Hawkins(w) |
| 10.41            |       |            | *Deferred Compensation  Plan for Greg Palmer(cc) |
| 10.42            |       |            | *Form of Change in Control  Severance Agreement(x) |

 

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| **Exhibit  No.** | ** ** | **Description** |
|------------------|------------|-----------------|
| 10.43            |       |            | *Amendment to Amended and  Restated Employment Agreement for Greg Palmer(y) |
| 10.44            |       |            | *Short-Term Incentive  Bonus Plan for Fiscal 2006(aa) |
| 10.45            |       |            | *Form of Lock-Up Agreement  with certain executive officers(bb) |
| 10.46            |       |            | Summary of Compensation  Arrangements for Named Executive Officers and Directors(cc) |
| 10.47            |       |            | Form of Franchising  Agreement for Licensed Offices (effective January 1, 2006)(dd) |
| 10.48            |       |            | Form of Early Renewal  Addendum for Existing Licensees (effective January 1, 2006)(dd) |
| 10.49            |       |            | Form of Software License  Agreement for Licensees (effective January 1, 2006)(dd) |
| 31.1             |       |            | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2             |       |            | Chief Administrative  Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
| 32               |       |            | Chief Executive Officer  and Chief Administrative Officer Certifications Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |

 

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*                   Indicates a management contract or acompensatory plan, contract or arrangement.

 

(a)            Incorporated by reference to the exhibit ofsame number to the Registrant’s Registration Statement on Form S-1 (Reg. No.333-4276), as amended.

 

(b)           Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Report on Form 10-Q for the quarterly period endedDecember 29, 1996.

 

(c)            Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 30, 1997.

 

(d)           Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended September28, 1997.

 

(e)            Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 27, 1998.

 

(f)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Reports on Form 10-Q for thequarterly period ended December 27, 1998.

 

(g)           Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Reports on Form 10-Q for the quarterly period ended June27, 1999 (original agreement) and for the quarterly period ended December 31,2000 (amendment).

 

(h)           Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended March 28,1999.

 

(i)               Incorporated by reference to exhibit number10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly periodended December 31, 2000.

 

(j)               Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended April 1, 2001.

 

(k)            Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended July 1, 2001.

 

(l)               Incorporated by reference to the exhibit ofsame number to the Registrant’s Annual Report on Form 10-K for the yearlyperiod ended September 30, 2001.

 

(m)         Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Report on Form 10-Q for the quarterly period endedDecember 30, 2001.

 

(n)           Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Report on Form 10-Q for the quarterly period ended June30, 2002.

 

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(o)           Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended September29, 2002.

 

(p)           Incorporated by reference to the exhibit of same number to theRegistrant’s Quarterly Report on Form 10-Q for the quarterly period ended June29, 2003.

 

(q)           Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended September28, 2003.

 

(r)              Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 28, 2004.

 

(s)            Incorporated by reference to the exhibit ofsame number to the Registrant’s Quarterly Report on Form 10-Q for the quarterlyperiod ended March 28, 2004.

 

(t)              Incorporated by reference to the exhibit ofsame number to Registrant’s Current Report on Form 8-K filed on December 3,2004.

 

(u)           Incorporated by reference to the exhibit of same number to Registrant’sQuarterly Report on Form 10-Q for the quarterly period ended January 2, 2005.

 

(v)           Incorporated by reference to Item 1.01 of the Registrant’s CurrentReport on Form 8-K filed on February 1, 2005. (w) Incorporated by reference toItem 10.1 of the Registrant’s Current Report on Form 8-K filed on May 9, 2005.

 

(w)         Incorporated by reference to Item 10.1 of the Registrant’s CurrentReport on Form 8-K filed on May 9, 2005.

 

(x)             Incorporated by reference to Exhibit 10.1 toRegistrant’s Current Report on Form 8-K filed on April 22, 2005.

 

(y)           Incorporated by reference to Exhibit 10.2 to Registrant’s CurrentReport on Form 8-K filed on April 22, 2005.

 

(z)             Incorporated by reference to Exhibit 10.2 toRegistrant’s Current Report on Form 8-K filed on September 27, 2005.

 

(aa)      Incorporated by reference to Item 1.01 of the Registrant’s CurrentReport on Form 8-K filed on September 23, 2005.

 

(bb)      Incorporated by reference to Exhibit 10.1 of the Registrant’s CurrentReport on Form 8-K filed on September 27, 2005.

 

(cc)      Incorporated by reference to the exhibit of same number to theRegistrant’s Annual Report on Form 10-K for the yearly period ended October 2,2005.

 

(dd)Incorporated by reference to the exhibit of same number to Registrant’sQuarterly Report on Form 10-Q for the quarterly period ended January 1, 2006.

 

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