**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.20549

----

**FORM 10-K**

**(Mark One)**

x             **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 25, 2005**

**OR**

o               **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the transitionperiod from                         to                          **

**CommissionFile No. 001-31299**

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC.**

*(**Exact name of registrant as specifiedin its charter)*

| **Delaware**                                                                                          |   | **65-0865171**                             |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|
| *(State  or other jurisdiction of incorporation or*                                                   |   | *(I.R.S.  Employer Identification Number)* |
| *organization)*                                                                                       |   | * *                                   |
| **901  Yamato Road, Suite 110  Boca Raton, FL 33431***(Address  of principal executive offices)* |

 

Registrant’s telephone number, including areacode:  **(561)322-1300**

Securities registeredpursuant to Section 12(b) of the Act:

|                                | ** ** | **Name of each exchange** |
|--------------------------------|------------|---------------------------|
| **Title of each class:**       | ** ** | **on which registered:**  |
| Common Stock, par  value $0.01 |       | New York Stock  Exchange  |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

----

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes o   No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

Yes o    No x

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x    No o

Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 ofthis chapter) is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of ‘‘accelerated filer and large acceleratedfiler’’ in Rule 12b-2 of the Exchange Act.

| Large accelerated filer o    Accelerated  filer x     Non-accelerated  filer o |
|-----------------------------------------------------------------------------------------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o    No x

The aggregate market valueof the voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of June 24,2005 (the last business day of the registrant’s most recently completed secondfiscal quarter) was $141,489,476. As of March 1, 2006, there were 30,236,142shares of common stock, $0.01 par value, outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE:**

Part IIIof this Form 10-K incorporates certain information by reference fromthe registrant’s Definitive Proxy Statement for the 2006 Annual Meeting ofStockholders, which will be filed no later than 120 days after December 25,2005.

 

----

**TABLE OF CONTENTS**

|                   | ** ** | ** **                                                                                                          | ** ** | **PAGE** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   | ** ** | ** **                                                                                                          | ** ** |
| Item 1.           |       | Business                                                                                                            |       | 1        |       |
| Item 1A.          |       | Risk  Factors                                                                                                       |       | 8        |       |
| Item 1B.          |       | Unresolved Staff Comments                                                                                           |       | 15       |       |
| Item 2.           |       | Properties                                                                                                          |       | 15       |       |
| Item  3.          |       | Legal  Proceedings                                                                                                  |       | 15       |       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                 |       | 16       |       |
| **PART II**  | ** ** | ** **                                                                                                          | ** ** |
| Item 5.           |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       | 17       |       |
| Item  6.          |       | Selected  Financial Data                                                                                            |       | 17       |       |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |       | 19       |       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risk                                                         |       | 29       |       |
| Item 8.           |       | Financial Statements and Supplementary Data                                                                         |       | 30       |       |
| Item 9.           |       | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                               |       | 30       |       |
| Item 9A.          |       | Controls and Procedures                                                                                             |       | 30       |       |
| Item  9B.         |       | Other  Information                                                                                                  |       | 30       |       |
| **PART III** |       |                                                                                                                |       |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                  |       | 31       |       |
| Item 11.          |       | Executive Compensation                                                                                              |       | 31       |       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                     |       | 31       |       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                      |       | 31       |       |
| Item 14.          |       | Principal Accounting Fees and Services                                                                              |       | 31       |       |
| **PART IV**  |       |                                                                                                                |       |
| Item 15.          |       | Exhibits, Financial Statement Schedules and Reports on  Form 8-K                                               |       | 32       |       |
| SIGNATURES        |       | 33                                                                                                                  |       |

 

All references to “Medical Staffing Network,” “we,” “us,”or “our,” in this Annual Report on Form 10-K means Medical StaffingNetwork Holdings, Inc.

----

**PART I**

**Item 1.**   Business

**General Development of Business**

We are a leading temporary healthcare staffing companyand the largest provider of per diem nurse staffing services (staffingassignments of less than thirteen weeks in duration) in the United States asmeasured by revenues. Our per diem staffing assignments place ourprofessionals, predominately nurses, at hospitals and other healthcarefacilities to solve our clients’ temporary staffing needs. We believe we arealso a leading provider of specialized radiology and diagnostic imagingspecialists and clinical laboratory technicians, or “allied health”professionals, as measured by revenues. We serve our clients through what webelieve to be the largest temporary healthcare staffing network in the UnitedStates, which was comprised as of December 25, 2005 of 120 per diembranches that provide nurse staffing on a per diem basis in 40 states. Ourextensive client base includes approximately 7,000 healthcare facilitiesincluding leading for-profit and not-for-profit hospitals, leadingteaching hospitals and regional healthcare providers. We do not receive amaterial portion of our revenues from Medicare or Medicaid reimbursements orsimilar state reimbursement programs.

Our business has grown significantly since ourfounding in 1998. We call branches that we have opened since our inception “*de novo*” branches, as opposed to branches acquired fromthird parties. The majority of our branches were *de novo*branches as of December 25, 2005.

For the year ended December 25, 2005, we hadrevenues of $402.5 million and incomefrom operations of $1.3 million. During this period, we earned 73% ofour revenues from our per diem nurse staffing assignments, 19% from our alliedhealth assignments, 7% from our travel nurse staffing assignments and 1% fromour per diem general staffing assignments.

We believe the flexibility of our service offeringsprovides substantial value to our clients and professionals. We provide ourclients with significant assistance in managing their profitability by givingthem a high degree of control in managing their labor costs without sacrificingclinical expertise. In addition, working on a per diem basis allows ourhealthcare professionals substantial flexibility in balancing their careerswith their lifestyle objectives.

We were formed as aDelaware corporation in 1998. Our predecessor corporation, Southeast StaffingPartners, Inc., a Florida corporation, was founded in June 1997.

**Industry Overview**

The temporary nurse staffing market has two majorcomponents: per diem nursing and travel nursing. Per diem nurse staffing is thelargest sector of the temporary healthcare staffing industry, providinghealthcare professionals for assignments of a single shift to thirteen weeks,and is used to meet local labor shortages and openings due to holidays,vacations, illness and staff turnover, as well as daily and seasonalfluctuations in hospital volume. The per diem market operates with many localoperators and is highly fragmented. The per diem staffing model requires alocal presence in every market served because these short-term staffing needsare typically filled on a local basis, and are dependant on the relationshipthat exists between local operators, local professionals and the healthcarefacility.

In the travel nurse market, healthcare facilities hiretravel nurses on a contracted, fixed-term basis to meet seasonal fluctuationsin hospital admissions levels for time periods ranging from several weeks toone year, but are typically thirteen weeks long. Travel nurse companiescoordinate travel and housing arrangements for their professionals whotypically relocate to the area in which they are placed. The travel staffingmodel utilizes a centralized approach to serving its clients.

1

----

Allied health staffing consists of highly specializedradiology and diagnostic imaging specialties, clinical laboratory specialties,rehabilitation specialties, pharmacists and respiratory therapists. Theseprofessionals are staffed on both a per diem and travel basis.

Service revenues and gross profit margins have beenunder pressure as demand for temporary nurses has been going through a periodof contraction. However, the rate of contraction has slowed during the pastyear. Due to the current difficult economic times, the unemployment rate, whileslightly improved over the past year, remains relatively high. We believe thishas resulted in nurses in many households becoming a primary wage earner, whichis causing such nurses to seek more traditional full-time employment.Additionally, hospitals are experiencing lower than projected admissions levelsand are placing greater reliance on existing full-time staff, resulting inincreased overtime and nurse-patient loads.

We cannot predict whenconditions will reverse, but we are confident in the long-term growth of theindustry. In a January 13, 2000 report, the U.S. Census Bureau, PopulationProjections Bureau, projected that the number of Americans over 65 years of ageis expected to grow from 34.5 million in 2000 to 53.7 million in 2020. In a July 2002report, the U.S. Department of Health and Human Services stated that thenational supply of full-time equivalent registered nurses was approximately 1.9million while demand was approximately 2.0 million. This gap between supply anddemand for nurses is expected to grow from 0.1 million in 2000 to 0.8 millionby 2020. Additionally, there is a growing trend to restrict mandatoryhealthcare worker overtime requirements by employers and to establishnurse-patient ratios. Several states have enacted legislation prohibitingmandatory overtime and other states have similar legislation pending. Inconjunction with the aforementioned factors, we believe that the prospects forthe healthcare staffing industry should improve as hospitals experience higheradmissions levels and increasing shortages of healthcare workers.

**Description of the Business**

We provide hospitals andother healthcare facilities with a wide range of staffing services, includingper diem nurses, allied health professionals and travel nurses. While we have anational presence, we operate on a local basis through an integrated network,which consisted of 120 per diem branches in 40 states as of December 25,2005, so that we may develop significant relationships with our clients andhealthcare professionals and provide the highest level of service. We haveprovided services to over 7,000 healthcare facilities that have paid usdirectly for the services we provide.

***Temporary Staffing Services Provided***

The per diem nurse staffing portion of our businessprovides nurses for assignments with durations ranging from a single shift to a13-week assignment and represented approximately 73% of our 2005 fiscalyear revenues. We offer our clients all major classifications of nurses,including registered nurses and licensed practical nurses, across allspecialties such as pediatric, geriatric, intensive care unit andcardiovascular. We provide per diem personnel to a variety of healthcare facilitiesincluding acute care hospitals, nursing homes, clinics and surgical andambulatory care centers. We serve both for-profit and not-for-profitorganizations that range in scope from one facility to national chains withover 100 facilities. The allied health staffing portion of our business, whichrepresented approximately 19% of our 2005 fiscal year revenues, specializes inproviding allied health professionals to hospitals, nursing homes, clinics andsurgical and ambulatory care centers, both on a per diem and a travel basis. Webelieve our allied healthcare business to be among the largest in the countryas measured by revenues. Allied health staffing specialties that we staffinclude diagnostic imaging and radiology technicians, clinical laboratory technicians,rehabilitation specialists, pharmacists and respiratory therapists. The travelnurse staffing portion of our business, which represented approximately 7% ofour 2005 fiscal year revenues, provides nurses and surgical technicians tohospitals across the country for assignments typically lasting thirteen weeks.The per diem general staffing portion of our business, which representedapproximately 1% of our 

2

----

2005 fiscal year revenues,places individuals in a variety of areas including clerical, janitorial andfood services.

During the second quarterof 2003, we discontinued our physician staffing operation, and as such, theresults of operations from these services are shown separately, as a totalamount, in our consolidated statements of operations for all years presented.

***National Branch Network***

We currently operate an integrated network, whichconsists of 120 per diem branches located in 40 states as of December 25,2005. Subsequent to year end, we announced that we were in the process ofclosing certain per diem nurse branches. Our branches are organized intoseveral geographic regions, each of which is coordinated by a regionaldirector. These branches serve as our direct contact with our healthcareprofessionals and clients and are active in recruiting, scheduling, and salesand marketing. Each branch is responsible for covering a specific localgeographic region. Our typical branch is staffed with four or fiveprofessionals who are responsible for the day-to-day operations of thebusiness. These professionals include a branch manager, two to three staffingcoordinators, and a payroll administrator.

The cost structure of ourtypical branch is primarily fixed, consisting of limited personnel, officespace rent, information systems infrastructure and supplies. We have been ableto develop a highly efficient branch management model that is easily scaleableto meet increasing demand.

***Recruitment and Retention***

Our ability torecruit and retain a pool of talented, motivated and highly credentialedhealthcare professionals is critical to our success. Our active pool ofprofessionals was greater than 28,000 in 2005. We typically attract newrecruits via word of mouth. The majority of our senior operations managementhave nursing or other clinical backgrounds. We believe this depth of clinicalexperience helps us understand the needs of clinical personnel and enhances ourreputation in the industry as an advocate for nurses and other healthcareprofessionals, improving our ability to recruit such personnel. In addition, weoffer competitive benefits packages that differentiate us from the smaller,local per diem staffing companies with which we compete, and which aretypically unable to offer the package of services and benefits that we offer.We believe our competitive advantages in recruiting skilled personnel includethe ability to offer the following opportunities to our personnel:

·       *Flexible Staffing Assignments*. We provide our professionalswith the flexibility to tailor their staffing schedules to accommodatelifestyle choices. There are many reasons why qualified nurses choose to workon a per diem basis, but most are motivated by the ability to balance theirprofession with their other responsibilities and interests. Our professionalsare able to choose not only when they work but also where they work. Ourscheduling systems are designed to place our professionals in facilities andshifts where they have had a productive and positive experience with ourclients.

·       *Competitive Benefits Package*. We believe that we were thefirst per diem healthcare staffing company to offer a comprehensive benefitsprogram for qualified per diem staff. Our program includes a matching 401(k) planand access to group discounted benefits such as health, dental, life,disability and general liability insurances for healthcare professionals whowork for us for a specified minimum number of hours per month for more than onemonth.

·       *Choice of Pay Frequency—Including Daily*. Our ability tooffer pay as frequently as daily provides our professionals with another keyelement of flexibility. Rather than waiting for the end of a traditional weeklyor biweekly pay period, our professionals can be paid immediately aftercompleting their shifts. This allows our branch staff to maintain an activedialogue with our 

3

----

professionals regardingfuture assignments. This consistent interaction fosters unique relationshipsthat distinguish us from our competition.

·       *Leading Continuing Educational Programs*. We also offercontinuing education courses as a means to improve our pool of nurses as wellas to maintain proper compliance. We have a unique relationship with FloridaAtlantic University’s College of Nursing. The College of Nursing facultydevelops continuing education courses that we offer online through our website.Our nurses can obtain continuing education units (CEUs) that many statesrequire to educate our nurses regarding changing technology and clinicalpractices. Our courses are fully accredited by the American NursesCredentialing Center of Excellence and the Florida Board of Nursing.

We have several provenrecruitment channels that consistently augment our pool of healthcareprofessionals at low marginal cost. In 2005, we spent approximately 1% of ourrevenues on recruitment activities. Our recruiting activities include printadvertisements in local newspapers and in trade journals, mailings, Internetlistings and solicitations at trade conventions.

***Quality Management***

We have developed a substantial clinical qualityimprovement program to uphold our high standards in recruiting healthcareprofessionals. Our two-step internal process ensures that all of our temporaryprofessionals have the proper credentials, skills and experience for theirassignments. We have found that our adherence to high quality managementstandards is an integral component of satisfying both clients and professionalswith our placements. Our two-step process for quality management includes thefollowing:

***Pre-employmentQualifications.*****  **Allof our healthcare professionals undergo a rigorous screening process thatincludes requirements such as a minimum of one year of related work experienceand the successful completion of written tests specific to their area ofspecialty. Each applicant is then interviewed in person by a local branchmanager. This sets us apart from our competitors who often do not conductface-to-face interviews. We also check prior work references, confirm thevalidity of the applicant’s professional license(s) and screen theapplicant for any criminal activity and drug abuse. All of these standardscomply with or exceed those required by Occupational Safety & HealthAdministration (OSHA) and Joint Commission on Accreditation of HealthcareOrganizations (JCAHO). In fact, we completed JCAHO’s voluntary comprehensivecertification review process in 2005 to earn its Gold Seal of Approval. We arethe first national provider of per diem nursing services to achieve JCAHOHealth Care Staffing Services Certification, which provides us with anothercompetitive advantage in the per diem nursing staffing marketplace. JCAHO’sGold Seal of Approval is recognized nationwide as a symbol of quality thatreflects a commitment to meeting certain performance standards.

***Placement and Ongoing Monitoring.******  ***Once we have hired ahealthcare professional, we enter all of the professional’s data into ourdatabase, which tracks any “renewal dates” with respect to licenses andcontinuing education requirements. Our database also matches our clients’ needswith our available pool of professionals. We strive to place our professionalsin facilities where they have previously worked in order to enhance thecontinuity of our services to our clients. If this is not possible, we provideour professionals with pre-staffing orientation to the facility. By takingthese steps, we ensure that the healthcare professional is comfortable with thefacility’s physical layout, permanent staff and clinical protocols. We alsocontinually monitor the performance of our professionals through evaluationsand client feedback, among other things. In addition, our clients may accessour database remotely (via the Internet), which provides them the ability toview the credentials of the professionals being staffed at their facilities.

4

----

***Sales and Marketing***

We have developed a three-pronged approach toour sales and marketing activities in order to address the different levels ofdecision makers at our clients’ facilities:

Our first level of business development andrelationship management is with the purchasing manager, administrator(s) orchief nursing officer at a group of facilities we service. Commonly-ownedhospitals, nursing home chains and healthcare group alliances often purchasetemporary staffing services for multiple facilities under a single contract,and a single person typically manages the selection process. A senior member ofour staff, the regional director and, in certain circumstances, the ExecutiveVice President of Operations, negotiate contractual terms and pricing with suchgroups of facilities.

Our second level of business development andrelationship management is with the director of nursing or a nurse/allieddepartment manager, who reviews our services from a clinical competency andquality hiring standards perspective. Our regional director and local branchmanager establish, build and maintain relationships at this level.

Our third level ofrelationship management is with the facility staffing coordinators and theafter-hours and weekend supervisors who are the actual users of theservices. Our branch managers and local staffing coordinators regularly contactthese buyers to coordinate the daily staffing and scheduling of personnel.

***Information Systems***

Our information system for our per diem staffingoperation, for which we hold an exclusive twenty-five year license andwhich we refer to as MSN HealthWorks, is customized to our recruiting,regulatory credentialing, scheduling and billing needs. Not only is thedatabase used as a management tool, but it is also used by our staffingcoordinators in each branch to respond quickly to client questions andrequests. MSN HealthWorks’ applications and its supporting infrastructure houseand organize all of our client and employee information. Electronic files aremaintained on our client facilities, detailing historical and prospectiverequests for staffing. These files also contain facility-specificprocedures and protocols so that we can ensure that our healthcareprofessionals integrate quickly. Each employee’s electronic file contains theemployee’s credentials, test scores, employment record and availability. Thisdata enables our branch-office staff to automatically match open requestswith qualified candidates.

MSN HealthWorks also monitors billing records using timecards to generate invoices for our clients and paycheck information for ouremployees. MSN HealthWorks operates as a single entry system, meaning that theinitial shift confirmation entry enables our payroll to be generated at thebranch level on a daily basis and the invoicing to be generated at ourcorporate office. This system enables us not only to monitor costs andcompliance, but also to ensure that we respond to client requests as quickly aspossible. We can typically fill a client staffing request in less than 15minutes.

We have adapted MSNHealthWorks to provide our clients with functionality for budgeting and accessto nurse and employee credentials via the Internet

***Competition***

The temporary healthcare staffing industry is highlycompetitive. We compete with both national firms and local and regional firms.We compete with these firms to attract nurses and other healthcareprofessionals as temporary healthcare professionals and to attract hospital andhealthcare facility clients. We compete for temporary healthcare professionalson the basis of the quantity, diversity and quality of assignments available,compensation packages, and the benefits that we provide to temporary healthcareprofessionals while they are on assignment. We compete for hospital andhealthcare facility clients on the 

5

----

basis of the quality ofour temporary healthcare professionals, the timely availability of ourprofessionals with the requisite skills, quality and scope, price andgeographic reach of our services.

The per diem market includes many local operators andis highly fragmented. The per diem staffing business requires a local presencein every market served since an important relationship exists between the localbranch and the healthcare facility. We believe, however, that larger,nationally established firms enjoy distinct competitive advantages oversmaller, local and regional competitors in the healthcare staffing industry.Larger and more established firms have a critical mass of available nursingcandidates, substantial word-of-mouth referral networks and established brandnames, enabling them to attract a consistent flow of new applicants. Largerfirms can also more easily provide payroll services, which are cash flowintensive, to healthcare providers. As a result, sizable and established firmssuch as ours have had a significant advantage over small participants.

Some of our largecompetitors in the temporary healthcare staffing industry include AMNHealthcare Services, Inc., Cross Country Healthcare, Inc. and InteliStafHealthcare, Inc.

**Professional Liability Insurance**

We retain the first $1.0million, per occurrence, of risk associated with professional liability. Wemaintain a professional liability insurance policy for losses in excess of thisper occurrence amount. We believe this is sufficient for the risks associatedwith our business. Medical malpractice claims against us relating to ourhealthcare professionals are defended by our insurance carrier. We haveindemnity agreements with many of our clients which state that we will defend,indemnify and hold harmless those clients against any act of omission orwillful or reckless acts, including negligence and misconduct. A majority ofsuch agreements are reciprocal.

**Trademarks and Service Marks**

The service mark “MedicalStaffing Network, Inc.” (Name and Logo), which was registered with theU.S. Patent and Trademark Office as of May 6, 2003, and the trade name “MedicalStaffing Network” are each owned and licensed from Medical Staffing NetworkAssets, LLC, our indirectly wholly-owned subsidiary.

**Government Regulation**

The healthcare industry is subject to extensive andcomplex federal and state laws and regulations relating to professionallicensure, conduct of operations, payment for services and payment for referrals.The extensive and complex laws that apply to our hospital and healthcarefacility clients, including laws related to Medicare, Medicaid and otherfederal and state healthcare programs, could indirectly affect the demand orthe prices paid for our services. For example, our hospital and healthcarefacility clients could suffer civil and/or criminal penalties and/or beexcluded from participating in Medicare, Medicaid and other healthcare programsif they fail to comply with the laws and regulations applicable to theirbusinesses.

Our business, however, is not directly impacted by orsubject to the laws and regulations that generally govern the healthcareindustry, because we provide services on a contract basis and are paid directlyby our hospital and other healthcare facility clients.

Some states require state licensure for businessesthat employ and/or assign healthcare personnel to provide healthcare serviceson-site at hospitals and other healthcare facilities. We hold a TemporaryHealthcare Staffing License in the following jurisdictions in which we dobusiness that require such licenses: Connecticut, Delaware, the District ofColumbia, Florida, Illinois, Kentucky, Maine, Maryland, 

6

----

Massachusetts, Minnesota,New Jersey, Nevada, North Carolina, Ohio, Rhode Island, Tennessee, Texas andWashington.

Most of our temporaryhealthcare professionals are required to be individually licensed or certifiedunder applicable state laws. We take reasonable steps to ensure that ourprofessionals possess all necessary licenses and certifications in all materialrespects. These steps include: eachemployee must present an original version of a state issued license; wevalidate each employee’s identity through government issued photoidentification; we call or verify online each employee’s license with theapplicable state board prior to assignment; and, a copy of the license ismaintained in the employee’s personnel file and expiration dates are monitoredthrough MSN HealthWorks.

**Seasonality**

Due to the regional and seasonal fluctuations in thehospital patient census of our hospital and healthcare facility clients and dueto the seasonal preferences for destinations by our temporary healthcareprofessionals, the number of healthcare professionals on assignment, revenue andearnings are subject to moderate seasonal fluctuations. Many of our hospitaland healthcare facility clients are located in areas, particularly Florida,that experience seasonal fluctuations in population, during the winter andsummer months. These facilities adjust their staffing levels to accommodate thechange in this seasonal demand and many of these facilities utilize temporaryhealthcare professionals to satisfy these seasonal staffing needs.

Historically, the number of temporary healthcareprofessionals on assignment has increased from December through March followedby declines or minimal growth from April through November. This patternmay or may not continue in the future. As a result of all of these factors,results of any one quarter are not necessarily indicative of the results to beexpected for any other quarter or for any year.

**Employees**

As of December 25, 2005, we had approximately1,100 branch, regional operations and corporate office employees. In addition,during 2005, we employed over 28,000 temporary staff and healthcareprofessionals. We do not have any organized labor unions. We believe we haveexcellent relationships with our employees.

Generally, our per diem and travel staff are ouremployees. However, our certified registered nurse anesthetists andanesthesiologists are, and before discontinuation of our physician staffingbusiness our physicians were, independent contractors. We have not entered intoany employment agreements with any of our healthcare professionals.

Subsequent to fiscal yearend, we initiated a plan to restructure our per diem nurse staffing divisionwhereby certain per diem branches will be closed thereby eliminating certainbranch employees. Additionally, certain operations and corporate staff will beeliminated.

**Available Information**

We file annual, quarterly and current reports andother information with the Securities and Exchange Commission. Our annualreports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filedor furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as amended, are available free of charge inthe “Investor Relations” section of our website at www.msnhealth.com. Thesereports, and any amendments to these reports, are made available on our websiteas soon as reasonably practicable after such reports are filed with orfurnished to the Securities and Exchange Commission.

7

----

In addition, our website,www.msnhealth.com, includes, free of charge, items related to corporategovernance matters, including our Corporate Governance Guidelines, charters ofvarious committees of our Board of Directors and our Code of Business Conduct andEthics applicable to our employees, officers and directors. A printed copy ofour Corporate Governance Guidelines and our Code of Business Conduct and Ethicsis available without charge by sending a written request to: Secretary, MedicalStaffing Network Holdings, Inc., 901 Yamato Road, Suite 110,Boca Raton, Florida 33431.

**Item 1A.   Risk Factors**

*There are a numberof factors, including those specified below, which may adversely affect ourbusiness, financial results or stock price. Additional risks that we do notknow about or that we currently view as immaterial may also impair our businessor adversely impact our financial results or stock price.*

**RisksRelated to Our Business and Industry**

***If we are unable to attract qualified nurses andallied healthcare professionals for our healthcare staffing business, ourbusiness could be negatively impacted.***

We rely significantly on our ability to attract andretain nurses and allied healthcare professionals who possess the skills,experience and licenses necessary to meet the requirements of our hospital andhealthcare facility clients. We compete for healthcare staffing personnel withother temporary healthcare staffing companies and with hospitals and healthcarefacilities. We must continually evaluate and expand our temporary healthcareprofessional network to keep pace with our hospital and healthcare facilityclients’ needs. Currently, there is a shortage of qualified nurses in mostareas of the United States, competition for nursing personnel is increasing, andsalaries and benefits have risen. We may be unable to continue to increase thenumber of temporary healthcare professionals that we recruit, therebydecreasing the potential for growing our business. Our ability to attract andretain temporary healthcare professionals depends on several factors, includingour ability to provide temporary healthcare professionals with assignments thatthey view as attractive and to provide them with competitive benefits andwages. We cannot assure you that we will be successful in any of these areas.The cost of attracting temporary healthcare professionals and providing themwith attractive benefits packages may be higher than we anticipate and, as aresult, if we are unable to pass these costs on to our hospital and healthcarefacility clients, our profitability could decline. Moreover, if we are unableto attract and retain temporary healthcare professionals, the quality of ourservices to our hospital and healthcare facility clients may decline and, as aresult, we could lose clients.

***Contraction of demand for our temporary nurses maycontinue if hospital admissions levels remain lower than expected.***

Demand for temporary nurses has been experiencing aperiod of contraction. However, the rate of contraction has slowed during thepast year. Hospitals are experiencing lower than projected admissions levelsand are placing greater reliance on existing full-time staff, resulting inincreased overtime and nurse-patient loads. Consequently, our service revenuesand gross profit margins have been under pressure. If these industry trendscontinue, our revenues and gross profit margins may decline. In June 2003,we completed a plan to restructure our operations by closing 29 branches. Therestructuring was in response to the current contraction in demand for ourservices and was necessary to adjust the infrastructure we had put in place tosupport multiple growth initiatives.

Subsequent to fiscal year end, we initiated a plan torestructure our per diem nurse staffing division whereby certain per diembranches will be closed. Additionally, certain operations and corporate staffwill be eliminated. The restructuring was in response to continued weak demandfor our per diem nurse staffing services.

8

----

***Higher unemployment rates could have a negative impacton our ability to successfully recruit additional healthcare professionals.***

We believe that high unemployment rates cause nursesin many households to become primary wage earners, which in turn causes them toseek more traditional full-time employment. Should unemployment rates increase,it could be more difficult for us to recruit nurses to become our employees.

***We operate in a highly competitive market and oursuccess depends on our ability to remain competitive in obtaining and retaininghospital and healthcare facility clients and temporary healthcareprofessionals.***

The temporary healthcare staffing business is highlycompetitive. We compete in national, regional and local markets withfull-service staffing companies and with specialized temporary staffingagencies. Some of our competitors in the temporary nurse staffing sector areAMN Healthcare Services, Inc., Cross Country Healthcare, Inc. andInteliStaf Healthcare, Inc. Some of our competitors may have greatermarketing and financial resources than we do. Competition for hospital andhealthcare facility clients and temporary healthcare professionals may increasein the future and, as a result, we may not be able to remain competitive. Tothe extent competitors seek to gain or retain market share by reducing pricesor increasing marketing expenditures, we could lose revenues or hospital andhealthcare facility clients. Furthermore, our margins could decline, whichcould seriously harm our operating results and cause the price of our stock todecline. In addition, the development of alternative recruitment channels couldlead our hospital and healthcare facility clients to bypass our services, whichwould also cause our revenues and margins to decline.

***Our business depends upon our continued ability tosecure and fill new orders from our hospital and healthcare facility clients,because we do not have long-term agreements or exclusive contracts with them.***

We do not have long-term agreements or exclusiveguaranteed order contracts with our hospital and healthcare facility clients.The success of our business depends upon our ability to continually secure neworders from hospitals and other healthcare facilities and to fill those orderswith our temporary healthcare professionals. Our hospital and healthcarefacility clients are free to place orders with our competitors and may chooseto use temporary healthcare professionals that our competitors offer them.Therefore, we must maintain positive relationships with our hospital andhealthcare facility clients. If we fail to maintain positive relationships withour hospital and healthcare facility clients, we may be unable to generate newtemporary healthcare professional orders and our business may be adverselyaffected.

Reacting to concerns over agency utilization in prioryears, hospitals and other healthcare facilities have devised strategies toreduce agency expenditure and limit overall agency utilization. If currentpressures to control agency usage continue and escalate, we will have fewerbusiness opportunities, which could harm our business.

***Fluctuations in patient occupancy at our hospital andhealthcare facility clients may adversely affect the demand for our servicesand therefore the profitability of our business.***

Demand for our temporary healthcare staffing servicesis significantly affected by the general level of patient occupancy at ourhospital and healthcare facility clients. When occupancy increases, hospitalsand other healthcare facilities often add temporary employees before full-timeemployees are hired. As occupancy decreases, hospitals and other healthcarefacilities typically reduce their use of temporary employees before undertakinglayoffs of their regular employees. In addition, we may experience morecompetitive pricing pressure during periods of occupancy downturn. Occupancy atour hospital and healthcare facility clients also fluctuates due to theseasonality of some elective procedures. We are unable to predict the level ofpatient occupancy at any particular time and its effect on our revenues andearnings.

9

----

***Healthcare reformcould negatively impact our business opportunities, revenues and margins.***

The U.S. governmenthas undertaken efforts to control increasing healthcare costs throughlegislation, regulation and voluntary agreements with medical care providersand drug companies. In the recent past, the U.S. Congress has consideredseveral comprehensive healthcare reform proposals. The proposals were generallyintended to expand healthcare coverage for the uninsured and reduce the growthof total healthcare expenditures. While the U.S. Congress did not adopt anycomprehensive reform proposals, members of Congress may raise similar proposalsin the future. If any of these proposals are approved, hospitals and other healthcarefacilities may react by spending less on healthcare staffing, including nurses.If this were to occur, we would have fewer business opportunities, which couldseriously harm our business.

Several stategovernments have also attempted to control increasing healthcare costs. Forexample, the State of Massachusetts has implemented a regulation that limitsthe hourly rate billable by and payable to temporary nursing agencies forregistered nurses, licensed practical nurses and certified nurses’ aides. TheState of Minnesota has also implemented a statute that limits the amount thatnursing agencies may charge nursing homes. Several states have also proposedlegislation that would limit the amounts that temporary staffing companies maycharge. Any such current or proposed laws could seriously harm our business,revenues and margins.

Furthermore, third party payors, such as healthmaintenance organizations, increasingly challenge the prices charged formedical care. Failure by hospitals and other healthcare facilities to obtainfull reimbursement from those third party payors could reduce the demand or theprice paid for our staffing services.

There is a growing trend to restrict mandatoryhealthcare worker overtime requirements by employers and to establishnurse-patient ratios. The State of California has already enacted suchlegislation and several other states have similar legislation pending. Thislegislation could ultimately have a potential positive or negative impact onour business.

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

The healthcare industry is subject to extensive andcomplex federal and state laws and regulations related to professionallicensure, conduct of operations, payment for services and payment forreferrals. If we fail to comply with the laws and regulations that are directlyapplicable to our business, we could suffer civil and/or criminal penalties orbe subject to injunctions or cease and desist orders.

The extensive and complex laws that apply to ourhospital and healthcare facility clients, including laws related to Medicare,Medicaid and other federal and state healthcare programs, could indirectlyaffect the demand or the prices paid for our services. For example, ourhospital and healthcare facility clients could suffer civil and/or criminalpenalties and/or be excluded from participating in Medicare, Medicaid and otherhealthcare programs if they fail to comply with the laws and regulationsapplicable to their businesses. In addition, our hospital and healthcarefacility clients could receive reduced reimbursements, or be excluded fromcoverage, because of a change in the rates or conditions set by federal orstate governments. In turn, violations of or changes to these laws andregulations that adversely affect our hospital and healthcare facility clientscould also adversely affect the prices that these clients are willing or ableto pay for our services.

JCAHO has created a set of standards by which tocertify healthcare staffing providers. Healthcare staffing companies can applyto be reviewed by JCAHO to ensure that they are compliant with the standards.Healthcare facilities could potentially use only those providers that obtaincertification. We went through the voluntary certification process in 2005 andreceived JCAHO’s gold seal of approval. Upon subsequent review (which occursbiannually), should we not meet the standards created by JCAHO, it couldpotentially have a material effect on our business.

10

----

***We are dependent onthe proper functioning of our information systems.***

We are dependent onthe proper functioning of our information systems in operating our business.Critical information systems used in daily operations identify and matchstaffing resources and client assignments and regulatory credentialingscheduling. They also perform billing and accounts receivable functions. Ourinformation systems are vulnerable to fire, storm, flood, power loss,telecommunications failures, physical or software break-ins and similar events.If our information systems fail or are otherwise unavailable, these functionswould have to be accomplished manually, which could impact our ability to identifybusiness opportunities quickly, maintain billing and clinical records reliably,pay our staff in a timely fashion and bill for services efficiently.

***Competition for acquisition opportunities may restrictour future growth by limiting our ability to make acquisitions at reasonablevaluations.***

Since our founding in 1998, we have completed 28acquisitions. Our business strategy includes increasing our market share andpresence in the temporary healthcare staffing industry through strategicacquisitions of companies that complement or enhance our business. We havehistorically faced competition for acquisitions. In the future, this couldlimit our ability to grow by acquisitions or could raise the prices ofacquisitions and make them less accretive to us. In addition, restrictivecovenants in our credit facility, including a covenant that requires us toobtain the approval of our lenders for any acquisition with a purchase priceover $3 million, may limit our ability to complete desirable acquisitions.If we are unable to secure necessary financing under our credit facility orotherwise, we may be unable to complete desirable acquisitions.

***We may face difficulties integrating our acquisitionsinto our operations and our acquisitions may be unsuccessful, involve significantcash expenditures or expose us to unforeseen liabilities.***

We continually evaluate opportunities to acquirehealthcare staffing companies that complement or enhance our business andfrequently have preliminary acquisition discussions with some of thesecompanies.

These acquisitionsinvolve numerous risks, including:

·       potentialloss of key employees or clients of acquired companies;

·       difficultiesintegrating acquired personnel and distinct cultures into our business;

·       difficultiesintegrating acquired companies into our operating, financial planning andfinancial reporting systems;

·       diversionof management attention from existing operations; and

·       assumptionof liabilities and exposure to unforeseen liabilities of acquired companies,including liabilities for their failure to comply with healthcare regulations.

These acquisitions may also involve significant cashexpenditures, debt incurrence and integration expenses that could seriouslyharm our financial condition and results of operations. Any acquisition mayultimately have a negative impact on our business and financial condition.

***Our ability to borrow under our credit facility may belimited.***

On December 22, 2003, we entered into a newcredit facility, consisting of a three-year, $65 million asset-based revolvingcredit facility and a two-year $17 million term loan. On June 25, 2004, weamended the credit facility to reduce the revolver capacity from $65.0 millionto $60.0 million. In conjunction with the amendment, on July 1, 2004, werepaid $5.0 million of borrowings under the term loan. The $5.0 million can notbe re-borrowed under the terms of the term loan. On February 24, 2005, weamended the terms of the credit facility whereby the term loan was reduced to$6.0 million, the applicable margin for the 

11

----

term loan was reduced to4.5%, the maturity of the term loan was extended to December 2006 andcertain financial covenants were amended. On September 24, 2005 and December 25,2005, we amended the terms of the credit facility whereby certain financialcovenants were favorably amended and the expiration date was extended to January 2,2007. The $6.0 million term loan repayment was funded with borrowings under therevolver. Our ability to borrow under the credit facility is based upon, andthereby limited by, the amount of our accounts receivable. Any materialdeterioration in our service revenues could reduce our borrowing base, whichcould cause us to lose our ability to borrow additional amounts under thecredit facility. In such a circumstance, the borrowing availability under thecredit facility may not be sufficient for our capital needs. During the year,our lenders amended certain financial covenants present in the revolving creditfacility. If future covenant violations occur and the lenders do not agree tomodify the covenants or waive such violations, our ability to borrow under ourcredit facility could be severely limited or eliminated which would have amaterial negative impact on our ability to fund ongoing operations.

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

In recent years, healthcare providers have becomesubject to an increasing number of legal actions alleging malpractice, productliability or related legal theories. Many of these actions involve large claimsand significant defense costs. In addition, we may be subject to claims relatedto torts or crimes committed by our employees or temporary healthcareprofessionals. In some instances, we are required to indemnify our clientsagainst some or all of these risks. A failure of any of our employees orhealthcare professionals to observe our policies and guidelines intended toreduce these risks, relevant client policies and guidelines or applicablefederal, state or local laws, rules and regulations could result innegative publicity, payment of fines or other damages. We retain the first $1.0million, per occurrence, of risk associated with professional liability. Wemaintain a professional liability insurance policy for losses in excess of thisper occurrence amount. Our professional malpractice liability insurance andgeneral liability insurance coverage may not cover all claims against us orcontinue to be available to us at a reasonable cost. If we are unable tomaintain adequate insurance coverage or if our insurers deny coverage we may beexposed to substantial liabilities.

***We may be legally liable for damages resulting fromour hospital and healthcare facility clients’ mistreatment of our healthcarepersonnel.***

Because we are in the business of placing ourtemporary healthcare professionals in the workplaces of other companies, we aresubject to possible claims by our temporary healthcare professionals allegingdiscrimination, sexual harassment, negligence and other similar activities by ourhospital and healthcare facility clients. The cost of defending such claims,even if groundless, could be substantial and the associated negative publicitycould adversely affect our ability to attract and retain qualified healthcareprofessionals in the future.

***If we become subject to material liabilities under ourself-insured programs, our financial results may be adversely affected.***

We provide for certain types ofrisk management coverage through a program that is partially self-insured. Weretain the first $1.0 million, per occurrence, of risk associated withprofessional liability claims. We retain the first $0.5 million, peroccurrence, of risk associated with workers compensation claims. In addition, we provide medical coverage to ouremployees through a partially self-insured preferred provider organization. Ifwe become subject to substantial uninsured workers compensation claims ormedical coverage liabilities, our financial results may be adversely affected.

***Our operations may deteriorate if we are unable tocontinue to attract, develop and retain our sales personnel.***

Our success depends upon the performance of our salespersonnel, especially regional directors, branch managers and staffingcoordinators. The number of individuals who meet our qualifications for 

12

----

these positions is limitedand we may experience difficulty in attracting qualified candidates. Inaddition, we commit substantial resources to the training, development andsupport of these individuals. Competition for qualified sales personnel in theline of business in which we operate is strong and there is a risk that we maynot be able to retain our sales personnel after we have expended the time andexpense to recruit and train them.

***The loss of key senior management personnel couldadversely affect our ability to remain competitive.***

We believe that the success of our business strategyand our ability to operate profitably depends on the continued employment ofour senior management team, consisting of Robert J. Adamson, Kevin S. Little,N. Larry McPherson, Patricia G. Donohoe, Lynne Stacy, Jan Casford and PatLayton. If any members of our senior management team become unable or unwillingto continue in their present positions, our business and financial resultscould be materially adversely affected.

***We have a substantial amount of goodwill on ourbalance sheet. Our level of goodwill may have the effect of decreasing ourearnings or increasing our losses.***

As of December 25, 2005, we had$130.6 million of goodwill, net on our balance sheet, which represents theexcess of the total purchase price of our acquisitions over the fair value ofthe net assets acquired. At December 25, 2005, goodwill representedapproximately 64% of our total assets.

Historically, we amortized goodwill on a straight-linebasis over the estimated period of future benefit of 20 years. In July 2001,the Financial Accounting Standards Board issued SFAS No. 141, *Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*.SFAS No. 141 requires that the purchase method of accounting be used forall business combinations initiated after June 30, 2001, as well as allpurchase method business combinations completed after June 30, 2001. SFAS No. 142requires that, subsequent to January 1, 2002, goodwill not be amortizedbut rather that it be reviewed annually for impairment. During the year ended December 25,2005, we reevaluated our reporting units and determined that each branchlocation represented a reporting unit, as opposed to viewing the entire companyas one reporting unit previously. We performed an analysis whereby thehistorical goodwill was allocated or “pushed down” to each reporting unit. Inaccordance with SFAS No. 142, we performed our annual review forimpairment during the fourth quarter of fiscal 2005 by performing a fair valueanalysis of each reporting unit. The fair value analysis was completed with theassistance of outside valuation professionals. Based on that analysis, noimpairment was noted at any individual reporting unit. Accordingly, there wasno financial impact in 2005 relating to the change in reporting unit forgoodwill impairment testing.

We will continue to perform a reporting unit levelfair value analysis impairment test during the fourth quarter of each year. Shouldimpairment indicators be present, including branches not achieving theirexpected operating results, additional analysis will be performed to determinethe extent of any impairment and the associated charge will be recorded to thestatement of operations. Should we decide to exit a market and close one ormore of our reporting units, the associated goodwill will be written off with acharge to the statement of operations.Although it does not affect our cash flow, an impairment charge to earnings hasthe effect of decreasing our earnings or increasing our losses, as the case maybe. If we are required to take an impairment charge to earnings, our stockprice could be adversely affected.

Subsequent to year end, we decided to close certainper diem nurse branches. As a result, during the first quarter of 2006, we willtake a charge of approximately $3.0 million to write down the associatedimpaired goodwill.

13

----

***Our costs ofproviding housing for nurses and other healthcare personnel in our travelbusiness may be higher than we anticipate and, as a result, our margins coulddecline.***

We currently haveapproximately 85 apartments on lease throughout the United States. If the costsof renting apartments and furniture for our nurses and other healthcarepersonnel increase more than we anticipate and we are unable to pass suchincreases on to our clients, our margins may decline. To the extent the lengthof a nurse’s or other professional’s housing lease exceeds the term of thenurse’s or other professional’s staffing contract, we bear the risk that wewill be obligated to pay rent for housing we do not use. To limit the costs ofunutilized housing, we try to secure leases with term lengths that match theterm lengths of our staffing contracts, which typically last thirteen weeks. Insome housing markets we have had, and believe we will continue to have,difficulty identifying short-term leases. If we cannot identify a sufficientnumber of appropriate short-term leases in regional markets, or if, for anyreason, we are unable to efficiently utilize the apartments we do lease, we maybe required to pay rent for unutilized housing or, to avoid such risk, we mayforego otherwise profitable opportunities.

***Demand forhealthcare staffing services is significantly affected by the general level ofeconomic activity and unemployment in the United States.***

When economic activityincreases, temporary employees are often added before full-time employees arehired. However, as economic activity slows, many companies, including ourhospital and healthcare facility clients, reduce their use of temporaryemployees before laying off full-time employees. In addition, we may experiencemore competitive pricing pressure during periods of economic downturn.Therefore, any significant economic downturn could have a material adverseimpact on our condition and results of operations.

***Our executiveofficers, directors and significant stockholders will be able to influencematters requiring stockholder approval and could discourage the purchase of ouroutstanding shares at a premium.***

Our executive officers anddirectors (including their affiliates) control approximately 64% of ouroutstanding common stock. Warburg Pincus Private Equity Fund VIII, L.P., aDelaware limited partnership (Warburg Pincus), owns approximately 48% of ourcommon stock. This concentration of ownership may have the effect of delaying,preventing or deterring a change in control of our company, could deprive ourstockholders of an opportunity to receive a premium for their common stock aspart of a sale or merger of our company and may negatively affect the marketprice of our common stock. These transactions might include proxy contests,tender offers, mergers or other purchases of common stock that could give ourstockholders the opportunity to realize a premium over the then-prevailingmarket price for shares of our common stock.

Warburg Pincus has theright under our stockholders agreement to designate two persons to our Board ofDirectors. As a result of this share ownership and minority representation onour Board of Directors, our current stockholders, in particular Warburg Pincus,will be able to influence all affairs and actions of our company, includingmatters requiring stockholder approval such as the election of directors andapproval of significant corporate transactions. The interests of our executiveofficers, directors and principal stockholders may differ from the interests ofthe other stockholders.

Warburg Pincus and certainsignificant stockholders have demand registration rights to cause us to file,at any time and at our expense, a registration statement under the SecuritiesAct covering resales of their shares. These shares represent approximately 48%of our outstanding common stock, or approximately 14.5 million shares. Theseshares may also be sold under Rule 144 of the Securities Act, depending ontheir holding period and subject to significant restrictions in the case ofshares held by persons deemed to be our affiliates.

14

----

***If provisions in our corporate documents and Delawarelaw delay or prevent a change in control of our company, we may be unable toconsummate a transaction that our stockholders consider favorable.***

Provisions in ourcertificate of incorporation and bylaws may discourage, delay or prevent amerger or acquisition involving us that our stockholders may considerfavorable. For example, our certificate of incorporation authorizes our Boardof Directors to issue up to 15 million shares of “blank check” preferredstock. Without stockholder approval, the Board of Directors has the authorityto attach special rights, including voting and dividend rights, to thispreferred stock. With these rights, preferred stockholders could make it moredifficult for a third party to acquire us. Applicable Delaware law may alsodiscourage, delay or prevent someone from acquiring or merging with us.

***Our stock price maybe volatile and your investment in our common stock could suffer a decline invalue.***

With the currentuncertainty about healthcare policy, reimbursement and coverage in the UnitedStates, there has been significant volatility in the market price and tradingvolume of securities of healthcare and other companies, which is unrelated tothe financial performance of these companies. These broad market fluctuationsmay negatively affect the market price of our common stock.

Somespecific factors that may have a significant effect on our common stock marketprice include:

·       actualor anticipated fluctuations in our operating results;

·       actualor anticipated changes in our growth rates or our competitors’ growth rates;

·       actualor anticipated changes in healthcare policy in the United States andinternationally;

·       conditionsin the financial markets in general or changes in general economic conditions;

·       ourinability to raise additional capital;

·       conditionsof other healthcare staffing companies or the medical staffing industrygenerally; and

·       changes in stock marketanalyst recommendations regarding our common stock, other comparable companiesor the healthcare staffing industry generally.

**Item1B.   Unresolved Staff Comments**

None.

**Item 2.   Properties**

Our U.S. corporateheadquarters is located in Boca Raton, Florida and has an aggregate of 50,000square feet. We operate on a national basis with a presence in 40 states and120 locations as of December 25, 2005. The facilities at our headquartersand at each of our locations are leased. The lease to our headquarters expiresin 2013. We believe that our properties are adequate for our current needs. Inaddition, we believe that adequate space can be obtained to meet ourforeseeable business needs. As of December 25, 2005, we have two materialoperating leases. They include our corporate headquarters lease and a lease forapproximately 27,000 square feet in Warrenville, Illinois, where our alliedhealth and travel divisions are concentrated.

**Item 3.   LegalProceedings**

On February 20, 2004,Joseph and Patricia Marrari, and on April 16, 2004, Tommie Williams, filedclass action lawsuits against Medical Staffing Network in the United StatesDistrict Court for the Southern District of Florida, on behalf of themselvesand purchasers of our common stock pursuant to or traceable to our initialpublic offering in April 2002. These lawsuits also named as defendantscertain of our directors and executive officers (collectively with MedicalStaffing Network, the “Defendants”). The complaints allege that certaindisclosures in the Registration Statement/Prospectus filed in connection withour initial public offering on April 17, 2002 were materially false andmisleading in violation of the Securities Act of 1933 (the “Securities Act”).The complaints seek compensatory damages as well as costs and attorney fees.

15

----

On March 29, 2004, athird class action lawsuit brought on behalf of the same class of ourstockholders, making claims under the Securities Act similar to those in thelawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams,was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of theFifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendantsremoved this case to the United States District Court for the Southern Districtof Florida and Plaintiff moved to remand the case back to the Florida CircuitCourt of the Fifteenth Judicial Circuit, which motion Defendants opposed. On September 16,2004 the federal district court entered an order granting Plaintiff’s motion toremand. On January 6, 2005, the state court stayed the state courtproceedings until further order of the court. The Zia complaint seeksrescission or damages as well as certain equitable relief and costs andattorney fees.

On March 2, 2004,another class action complaint was filed against Medical Staffing Network andcertain of our directors and executive officers in the United States DistrictCourt for the Southern District of Florida by Jerome Gould, individually and onbehalf of a class of Medical Staffing Network’s stockholders who purchasedstock during the period from April 18, 2002 through June 16, 2003.The complaint alleges that certain of our public disclosures during the classperiod were materially false and misleading in violation of Section 10(b) ofthe Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5promulgated thereunder. The complaint seeks compensatory damages, costs andattorney fees.

On July 2, 2004, theMarrari, Gould, Williams and Zia actions were consolidated, although, as notedabove, the Zia action was subsequently remanded to state court. PlaintiffThomas Greene was appointed Lead Plaintiff of the consolidated action and thelaw firm of Cauley Geller Bowman & Rudman LLP (now known as LerachCoughlin Stoia Geller Rudman and Robbins LLP) was appointed Plaintiffs’ LeadCounsel.

On September 1, 2004,Lead Plaintiff filed his consolidated amended class action complaint (the “Complaint”).The Complaint makes allegations on behalf of a class consisting of purchasersof our common stock pursuant to or traceable to our initial public offering in April 2002,for purposes of the Securities Act claims, and on behalf of Medical StaffingNetwork’s stockholders who purchased stock during the period from April 18,2002 through June 16, 2003, for purposes of the Exchange Act claims. TheComplaint alleges that certain of our public disclosures during the classperiod were materially false and misleading in violation of Section 11 ofthe Securities Act and Section 10(b) of the Exchange Act. The Complaintseeks compensatory damages as well as costs and attorney fees. Defendants havefiled a motion to dismiss the Complaint, which, on September 27, 2005, wasgranted in part as to those portions of Plaintiffs’ Section 10(b) and20(a) claims concerning statements or omissions prior to October 29,2002, and denied as to the remaining claims. The litigation is now proceedingas to those portions of the complaint that were not dismissed.

We believe that theselawsuits are without merit and we intend to defend ourselves against themvigorously. Due to their preliminary status, we are unable to predict theoutcome of these lawsuits or reasonably estimate a range of possible loss.

From time to time, we aresubject to lawsuits and claims that arise out of our operations in the normalcourse of business. We are plaintiffs or defendants in various litigationmatters in the ordinary course of business, some of which involve claims fordamages that are substantial in amount. We believe that the disposition of anyclaims that arise out of operations in the normal course of business will nothave a material adverse effect on our financial position or results ofoperations.

**Item4.   Submission of Matters to a Vote of Security Holders**

There were no matterssubmitted to a vote of security holders during the fourth quarter of the fiscalyear ended December 25, 2005.

16

----

**PART II**

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

Thefollowing table sets forth, for the fiscal quarters indicated, the high and lowsales prices per share of our common stock, as reported by the New York StockExchange (NYSE).

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2004:**      |       |     |       |    |       |
| First Quarter  |       | $        | 12.31      |    | $          | 7.10 |   |
| Second Quarter |       | $        | 8.82       |    | $          | 5.35 |   |
| Third Quarter  |       | $        | 7.10       |    | $          | 5.16 |   |
| Fourth Quarter |       | $        | 8.75       |    | $          | 5.87 |   |
| **2005:**      |       |     |       |    |       |
| First Quarter  |       | $        | 8.31       |    | $          | 6.00 |   |
| Second Quarter |       | $        | 6.94       |    | $          | 4.52 |   |
| Third Quarter  |       | $        | 6.75       |    | $          | 4.66 |   |
| Fourth Quarter |       | $        | 6.22       |    | $          | 4.72 |   |

 

Our common stock has traded on the NYSE under thesymbol “MRN” since our initial public offering on April 17, 2002. Prior tothat time, there was no public trading market for our common stock.

As of March 1, 2006, there were 18 holders ofrecord of our common stock, which numbers do not reflect stockholders whobeneficially own common stock held in nominee or street name.

We have never declared or paid cash dividends on ourcommon stock. We currently intend to retain all future earnings for theoperation and expansion of our business and, therefore, do not anticipatedeclaring or paying cash dividends on our common stock in the foreseeable future.Except as otherwise restricted by our current senior credit facility, anypayment of cash dividends on our common stock will be at the discretion of ourBoard of Directors and will depend upon our results of operations, earnings,capital requirements, contractual restrictions and other factors deemedrelevant by our Board of Directors. Our current senior credit facilityprohibits us and our subsidiaries from declaring or paying any dividends or anyother distributions without the consent of lenders holding more than 50% of theloans under the facility (or if a single lender holds more then 50% of theloans under the facility, the consent of that lender and at least one otherlender is required), except that we and our subsidiaries may pay dividends or makeother distributions to each other, except further that our operating subsidiarymay pay dividends or make other distributions to us to be used to pay ouroperating expenses in an amount up to $500,000 in the aggregate in any fiscalyear.

We did not repurchase anyshares of our common stock during the fourth quarter of the fiscal year ended December 25,2005.

**Item 6.   Selected Financial Data**

The selected Consolidated Statement of Operations datafor the years ended December 25, 2005, December 26, 2004, and December 28,2003 and the selected Consolidated Balance Sheet data as of December 25,2005 and December 26, 2004 are derived from our audited consolidatedfinancial statements included elsewhere in this annual report. The selectedConsolidated Statement of Operations data for the years ended December 29,2002 and December 30, 2001 and the selected Consolidated Balance Sheetdata as of December 28, 2003, December 29, 2002, and December 30,2001 are derived from our audited consolidated financial statements notincluded in this annual report. Certain reclassifications have been made toprior year amounts to conform to the 2005 presentation.

17

----

In thefollowing tables, we provide you with select consolidated financial data andother operating information of Medical Staffing Network which should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and our audited consolidated financial statementsand accompanying notes included in this annual report.

| ** **                                                                                 | ** ** | **Fiscal Years Ended**                                   | ** **  |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2005**                                                           | ** **  | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands, except per share data)** | ** **  |
| **Consolidated Statement of  Operations Data:**                                            |       |                                                               |        |   |   |   |   |   |   |   |   |
| Service revenues                                                                           | ** ** | **$**                                                              | **402,507** |   | $ | 417,058 |   | $ | 512,985 |   | $ | 478,827 |   | $ | 338,229 |   |
| Cost of services  rendered                                                                 | ** ** | **314,341**                                                        |        | 327,075 |   | 398,224 |   | 358,394 |   | 253,139 |   |
| Gross profit                                                                               | ** ** | **88,166**                                                         |        | 89,983 |   | 114,761 |   | 120,433 |   | 85,090 |   |
| Selling, general  and administrative expenses                                              | ** ** | **81,087**                                                         |        | 82,067 |   | 90,519 |   | 78,102 |   | 53,221 |   |
| Depreciation and  amortization expenses(1)                                                 | ** ** | **5,259**                                                          |        | 6,316 |   | 6,773 |   | 4,486 |   | 5,870 |   |
| Other                                                                                      | ** ** | **512**                                                            |        | **—** |   | **—** |   | **—** |   | **—** |   |
| Recapitalization  expenses                                                                 | ** ** | **—**                                                         |        | — |   | — |   | — |   | 7,160 |   |
| Income from  operations                                                                    | ** ** | **1,308**                                                          |        | 1,600 |   | 17,469 |   | 37,845 |   | 18,839 |   |
| Loss on early  extinguishment of debt(2)                                                   | ** ** | **—**                                                         |        | — |   | 3,555 |   | — |   | 4,380 |   |
| Interest expense,  net                                                                     | ** ** | **2,767**                                                          |        | 3,541 |   | 4,685 |   | 7,603 |   | 14,312 |   |
| Income (loss) from  continuing operations before provision for (benefit from) income taxes | ** ** | **(1,459**                                                         | **)**       | (1,941 | ) | 9,229 |   | 30,242 |   | 147 |   |
| Provision for  (benefit from) income taxes                                                 | ** ** | **(660**                                                           | **)**       | (615 | ) | 3,708 |   | 12,400 |   | 1,794 |   |
| Income (loss) from  continuing operations                                                  | ** ** | **(799**                                                           | **)**       | (1,326 | ) | 5,521 |   | 17,842 |   | (1,647 | ) |
| Income (loss) from  discontinued operations, net of taxes                                  | ** ** | **—**                                                         |        | — |   | (506 | ) | 52 |   | 341 |   |
| Net income (loss)                                                                          | ** ** | **(799**                                                           | **)**       | (1,326 | ) | 5,015 |   | 17,894 |   | (1,306 | ) |
| Deduct required  dividends on convertible preferred stock(3)                               | ** ** | **—**                                                         |        | — |   | — |   | 3,099 |   | 1,804 |   |
| Income (loss)  available to common stockholders                                       | ** ** | **$**                                                              | **(799**    | **)** | $ | (1,326 | ) | $ | 5,015 |   | $ | 14,795 |   | $ | (3,110 | ) |
| Income (loss) per  share—basic:                                                       |       |                                                               |        |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                  | ** ** | **$**                                                              | **(0.03**   | **)** | $ | (0.04 | ) | $ | 0.18 |   | $ | 0.70 |   | $ | (0.54 | ) |
| Discontinued  operations, net of taxes                                                     | ** ** | **—**                                                         |        | — |   | (0.01 | ) | — |   | 0.05 |   |
| Basic net income  (loss) per share                                                         | ** ** | **$**                                                              | **(0.03**   | **)** | $ | (0.04 | ) | $ | 0.17 |   | $ | 0.70 |   | $ | (0.49 | ) |
| Income (loss) per  share—diluted:                                                     |       |                                                               |        |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                  | ** ** | **$**                                                              | **(0.03**   | **)** | $ | (0.04 | ) | $ | 0.18 |   | $ | 0.62 |   | $ | (0.54 | ) |
| Discontinued  operations, net of taxes                                                     | ** ** | **—**                                                         |        | — |   | (0.02 | ) | — |   | 0.05 |   |
| Diluted net income  (loss) per share                                                       | ** ** | **$**                                                              | **(0.03**   | **)** | $ | (0.04 | ) | $ | 0.16 |   | $ | 0.62 |   | $ | (0.49 | ) |
| Weighted average common  shares outstanding:                                               |       |                                                               |        |   |   |   |   |   |   |   |   |
| Basic                                                                                      | ** ** | **30,233**                                                         |        | 30,228 |   | 30,190 |   | 21,177 |   | 6,338 |   |
| Diluted                                                                                    | ** ** | **30,233**                                                         |        | 30,228 |   | 30,807 |   | 28,637 |   | 6,338 |   |
| Other Operating Data:                                                                      |       |                                                               |        |   |   |   |   |   |   |   |   |
| Number of per diem branches  at year end                                                   | ** ** | **120**                                                            |        | 126 |   | 146 |   | 181 |   | 136 |   |

 

| ** **                                              | ** ** | **As of Fiscal Years Ended** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                          | ** ** |
| **Balance Sheet Data:**                                 |       |                                             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                              | ** ** | **$**                                            | **42**     | ** ** | $ | 345 |   | $ | 825 |   | $ | 4,595 |   | $ | 11,253 |   |
| Total assets                                            | ** ** | **204,916**                                      |       | 210,903 |   | 228,870 |   | 248,083 |   | 162,019 |   |
| Total liabilities  and redeemable preferred stock  | ** ** | **55,668**                                       |       | 60,877 |   | 77,583 |   | 102,415 |   | 319,741 |   |
| Total common  stockholders’ equity (deficit)       | ** ** | **149,248**                                      |       | 150,026 |   | 151,287 |   | 145,668 |   | (157,722 | ) |
|                                                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Pursuant to provisionsof SFAS No. 142, in 2002 we ceased amortizing goodwill and certainintangible assets with an indefinite useful life period.

18

----

(2)          Pursuant to theprovisions of SFAS No. 145, which we adopted December 29, 2002, wewere required to reclassify our extraordinary loss on early extinguishment ofdebt of $2.7 million, net of tax benefit of $1.7 million, related to the October 2001recapitalization transaction into income from continuing operations.

(3)          Reflects8% dividends accrued on the Series I Convertible Preferred Stock issued inconnection with the recapitalization. This preferred stock was converted intocommon stock upon completion of our initial public offering.

**Item 7.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**Introduction**

Management’sdiscussion and analysis of financial condition and results of operations isprovided as a supplement to our consolidated financial statements andaccompanying notes to help provide an understanding of our financial condition,changes in financial condition and results of operations. The discussion andanalysis is organized as follows:

·       *Overview.*This section provides a general description of ourbusiness, trends in our industry, as well as significant transactions that haveoccurred that we believe are important in understanding our financial conditionand results of operations.

·       *Recent accounting pronouncements.*This section provides ananalysis of relevant recent accounting pronouncements issued by the FinancialAccounting Standards Board (FASB) and the effect of those pronouncements.

·       *Results of operations.*This section provides an analysis ofour results of operations for all three years presented in the accompanyingconsolidated statements of operations.

·       *Liquidity and capital resources.*This section provides ananalysis of our cash flows, capital resources, off-balance sheet arrangementsand our outstanding debt and commitments as of December 25, 2005.

·       *Critical accounting policies.*This section discusses thoseaccounting policies that are both considered important to our financialcondition and results of operations, and require significant judgment andestimates on the part of management in their application. In addition, all ofour significant accounting policies, including the critical accountingpolicies, are summarized in Note 1 to the accompanying consolidated financialstatements.  

·       *Caution concerning forward-looking statements.*This sectiondiscusses how certain forward-looking statements made by us throughout thisdiscussion and analysis are based on management’s present expectations aboutfuture events and are inherently susceptible to uncertainty and changes incircumstance.

**Overview**

***Business Description***

We are a leading temporary healthcare staffing companyand the largest provider of per diem nurse staffing services in the UnitedStates as measured by revenues. More than two-thirds of our clients areacute care hospitals, clinics and surgical and ambulatory care centers. Weserve both for-profit and not-for-profit organizations that range in scope fromone facility to national chains with over 100 facilities. Our clients pay usdirectly. We do not receive a material portion of our revenues from Medicare orMedicaid reimbursements or similar state reimbursement programs.

19

----

Our per diem nurse staffing division currentlyoperates in an integrated network of branches that are organized into severalgeographic regions. These branches serve as our direct contact with ourhealthcare professionals and clients. The cost structure of a typical branch issubstantially fixed, consisting of limited personnel, office space rent,information systems infrastructure and office supplies. We have been able todevelop a highly efficient branch management model that is easily scalable.During 2004, we expanded our services to provide temporary general staffing.Our per diem general staffing assignments place individuals in a variety ofareas including clerical, janitorial and food services. We believe that generalstaffing compliments our temporary healthcare staffing and makes us a fullservice provider to our existing clients.

***Industry Trends***

Service revenues and gross profit margins have beenunder pressure as demand for temporary nurses has been going through a periodof contraction. However, the rate of contraction has slowed during the pastyear. Due to the current difficult economic times, the unemployment rate, whileslightly improved over the past year, remains relatively high. We believe thishas resulted in nurses in many households becoming a primary wage earner, whichis causing such nurses to seek more traditional full-time employment.Additionally, hospitals are experiencing lower than projected admissions levelsand are placing greater reliance on existing full-time staff, resulting inincreased overtime and nurse-patient loads.

We cannot predict whenconditions will reverse, but we are confident in the long-term growth of theindustry. In a January 13, 2000 report, the U.S. Census Bureau, PopulationProjections Bureau, projected that the number of Americans over 65 years of ageis expected to grow from 34.5 million in 2000 to 53.7 million in 2020. In a July 2002report, the U.S. Department of Health and Human Services stated that thenational supply of full-time equivalent registered nurses was approximately 1.9million while demand was approximately 2.0 million. This gap between supply anddemand for nurses is expected to grow from 0.1 million in 2000 to 0.8 millionby 2020. Additionally, there is a growing trend to restrict mandatoryhealthcare worker overtime requirements by employers and to establishnurse-patient ratios. Several states have enacted legislation prohibitingmandatory overtime and other states have similar legislation pending. Inconjunction with the aforementioned factors, as the economy rebounds, theprospects for the healthcare staffing industry should improve as hospitalsexperience higher census levels and increasing shortages of healthcare workers.

***Acquisitions***

In 2005, we purchasedsubstantially all of the assets of two healthcare staffing companies for anaggregate purchase price of $1.9 million. In 2004, we made no acquisitions. In2003, we purchased substantially all of the assets of one healthcare staffingcompany for an aggregate purchase price of $10.8 million. All such acquisitionswere accounted for as purchases and, accordingly, the results of these acquiredbusinesses are included in our consolidated financial statements from theacquisition dates or the dates when we assumed substantial control.

***Discontinued Operations***

We discontinued ourphysician staffing services in the second quarter of 2003. Pursuant to theprovisions of the FASB Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS No. 144), results of operations are tobe classified as discontinued when the disposal of the “component of an entity”has occurred or it has met the “held for sale” criteria. As such, the total isshown separately in the line item, income (loss) from discontinued operations,net of taxes, in our consolidated statement of operations. For the year ended December 28,2003, we had a loss from discontinued operations, net of taxes, ofapproximately $0.5 million.

20

----

***Restructuring Charge***

Subsequent to fiscal year end, we initiated a plan torestructure our per diem nurse staffing division, due to the continuedchallenging market conditions. This initiative includes certain per diem branchclosures along with corresponding elimination of certain branch positions. Additionally,certain operations and corporate staff will be eliminated. As a result of theseinitiatives, we expect to incur a charge of approximately $6.0 million in thefirst quarter of 2006. The charge will be comprised of approximately $3.0million primarily related to severance costs and lease termination fees andapproximately $3.0 million in non-cash goodwill impairment related to thebranch closures. We do not expect to realize the full benefits of thisinitiative until the third quarter of 2006.

On June 16, 2003, wecompleted our plan to restructure our operations by closing 29 branches. Therestructuring was necessary to adjust the infrastructure we had put in place tosupport multiple growth initiatives and was in response to the current contractionin demand for our services. As a result, in the second quarter of 2003, werecorded a pre-tax charge, of approximately $0.8 million, relating to employeeseverance costs, branch closing costs and lease termination costs. Therestructuring charge is included in selling, general and administrativeexpenses in our consolidated statement of operations for the year ended December 28,2003. No amounts have been or are expected to be incurred or paid in subsequentquarters relating to this restructuring.

***Loss on Early Extinguishment of Debt***

In December 2003, weentered into a new credit facility. The $82.0 million facility was comprised ofa three-year $65.0 million revolving credit facility and a two-year $17.0million term loan. Approximately $60.0 million of proceeds from the creditfacility were used to refinance all of our existing debt and to pay financingrelated fees. The remaining borrowing availability was to be used for workingcapital and general business purposes. As a result of the prepayment of thefacility, we recorded a charge of approximately $3.6 million to write off debtissuance costs associated with the extinguished facility. The charge appears inthe line item loss on early extinguishment of debt on the consolidatedstatement of operations for the year ended December 28, 2003.

**Recent Accounting Pronouncements**

***Stock-Based Compensation***

In December 2004, the FASB issued Statement ofFinancial Accounting Standard (SFAS) No. 123(revised 2004), *Share-Based Payment*, (SFAS No. 123(R))which is a revision of SFAS No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123). Statement 123(R) supersedesAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees,*(APB No. 25). SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative. Additionally, SFAS No. 123(R) amends the presentationof the statement of cash flows and requires additional annual disclosures. SFASNo. 123(R) is effective for public companies beginning with the firstinterim period that begins after June 15, 2005. In April 2005, theSecurities and Exchange Commission adopted a new rule that postponed theeffective date for SFAS No. 123(R) to the fiscal year beginning afterJune 15, 2005. We adopted SFAS No. 123(R) on December 26,2005, using the modified prospective method. As permitted by SFAS No. 123,we currently account for share-based payments to employees using the intrinsicvalue method in accordance with the recognition and measurement principles ofAPB No. 25, and, as such, generally recognize no compensation cost foremployee stock options, as options granted under our plans have an exerciseprice equal to or greater than the fair value of the underlying common stock onthe date of grant.

21

----

On December 1, 2005, our Compensation Committeeaccelerated the vesting of all of our unvested stock options awarded toemployees under our 2001 Stock Incentive Plan (with the exception of three ofour officers, who only had their options that were scheduled to vest in 2006accelerated). As a result of the acceleration, options to acquire approximately374,000 shares of our common stock (representing approximately 18% of the totaloutstanding options), which otherwise would have vested periodically over thenext 48 months, became immediately exercisable. Approximately 50% of theaccelerated options would have vested in 2006. If we had already adopted thefair value method, the acceleration of the options would have increasedcompensation expense by approximately $1.0 million in 2005 and would havedecreased compensation expense by approximately $0.5 million in 2006, $0.3million in 2007 and $0.1 million in 2008.

Our Compensation Committee’sdecision to accelerate the vesting of these options was in response to theissuance of SFAS No. 123(R). By accelerating the vesting of these options,we have minimized the potential compensation expense that will be required tobe recognized in future periods under SFAS No. 123(R). However, the impactof adoption of SFAS No. 123(R), which is not expected to be material,cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. Had we adopted SFAS No. 123(R) inprior periods, its impact would have approximated the impact of SFAS No. 123as described in the disclosure of pro forma net income and earnings per sharein Stock-Based Compensation (Note 1 to the consolidated financial statements).

*Changes inAccounting Principles*

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections,*which replaces APB No. 20, *AccountingChanges,* and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*. This Statementrequires retrospective application to prior periods’ financial statements ofchanges in accounting principles, unless it is impracticable to determine theperiod specific effects or cumulative effect of the change. When it isimpracticable to determine the period specific effects of an accounting changeon one or more individual prior periods presented, this Statement requires thatthe new accounting principle be applied to the balances of assets and liabilitiesat the beginning of the earliest period for which retrospective application ispracticable and a corresponding adjustment is to be made to the opening balanceof retained earnings for that period. When it is impracticable to determine thecumulative effect of applying a change in accounting principle to all priorperiods, it requires that the new accounting principle be applied as if it wereadopted prospectively from the earliest date practicable. This Statementdefines “retrospective application” as the application of a differentaccounting principle to prior accounting periods as if that principle hadalways been used or as the adjustment of previously issued financial statementsto reflect a change in the reporting entity. It also redefines “restatement” asthe revising of previously issued financial statements to reflect thecorrection of an error. This Statement also requires that a change indepreciation, amortization, or depletion method for long-lived, nonfinancialassets be accounted for as a change in accounting estimate effected by a changein accounting principle. It is effective for fiscal years beginning afterDecember 15, 2005. The impact of adoption of this statement is notexpected to be significant.

22

----

**Results of Operations**

Thefollowing table sets forth, for the periods indicated, certain selectedfinancial data:

| ** **                                                                                 | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service revenues                                                                           | ** ** | **100.0**                       | **%**      | 100.0 | % | 100.0 | % |
| Cost of services  rendered                                                                 | ** ** | **78.1**                        |       | 78.4 |   | 77.6 |   |
| Gross profit                                                                               | ** ** | **21.9**                        |       | 21.6 |   | 22.4 |   |
| Selling, general  and administrative expenses                                              | ** ** | **20.1**                        |       | 19.7 |   | 17.7 |   |
| Depreciation and  amortization expenses                                                    | ** ** | **1.3**                         |       | 1.5 |   | 1.3 |   |
| Income from  operations                                                                    | ** ** | **0.3**                         |       | 0.4 |   | 3.4 |   |
| Loss on early  extinguishment of debt                                                      | ** ** | **—**                      |       | — |   | 0.7 |   |
| Interest expense,  net                                                                     | ** ** | **0.7**                         |       | 0.9 |   | 0.9 |   |
| Income (loss) from  continuing operations before provision for (benefit from) income taxes | ** ** | **(0.4**                        | **)**      | (0.5 | ) | 1.8 |   |
| Provision for  (benefit from) income taxes                                                 | ** ** | **(0.2**                        | **)**      | (0.2 | ) | 0.7 |   |
| Income (loss)  from continuing operations                                                  | ** ** | **(0.2**                        | **)**      | (0.3 | ) | 1.1 |   |
| Loss from  discontinued operations, net of taxes                                           | ** ** | **—**                      |       | — |   | (0.1 | ) |
| Net income (loss)                                                                          | ** ** | **(0.2**                        | **)**      | (0.3 | ) | 1.0 |   |

 

***Comparison of YearEnded December 25, 2005 to Year Ended December 26, 2004***

***Service Revenues.******  ***Service revenues decreased$14.6 million, or 3.5%, to $402.5 million for the year ended December 25,2005, as compared to $417.1 million for the prior year. The decrease wasdue to a lower number of hours worked by professionals caused by the currentweak demand for temporary healthcare staffing, partially offset by revenuesfrom an acquisition in the second quarter of 2005. Average hourly billing ratesremained relatively consistent with those in the prior year.

Per diem nurse staffingrevenues decreased $19.0 million, or 6.1%, to $292.2 million for the yearended December 25, 2005 as compared to $311.2 million for the prioryear. The decrease was primarily due to a decrease in the number of hoursworked by professionals.

Revenues from other thanper diem nurse staffing, collectively, increased $4.4 million, or 4.2%, to$110.3 million for the year ended December 25, 2005 as compared to$105.9 million for the prior year. The increase primarily reflects ahigher number of hours worked by non-nursing professionals, including alliedhealth professionals, coupled with a full-year of general staffing business.

***Cost of Services Rendered.******  ***Cost of services rendereddecreased $12.7 million, or 3.9%, to $314.3 million for the yearended December 25, 2005 as compared to $327.1 million for the prioryear. The decrease was due to a lower number of hours worked by professionals,partially offset by higher compensation and benefits associated with ourhealthcare professionals.

***Gross Profit.******  ***Gross profit decreased$1.8 million, or 2.0%, to $88.2 million for the year ended December 25,2005 as compared to $90.0 million for the prior year. The decrease wasprimarily due to the reduction in service revenues. Gross margin for the yearended December 25, 2005 was 21.9% as compared with 21.6% for the prioryear. The increase was primarily due to favorable claims experience under ourself insurance programs for workers compensation.

***Selling, General and Administrative.******  ***Selling, general andadministrative expenses decreased to $81.1 million, or 20.1% of revenuesfor the year ended December 25, 2005, as compared to $82.1 million, 

23

----

or 19.7% ofrevenues for the prior year. The decrease was primarily due to a reduction inbad debt expense due to favorable collection history and other cost reductionmeasures.

***Other.******  ***Other represents legal andprofessional fees and other expenses associated with due diligence performedrelated to a potential acquisition that was ultimately not completed.

***Depreciation and Amortization.******  ***Depreciation and amortizationdecreased to $5.3 million for the year ended December 25, 2005, ascompared to $6.3 million for the prior year. The decrease was due to moreassets becoming fully depreciated during 2005.

***Interest Expense, Net.******  ***Interest expense, net,decreased to $2.8 million for the year ended December 25, 2005 ascompared to $3.5 million for the prior year. The decrease was primarilydue to lower average outstanding borrowings.

***Provision for (Benefit from) Income Taxes.******  ***Our effective income taxbenefit rate for the year ended December 25, 2005 was 45.2% as compared toan effective income tax benefit rate of 31.7% in the prior year. The increasein the effective tax benefit rate was primarily due to state income taxplanning initiatives having a larger impact in 2005 than in 2004.

***Net Income (Loss).******  ***As a result of the above, weincurred a net loss of $0.8 million for the year ended December 25, 2005 as compared to a net lossof $1.3 million for the prior year.

***Comparison of YearEnded December 26, 2004 to Year Ended December 28, 2003***

***Service Revenues.******  ***Service revenuesdecreased $95.9 million, or 18.7%, to $417.1 million for the yearended December 26, 2004 as compared to $513.0 million for the prioryear. The decrease was due to a lower number of hours worked by professionalscaused by the current weak demand for temporary healthcare staffing, partiallyoffset by revenues from the acquisition we made in the first quarter of 2003.Average hourly billing rates remained relatively consistent with those in theprior year.

Per diem nurse staffingrevenues decreased $59.0 million, or 15.9%, to $311.2 million for the yearended December 26, 2004 as compared to $370.2 million for the prioryear. The decrease was primarily due to a decrease in the number of hoursworked by professionals.

Revenues from other thanper diem nurse staffing collectively decreased $36.9 million, or 25.8%, to$105.9 million for the year ended December 26, 2004 as compared to$142.8 million for the prior year. The decrease was the result of a lowernumber of hours worked by professionals.

***Cost of Services Rendered.******  ***Cost of servicesrendered decreased $71.1 million, or 17.9%, to $327.1 million for theyear ended December 26, 2004 as compared to $398.2 million for theprior year. The decrease was due to a lower number of hours worked byprofessionals, partially offset by higher compensation and benefits associatedwith our healthcare professionals.

***Gross Profit.******  ***Gross profit decreased$24.8 million, or 21.6%, to $90.0 million for the year ended December 26,2004 as compared to $114.8 million for the prior year. The decrease wasprimarily due to the reduction in service revenues coupled with a decrease ingross margin. Gross margin for the year ended December 26, 2004 was 21.6%as compared with 22.4% for the prior year period. The decrease was primarilydue to higher benefits and insurance costs associated with our healthcareprofessionals and other direct costs.

***Selling, General and Administrative.******  ***Selling, general andadministrative expenses decreased to $82.1 million, or 19.7% of revenuesfor the year ended December 26, 2004, as compared to $90.5 million,or 17.6% of revenues for the prior year. The decrease was primarily due to theelimination of expenses 

24

----

associated withlocations closed and other cost reduction programs implemented as part of arestructuring initiative that was implemented in the second quarter of 2003. Additionally,the second quarter of 2003 included an $0.8 million restructuring chargeassociated with the restructuring initiative.

***Depreciation and Amortization.******  ***Depreciation andamortization decreased to $6.3 million for the year ended December 26,2004, as compared to $6.8 million for the prior year.

***Loss on Early Extinguishment of Debt.******  ***There was no loss fromthe early extinguishment of debt in 2004. There was a loss on earlyextinguishment of debt of $3.6 million in 2003 due to the December 2003refinancing.

***Interest Expense, Net.******  ***Interest expense, net,decreased to $3.5 million for the year ended December 26, 2004 ascompared to $4.7 million for the prior year. The decrease was primarilydue to lower average outstanding borrowings.

***Provision for (Benefit from) Income Taxes.******  ***Our effective incometax benefit rate for the year ended December 26, 2004 was 31.7% ascompared to an effective income tax provision rate of 40.2% in the prior year.The decrease in the effective tax benefit rate was due to nondeductible itemshaving a greater percentage impact on the rate than on the actual tax dollaramount.

***Loss from Discontinued Operations, Net of Taxes.******  ***There was no loss fromdiscontinued operations for the year ended December 26, 2004 as comparedto a loss from discontinued operations, net of taxes, of $0.5 million forthe prior year. In the second quarter of 2003, we discontinued our physician staffing services.

***Net Income (Loss).******  ***As a result of theabove, we incurred a net loss of $1.3 million for the year ended December 26, 2004 as compared to net incomeof $5.0 million for the prior year.

***Seasonality***

Due to the regional andseasonal fluctuations in the hospital patient census of our hospital andhealthcare facility clients and due to the seasonal preferences fordestinations by our temporary healthcare professionals, the number of healthcareprofessionals on assignment, revenue and earnings are subject to moderateseasonal fluctuations. Many of our hospital and healthcare facility clients arelocated in areas, particularly Florida, that experience seasonal fluctuationsin population, during the winter and summer months. These facilities adjusttheir staffing levels to accommodate the change in this seasonal demand andmany of these facilities utilize temporary healthcare professionals to satisfythese seasonal staffing needs.

Historically, the numberof temporary healthcare professionals on assignment has increased fromDecember through March followed by declines or minimal growth fromApril through November. This trend may or may not continue in the future.As a result of all of these factors, results of any one quarter are notnecessarily indicative of the results to be expected for any other quarter orfor any year.

**Liquidityand Capital Resources**

***Discussion onLiquidity and Capital Resources***

Our historical capitalresource requirements have been the funding of working capital, debt service,capital expenditures and acquisitions. We have historically funded theserequirements from a combination of cash flow from operations, equity issuancesand borrowings under our credit facilities.

25

----

Cash flow from operationswas $12.9 million for the year ended December 25, 2005 as compared to $26.7 million for theyear ended December 26,2004. During the year ended December 25, 2005, we used cash generated fromoperations to repay $8.2 million of borrowings under our senior creditfacility and capital lease obligations.

As of December 25,2005, we had net working capital of $41.9 million as compared to$49.9 million as of December 26, 2004. The decrease was primarily dueto a reduction in accounts receivable and prepaid expenses.

Available borrowings underour senior credit facility is an important component of our liquidity. On December 22,2003, we entered into a new senior credit facility (the Senior Credit Facility)which replaced the previous facility. The Senior Credit Facility provided a$65.0 million revolving credit facility (the Revolver) which expires in December 2006and a $17.0 million term loan (the Term Loan) which was due in December 2005.

On June 25, 2004, weamended the Senior Credit Facility to reduce the Revolver capacity from$65.0 million to $60.0 million. The amendment also favorably modifiedcertain financial covenants while increasing the applicable margin on theRevolver by 0.5% and on the Term Loan by 1.0%. In conjunction with theamendment, on July 1, 2004, we repaid $5.0 million of borrowingsunder the Term Loan. The $5.0 million can not be re-borrowed under theterms of the Term Loan. The impact of repaying the higher average interest rateborrowings under the Term Loan, offset partially by the marginally higherinterest rates, will reduce the overall cost of capital under the Senior CreditFacility going forward.

On February 24, 2005,we amended the terms of the Senior Credit Facility whereby the Term Loan wasreduced to $6.0 million, the applicable margin for the Term Loan was reduced,the maturity of the Term Loan was extended to December 2006 and certainfinancial covenants were favorably amended. The $6.0 million Term Loanrepayment was funded with borrowings under the Revolver.

On September 24, 2005and December 25, 2005, we amended the terms of the Senior Credit Facilitywhereby certain financial covenants were favorably amended and the expirationdate was extended to January 2, 2007.

The amount that can beborrowed at any given time under the Revolver is based on a formula that takesinto account, among other things, eligible accounts receivable and anavailability reserve, which can result in borrowing availability of less thanthe full capacity of the Revolver. The Revolver bears interest at either primerate or LIBOR plus an applicable margin (6.6% at December 25, 2005) withinterest payable monthly or as interest rate contracts expire. The Term Loanbears interest at LIBOR plus an applicable margin (8.5% at December 25,2005) with interest payable as interest rate contacts expire. Unused capacityunder the Revolver bears interest at 0.5% and is payable monthly. The SeniorCredit Facility is secured by substantially all of our assets and containscertain covenants that, among other things, limit the payment of dividends,restrict additional indebtedness and obligations, and require maintenance ofcertain financial ratios. As of December 25, 2005, we were in compliancewith all covenants.

As the borrower under theSenior Credit Facility, our subsidiary, Medical Staffing Network, Inc.,may only pay dividends or make other distributions to us in the amount of$500,000 in any fiscal year to pay our operating expenses. This limitation onour subsidiary’s ability to distribute cash to us will limit our ability toobtain and service any additional debt at the holding company level. Inaddition, our subsidiary is subject to restrictions under the Senior CreditFacility against incurring additional indebtedness.

For the year ended December 25,2005, the weighted average interest rate for the loans under the Senior CreditFacility was 6.7%. As of December 25, 2005, the blended rate for loansoutstanding under the Senior Credit Facility was 7.1%.

26

----

As of December 25,2005, $6.0 million was outstanding on the Term Loan and $18.0 millionwas outstanding under the Revolver. As of December 25, 2005, an additional$20.4 million was immediately available for borrowing under the Revolver.

Capital expenditures were$3.2 million for the year ended December 25, 2005 and were $2.9 millionfor the prior year. The expenditures primarily relate to the upgrade orreplacement of various computer systems including hardware, and purchased andinternally developed software. We expect a similar rate and type of capitalexpenditures on a going forward basis.

Because we rely on cashflow from operations as a source of liquidity, we are subject to the risk thata decrease in the demand for our staffing services could have an adverse impacton our liquidity. Decreased demand for our staffing services could result froman inability to attract qualified healthcare professionals, fluctuations inpatient occupancy at our hospital and healthcare facility clients and changesin state and federal regulations relating to our business.

We believe that ourcurrent cash balances, together with borrowing capacity under the Senior CreditFacility and other available sources of liquidity, will be sufficient for us tomeet our current and future financial obligations, as well as to provide uswith funds for working capital, anticipated capital expenditures and otherneeds for at least the next twelve months. No assurance can be given, however,that this will be the case. In the longer term, we may require additionalequity and debt financing to meet our working capital needs, or to fund ouracquisition activities, if any. There can be no assurance that additionalfinancing will be available when required or, if available, will be availableon satisfactory terms.

***Off-Balance SheetArrangements***

We have no off-balancesheet arrangements that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that is material to our investors.

***ContractualObligations***

Thefollowing table reflects our significant contractual obligations and othercommitments as of December 25, 2005 (in thousands):

| ** **                           | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **2-3  years** | ** ** | **4-5  years** | ** ** | **After  5 years** | ** ** |
| Long-term debt obligations |       | $                                         | 23,991     |   |   | $ | — |   |   | $ | 23,991 |   | $ | — |   | $ | — |   |
| Operating leases                     |       | 17,182                                    |       |   | 4,518 |   |   | 5,170 |   | 3,128 |   | 4,366 |   |
| Capital lease  obligations           |       | 1,019                                     |       |   | 317 |   |   | 413 |   | 289 |   | — |   |
| Total                                |       | $                                         | 42,192     |   |   | $4,835 |   |   | $ | 29,574 |   | $ | 3,417 |   | $ | 4,366 |   |

 

**CriticalAccounting Policies**

In response to theSecurities and Exchange Commission (SEC) Release Number 33-8040 “CautionaryAdvice Regarding Disclosure About Critical Accounting Policies” and SEC ReleaseNumber 33-8056, “Commission Statement about Management’s Discussionand Analysis of Financial Condition and Results of Operations,” we haveidentified the following critical accounting policies that affect the more significantjudgments and estimates used in the preparation of the consolidated financialstatements. The preparation of the consolidated financial statements inconformity with accounting principles generally accepted in the United Statesrequires that we make estimates and judgments that affect the reported amountsof assets and liabilities, revenues and expenses, and related disclosures ofcontingent assets and liabilities. On an on-

27

----

goingbasis, we will evaluate our estimates, including those related to assetimpairment, accruals for self-insurance and compensation and related benefits,allowance for doubtful accounts, and contingencies and litigation. Theseestimates are based on the information that is currently available to us and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results could vary from those estimates under differentassumptions or conditions. For a summary of all our significant accountingpolicies, including the critical accounting policies discussed below, seeNote 1 to the consolidated financial statements included in this AnnualReport on Form 10-K.

Webelieve that the following critical accounting policies affect the moresignificant judgments and estimates used in the preparation of our consolidatedfinancial statements:

·                    We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments, which results in aprovision for bad debt expense. The adequacy of this allowance is determined bycontinually evaluating customer receivables, considering the customers’financial condition, credit history and current economic conditions. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances would berequired.

·                    We haverecorded goodwill and other intangibles resulting from our acquisitions throughDecember 25, 2005. Through December 30, 2001, goodwill and otherintangibles were amortized on a straight-line basis over their lives of 6 to 20years. Pursuant to the provisions of SFAS No. 142, *Goodwill andOther Intangible Assets*, which we adopted in 2002, goodwill andintangible assets deemed to have an indefinite life are no longer amortized.During the year ended December 25, 2005, we reevaluated our reportingunits and determined that each branch location represented a reporting unit, asopposed to viewing the entire company as one reporting unit previously. Weperformed an analysis whereby the historical goodwill was allocated or “pusheddown” to each reporting unit. In accordance with SFAS No. 142, weperformed our annual review for impairment during the fourth quarter of fiscal2005 by performing a fair value analysis of each reporting unit. The fair valueanalysis was completed with the assistance of outside valuation professionals. Basedon that analysis, no impairment was noted at any individual reporting unit. Accordingly,there was no financial impact in 2005 relating to the change in the reportingunits for goodwill impairment testing.

Wewill continue to perform a reporting unit level fair value analysis impairmenttest during the fourth quarter of each year. Should impairment indicators bepresent, including branches not achieving their expected operating results,additional analysis will be performed to determine the extent of any impairmentand the associated charge will be recorded to the statement of operations. Shouldwe decide to exit a market and close one or more of our reporting units, theassociated goodwill will be written off with a charge to the statement ofoperations. Although it does not affect ourcash flow, an impairment charge to earnings has the effect of decreasing ourearnings or increasing our losses, as the case may be. If we arerequired to record an impairment charge in the future, it could have an adverseimpact on results of operations.Subsequent to year end, we decided to closecertain per diem nurse branches. As a result, during the first quarter of 2006,we will take a charge of approximately $3.0 million to write down theassociated impaired goodwill.

·                     We maintainan accrual for our health, workers compensation and professional liability thatare either self-insured or partially self-insured and are classified inaccounts payable and accrued expenses. The adequacy of these accruals isdetermined by periodically evaluating our historical experience and trendsrelated to health, workers compensation, and professional liability claims andpayments, based on company-specific actuarial computations and industryexperience and trends. If such information indicates that the accruals areoverstated or understated, we will adjust the assumptions utilized in themethodologies and reduce or provide for additional accruals as appropriate.

28

----

·                     We aresubject to various claims and legal actions in the ordinary course of ourbusiness. Some of these matters include professional liability andemployee-related matters. Hospital and healthcare facility clients may alsobecome subject to claims, governmental inquiries and investigations and legalactions to which we may become a party relating to services provided by ourprofessionals. From time to time, and depending upon the particular facts andcircumstances, we may be subject to indemnification obligations under ourcontracts with hospital and healthcare facility clients relating to thesematters. Although we are currently not aware of any such pending or threatenedlitigation that we believe is reasonably likely to have a material adverseeffect on our financial condition or results of operations, if we become awareof such claims against us, we will evaluate the probability of an adverseoutcome and provide accruals for such contingencies as necessary.

**CautionConcerning Forward-Looking Statements**

TheSEC encourages companies to disclose forward-looking information so thatinvestors can better understand a company’s future prospects and make informedinvestment decisions. This document contains such “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,particularly statements anticipating future growth in revenues, operatingincome and cash flow. Statements that are predictive in nature, that dependupon or refer to future events or conditions or that include words such as“expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” andsimilar expressions are forward-looking statements. These statements involveknown and unknown risks, uncertainties and other factors that may cause our actualresults and performance to be materially different from any future results orperformance expressed or implied by these forward-looking statements. Thesefactors include the following:

·                    Our ability toattract and retain qualified nurses and other healthcare personnel;

·                    The overalllevel of demand for services provided by temporary nurses;

·                    Our ability toenter into contracts with hospital and healthcare facility clients on termsattractive to us;

·                    Thewillingness of hospital and healthcare facility clients to utilize temporaryhealthcare staffing services;

·                    The generallevel of patient occupancy at hospital and healthcare facility clients;

·                    Thefunctioning of our information systems;

·                    The effect ofexisting or future government regulation and federal and state legislative andenforcement initiatives on our business;

·                    Our clients’ability to pay for services;

·                    Our ability tosuccessfully implement our acquisition and integration strategies;

·                    The effect ofliabilities and other claims asserted against us;

·                    The effect ofcompetition in the markets we serve; and

·                    Our ability tocarry out our business strategy.

Although we believe thatthese statements are based upon reasonable assumptions, we cannot guaranteefuture results. Given these uncertainties, the forward-looking statementsdiscussed herein might not occur.

**Item7A.**   Quantitative and QualitativeDisclosures About Market Risk

**Interest Rate Risk**

Our exposure to interestrate risk arises principally from the variable rates associated with our creditfacility. On December 25, 2005, we had borrowings of $24.0 millionunder our credit facility that were subject to variable rates, with a blendedrate of 7.1%. As of December 25, 2005, an adverse change of 1.0% 

29

----

in theinterest rate of all such borrowings outstanding would have caused us to incuran increase in interest expense of approximately $0.2 million on an annualbasis.

**Foreign CurrencyRisk**

We have no foreigncurrency risk as we have no revenue outside the United States and all of ourrevenues are in U.S. dollars.

**Inflation**

We do not believe thatinflation has had a material effect on our results of operations in recentyears and periods. There can be no assurance, however, that we will not beadversely affected by inflation in the future.

**Item8.   Financial Statements and Supplementary Data**

The information requiredto be presented by this item is presented commencing on page F-1 ofthis Annual Report on Form 10-K.

**Item9.   Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

We have had nodisagreements with our independent registered public accounting firm on anymatter of accounting principles or practices or financial statement disclosure.

**Item9A.   Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

The term “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) refers tothe controls and other procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it filesor submits under the Exchange Act is recorded, processed, summarized andreported within required time periods. Our management, with the participationof our Chief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this annual report (the “Evaluation Date”). Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the Evaluation Date, such controls and procedures wereeffective.

**Management’s Report onInternal Control Over Financial Reporting**

Management’s Report onInternal Control Over Financial Reporting, which appears on page F-2of this Annual Report on Form 10-K, is incorporated by referenceherein.

**Changesin Internal Controls**

The term “internal controlover financial reporting” (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act) refers to the process of a companythat is designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated our internal control over financial reporting andconcluded that no changes in internal control over financial reporting occurredduring the quarter ended December 25, 2005 that has materially affected,or is reasonably likely Item  B    OtherInformationto materially affect, our internal control over financial reporting.

**Item 9B.     OtherInformation**

None.

30

----

**PART III.**

**Item 10.   Directors and Executive Officers of theRegistrant**

Information regarding ourdirectors and executive officers is included in our Proxy Statement for the2006 Annual Meeting of Stockholders under the captions “Board Nominees Proposal—Directorsand Executive Officers”, “*—*Nominees for Class IIDirectors*—*Term Expiring 2009”, “*—*Class I Directors—Term Expiring 2008”, “*—*Class III Directors—Term Expiring 2007”, “*—*Non-Director Executive Officers”, “*—*Boardof Directors and Committees”, “*—*Compliancewith Section 16(a) of the Exchange Act” and “*—*Codeof Business Conduct and Ethics” and is incorporated herein by reference.

**Item 11.   Executive Compensation**

Information regardingexecutive compensation is included in our Proxy Statement for the 2006 AnnualMeeting of Stockholders under the captions “Board Nominees Proposal*—*Board of Directors and Committees”, “Director Compensation,”“*—*Executive Compensation”, “*—*Employment Agreements”, and “*—*CompensationCommittee Interlocks and Insider Participation” and is incorporated herein byreference.

**Item 12.   Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

Information regardingsecurity ownership of certain beneficial owners and management and relatedstockholder matters is included in our Proxy Statement for the 2006 AnnualMeeting of Stockholders under the caption “Board Nominees Proposal—Principal Stockholders”and is incorporated herein by reference.

**Item 13.   Certain Relationships and RelatedTransactions**

Information regardingcertain relationships and related transactions is included in our ProxyStatement for the 2006 Annual Meeting of Stockholders under the caption “BoardNominees Proposal*—*Certain Transactions” and isincorporated herein by reference.

**Item 14.   Principal Accounting Fees and Services**

Information regarding principal accounting fees andservices is included in our Proxy Statement for the 2006 Annual Meeting ofStockholders under the caption “Independent Public Accountants” and isincorporated herein by reference.

31

----

**PARTIV.**

**Item 15.   Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

The followingdocuments are filed as part of this Annual Report on Form 10-K:

1.                FinancialStatements

The informationrequired to be presented by this item is presented commencing on page F-1of this Annual Report on Form 10-K.

2.                FinancialStatement Schedules

The informationrequired to be presented by this item is presented commencing on page S-1of this Annual Report on Form 10-K.

3.                Exhibits:

See the Exhibit Index on page 34 of thisAnnual Report on Form 10-K.

32

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. 
|        |   | Medical Staffing Network Holdings, Inc. |
|--------|--------|----------------------------------------------|
|   |   | By:                                          | /s/ Robert J. Adamson |
|   |   |                                         | Robert J. Adamson |
|   |   |                                         | Chairman of the  Board, Chief Executive Officer and Director |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons in the capacities and on the datesindicated. 
| Signature               | ** ** | **Title**                                       | ** ** | **Date**            |
|-------------------------|------------|-------------------------------------------------|------------|---------------------|
| /s/  Robert J. Adamson  |       | Chairman of the Board,  Chief Executive Officer |       | March 3,  2006 |
| Robert J. Adamson       |       | and Director  (Principal Executive Officer)     |       |                |
| /s/  N. Larry McPherson |       | Chief Financial Officer  (Principal Financial   |       | March 3,  2006 |
| N. Larry  McPherson     |       | Officer and  Principal Accounting Officer)      |       |                |
| /s/  Joel Ackerman      |       | Director                                        |       | March 3,  2006 |
| Joel Ackerman           |       |                                            |       |                |
| /s/  Anne Boykin        |       | Director                                        |       | March 3,  2006 |
| Anne Boykin             |       |                                            |       |                |
| /s/  C. Daryl Hollis    |       | Director                                        |       | March 3,  2006 |
| C. Daryl Hollis         |       |                                            |       |                |
| /s/  Philip Incarnati   |       | Director                                        |       | March 3,  2006 |
| Philip Incarnati        |       |                                            |       |                |
| /s/  Edward J. Robinson |       | Director                                        |       | March 3,  2006 |
| Edward J.  Robinson     |       |                                            |       |                |
| /s/  David J. Wenstrup  |       | Director                                        |       | March 3,  2006 |
| David J. Wenstrup       |       |                                            |       |                |
| /s/  David Wester       |       | Director                                        |       | March 3,  2006 |
| David Wester            |       |                                            |       |                |

 

33

----

**EXHIBIT INDEX**

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                    |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of  Merger, dated August 20, 2001, among Warburg Pincus Private Equity VIII,  L.P., MSN Acquisition Corp., Medical Staffing Network Holdings, Inc. and  certain stockholders (Incorporated by reference to Exhibit 2.1 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                         |
| 2.2              |       | First Amendment to  Agreement and Plan of Merger, dated October 26, 2001, among Warburg  Pincus Private Equity VIII, L.P. and Medical Staffing Network  Holdings, Inc. (Incorporated by reference to Exhibit 2.2 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                  |
| 2.3              |       | Asset Purchase  Agreement, dated October 31, 2002, among Clinical Resource  Services, Inc., Health Search International, Inc., Cheryl Rhodes,  Stacey Birnbach and Medical Staffing Network, Inc. (Incorporated by  reference to Exhibit 2.1 to the Registrant’s Current Report on  Form 8-K, dated November 22, 2002 (File No. 001-31299)).                                          |
| 2.4              |       | Escrow Agreement, dated  as of October 31, 2002, among Medical Staffing Network, Inc.,  Clinical Resource Services, Inc. and Silver, Friedman & Taft,  LLP (Incorporated by reference to Exhibit 2.2 to the Registrant’s  Current Report on Form 8-K, dated November 22, 2002 (File  No. 001-31299)).                                                                             |
| 3.1              |       | Amended and Restated  Certificate of Incorporation of Medical Staffing Network Holdings, Inc.  (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 29,  2002 (File No. 001-31299)).                                                                                                                                         |
| 3.2              |       | Amended and Restated  Bylaws of Medical Staffing Network Holdings, Inc. (Incorporated by  reference to Exhibit 3.2 to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 29, 2002 (File  No. 001-31299)).                                                                                                                                                               |
| 4.1              |       | Registration Rights  Agreement, dated October 26, 2001, among the investors listed on  Schedule I to such Agreement and Medical Staffing Network  Holdings, Inc. (Incorporated by reference to Exhibit 4.1 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                   |
| 4.2              |       | Form of Stock  Certificate (Incorporated by reference to Exhibit 4.2 to the  Registrant’s Registration Statement on Form S-1, dated  April 1, 2002 (Registration Number 333-82438)).                                                                                                                                                                                                                      |
| 10.1             |       | Stockholders Agreement,  dated as of October 26, 2001, by and among Medical Staffing Network  Holdings, Inc. and the investors named therein (Incorporated by  reference to Exhibit 10.1 to the Registrant’s Registration Statement on  Form S-1, dated February 8, 2002 (Registration Number 333-82438)).                                                                                           |
| 10.2+            |       | Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Robert Adamson, dated August 20, 2001  (Incorporated by reference to Exhibit 10.2 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                                                                   |
| 10.3+            |       | First Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Robert Adamson, dated October 26, 2001  (Incorporated by reference to Exhibit 10.3 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)). |

34

----

 

| 10.4+  |   | Second Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Robert Adamson, dated October 26, 2001  (Incorporated by reference to Exhibit 10.4 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5+  |   | Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Kevin Little, dated August 20, 2001  (Incorporated by reference to Exhibit 10.5 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                                                                       |
| 10.6+  |   | First Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Kevin Little, dated October 26, 2001  (Incorporated by reference to Exhibit 10.6 to the Registrant’s Registration  Statement on Form S-1, dated February 8, 2002 (Registration  Number 333-82438)).     |
| 10.7+  |   | Second Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network Holdings, Inc.  and Kevin Little, dated October 26, 2001 (Incorporated by reference to  Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1,  dated February 8, 2002 (Registration Number 333-82438)).     |
| 10.8+  |   | Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Patricia Donohoe, dated August 20, 2001  (Incorporated by reference to Exhibit 10.8 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                                                                   |
| 10.9+  |   | First Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Patricia Donohoe, dated October 26, 2001  (Incorporated by reference to Exhibit 10.9 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)). |
| 10.10+ |   | Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Linda Duval, dated August 20, 2001 (Incorporated  by reference to Exhibit 10.10 to the Registrant’s Registration Statement  on Form S-1, dated February 8, 2002 (Registration Number 333-82438)).                                                                                        |
| 10.11+ |   | First Amendment to the  Medical Staffing Network, Inc. Amended and Restated Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Linda Duval, dated October 26, 2001  (Incorporated by reference to Exhibit 10.11 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).     |
| 10.12+ |   | Termination Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Linda Duval, dated January 4, 2003 (Incorporated  by reference to Exhibit 10.12 to the Registrant’s Registration Statement  on Form 10-K, dated March 5, 2004 (Registration Number 001-31299)).                                                                                         |
| 10.13+ |   | Employment Agreement  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Jeffrey Jacobsen, dated November 1, 1999  (Incorporated by reference to Exhibit 10.12 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                                                                 |

35

----

 

| 10.14+ |   | Employment Agreement,  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Gregory K. Guckes, dated June 9, 2003  (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Registration Statement on Form 10-Q, dated May 6, 2004  (Registration Number 001-31299)).                                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15+ |   | Separation Agreement,  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Gregory K. Guckes, dated June 7, 2004  (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Registration Statement on Form 10-Q, dated August 5, 2004  (Registration Number 001-31299)).                                                                                                                                                                                                                 |
| 10.16+ |   | Employment Agreement,  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and N. Larry McPherson, dated August 2, 2004  (Incorporated by reference to Exhibit 10.1 to the Registrant’s  Registration Statement on Form 10-Q, dated November 4, 2004  (Registration Number 001-31299)).                                                                                                                                                                                                            |
| 10.17+ |   | Employment Agreement,  among Medical Staffing Network, Inc., Medical Staffing Network  Holdings, Inc. and Gary Peck, dated March 10, 2005 (Incorporated by  reference to Exhibit 10.17 to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 26, 2004 (File  No. 001-31299)).                                                                                                                                                                                                               |
| 10.18+ |   | General Waiver and  Release of Claims, among Medical Staffing Network, Inc., Medical  Staffing Network Holdings, Inc. and Gary Peck, dated January 17,  2006 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                    |
| 10.19+ |   | Amended and Restated  Stock Option Plan of Medical Staffing Network Holdings, Inc., dated  February 27, 2001 (Incorporated by reference to Exhibit 10.13 to  the Registrant’s Registration Statement on Form S-1, dated February 8,  2002 (Registration Number 333-82438)).                                                                                                                                                                                                                                                        |
| 10.20+ |   | Amendment No. 1 to  the Amended and Restated Stock Option Plan of Medical Staffing Network  Holdings, Inc. (Incorporated by reference to Exhibit 10.4 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                                                                                                                                                                                                           |
| 10.21+ |   | 2001 Stock Incentive  Plan of Medical Staffing Network Holdings, Inc. (Incorporated by  reference to Exhibit 10.4 to the Registrant’s Registration Statement on  Form S-1, dated February 8, 2002 (Registration Number 333-82438)).                                                                                                                                                                                                                                                                                                     |
| 10.22+ |   | Form of Amended and  Restated Executive Incentive Stock Ownership Plan of Medical Staffing Network  Holdings, Inc. (Incorporated by reference to Exhibit 10.16 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                                                                                                                                                                                                  |
| 10.23  |   | Credit Agreement, dated  as of October 26, 2001, among Medical Staffing Network, Inc.,  Medical Staffing Holdings, LLC, LaSalle Bank, National Association, as  syndication agent, Bank of America, N.A., as administrative agent, and  General Electric Capital Corporation, Barclays Bank, PLC, and Antares Capital  Corporation, as co-documentation agents (Incorporated by reference to  Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1,  dated February 8, 2002 (Registration Number 333-82438)).      |
| 10.24  |   | Amendment to Credit  Agreement, dated as of April 3, 2002, among Medical Staffing  Network, Inc., Medical Staffing Holdings, LLC, the Subsidiaries of the  Borrower identified as “Guarantors” on the signature pages thereto, the  Lenders identified on the signature pages thereto and Bank of America,  N.A., as Administrative Agent (Incorporated by reference to  Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 29, 2002 (File No. 001-31299)). |

36

----

 

| 10.25 |   | Second Amendment to  Credit Agreement, dated as of July 5, 2002, among Medical Staffing  Network, Inc., Medical Staffing Holdings, LLC, the Subsidiaries of the  Borrower identified as “Guarantors” on the signature pages thereto, the  Lenders identified on the signature pages thereto and Bank of America,  N.A., as Administrative Agent (Incorporated by reference to  Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 29, 2002 (File No. 001-31299)).      |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26 |   | Third Amendment to  Credit Agreement, dated as of October 3, 2002, among Medical Staffing  Network, Inc., Medical Staffing Holdings, LLC, the Subsidiaries of the  Borrower identified as “Guarantors” on the signature pages thereto, the  Lenders identified on the signature pages thereto and Bank of America,  N.A., as Administrative Agent (Incorporated by reference to  Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 29, 2002 (File No. 001-31299)).    |
| 10.27 |   | Fourth Amendment to  Credit Agreement, dated as of December 23, 2002, among Medical Staffing  Network, Inc., Medical Staffing Holdings, LLC, the Subsidiaries of the  Borrower identified as “Guarantors” on the signature pages thereto, the  Lenders identified on the signature pages thereto and Bank of America,  N.A., as Administrative Agent (Incorporated by reference to  Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K  for the fiscal year ended December 29, 2002 (File No. 001-31299)). |
| 10.28 |   | Fifth Amendment to  Credit Agreement, dated as of March 21, 2003, among Medical Staffing  Network, Inc., Medical Staffing Holdings, LLC, the Subsidiaries of the  Borrower identified as “Guarantors” on the signature pages thereto, the  Lenders identified on the signature pages thereto and Bank of America,  N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1  to the Registrant’s Quarterly Report on Form 10-Q for the  quarterly period ended March 30, 2003 (File No. 001-31299)). |
| 10.29 |   | Security Agreement,  dated as of October 26, 2001, among Medical Staffing Network, Inc.,  Medical Staffing Holdings, LLC and Bank of America, N.A., as collateral agent  (Incorporated by reference to Exhibit 10.18 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                                                                                                                                                                                       |
| 10.30 |   | Credit Agreement, dated  December 22, 2003, among Medical Staffing Network, Inc., the other  Credit Parties identified on the signature pages thereto, the Lenders  identified on the signature pages thereto, General Electric Capital  Corporation, as Administrative Agent, and LaSalle Bank, National Association,  as syndication agent (Incorporated by reference to Exhibit 10.25 to the  Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 28, 2003 (File No. 001-31299)).                   |
| 10.31 |   | First Amendment to  Credit Agreement, dated June 25, 2004, among Medical Staffing  Network, Inc., the other Credit Parties identified on the signature  pages thereto, General Electric Capital Corporation, LaSalle Bank  National Association and Special Situations Investing Group, Inc.  (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly  Report on Form 10-Q for the quarterly period ended June 27,  2004 (File No. 001-31299)).                                                               |
| 10.32 |   | Second Amendment to  Credit Agreement, dated February 24, 2005, among Medical Staffing  Network, Inc., the other Credit Parties identified on the signature  pages thereto, General Electric Capital Corporation, LaSalle Bank  National Association and Special Situations Investing Group, Inc.  (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current  Report on Form 8-K, dated February 28, 2005 (File  No. 001-31299)).                                                                                 |

37

----

 

| 10.33 |   | Credit Party Pledge  Agreement, dated as of October 26, 2001, among Medical Staffing Network, Inc.,  Medical Staffing Holdings, LLC and Bank of America, N.A., as collateral agent  (Incorporated by reference to Exhibit 10.19 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).       |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34 |   | Holdings Pledge  Agreement, dated as of October 26, 2001, among Medical Staffing Network  Holdings, Inc. and Bank of America, N.A., as collateral agent  (Incorporated by reference to Exhibit 10.20 to the Registrant’s  Registration Statement on Form S-1, dated February 8, 2002  (Registration Number 333-82438)).                                  |
| 10.35 |   | Lease Agreement, dated  November 22, 1999, between Fairfax Boca ‘92 LP and Medical Staffing  Network, Inc. (Incorporated by reference to Exhibit 10.21 to the  Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                           |
| 10.36 |   | Lease Amendment  No. 1, dated July 31, 2001, between Fairfax Boca ‘92 LP and Medical  Staffing Network, Inc. (Incorporated by reference to Exhibit 10.22  to the Registrant’s Registration Statement on Form S-1, dated  February 8, 2002 (Registration Number 333-82438)).                                                                    |
| 10.37 |   | Lease Agreement, dated  January 24, 2005, between Cantera H-6 LLC and Medical Staffing  Network, Inc. (Incorporated by reference to Exhibit 99.1 to the  Registrant’s Current Report on Form 8-K, dated January 24,  2005 (File No. 001-31299)).                                                                                                    |
| 10.38 |   | License and Master  Agreement, dated February 8, 2002, between Premier Computer  Systems, Inc. and Medical Staffing Network Holdings, Inc.  (Incorporated by reference to Exhibit 10.23 to the Registrant’s  Registration Statement on Form S-1, dated March 15, 2002  (Registration Number 333-82438)).                                            |
| 10.39 |   | Blanket Purchase  Agreement, dated as of September 6, 2005, between Medical Staffing  Network Holdings, Inc. and the United States Department of Health and  Human Services (Incorporated by reference to Exhibit 10.1 to the  Registrant’s Quarterly Report on Form 10-Q for the quarterly  period ended September 25, 2005 (File No. 001-31299)). |
| 21.1  |   | List of Subsidiaries  (Incorporated by reference to Exhibit 21.1 to the Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 28,  2003 (File No. 001-31299)).                                                                                                                                                                          |
| 23.1  |   | Consent of Independent  Registered Public Accounting Firm (filed herewith).                                                                                                                                                                                                                                                                                                            |
| 31.1  |   | Certification of Robert  J. Adamson, Chief Executive Officer of Medical Staffing Network  Holdings, Inc., as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                            |
| 31.2  |   | Certification of N.  Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc.,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (filed herewith).                                                                                                                                                                           |
| 32.1  |   | Certification of Robert  J. Adamson, Chief Executive Officer of Medical Staffing Network  Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                   |
| 32.2  |   | Certification of N.  Larry McPherson, Chief Financial Officer of Medical Staffing Network  Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed  herewith).                                                                                                                                 |

----

+                Managementcontract or compensatory plan.

38

----

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTSMEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**

**Contents**
| Management’s Report on  Internal Control Over Financial Reporting                                                                                          |   | F-2  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|
| Reports of Independent Registered Public Accounting  Firm                                                                                                       |   | F-3  |   |
| Consolidated Balance Sheets as of December 25,  2005 and December 26, 2004                                                                            |   | F-5  |   |
| Consolidated Statements of Operations for the years  ended December 25, 2005, December 26, 2004 and December 28,  2003                           |   | F-6  |   |
| Consolidated Statements of Changes in Stockholders’  Equity for the years ended December 25, 2005, December 26, 2004 and  December 28, 2003 |   | F-7  |   |
| Consolidated Statements of Cash Flows for the years  ended December 25, 2005, December 26, 2004 and December 28,  2003                           |   | F-8  |   |
| Notes to Consolidated Financial Statements                                                                                                                      |   | F-10 |   |

 

F-1

----

**MANAGEMENT’S REPORT ON INTERNAL CONTROL**

**OVERFINANCIAL REPORTING**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, and forperforming an assessment of the effectiveness of internal control over financialreporting as of December 25, 2005. Internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. The Company’s system of internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the financialstatements.

Management performed an assessment of theeffectiveness of the Company’s internal control over financial reporting as of December 25,2005 based upon criteria in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on our assessment, management determined thatthe Company’s internal control over financial reporting was effective as of December 25,2005 based on the criteria in *InternalControl-Integrated Framework* issued by COSO.

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

Management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting asof December 25, 2005 has been audited by Ernst & Young LLP, anindependent registered public accounting firm, as stated in their report whichis included herein.

Dated:  February 24, 2006 

| /s/ Robert J. Adamson                                    |   | /s/ N. Larry  McPherson                      |
|----------------------------------------------------------|--------|----------------------------------------------|
| Robert J. Adamson  Chairman and  Chief Executive Officer |   | N. Larry  McPherson  Chief Financial Officer |

 

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

TheBoard of Directors and Shareholders

Medical Staffing Network Holdings, Inc.

Wehave audited management’s assessment, included in the accompanying Management’sReport on Internal Control Over Financial Reporting, that Medical StaffingNetwork Holdings, Inc. maintained effective internal control overfinancial reporting as of December 25, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Medical StaffingNetwork Holdings, Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Inour opinion, management’s assessment that Medical Staffing Network Holdings, Inc.maintained effective internal control over financial reporting as of December 25,2005, is fairly stated, in all material respects, based on the COSO criteria. Also,in our opinion, Medical Staffing Network Holdings, Inc. maintained, in allmaterial respects, effective internal control over financial reporting as of December 25,2005, based on****the COSO criteria**.**

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financial statements of Medical Staffing NetworkHoldings, Inc. as of December 25, 2005 and December 26, 2004 andfor each of the three years in the period ended December 25, 2005 and ourreport dated February 24, 2006 expressed an unqualified opinion thereon.

|        |   | /s/ Ernst & Young LLP |
|--------|--------|--------------------------------|
|   |   | Certified Public Accountants   |

 

FortLauderdale, Florida

February 24, 2006

F-3

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersMedical Staffing Network Holdings, Inc.

We have audited the accompanying consolidated balancesheets of Medical Staffing Network Holdings, Inc. and Subsidiaries as of December 25,2005 and December 26, 2004, and the related consolidated statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 25, 2005. These financialstatements are the responsibility of Medical Staffing Network Holdings, Inc.’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

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

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Medical Staffing Network Holdings, Inc. and Subsidiaries at December 25,2005 and December 26, 2004, and the consolidated results of theiroperations and their cash flows for each of the three years in the period endedDecember 25, 2005, in conformity with U.S. generally accepted accountingprinciples.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Medical Staffing NetworkHoldings, Inc.’s internal control over financial reporting as of December 25,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 24, 2006, expressed an unqualified opinionthereon.
|        |   | /s/ Ernst & Young LLP |
|--------|--------|--------------------------------|
|   |   | Certified Public Accountants   |

 

Fort Lauderdale, FloridaFebruary 24, 2006

F-4

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. ANDSUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except per share amounts)**

| ** **                                                                                                                                                             | ** ** | **December 25,** | ** **   | **December 26,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|--------------|-----------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2005**              | ** **   | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                             |       |                  |         |                  |       |   |   |   |   |
| Current assets:                                                                                                                                                        |       |                  |         |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                              | ** ** | ** **            | **$**        | **42**                |       |   |   | $ | 345 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of **$772** and $1,064 at **December 25, 2005** and December 26, 2004,  respectively            | ** ** | ** **            | **55,863**   |                  |       |   | 57,478 |   |   |
| Prepaid expenses                                                                                                                                                       | ** ** | ** **            | **1,966**    |                  |       |   | 6,406 |   |   |
| Other current assets                                                                                                                                                   | ** ** | ** **            | **4,576**    |                  |       |   | 4,758 |   |   |
| Total current  assets                                                                                                                                                  | ** ** | ** **            | **62,447**   |                  |       |   | 68,987 |   |   |
| Furniture and equipment, net of accumulated  depreciation of **$21,698** and  $18,650 at **December 25, 2005** and  December 26, 2004, respectively          | ** ** | ** **            | **8,427**    |                  |       |   | 8,481 |   |   |
| Goodwill, net of  accumulated amortization of **$8,545** at  both **December 25, 2005** and  December 26, 2004                                               | ** ** | ** **            | **130,589**  |                  |       |   | 129,474 |   |   |
| Intangible assets, net of accumulated amortization of **$2,394** and $1,663 at **December 25, 2005** and December 26, 2004, respectively                     | ** ** | ** **            | **2,253**    |                  |       |   | 2,438 |   |   |
| Other assets                                                                                                                                                           | ** ** | ** **            | **1,200**    |                  |       |   | 1,523 |   |   |
| Total assets                                                                                                                                                           | ** ** | ** **            | **$**        | **204,916**           |       |   |   | $ | 210,903 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                         |       |                  |         |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                   |       |                  |         |                  |       |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                  | ** ** | ** **            | **$**        | **14,099**            |       |   |   | $ | 12,072 |   |   |
| Accrued payroll and related liabilities                                                                                                                                | ** ** | ** **            | **6,157**    |                  |       |   | 6,597 |   |   |
| Current portion of capital lease obligations                                                                                                                           | ** ** | ** **            | **317**      |                  |       |   | 385 |   |   |
| Total current  liabilities                                                                                                                                             | ** ** | ** **            | **20,573**   |                  |       |   | 19,054 |   |   |
| Long-term debt                                                                                                                                                         | ** ** | ** **            | **23,991**   |                  |       |   | 31,760 |   |   |
| Deferred income  taxes                                                                                                                                                 | ** ** | ** **            | **9,790**    |                  |       |   | 9,808 |   |   |
| Capital lease  obligations, net of current portion                                                                                                                     | ** ** | ** **            | **702**      |                  |       |   | 33 |   |   |
| Other liabilities                                                                                                                                                      | ** ** | ** **            | **612**      |                  |       |   | 222 |   |   |
| Total liabilities                                                                                                                                                      | ** ** | ** **            | **55,668**   |                  |       |   | 60,877 |   |   |
| Commitments and  contingencies                                                                                                                                         |       |                  |         |                  |       |   |   |   |   |
| Stockholders’  equity:                                                                                                                                            |       |                  |         |                  |       |   |   |   |   |
| Common stock, $0.01 par value, 75,000 authorized: **30,237** and 30,231 issued and outstanding at **December 25, 2005** and December 26, 2004,  respectively | ** ** | ** **            | **302**      |                  |       |   | 302 |   |   |
| Additional paid-in capital                                                                                                                                             | ** ** | ** **            | **284,432**  |                  |       |   | 284,411 |   |   |
| Accumulated deficit                                                                                                                                                    | ** ** | ** **            | **(135,486** | **)**                 |       |   | (134,687 | ) |   |
| Total  stockholders’ equity                                                                                                                                       | ** ** | ** **            | **149,248**  |                  |       |   | 150,026 |   |   |
| Total liabilities and  stockholders’ equity                                                                                                                       | ** ** | ** **            | **$**        | **204,916**           |       |   |   | $ | 210,903 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)**

| ** **                                                    | ** ** | **Years Ended**  | ** **  |
|---------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                    | ** ** | **December 25,** | ** **  | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                    | ** ** | **2005**              | ** **  | **2004** | ** ** | **2003** | ** ** |
| Service revenues                                              | ** ** |                  | **$**       | **402,507** |   |   |   | $ | 417,058 |   |   |   | $ | 512,985 |   |   |
| Cost of services  rendered                                    | ** ** |                  | **314,341** |   |   |   | 327,075 |   |   |   | 398,224 |   |   |
| Gross profit                                                  | ** ** |                  | **88,166**  |   |   |   | 89,983 |   |   |   | 114,761 |   |   |
| Operating  expenses:                                          |       |                  | ** **  |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                           | ** ** |                  | **81,087**  |   |   |   | 82,067 |   |   |   | 90,519 |   |   |
| Depreciation and amortization                                 | ** ** |                  | **5,259**   |   |   |   | 6,316 |   |   |   | 6,773 |   |   |
| Other                                                         | ** ** |                  | **512**     |   |   |   | — |   |   |   | — |   |   |
| Income from operations                                        | ** ** |                  | **1,308**   |   |   |   | 1,600 |   |   |   | 17,469 |   |   |
| Loss on early  extinguishment of debt                         | ** ** |                  | **—**  |   |   |   | — |   |   |   | 3,555 |   |   |
| Interest expense,  net                                        | ** ** |                  | **2,767**   |   |   |   | 3,541 |   |   |   | 4,685 |   |   |
| Income (loss) from continuing operations before  income taxes | ** ** |                  | **(1,459**  | **)** |   |   | (1,941 | ) |   |   | 9,229 |   |   |
| Provision for  (benefit from) income taxes                    | ** ** |                  | **(660**    | **)** |   |   | (615 | ) |   |   | 3,708 |   |   |
| Income (loss) from continuing operations                      | ** ** |                  | **(799**    | **)** |   |   | (1,326 | ) |   |   | 5,521 |   |   |
| Loss from  discontinued operations, net of taxes              | ** ** |                  | **—**  |   |   |   | — |   |   |   | (506 | ) |   |
| Net income (loss)                                             | ** ** |                  | **$**       | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,015 |   |   |
| Income (loss) per  share—basic:                          |       |                  | ** **  |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      | ** ** |                  | **$**       | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued operations, net of taxes                         | ** ** |                  | **—**  |   |   |   | — |   |   |   | (0.01 | ) |   |
| Basic net income (loss) per share                             | ** ** |                  | **$**       | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.17 |   |   |
| Income (loss) per  share—diluted:                        |       |                  | ** **  |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      | ** ** |                  | **$**       | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued operations, net of taxes                         | ** ** |                  | **—**  |   |   |   | — |   |   |   | (0.02 | ) |   |
| Diluted net income (loss) per share                           | ** ** |                  | **$**       | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.16 |   |   |
| Weighted average  number of common shares outstanding:        |       |                  | ** **  |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         | ** ** |                  | **30,233**  |   |   |   | 30,228 |   |   |   | 30,190 |   |   |
| Diluted                                                       | ** ** |                  | **30,233**  |   |   |   | 30,228 |   |   |   | 30,807 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-6

----

**MEDICAL STAFFINGNETWORK HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                    | ** ** | **Stockholders’ Equity** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **Common Stock**              | ** ** | **Additional  Paid-in** | ** ** | **Accumulated Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Shares**                         | ** ** | **Par** | ** ** | **Capital** | ** ** | **Loss** | ** ** | **Deficit)** | ** ** | **Total** | ** ** |
| **Balance  at December 29, 2002**        | ** ** | **30,119**                         | ** ** | **$** | **301** | ** ** | **$** | **283,848** | ** ** |   | **$** | **(105** | **)** |   |   | **$** | **(138,376** | **)** |   | **$** | **145,668** | ** ** |
| Net income                                    |       | —                             |       | — |   | — |   |   | — | ** ** |   |   | 5,015 |   |   | 5,015 |   |
| Unrealized income on derivative, net of taxes |       | —                             |       | — |   | — |   |   | 105 | ** ** |   |   | — |   |   | 105 |   |
| Comprehensive income                          |       | —                             |       | — |   | — |   |   | — | ** ** |   |   | — |   |   | 5,120 |   |
| Exercise of stock options                     |       | 90                                 |       | 1 |   | 498 |   |   | — | ** ** |   |   | — |   |   | 499 |   |
| **Balance  at December 28, 2003**        | ** ** | **30,209**                         | ** ** | **302** | ** ** | **284,346** | ** ** |   | **—** | ** ** |   |   | **(133,361** | **)** |   | **151,287** | ** ** |
| Net loss and comprehensive loss               |       | —                             |       | — |   | — |   |   | — | ** ** |   |   | (1,326 | ) |   | (1,326 | ) |
| Exercise of stock options                     |       | 22                                 |       | — |   | 65 |   |   | — | ** ** |   |   | — |   |   | 65 |   |
| **Balance  at December 26, 2004**        | ** ** | **30,231**                         | ** ** | **302** | ** ** | **284,411** | ** ** |   | **—** | ** ** |   |   | **(134,687** | **)** |   | **150,026** | ** ** |
| Net loss and comprehensive loss               |       | —                             |       | — |   | — |   |   | — | ** ** |   |   | (799 | ) |   | (799 | ) |
| Exercise of stock options                     |       | 6                                  |       | — |   | 21 |   |   | — | ** ** |   |   | — |   |   | 21 |   |
| **Balance at December 25,  2005**        | ** ** | **30,237**                         | ** ** | **$** | **302** | ** ** | **$** | **284,432** | ** ** |   | **$** | **—** | ** ** |   |   | **$** | **(135,486** | **)** |   | **$** | **149,248** | ** ** |

 

F-7

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                | ** ** | **Years Ended**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                                                | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating activities**                                                                  | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                         | ** ** |                  | **$**      | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,015 |   |   |
| Loss from  discontinued operations, net of taxes                                          | ** ** |                  | **—** |   |   |   | — |   |   |   | 506 |   |   |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Loss on early extinguishment of debt                                                      | ** ** |                  | **—** |   |   |   | — |   |   |   | 3,555 |   |   |
| Depreciation and amortization                                                             | ** ** |                  | **5,259**  |   |   |   | 6,316 |   |   |   | 6,773 |   |   |
| Amortization of debt issuance cost                                                        | ** ** |                  | **656**    |   |   |   | 694 |   |   |   | 1,094 |   |   |
| Deferred income taxes                                                                     | ** ** |                  | **(515**   | **)** |   |   | 2,568 |   |   |   | 4,618 |   |   |
| Provision for doubtful accounts                                                           | ** ** |                  | **486**    |   |   |   | 1,213 |   |   |   | 3,226 |   |   |
| Other                                                                                     | ** ** |                  | **17**     |   |   |   | 55 |   |   |   | 91 |   |   |
| Changes in operating  assets and liabilities:                                             | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                       | ** ** |                  | **1,673**  |   |   |   | 9,911 |   |   |   | 22,396 |   |   |
| Prepaid expenses and other current assets                                                 | ** ** |                  | **4,714**  |   |   |   | 2,511 |   |   |   | (5,440 | ) |   |
| Other assets                                                                              | ** ** |                  | **(171**   | **)** |   |   | (132 | ) |   |   | (564 | ) |   |
| Accounts payable and accrued expenses                                                     | ** ** |                  | **1,856**  |   |   |   | 5,024 |   |   |   | (1,458 | ) |   |
| Accrued payroll and related liabilities                                                   | ** ** |                  | **(440**   | **)** |   |   | (19 | ) |   |   | (2,787 | ) |   |
| Other liabilities                                                                         | ** ** |                  | **198**    |   |   |   | (96 | ) |   |   | 194 |   |   |
| Cash provided by  continuing operations                                                   | ** ** |                  | **12,934** |   |   |   | 26,719 |   |   |   | 37,219 |   |   |
| Cash used in  discontinued operations                                                     | ** ** |                  | **—** |   |   |   | — |   |   |   | (500 | ) |   |
| Cash provided by  operating activities                                                    | ** ** |                  | **12,934** |   |   |   | 26,719 |   |   |   | 36,719 |   |   |
| **Investing  activities**                                                                 | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                                         | ** ** |                  | **(1,887** | **)** |   |   | (24 | ) |   |   | (10,803 | ) |   |
| Purchases of  furniture and equipment, net                                                | ** ** |                  | **(1,863** | **)** |   |   | (1,179 | ) |   |   | (3,516 | ) |   |
| Capitalized  internally developed software costs                                          | ** ** |                  | **(1,332** | **)** |   |   | (1,753 | ) |   |   | (1,113 | ) |   |
| Net cash used in  investing activities                                                    | ** ** |                  | **(5,082** | **)** |   |   | (2,956 | ) |   |   | (15,432 | ) |   |
| **Financing  activities**                                                                 | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Net repayments under  revolving credit facility                                           | ** ** |                  | **(1,768** | **)** |   |   | (18,218 | ) |   |   | (15,575 | ) |   |
| Proceeds from  borrowings on term loan                                                    | ** ** |                  | **—** |   |   |   | — |   |   |   | 12,000 |   |   |
| Principal  payments on term loan                                                          | ** ** |                  | **(6,000** | **)** |   |   | (5,000 | ) |   |   | (20,877 | ) |   |
| Proceeds from  exercise of stock options                                                  | ** ** |                  | **21**     |   |   |   | 65 |   |   |   | 499 |   |   |
| Principal  payments under capital lease obligations                                       | ** ** |                  | **(408**   | **)** |   |   | (1,090 | ) |   |   | (1,104 | ) |   |
| Net cash used in financing activities                                                     | ** ** |                  | **(8,155** | **)** |   |   | (24,243 | ) |   |   | (25,057 | ) |   |
| Net decrease in  cash                                                                     | ** ** |                  | **$**      | **(303** | **)** |   |   | $ | (480 | ) |   |   | $ | (3,770 | ) |   |
| Cash and cash  equivalents at beginning of year                                           | ** ** |                  | **345**    |   |   |   | 825 |   |   |   | 4,595 |   |   |
| Cash and cash  equivalents at end of year                                                 | ** ** |                  | **$**      | **42** |   |   |   | $ | 345 |   |   |   | $ | 825 |   |   |

 

*Continued on next page.*

F-8

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued) (in thousands)**

| ** **                                                                  | ** ** | **Years Ended**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                                  | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Supplemental disclosure of  noncash investing and financing activities:** | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Noncash payment  of interest                                                | ** ** |                  | **$**      | **2,019** |   |   |   | $ | 2,703 |   |   |   | $ | — |   |   |
| Purchases of  equipment through capital leases                              | ** ** |                  | **$**      | **1,009** |   |   |   | $ | — |   |   |   | $ | 185 |   |   |
| Vendor supplied  equipment                                                  | ** ** |                  | **$**      | **267** |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Noncash payment  of additional consideration related to an acquisition      | ** ** |                  | **$**      | **—** |   |   |   | $ | 4,161 |   |   |   | $ | — |   |   |
| Noncash receipt  of note receivable and interest receivable                 | ** ** |                  | **$**      | **—** |   |   |   | $ | (4,161 | ) |   |   | $ | — |   |   |
| Noncash payoff of  extinguished credit facility                             | ** ** |                  | **$**      | **—** |   |   |   | $ | — |   |   |   | $ | 56,123 |   |   |
| Additional  consideration to be paid relating to acquisitions               | ** ** |                  | **$**      | **—** |   |   |   | $ | — |   |   |   | $ | 113 |   |   |
| **Supplemental disclosures of  cash flow information:**                     | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Interest paid                                                               | ** ** |                  | **$**      | **23** |   |   |   | $ | 23 |   |   |   | $ | 3,982 |   |   |
| Income taxes paid  (refunded), net                                          | ** ** |                  | **$**      | **(3,925** | **)** |   |   | $ | (4,835 | ) |   |   | $ | (3,335 | ) |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-9

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

***Organization***

Medical Staffing NetworkHoldings, Inc. (the Company), a Delaware corporation, is a provider oftemporary staffing services in the United States. The Company’s per diemhealthcare staffing assignments place professionals, predominately nurses, athospitals and other healthcare facilities to solve temporary staffing needs.The Company also provides staffing of allied health professionals such asspecialized radiology and diagnostic imaging specialists and clinicallaboratory technicians. During 2004, the Company expanded its services toprovide temporary general staffing. The Company’s per diem general staffingassignments, which represent less than 2.0% of 2005 revenue,  place individuals in a variety of areasincluding clerical, janitorial and food services. The Company’s temporaryhealthcare staffing client base includes for-profit and non-profit hospitals,teaching hospitals, and regional healthcare providers. The Company provides itsservices through a network of over 100 branch locations around the UnitedStates and considers each branch location to be a reporting unit and thereforean operating segment. The Company has aggregated all branch operating resultsunder one reportable segment as each branch has similar economiccharacteristics. Each branch provides the same type of service, temporarystaffing, and utilizes similar distribution methods, common systems, databases,procedures, processes and similar methods of identifying and serving theircustomers. Temporary staffing services represent 100% of the Company’sconsolidated revenue for years ended December 25, 2005, December 26,2004 and December 28, 2003.

***Recent Accounting Pronouncements***

**Stock-Based Compensation**

In December 2004, the FASB issued Statement ofFinancial Accounting Standard (SFAS) No. 123(revised 2004), *Share-Based Payment*, (SFAS No. 123(R))which is a revision of SFAS No. 123, *Accounting for Stock-BasedCompensation* (SFAS No. 123). Statement 123(R) supersedes AccountingPrinciples Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees,* (APB No. 25). SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues. Pro forma disclosure is no longer an alternative. Additionally, SFAS No. 123(R) amendsthe presentation of the statement of cash flows and requires additional annualdisclosures. SFAS No. 123(R) is effective for public companies beginningwith the first interim period that begins after June 15, 2005. In April 2005,the Securities and Exchange Commission adopted a new rule that postponedthe effective date for SFAS No. 123(R) to the fiscal year beginningafter June 15, 2005. The Company adopted SFAS No. 123(R) on December 26,2005, using the modified prospective method. As permitted by SFAS No. 123,the Company currently accounts for share-based payments to employees using theintrinsic value method in accordance with the recognition and measurementprinciples of APB No. 25, and, as such, generally recognizes nocompensation cost for employee stock options, as options granted under theCompany’s plans have an exercise price equal to or greater than the fair valueof the underlying common stock on the date of grant.

On December 1, 2005, the Company’s CompensationCommittee accelerated the vesting of all of our unvested stock options awardedto employees under the Company’s 2001 Stock Incentive Plan (the 2001 Plan)(with the exception of three of the Company’s officers, who only had theiroptions that were scheduled to vest in 2006 accelerated). As a result of theacceleration, options to acquire approximately 374,000 shares of the Company’scommon stock (representing approximately 18% of the total outstanding 

F-10

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

options), which otherwisewould have vested periodically over the next 48 months, became immediatelyexercisable. Approximately 50% of the accelerated options would have vested in2006. If the Company had already adopted the fair value method, theacceleration of the options would have increased compensation expense byapproximately $1.0 million in 2005 and would have decreased compensationexpense approximately $0.5 million in 2006, $0.3 million in 2007 and $0.1million in 2008.

The Compensation Committee’sdecision to accelerate the vesting of these options was in response to theissuance of SFAS No. 123(R). By accelerating the vesting of these options,the Company has minimized the potential compensation expense that will berequired to be recognized in future periods under SFAS No. 123(R). However,the impact of adoption of SFAS No. 123(R), which is not expected to bematerial, cannot be predicted at this time because it will depend on levels ofshare-based payments granted in the future. Had the Company adopted SFAS No. 123(R) inprior periods, its impact would have approximated the impact of SFAS No. 123as described in the disclosure of pro forma net income (loss) and earnings(loss) per share in Stock-Based Compensation.

***Changes in Accounting Principles***

In May 2005, the FASBissued SFAS No. 154, *Accounting Changesand Error Corrections,* which replaces APB No. 20, *Accounting Changes,* and SFAS No. 3, *Reporting Accounting Changes in Interim FinancialStatements*. This Statement requires retrospective application toprior periods’ financial statements of changes in accounting principles, unlessit is impracticable to determine the period specific effects or cumulativeeffect of the change. When it is impracticable to determine the period specificeffects of an accounting change on one or more individual prior periodspresented, this Statement requires that the new accounting principle be appliedto the balances of assets and liabilities at the beginning of the earliestperiod for which retrospective application is practicable and a correspondingadjustment is to be made to the opening balance of retained earnings for thatperiod. When it is impracticable to determine the cumulative effect of applyinga change in accounting principle to all prior periods, it requires that the newaccounting principle be applied as if it were adopted prospectively from theearliest date practicable. This Statement defines “retrospective application”as the application of a different accounting principle to prior accountingperiods as if that principle had always been used or as the adjustment ofpreviously issued financial statements to reflect a change in the reportingentity. It also redefines “restatement” as the revising of previously issuedfinancial statements to reflect the correction of an error. This Statement alsorequires that a change in depreciation, amortization, or depletion method forlong-lived, nonfinancial assets be accounted for as a change in accountingestimate effected by a change in accounting principle. It is effective forfiscal years beginning after December 15, 2005. The impact of adoption ofthis statement is not expected to be significant.

***Summary of Significant Accounting Policies***

**Use of Estimates**

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes. Actual resultscould differ from those estimates. The most significant areas requiring the useof management estimates relate to the determination of allowance for doubtfulaccounts, the determination of required accruals for health, workerscompensation and professional liability that are partially self funded and thedetermination of estimates used in the impairment analysis of goodwill andother intangible assets.

F-11

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Principles of Consolidation**

The consolidated financial statements include theaccounts of the Company, its wholly-owned subsidiaries, Medical StaffingHoldings, LLC (MSN LLC), Medical Staffing Network, Inc. (MSN Inc.), awholly-owned subsidiary of MSN LLC, MSN-Illinois Holdings, Inc. (MSN-Ill),a wholly-owned subsidiary of MSN Inc., Medical Staffing Network of Illinois,LLC, a wholly-owned subsidiary of MSN-Ill, and Medical Staffing Network Assets,LLC, a wholly-owned subsidiary of MSN-Ill. All material intercompanytransactions and balances have been eliminated in consolidation.

The Company’s fiscal yearconsists of 52/53 weeks ending on the last Sunday in December in eachyear. Each of the years ended December 25, 2005, December 26, 2004and December 28, 2003 consisted of 52 weeks.

**Cash and Cash Equivalents**

For purposes of reportingcash flows, the Company considers all highly liquid investments purchased withan original maturity of three months or less to be cash equivalents. Depositsin banks may exceed the amount of insurance provided on such deposits. TheCompany performs reviews of the creditworthiness of its depository banks. TheCompany has not historically experienced any losses on deposits.

**AccountsReceivable and Concentrations of Credit Risk**

Financial instruments thatpotentially subject the Company to concentrations of credit risk as defined bySFAS No. 105, Disclosure of Information About Financial Instruments WithOff-Balance-Sheet Risk and Financial Instruments with Concentrations ofCredit Risk, consist principally of accounts receivable. Concentrations ofcredit risk with respect to trade accounts receivable are limited due to thelarge number of customers and their dispersion across a number of geographicareas. However, essentially all trade receivables are concentrated in thehospital and healthcare sectors in the United States and, accordingly, theCompany is exposed to their respective business and economic variables. Althoughthe Company does not currently foresee a concentrated credit risk associatedwith these receivables, repayment is dependent upon the financial stability ofthese industry sectors. The Company does not generally require collateral. Theallowance for doubtful accounts represents the Company’s estimate foruncollectible receivables based on a review of specific accounts and theCompany’s historical collection experience. The Company writes off specificaccounts based on an ongoing review of collectibility as well as management’spast experience with the customers.

**Fixed Assets**

Furniture and equipment are stated at cost anddepreciated using the straight-line method over their estimated useful lives,ranging generally from three to seven years. Leasehold improvements aredepreciated over the lives of the related leases or their estimated usefullives, whichever is shorter.

Certain leases for office equipment have beencapitalized in accordance with the provisions of SFAS No. 13, *Accounting for Leases*, and are amortized over the lives ofthe related leases.

Certain software development costs for internallydeveloped software have been capitalized in accordance with the provisions ofStatement of Position 98-1, *Accounting for the Costsof Computer Software Developed or Obtained for Internal Use.* Thesecapitalized costs include purchased software for internal use, consulting servicesand costs for personnel associated with programming, coding and testing 

F-12

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

such software during theapplication development stage. Amortization of capitalized software costsbegins when the software is placed into service and is included in depreciationexpense in the accompanying consolidated statements of operations. Softwaredevelopment costs are being amortized using the straight-line method overtheir estimated useful life of three years.

**Goodwilland Other Intangible Assets**

Goodwill represents the excess of purchase price overthe fair value of net assets acquired. Identifiable intangible assets are beingamortized using the straight-line method over their estimated useful livesranging from 3 to 7.5 years. Pursuant to the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*(SFAS No. 142), the Company does not amortize goodwill or intangibleassets deemed to have an indefinite useful life. Per SFAS No. 142,impairment for goodwill and intangible assets deemed to have an indefinite lifeexists if the net book value of the goodwill or intangible asset exceeds itsfair value. During the year ended December 25, 2005, the Companyreevaluated its reporting units and determined that each branch locationrepresented a reporting unit, as opposed to viewing the entire company as onereporting unit previously. The Company performed an analysis whereby thehistorical goodwill was allocated or “pushed down” to each reporting unit. Inaccordance with SFAS No. 142, the Company performed its annual review forimpairment during the fourth quarter of fiscal 2005 by performing a fair valueanalysis of each reporting unit. The fair value analysis was completed with theassistance of outside valuation professionals. Based on that analysis, noimpairment was noted at any individual reporting unit. Accordingly, there wasno financial impact in 2005 relating to the change in the reporting units forgoodwill impairment testing.

The Company will continue to perform a reporting unitlevel fair value analysis impairment test during the fourth quarter of eachyear. Should impairment indicators be present, including branches not achievingtheir expected results, additional analysis will be performed to determine theextent of any impairment and the associated charge will be recorded to thestatement of operations. Should the Company decide to exit a market and closeone or more of its reporting units, the associated goodwill will be written offwith a charge to the statement of operations (see Note 18).

The Company accounts for long-lived assets withdefinite useful lives pursuant to SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS No. 144), which requiresimpairment losses to be recorded on long-lived assets used in operations whenevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of intangible assets with adefinite useful life is determined by comparison of the carrying amount of theasset to net future cash flows expected to be generated from the asset.Management reviews long-lived assets for impairment whenever events or changesin circumstances indicate the assets may be impaired. An impairment loss isrecorded when the net book value of the assets exceeds the fair value, asmeasured by projected undiscounted future cash flows. No impairment chargeswere recorded in any of the years ended December 25, 2005, December 26,2004 and December 28, 2003.

The Company’s identifiableintangible assets are comprised of noncompete agreements, contractor databases,trademarks, trade names and customer relationships (see Note 5). The Companycompleted its review for annual impairment indicators for all intangible assetsduring the fourth quarter of 2005 and determined that there were no impairmentindicators present.

F-13

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Letters of Credit**

As of December 25,2005, the Company had an outstanding $0.5 million letter of credit, assecurity on its Warrenville, Illnois, office lease. This letter of creditexpires on May 6, 2006.

**Reserves for Claims**

Workers’ compensation,healthcare benefits and professional liability are provided under self-insuredand partially self-funded plans. The Company records its estimate of theultimate cost of, and reserves for, workers’ compensation and professional liabilitybased on actuarial computations and the Company’s loss history as well asindustry statistics. Furthermore, in determining its reserves, the Companyincludes reserves for estimated claims incurred but not reported. The ultimatecost of workers’ compensation, healthcare benefits and professional liabilitywill depend on actual costs incurred to settle the claims and may differ fromthe amounts reserved by the Company for those claims.

**Debt Issuance Costs**

Deferred costs related tothe issuance of debt are being amortized using the effective interest methodover the terms of the respective debt. Debt issuance costs of $1.8 million,less accumulated amortization of $1.2 million at December 25, 2005, and$1.7 million, less accumulated amortization of $0.7 million at December 26,2004, are recorded in other assets in the consolidated balance sheets.

**Revenue Recognition**

Revenue from servicesconsists of temporary staffing revenues. Revenues are recognized when servicesare rendered. Reimbursable expenses, including those related to travel andout-of-pocket expenses, are recorded as service revenues with an equal amountin cost of services rendered.

**Stock-Based Compensation**

The Company grants stock options for a fixed number ofcommon shares to employees and directors from time to time. The Companyaccounts for employee stock options using the intrinsic value method asprescribed by APB Opinion No. 25, *Accounting for StockIssued to Employees*, and, accordingly, currently recognizes nocompensation expense for stock option grants when the exercise price of theoptions equals, or is greater than, the market value of the underlying stock onthe date of grant*.* Accordingly, the Company didnot recognize any compensation cost during each of the years ended December 25,2005, December 26, 2004 and December 28, 2003 for stock-basedemployee compensation awards. The Company currently follows the accounting anddisclosure provisions of SFAS No. 123 as amended by SFAS No. 148, forstock options issued to employees and directors.

F-14

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Theeffect of applying the fair value method prescribed by SFAS No. 123, asamended by SFAS No. 148,  to theCompany’s options would have the Company recording the following net income(loss) and pro forma net income (loss) per share amounts (in thousands, except per share information):

| ** **                                                    | ** ** | **Years Ended**  | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                    | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)  as reported                                | ** ** |                  | **$**      | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,015 |   |   |
| Fair value method  of stock based compensation, net of tax    | ** ** |                  | **(1,156** | **)** |   |   | (965 | ) |   |   | (1,257 | ) |   |
| Pro forma net  income (loss)                                  | ** ** |                  | **$**      | **(1,955** | **)** |   |   | $ | (2,291 | ) |   |   | $ | 3,758 |   |   |
| As reported basic  income (loss) from continuing operations   |       |                  | $          | (0.03 | ) |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued  operations, net of taxes                        | ** ** |                  | **—** | ** ** |   |   | — |   |   |   | (0.01 | ) |   |
| As reported basic  income (loss) per share                    | ** ** | ** **            | **$**      | **(0.03** | **)** | ** ** | ** ** | $ | (0.04 | ) |   |   | $ | 0.17 | ** ** | ** ** |
| As reported  diluted income (loss) from continuing operations | ** ** |                  | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued  operations, net of taxes                        | ** ** |                  | **—** | ** ** |   |   | — |   |   |   | (0.02 | ) |   |
| As reported  diluted income (loss) per share                  | ** ** |                  | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.16 |   |   |
| Pro forma basic  income (loss) from continuing operations     | ** ** |                  | **$**      | **(0.06** | **)** |   |   | $ | (0.08 | ) |   |   | $ | 0.14 |   |   |
| Discontinued  operations, net of taxes                        | ** ** |                  | **—** | ** ** |   |   | — |   |   |   | (0.02 | ) |   |
| Pro forma basic  income (loss) per share                      | ** ** |                  | **$**      | **(0.06** | **)** |   |   | $ | (0.08 | ) |   |   | $ | 0.12 |   |   |
| Pro forma diluted  income (loss) from continuing operations   | ** ** |                  | **$**      | **(0.06** | **)** |   |   | $ | (0.08 | ) |   |   | $ | 0.14 |   |   |
| Discontinued  operations, net of taxes                        | ** ** |                  | **—** | ** ** |   |   | — |   |   |   | (0.02 | ) |   |
| Pro forma diluted income  (loss) per share                    | ** ** |                  | **$**      | **(0.06** | **)** |   |   | $ | (0.08 | ) |   |   | $ | 0.12 |   |   |

 

Proforma information regarding net income or loss is required by SFAS No. 123and has been determined as if the Company had accounted for its employee stockoptions under the fair value method of that statement. The fair value ofoptions granted was estimated at the date of grant using the Black-Scholesoption pricing model with the following assumptions: 

| ** **               | ** ** | **Years Ended**  | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **               | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life            | ** ** | **4—8**          |       | 3—8 |   | 3—8 |   |
| Risk-free  interest rate | ** ** | **3.91% - 4.66**      | **%**      | 4.25% - 4.44 | % | 3.25% - 4.19 | % |
| Volatility               | ** ** | **60**                | **%**      | 63 | % | 70 | % |
| Dividend yield           | ** ** | **0**                 | **%**      | 0 | % | 0 | % |

 

**Advertising**

**TheCompany’s advertising expense consists primarily of print media, onlineadvertising, direct mail marketing and promotional material. Advertising coststhat are not considered direct response are expensed as incurred and wereapproximately $3.6 million, $3.4 million and $4.8 million forthe years ended December 25, 2005, December 26, 2004 and December 28,2003, respectively.**

**Income (Loss) PerShare**

In accordance with therequirements of SFAS No. 128, *Earnings Per Share*(SFASNo. 128), basic earnings per share is computed by dividing net income orloss by the weighted average number of shares outstanding and diluted earningsper share reflects the dilutive effects of stock options and other common 

F-15

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

stockequivalents (as calculated utilizing the treasury stock or reverse treasurystock method, as appropriate). Shares of common stock that are issuable uponthe exercise of options have been excluded from the 2005 and 2004 per sharecalculation because their effect would have been anti-dilutive. SeeNote 13 for the calculation of income (loss) per share.

**Income Taxes**

The Company accounts forincome taxes under SFAS No. 109, *Accounting for IncomeTaxes* (SFAS No. 109). Deferred income tax assets andliabilities are determined based upon differences between financial reportingand tax bases of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse.

**DerivativeFinancial Instruments**

The Company is exposed tomarket risks arising from changes in interest rates. To protect against suchrisks, the Company had one derivative financial instrument, an interest rate swapagreement, which is more fully disclosed in Note 16.

SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*(SFASNo. 133), requires companies to recognize all of their derivativeinstruments as either assets or liabilities in the statement of financialposition at fair value. The accounting for changes in the fair value (i.e.,gains or losses) of a derivative instrument depends on whether it has beendesignated and qualifies as part of a hedging relationship and on the type ofhedging relationship. For those derivative instruments that are designated andqualify as hedging instruments, a company must designate the hedginginstrument, based upon the exposure being hedged, as either a fair value hedge,a cash flow hedge or a hedge of a net investment in a foreign operation. As theCompany’s derivative instrument was designated and qualified as a cash flowhedge (i.e., hedging the exposure to variability in expected future cash flowsthat was attributable to a particular risk), the effective portion of the gainor loss on the derivative instrument was reported as a component of othercomprehensive income and reclassified into earnings in the same period orperiods during which the hedged transaction affects earnings. The remaininggain or loss on the derivative instrument in excess of the cumulative change inthe present value of future cash flows of the hedged item, if any, wasrecognized in current earnings during the period of change.

As of December 25,2005 and December 26, 2004, the Company had no derivative instruments. Asof December 28, 2003, the Company marked to market the fair value of theinterest rate swap agreement and recorded a loss of approximately$0.1 million. Additionally, in connection with the December 2003refinancing of the credit facility (see Note 9), the Company wrote off theremaining balance of approximately $0.1 million.

**ComprehensiveIncome (Loss)**

SFAS No. 130, *Comprehensive Income* (SFAS No. 130), requires that anenterprise (a) classify items of other comprehensive income by theirnature in the financial statements, and (b) display the accumulatedbalance of other comprehensive income separately from retained earnings andadditional paid-in capital in the equity section of the balance sheet. Theitems of other comprehensive income (loss) that are typically required to bedisplayed are foreign currency items, minimum pension liability adjustments,unrealized gains and losses on certain investments in debt and equitysecurities and the effective portion of certain derivative instruments. Thereare no components of comprehensive income (loss) other than the 

F-16

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Company’snet income (loss) and unrealized income on the derivative instrument for theyears ended December 25, 2005, December 26, 2004 and December 28,2003.

Thefollowing table sets forth the computation of comprehensive income (loss) forthe periods indicated (in thousands):

| ** **                         | ** ** | **Years Ended**  | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                         | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                  | ** ** |                  | **$**      | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,015 |   |   |
| Other  comprehensive income:       |       |                  | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Income on derivative, net of taxes | ** ** |                  | **—** | ** ** |   |   | — |   |   |   | 105 |   |   |
| Total comprehensive  income (loss) | ** ** |                  | **$**      | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,120 |   |   |

 

**Reclassifications**

Certain reclassificationshave been made to the 2004 and 2003 consolidated financial statements toconform to the 2005 presentation.

**2.**                 DISCONTINUEDOPERATIONS

The Company discontinuedits physician staffing services in the second quarter of 2003. Pursuant to theprovisions of SFAS No. 144, results of operations are to be classified asdiscontinued when the disposal of the “component of an entity” has occurred orit has met the “held for sale” criteria. As such, the total is shown separatelyin the line item, loss from discontinued operations, net of taxes, in theCompany’s consolidated statement of operations for the year ended December 28,2003. There were no revenues or cost of services rendered from physicianstaffing services during the years ended December 25, 2005 and December 26,2004. There were no net assets of the discontinued operations at December 25,2005 and December 26, 2004.

Servicerevenues, cost of services, gross loss and loss from discontinued operations,net of taxes, for the year ended December 28, 2003 are as follows (inthousands):

| Service revenues                                 |   | $      | 495    |   |
|--------------------------------------------------|--------|--------|--------|--------|
| Cost of service  revenues                        |   | (1,095 | )      |
| Gross loss                                       |   | $      | (600   | )      |
| Loss before  benefit from income taxes           |   | $      | (845   | )      |
| Benefit from  income taxes                       |   | 339    |   |
| Loss from discontinued  operations, net of taxes |   | $      | (506   | )      |

 

**3.**                 RESTRUCTURINGCHARGE

Asannounced on June 16, 2003, the Company completed its plan to restructureits operations by closing 29 branches. The restructuring was necessary toadjust the infrastructure the Company had put in place to support multiplegrowth initiatives and was in response to the current contraction in demand forits services. Approximately 130 branch staff and corporate employees wereterminated as part of the restructuring. As a result, in the second quarter of2003, the Company recorded a pre-tax charge, of approximately $0.8 million,relating to employee severance costs, branch closing costs and leasetermination costs. The restructuring charge is included in selling, general andadministrative expenses in the Company’s consolidated statement of operationsfor the year ended December 28, 2003. No amounts 

F-17

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

have been or are expected to be incurred or paid insubsequent quarters relating to this restructuring. A breakdown of therestructuring charge is as follows (in thousands):

| Lease termination  costs    |   | $   | 390    |   |
|-----------------------------|--------|-----|--------|--------|
| Office closing  costs       |   | 164 |   |
| Employee  termination costs |   | 158 |   |
| Miscellaneous               |   | 51  |   |
| Total                       |   | $   | 763    |   |

 

**4.**                 ACQUISITIONS

On November 30, 2005,the Company acquired certain assets of Winnertech, a New Jersey based temporaryhealthcare staffing company, for approximately $0.6 million in cash, of whichapproximately $0.1 million was held in escrow, and the assumption ofapproximately $0.3 million in liabilities. Approximately $0.7 million and $0.1million of the purchase price was allocated to goodwill and a non-competeagreement (three-year life), respectively. The primary reason for theacquisition was to expand service offerings within the temporary healthcareindustry. The acquisition was accounted for in accordance with SFAS No. 141,*Business Combinations*, and, accordingly,the results of operations have been included in the consolidated statement ofoperations beginning from December 1,2005, the date when the Company assumed control.

On March 31, 2005,the Company acquired certain assets of Quality Medical Professionals (QMP), aCalifornia based temporary allied healthcare staffing company, forapproximately $1.0 million in cash, of which approximately $0.1 million washeld in escrow, and the potential for additional consideration contingent uponQMP achieving certain financial results in the future. Approximately $0.4million, $0.2 million, $0.1 million and $0.1 million of the purchase price wasallocated to goodwill, customer contracts (two-year life), contractor databases(five-year life) and a non-compete agreement (six-year life), respectively. Theprimary reason for the acquisition was to expand service offerings within thetemporary healthcare industry. The acquisition was accounted for in accordancewith SFAS No. 141, *Business Combinations*,and, accordingly, the results of operations have been included in theconsolidated statement of operations beginning from April 1, 2005, thedate when the Company assumed control.

In March 2003, theCompany acquired certain assets of Saber-Salisbury Group (SSG), a temporaryhealthcare staffing company, for approximately $10.8 million in cash, of whichapproximately $2.2 million was held in escrow and the potential for additionalconsideration contingent upon SSG achieving certain financial results.Approximately $10.4 million of the purchase price was allocated togoodwill. The primary reason for the acquisition was to expand serviceofferings within the temporary healthcare industry. The acquisition wasaccounted for in accordance with SFAS No. 141, *BusinessCombinations*, and, accordingly, the results of operations have beenincluded in the consolidated statements of operations beginning from March 1,2003, the date when the Company assumed substantial control over SSG.

The Company neither paid,nor accrued, any additional consideration related to acquisitions during 2005. In2004, the Company paid approximately $0.1 million of additional considerationrelated to prior year acquisitions, and also had additional considerationpursuant to the TNI acquisition as the earnout amount due under the purchaseagreement was set off against the $4.0 million note receivable and associatedinterest receivable of $0.2 million. In 2003, the Company made no payments ofadditional consideration related to prior year acquisitions but the Companyaccrued $0.1 million for additional consideration to be paid.

F-18

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The following unaudited pro forma financialinformation reflects the results of operations for the years ended December 25,2005, December 26, 2004 and December 28, 2003, as if the acquisitionshad occurred at the beginning of the respective periods presented. The proforma financial information, in the schedule below, does not purport to beindicative of the results of operations that would have occurred had thetransactions taken place at the beginning of the periods presented or of futureresults of operations (in thousands, exceptper share information): 

| ** **                                                | ** ** | **Years Ended**  | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service revenues                                          | ** ** |                  | **$**      | **405,612** |   |   |   | $ | 417,058 |   |   |   | $ | 515,892 |   |   |
| Income from  operations                                   | ** ** |                  | **1,447**  |   |   |   | 1,600 |   |   |   | 17,754 |   |   |
| Income (loss)  from continuing operations                 | ** ** |                  | **(1,320** | **)** |   |   | (1,941 | ) |   |   | 5,690 |   |   |
| Income (loss)  from discontinued operations, net of taxes | ** ** |                  | **—** |   |   |   | — |   |   |   | (506 | ) |   |
| Net income (loss)                                         | ** ** |                  | **(712**   | **)** |   |   | (1,326 | ) |   |   | 5,184 |   |   |
| Income (loss) per  share—basic:                      | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                  | ** ** |                  | **$**      | **(0.02** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.19 |   |   |
| Discontinued operations, net of taxes                     | ** ** |                  | **—** |   |   |   | — |   |   |   | (0.02 | ) |   |
| Basic net income (loss) per share                         | ** ** |                  | **$**      | **(0.02** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.17 |   |   |
| Income (loss) per  share—diluted:                    | ** ** |                  | ** ** |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                  | ** ** |                  | **$**      | **(0.02** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued operations, net of taxes                     | ** ** |                  | **—** |   |   |   | — |   |   |   | (0.01 | ) |   |
| Diluted net  income (loss) per share                      | ** ** |                  | **$**      | **(0.02** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.17 |   |   |

 

**5.    GOODWILL ANDINTANGIBLE ASSETS**

As discussed in Note 1, pursuant to the provisions ofSFAS No. 142, the Company does not amortize goodwill or intangible assetsdeemed to have an indefinite useful life. Identifiable intangibles withdefinite lives are amortized. SFAS No. 142 requires that goodwill beseparately disclosed from other intangible assets on the balance sheet andtested for impairment on a periodic basis, or more frequently if certainindicators arise.

Goodwill increased by $1.1 million from $129.5 millionat December 26, 2004 to $130.6 million at December 25, 2005. Thisincrease is associated with the goodwill recorded during 2005 relating to theQMP and Winnertech acquisitions.

Thefollowing reflects the changes to goodwill for the years ended December 25,2005 and December 26, 2004 (in thousands):
|                                                        | ** ** | **Years Ended**        | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **December 25,  2005** | ** ** | **December 26,  2004** | ** ** |
| Balance at  beginning of year                          | ** ** |                        | **$**      | **129,474** |   |   |   | $ | 125,028 |   |   |
| Goodwill acquired  during year                         | ** ** |                        | **1,115**  |   |   |   | 4,446 |   |   |
| Impairment losses                                      | ** ** |                        | **—** |   |   |   | — |   |   |
| Goodwill written  off related to sale of business unit | ** ** |                        | **—** |   |   |   | — |   |   |
| Balance at end of year                                 | ** ** |                        | **$**      | **130,589** |   |   |   | $ | 129,474 |   |   |
|                                                        |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

F-19

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

As of December 25,2005 and December 26, 2004, the Company’s intangible assets, other thangoodwill, and related accumulated amortization, were as follows (in thousands):

| ** **                                      | ** ** | **December 25, 2005** | ** ** | **December 26, 2004** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying**             | ** ** | **Accumulated**                 | ** ** | **Net  Carrying** | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** | **Net  Carrying** | ** ** |
| ** **                                      | ** ** | **Amount**                      | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Intangible assets  subject to amortization:     |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-compete  agreements (3—7.5 years)      | ** ** | ** **                      | **$**      | **3,531**                       |       | ** ** | ** ** | **$** | **(1,903** | **)** | ** ** | ** ** | **$** | **1,628** |   |   |   | $ | 3,348 |   |   |   | $ | (1,408 | ) |   |   | $ | 1,940 |   |   |
| Contractor  database (5 years)                  | ** ** | ** **                      | **742**    |                            | ** ** | ** ** | **(366** | **)** | ** ** | ** ** | **376** |   |   |   | 612 |   |   |   | (224 | ) |   |   | 388 |   |   |
| Customer  relationships (3 years)          | ** ** | ** **                      | **266**    |                            | ** ** | ** ** | **(125** | **)** | ** ** | ** ** | **141** |   |   |   | 39 |   |   |   | (31 | ) |   |   | 8 |   |   |
| Total intangibles  subject to amortization      | ** ** | ** **                      | **4,539**  |                            | ** ** | ** ** | **(2,394** | **)** | ** ** | ** ** | **2,145** |   |   |   | 3,999 |   |   |   | (1,663 | ) |   |   | 2,336 |   |   |
| Intangible assets  not subject to amortization: | ** ** | ** **                      | ** ** |                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks, trade  names                        | ** ** | ** **                      | **108**    |                            | ** ** | ** ** | **—** | ** ** | ** ** | ** ** | **108** |   |   |   | 102 |   |   |   | — |   |   |   | 102 |   |   |
| Total intangible assets                         | ** ** | ** **                      | **$**      | **4,647**                       |       | ** ** | ** ** | **$** | **(2,394** | **)** | ** ** | ** ** | **$** | **2,253** |   |   |   | $ | 4,101 |   |   |   | $ | (1,663 | ) |   |   | $ | 2,438 |   |   |

 

During 2004, the Company reevaluated the initialrecording of certain of its goodwill and intangible assets. As a result of thisreevaluation, the Company reduced the gross value of noncompete agreements byapproximately $1.0 million and increased contractor database by $0.6 million,trademarks, trade names by $0.1 million, and customer relationships by lessthan $0.1 million. The cumulative net effect of these adjustments resulted inan increase to goodwill of approximately $0.3 million and a pre-tax decrease inamortization expense of approximately $0.2 million. Such adjustments wererecorded in the fourth quarter of 2004 as they were not material to any periodeffected.

During 2005, the Company acquired intangible assetstotaling $0.5 million as part of the QMP and Winnertech acquisitions (see Note4). During 2004, the Company did not purchase any intangible assets. TheCompany recorded amortization expense on intangible assets of $0.7 million,$0.5 million and $0.7 million for the years ended December 25, 2005, December 26,2004 and December 28, 2003, respectively.

Theestimated annual amortization expense for intangible assets for the next fivefiscal years as of December 25, 2005 is as follows (in thousands):

| 2006 |   | $   | 797    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 698 |   |
| 2008 |   | 359 |   |
| 2009 |   | 224 |   |
| 2010 |   | 65  |   |

 

F-20

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**6.   FURNITURE ANDEQUIPMENT**

Furnitureand equipment consist of the following (in thousands): 

| ** **                                      | ** ** | **December 25,** | ** **  | **December 26,** | ** ** |
|-------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** **  | **2004**              | ** ** |
| Leasehold  improvements                         | ** ** |                  | **$**       | **1,485**             |       |   |   | $ | 1,287 |   |   |
| Furniture and  equipment                        | ** ** |                  | **15,475**  |                  |       |   | 14,015 |   |   |
| Internally  developed software                  | ** ** |                  | **9,627**   |                  |       |   | 8,296 |   |   |
| Equipment held  under capital leases            | ** ** |                  | **3,537**   |                  |       |   | 3,533 |   |   |
| Total                                           | ** ** |                  | **30,124**  |                  |       |   | 27,131 |   |   |
| Less accumulated  depreciation and amortization | ** ** |                  | **(21,697** | **)**                 |       |   | (18,650 | ) |   |
| Furniture and equipment,  net                   | ** ** |                  | **$**       | **8,427**             |       |   |   | $ | 8,481 |   |   |

 

Depreciation expense from furniture and equipment was$4.5 million, $5.8 million and $6.1 million for each of theyears ended December 25, 2005, December 26, 2004 and December 28,2003, respectively.

Accumulated amortizationon assets held under capital leases was $2.5 million and $3.2 million at December 25,2005 and December 26, 2004, respectively.

**7.**   ACCOUNTSPAYABLE AND ACCRUED EXPENSES

Accountspayable and accrued expenses consist of the following (in thousands): 

| ** **                          | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Insurance related  accrued expenses | ** ** |                  | **$**      | **9,041**             |       |   |   | $ | 7,835 |   |   |
| Accounts payable                    | ** ** |                  | **1,330**  |                  |       |   | 1,694 |   |   |
| Other                               | ** ** |                  | **3,728**  |                  |       |   | 2,543 |   |   |
| Total                               | ** ** |                  | **$**      | **14,099**            |       |   |   | $ | 12,072 |   |   |

 

**8.   INCOME TAXES**

As of December 25, 2005, December 26, 2004and December 28, 2003, the Company had temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andsuch amounts measured by the tax laws.

Theprovision for (benefit from) income taxes is as follows (in thousands): 

| ** **                                 | ** ** | **Years Ended**  | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current income  taxes                      |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Federal                                    | ** ** | ** **            | **$**      | **(548** | **)** |   |   | $ | (2,865 | ) |   |   | $ | (819 | ) |   |
| State                                      | ** ** | ** **            | **403**    |   |   |   | (318 | ) |   |   | (91 | ) |   |
| Total current  income taxes                | ** ** | ** **            | **(145**   | **)** |   |   | (3,183 | ) |   |   | (910 | ) |   |
| Deferred income  taxes                     | ** ** | ** **            | **(515**   | **)** |   |   | 2,568 |   |   |   | 4,618 |   |   |
| Provision for  (benefit from) income taxes | ** ** | ** **            | **$**      | **(660** | **)** |   |   | $ | (615 | ) |   |   | $ | 3,708 |   |   |

 

F-21

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows(in thousands): 

| ** **                                      | ** ** | **December 25,** | ** **  | **December 26,** | ** ** |
|-------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** **  | **2004**              | ** ** |
| Current deferred tax  assets:                   |       |                  |        |                  |       |   |   |   |   |
| Provision for  doubtful accounts                | ** ** | ** **            | **$**       | **317**               |       |   |   | $ | 523 |   |   |
| State NOL carryforwards                         |       |                  | —      |                  |       |   | 330 |   |   |
| Accrued expenses                                | ** ** | ** **            | **157**     |                  |       |   | 162 |   |   |
| Insurance  reserves                             | ** ** | ** **            | **1,236**   |                  |       |   | — |   |   |
| Total current deferred tax assets               | ** ** | ** **            | **$**       | **1,710**             |       |   |   | $ | 1,015 |   |   |
| Current deferred  tax liabilities:              |       |                  |        |                  |       |   |   |   |   |
| Prepaid expenses                                | ** ** | ** **            | **(198**    | **)**                 |       |   | — |   |   |
| Total current deferred tax assets, net          | ** ** | ** **            | **$**       | **1,512**             |       |   |   | $ | 1,015 |   |   |
| Noncurrent  deferred tax assets:                |       |                  |        |                  |       |   |   |   |   |
| Federal NOL  carryforwards                      | ** ** | ** **            | **$**       | **1,728**             |       |   |   | $ | — |   |   |
| State NOL  carryforwards                        | ** ** | ** **            | **1,169**   |                  |       |   | — |   |   |
| Accrued expenses                                | ** ** | ** **            | **242**     |                  |       |   | 154 |   |   |
| Total noncurrent deferred tax assets            | ** ** | ** **            | **3,139**   |                  |       |   | 154 |   |   |
| Noncurrent  deferred tax liabilities:           |       |                  |        |                  |       |   |   |   |   |
| Goodwill and  intangible assets                 | ** ** | ** **            | **(12,653** | **)**                 |       |   | (9,325 | ) |   |
| Furniture and  equipment                        | ** ** | ** **            | **(276**    | **)**                 |       |   | (637 | ) |   |
| Total noncurrent deferred tax liabilities       | ** ** | ** **            | **(12,929** | **)**                 |       |   | (9,962 | ) |   |
| Total noncurrent  deferred tax liabilities, net | ** ** | ** **            | **$**       | **(9,790**            | **)**      |   |   | $ | (9,808 | ) |   |

 

Current deferred tax assets are included in othercurrent assets in the Company’s consolidated balance sheets. SFAS No. 109requires a valuation allowance to reduce the deferred tax assets reported if,based on the weight of the evidence, it is more likely than not that someportion or all of the deferred tax asset will not be realized. Afterconsideration of all the evidence, both positive and negative, management hasdetermined that no valuation allowance is required as of December 25, 2005and December 26, 2004. As of December 25, 2005, the Company had aFederal net operating loss carryforward of $5.1 million, which expires in 2020,and state net operating loss carryforwards of $29.9 million, the majorityof which expire after 2019.

F-22

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Thereconciliation of income tax computed at the U.S. federal statutory rate toincome tax expense is as follows: 

| ** **                           | ** ** | **Years Ended**  | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **December 25,** | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Tax at U.S.  statutory rate          | ** ** |                  | **34.0**   | **%** |   |   | 34.0 | % |   |   | 34.0 | % |   |
| State taxes, net  of federal benefit | ** ** |                  | **3.6**    | ** ** |   |   | 3.6 |   |   |   | 3.6 |   |   |
| Other state tax  items               | ** ** |                  | **17.1**   | ** ** |   |   | — |   |   |   | — |   |   |
| Non-deductible  items                | ** ** |                  | **(12.4**  | **)** |   |   | (10.7 | ) |   |   | 2.9 |   |   |
| Other, net                           | ** ** |                  | **2.9**    | ** ** |   |   | 4.8 |   |   |   | (0.3 | ) |   |
| Effective income tax  rate           | ** ** |                  | **45.2**   | **%** |   |   | 31.7 | % |   |   | 40.2 | % |   |

 

**9.**                 LONG-TERMDEBT

On October 26, 2001, the Company entered into a$120.0 million senior credit facility. The facility consisted of a$40.0 million term note due in October 2006, a $60.0 millionterm note due in October 2007 and a $20.0 million revolving creditfacility due to expire in October 2006. In connection with the Company’sinitial public offering completed on April 23, 2002 the Company repaid$93.4 million of borrowings that were outstanding under the facility and repaid$62.9 million that was outstanding under its previously existing seniorunsecured notes.

On July 3, 2002, the Company amended the facilityby replacing the previous two term notes with a single $25.0 million term note.All amounts outstanding under the previous term notes were repaid at that time.On October 3, 2002, the Company amended the facility by replacing the$25.0 million term note with a $65.0 million term note and reducing theborrowing capacity of its revolving credit facility from $20.0 million to $15.0million. On March 21, 2003, the Company amended the facility by replacingthe $65.0 million term note with a $77.0 million term note and a new term notefacility that allowed for borrowings of up to $13.0 million.

On December 22, 2003, the Company entered into anew senior credit facility (the Senior Credit Facility) which replaced theprevious facility. The Senior Credit Facility provided a $65.0 millionrevolving credit facility (the Revolver) which expires in December 2006and a $17.0 million term loan (the Term Loan) which was due in December 2005.

On June 25, 2004, the Company amended the SeniorCredit Facility to reduce the Revolver capacity from $65.0 million to $60.0million. The amendment also favorably modified certain financial covenantswhile increasing the applicable margin on the Revolver by 0.5% and on the TermLoan by 1.0%. In conjunction with the amendment, on July 1, 2004, theCompany repaid $5.0 million of borrowings under the Term Loan. The $5.0 millioncan not be re-borrowed under the terms of the Term Loan.

On February 24, 2005, the Company amended theterms of the Senior Credit Facility whereby the Term Loan was reduced to $6.0million, the applicable margin for the Term Loan was reduced to 4.5%, thematurity of the Term Loan was extended to December 2006 and certainfinancial covenants were amended. The $6.0 million Term Loan repayment wasfunded with borrowings under the Revolver.

Effective September 24, 2005 and December 25,2005, the Company amended the terms of the Senior Credit Facility wherebycertain financial covenants were favorably amended and the expiration date wasextended to January 2, 2007.

F-23

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

The amount that can be borrowed at any given timeunder the Revolver is based on a formula that takes into account, among otherthings, eligible accounts receivable and an availability reserve, which canresult in borrowing availability of less than the full capacity of theRevolver. The Revolver bears interest at either prime rate or LIBOR plus anapplicable margin (6.6% at December 25, 2005) with interest payablemonthly or as interest rate contracts expire. The Term Loan bears interest atLIBOR plus an applicable margin (8.5% at December 25, 2005) with interestpayable as interest rate contracts expire. Unused capacity under the Revolver bearsinterest at 0.5% and is payable monthly. The Senior Credit Facility is securedby substantially all of the Company’s assets and contains certain covenantsthat, among other things, limit the payment of dividends, restrict additionalindebtedness and obligations, and require maintenance of certain financialratios. As of December 25, 2005, the Company was in compliance with allcovenants.

As the borrower under the Senior Credit Facility, theCompany’s subsidiary, Medical Staffing Network, Inc., may only paydividends or make other distributions to the Company in the amount of $500,000in any fiscal year to pay the Company’s operating expenses. This limitation onthe Company’s subsidiary’s ability to distribute cash to the Company will limitits ability to obtain and service any additional debt at the holding companylevel. In addition, the Company’s subsidiary is subject to restrictions underthe Senior Credit Facility against incurring additional indebtedness.

As of December 25, 2005, $6.0 million was outstandingon the Term Loan and $18.0 million was outstanding under the Revolver. As of December 25,2005, an additional $20.0 million was immediately available for borrowing underthe Revolver.

Asummary of long-term debt as of December 25, 2005 and  December 26, 2004 is as follows (inthousands): 

| ** **            | ** ** | **December 25,** | ** ** | **December 26,** | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Senior facility       | ** ** |                  | **$**      | **17,991**            |       |   |   | $ | 19,760 |   |   |
| Term loan             | ** ** |                  | **6,000**  |                  |       |   | 12,000 |   |   |
| ** **            |       |                  | **23,991** |                  |       |   | 31,760 |   |   |
| Less current  portion | ** ** |                  | **—** |                  |       |   | — |   |   |
| ** **            |       |                  | **$**      | **23,991**            |       |   |   | $ | 31,760 |   |   |

 

Scheduled maturities of long-term debt as of December 25,2005 are as follows (in thousands): 

| 2006 |   | $      | — |   |
|------|--------|--------|--------|--------|
| 2007 |   | 23,991 |   |

 

**10.**          EMPLOYEEBENEFIT PLANS

The Company has a voluntary defined contribution 401(k) profit-sharingplan covering all eligible employees as defined in the plan documents. The Planallows for its participants to defer up to 15% of annual salary up to theadjusted IRS maximum each year. In addition, the plan provides for matching 50%of the participants’ contributions, up to a maximum of 7% of the participants’salary contributed and provides for a discretionary matching contribution,which would be allocated to each employee based on the employee’s annual paydivided by the total annual pay of all participants eligible to receive suchcontribution. The Company’s matching contribution was approximately $1.0million, $1.2 million and $1.4 million for the years ended December 25,2005, December 26, 2004 and December 28, 2003, respectively.

F-24

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

In 2003, the Companyestablished a Deferred Compensation Plan covering senior management who haveexecutive-level decision making responsibilities. The plan allows for itsparticipants to defer up to 100% of annual salary up to the adjusted401(k) maximum that individuals can defer in the Company’s existing401(k) plan (see above). In addition, the Company will match 50% of theparticipant’s contributions, up to a maximum of 7% of the participant’s salarycontributed, a match that is consistent with the Company’s existing401(k) plan. Participants may also contribute 100% of any excesscontributions, excess company match and potential earnings from the prioryear’s 401(k) discrimination testing refunds. The plan is a nonqualifiedfunded deferred compensation plan and all participants’ contributions are heldin trust in the Company’s name. As such, the Company recorded the fair value ofthe trust of $0.6 million and $0.4 million, in the other current assetsand accounts payable and accrued expenses within the consolidated balancesheets for the years ended December 25, 2005 and December 26, 2004,respectively. The Company’s matching contribution was $0.1 million and $0.1million for the years ended December 25, 2005  and December 26, 2004.

**11.**          COMMITMENTSAND CONTINGENCIES

**Capital Leases**

The Company leases equipment under several leaseagreements, which are accounted for as capital leases. The assets andliabilities under capital leases are recorded at the lower of the net presentvalue of the minimum lease payments or the fair value of the asset. The assetsare amortized over the related lease term.

Futureminimum lease payments under capital leases are as follows as of December 25,2005 (in thousands): 

| 2006                               |   | $     | 378    |   |
|------------------------------------|--------|-------|--------|--------|
| 2007                               |   | 352   |   |
| 2008                               |   | 348   |   |
| 2009 and thereafter                |   | 58    |   |
|                               |   | 1,136 |   |
| Less amount representing interest  |   | (117  | )      |
| Less amount  classified as current |   | (317  | )      |
|                               |   | $     | 702    |   |

 

F-25

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**Operating Leases**

TheCompany has entered into noncancelable operating lease agreements for therental of space and equipment. Certain of these leases include options to renewas well as rent escalation clauses. Future minimum lease payments as of December 25,2005 associated with these agreements are as follows (in thousands): 

| 2006       |   | $     | 4,518  |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 3,064 |   |
| 2008       |   | 2,106 |   |
| 2009       |   | 1,604 |   |
| 2010       |   | 1,524 |   |
| Thereafter |   | 4,366 |   |

 

Total operating leaseexpense was approximately $5.8 million for each of the years ended December 25,2005 and December 26, 2004 and $6.3 million for the year ended December 28,2003.

**Litigation**

On February 20, 2004, Joseph and PatriciaMarrari, and on April 16, 2004, Tommie Williams, filed class actionlawsuits against the Company in the United States District Court for theSouthern District of Florida, on behalf of themselves and purchasers of theCompany’s common stock pursuant to or traceable to the Company’s initial publicoffering in April 2002. These lawsuits also named as defendants certain ofthe Company’s directors and executive officers (collectively with the Company,the “Defendants”). The complaints allege that certain disclosures in theRegistration Statement/Prospectus filed in connection with the Company’sinitial public offering on April 17, 2002 were materially false andmisleading in violation of the Securities Act of 1933 (the “Securities Act”).The complaints seek compensatory damages as well as costs and attorney fees.

On March 29, 2004, a third class action lawsuitbrought on behalf of the same class of the Company’s stockholders, makingclaims under the Securities Act similar to those in the lawsuits filed byPlaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced byPlaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth JudicialCircuit in and for Palm Beach County, Florida. Defendants removed this case tothe United States District Court for the Southern District of Florida andPlaintiff moved to remand the case back to the Florida Circuit Court of theFifteenth Judicial Circuit, which motion Defendants opposed. On September 16,2004 the federal district court entered an order granting Plaintiff’s motion toremand. On January 6, 2005, the state court stayed the state courtproceedings until further order of the court. The Zia complaint seeksrescission or damages as well as certain equitable relief and costs andattorney fees.

On March 2, 2004, another class action complaintwas filed against the Company and certain of its directors and executiveofficers in the United States District Court for the Southern District ofFlorida by Jerome Gould, individually and on behalf of a class of the Company’sstockholders who purchased stock during the period from April 18, 2002through June 16, 2003. The complaint alleges that certain of the Company’spublic disclosures during the class period were materially false and misleadingin violation of Section 10(b) of the Securities Exchange Act of 1934(the “Exchange Act”), and Rule 10b-5 promulgated thereunder. Thecomplaint seeks compensatory damages, costs and attorney fees.

F-26

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

On July 2, 2004, the Marrari, Gould, Williams andZia actions were consolidated, although, as noted above, the Zia action wassubsequently remanded to state court. Plaintiff Thomas Greene was appointedLead Plaintiff of the consolidated action and the law firm of Cauley GellerBowman & Rudman LLP (now known asLerach Coughlin Stoia Geller Rudman and Robbins LLP) was appointedPlaintiffs’ Lead Counsel.

On September 1, 2004, Lead Plaintiff filed hisconsolidated amended class action complaint (the “Complaint”). The Complaintmakes allegations on behalf of a class consisting of purchasers of the Company’scommon stock pursuant to or traceable to the Company’s initial public offeringin April 2002, for purposes of the Securities Act claims, and on behalf ofthe Company’s stockholders who purchased stock during the period from April 18,2002 through June 16, 2003, for purposes of the Exchange Act claims. TheComplaint alleges that certain of the Company’s public disclosures during theclass period were materially false and misleading in violation of Section 11of the Securities Act and Section 10(b) of the Exchange Act. TheComplaint seeks compensatory damages as well as costs and attorney fees.Defendants have a motion to dismiss the Complaint, which, on September 27, 2005, was granted in part as to thoseportions of Plaintiffs’ Section 10(b) and 20(a) claimsconcerning statements or omissions prior to October 29, 2002, and deniedas to the remaining claims. The litigation is now proceeding as to thoseportions of the complaint that were not dismissed.

The Company believes that these lawsuits are withoutmerit and it intends to defend itself against them vigorously. Due to theirpreliminary status, the Company is unable to predict the outcome of theselawsuits or reasonably estimate a range of possible loss.

From time to time, theCompany is subject to lawsuits and claims that arise out of its operations inthe normal course of business. The Company is a plaintiff or a defendant invarious litigation matters in the ordinary course of business, some of whichinvolve claims for damages that are substantial in amount. The Company believesthat the disposition of any claims that arise out of operations in the normalcourse of business will not have a material adverse effect on the Company’sfinancial position or results of operations.

**12.**          STOCKHOLDERS’  EQUITY

**Stockholders’ Agreement**

The Company andcertain of its stockholders entered into a stockholders agreement conferringcertain rights and restrictions, including among others, restrictions ontransfers of shares, rights to acquire shares, and designation of Board ofDirector seats. This agreement terminated upon the Company’s initial publicoffering except that:

·       foras long as any investor that is a party to the stockholders agreementbeneficially owns at least 20% of the Company’s outstanding shares, the Companyis obligated to nominate and use its best efforts to have two individualsdesignated by that investor elected to its Board of Directors; and

·       for as long as any investorthat is a party to the stockholders agreement beneficially owns at least 10% ofthe Company’s outstanding shares, the Company is obligated to nominate and useits best efforts to have one individual designated by that investor elected toits Board of Directors.

**Stock Options**

The Company has a stock option plan (the Plan), underwhich 1.2 million shares of common stock are available for grant. At December 30,2001, 0.3 million shares were reserved for future issuances under the 

F-27

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Plan. The Plan is designedto serve as an incentive for retaining qualified and competent employees. TheCompensation Committee of the Board of Directors administers the Plan and isauthorized to grant options thereunder to all eligible employees of theCompany, including officers and directors of the Company and consultants. ThePlan provides for the granting of both “incentive stock options” (as defined inSection 422A of the Internal Revenue Code) and nonqualified stock options.Each option is exercisable after the period or periods specified in the optionagreement, but no option can be exercised after the expiration of ten years andone day from the date of grant.

The 2001 Plan was adopted by the Board on November 14,2001. Under the terms of the 2001 Plan, the Company is authorized to grantincentive stock options and nonqualified stock options, make stock awards andprovide the opportunity to purchase stock to employees, directors, officers andconsultants of the Company. The 2001 Plan provides for the issuance of amaximum of 2.3 million shares of common stock. On June 17, 2003 theshareholders of the Company approved an amendment to the 2001 Plan whichincreased the maximum number of shares for issuance by 0.5 million, to 2.8million. The Compensation Committee of the Board of Directors administers the2001 Plan and is authorized to grant options thereunder to all eligibleemployees of the Company, including officers and directors of the Company andconsultants. The 2001 Plan provides for the granting of both “incentive stockoptions” (as defined in Section 422A of the Internal Revenue Code) andnonqualified stock options. On December 1, 2005, the Company’sCompensation Committee accelerated the vesting of all unvested stock optionsawarded to employees under the 2001 Plan (with the exception of three of theCompany’s officers, who only had their options that were scheduled to vest in2006 accelerated). As a result of the acceleration, options to acquireapproximately 374,000 shares of the Company’s common stock (representingapproximately 18% of the total outstanding options), which otherwise would havevested periodically over the next 48 months, became immediatelyexercisable. Approximately 50% of the accelerated options would have vested in2006. Still, no option granted under the 2001 Plan can be exercised after theexpiration of ten years and one day from the date of grant.

The Compensation Committee’s decision to acceleratethe vesting of these options was in response to the issuance of SFAS No. 123(R).By accelerating the vesting of these options, the Company has minimized thepotential compensation expense that will be required to be recognized in futureperiods under SFAS No. 123(R). However, the impact of adoption of SFAS No. 123(R),which is not expected to be material, cannot be predicted at this time becauseit will depend on levels of share-based payments granted in the future. Had theCompany adopted SFAS No. 123(R) in prior periods, its impact wouldhave approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net income (loss) and earnings (loss) per share inStock-Based Compensation.

F-28

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

Asummary of the Company’s stock option activity and related information is asfollows: 

| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding at  December 29, 2002 |       | 2,098,939  |       |                                           | $          | 6.84 |   |   |
| Granted                                |       | 235,788    |       |                                           | $          | 8.94 |   |   |
| Exercised                              |       | (90,362    | )          |                                           | $          | 4.00 |   |   |
| Forfeited                              |       | (272,304   | )          |                                           | $          | 7.21 |   |   |
| Outstanding at December 28, 2003  |       | 1,972,061  |       |                                           | $          | 7.16 |   |   |
| Granted                                |       | 165,000    |       |                                           | $          | 7.27 |   |   |
| Exercised                              |       | (21,633    | )          |                                           | $          | 2.22 |   |   |
| Forfeited                              |       | (222,619   | )          |                                           | $          | 10.14 |   |   |
| Outstanding at December 26, 2004  |       | 1,892,809  |       |                                           | $          | 6.88 |   |   |
| Granted                                |       | 326,000    |       |                                           | $          | 6.85 |   |   |
| Exercised                              |       | (5,521     | )          |                                           | $          | 2.19 |   |   |
| Forfeited                              |       | (150,956   | )          |                                           | $          | 8.07 |   |   |
| Outstanding at December 25, 2005  |       | 2,062,332  |       |                                           | $          | 6.80 |   |   |
| Exercisable at end of  year            |       | 1,949,292  |       |                                           | $          | 6.78 |   |   |

 

| ** **                        | ** ** | **Weighted Average  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| Options granted during  the year: |       |                                       |       |   |   |
| Issued at or  above market price  |       |                                       | $          | 3.42 |   |   |
|                                   |            |                                            |            |  |  |  |

 

Informationabout options outstanding as of December 25, 2005 is as follows: 

| ** **                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                           | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------|------------|
| **Range  of Exercise Prices** | ** ** | ** **                   | ** ** | **Weighted  Average  Remaining   Contractual  Life (Years)** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $1.95 to $2.20                     |       |                         | 4.9        |                                                                   |       | 88,448 |   |   | $ | 2.18 |   |   | 88,448 |   |   | $ | 2.18 |   |   |
| $6.00 to $6.06                     |       |                         | 6.0        |                                                                   |       | 1,407,567 |   |   | $ | 6.06 |   |   | 1,407,567 |   |   | $ | 6.06 |   |   |
| $7.00 to $10.00                    |       |                         | 8.9        |                                                                   |       | 439,817 |   |   | $ | 7.39 |   |   | 326,777 |   |   | $ | 7.53 |   |   |
| $14.00 to $21.00                   |       |                         | 6.9        |                                                                   |       | 126,500 |   |   | $ | 16.07 |   |   | 126,500 |   |   | $ | 16.07 |   |   |
|                               |       |                         |       |                                                                   |       | 2,062,332 |   |   | $ | 6.80 |   |   | 1,949,292 |   |   | $ | 6.78 |   |   |
|                                    |            |                              |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-29

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**13.**          INCOME(LOSS) PER SHARE

| ** **                                                                                                     | ** ** | **Years Ended**                                                      | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **December 25,**                                                     | ** ** | **December 26,** | ** ** | **December 28,** | ** ** |
| ** **                                                                                                     | ** ** | **2005**                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands, except per share information)** | ** ** |
| Numerator for  diluted income (loss) per share                                                                 | ** ** |                                                                      | **$**      | **(799** | **)** |   |   | $ | (1,326 | ) |   |   | $ | 5,015 |   |   |
| Denominator:                                                                                                   | ** ** |                                                                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Denominator for basic income (loss) per share—  weighted-average shares                                   | ** ** |                                                                      | **30,233** | ** ** |   |   | 30,228 |   |   |   | 30,190 |   |   |
| Effect of dilutive  shares:                                                                                    | ** ** |                                                                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Employee stock options                                                                                         | ** ** |                                                                      | **—** | ** ** |   |   | — |   |   |   | 617 |   |   |
| Denominator for diluted income (loss) per  share—adjusted weighted-average shares and assumed conversions | ** ** |                                                                      | **30,233** | ** ** |   |   | 30,228 |   |   |   | 30,807 |   |   |
| Income (loss) per  share—basic:                                                                           | ** ** |                                                                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                                      | ** ** |                                                                      | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued  operations, net of taxes                                                                         | ** ** |                                                                      | **—** | ** ** |   |   | — |   |   |   | (0.01 | ) |   |
| Basic net income  (loss) per share                                                                             | ** ** |                                                                      | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.17 |   |   |
| Income (loss) per  share—diluted:                                                                         | ** ** |                                                                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Income (loss) from  continuing operations                                                                      | ** ** |                                                                      | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.18 |   |   |
| Discontinued  operations, net of taxes                                                                         | ** ** |                                                                      | **—** | ** ** |   |   | — |   |   |   | (0.02 | ) |   |
| Diluted net income (loss)  per share                                                                           | ** ** |                                                                      | **$**      | **(0.03** | **)** |   |   | $ | (0.04 | ) |   |   | $ | 0.16 |   |   |

 

For the years ended December 25,2005 and December 26, 2004, approximately 2.1 million and 1.9 millionoptions, respectively, were excluded from the calculation of diluted shares asthe impact of their conversion was anti-dilutive due to the net loss. For theyear ended December 28, 2003, approximately 0.3 million incrementaloptions were excluded from the denominator for diluted income per share as theimpact of conversion was anti-dilutive.

**14.**          RELATEDPARTY TRANSACTIONS

The Company provides staffing services to a healthcaresystem of which one of the Company’s directors, Philip A. Incarnati, is thePresident and Chief Executive Officer. During the years ended December 25,2005, December 26, 2004 and December 28, 2003, the Company billedapproximately $2.8 million, $3.3 million and $2.2 million, respectively, forits services. The Company had a receivable balance from the healthcare systemof approximately $0.3 million, at both December 25, 2005 and December 26,2004.

The Company provides staffing services to a healthcaresystem of which one of the Company’s directors, David Wester, is the President.During the year ended December 25, 2005, the Company billed approximately$0.4 million for its services and had a receivable balance from the healthcaresystem of approximately $0.1 million, at December 25, 2005.

The Company paidapproximately $0.1 million, during each of the years ended December 25,2005, December 26, 2004 and December 28, 2003, to Florida AtlanticUniversity (FAU) in connection with a continuing education program for theCompany’s nurses. One of the Company’s directors, Dr. Anne Boykin, is theDean of the College of Nursing at FAU, a university located in Boca Raton,Florida.

F-30

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**15.**          ESTIMATEDFAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amountsreported in the consolidated balance sheet for accounts receivable, accountspayable and accrued expenses approximate fair value because of their shortduration of maturity. The carrying amounts of the revolving credit note andterm note approximate fair value because the interest rate is tied to a quotedvariable index.

**16.**          INTERESTRATE SWAP

The Company’s formersenior credit facility required that the Company maintain an interest rateprotection agreement to manage the impact of interest rate changes on a portionof the Company’s variable rate obligations. Effective December 24, 2001,the Company entered into an interest rate swap agreement (the Swap Agreement)with a financial institution. The Swap Agreement involved the receipt offloating interest rate payments based on the U.S. Dollar London InterbankOffered Rate, which was reset quarterly and the payment of fixed interest ratepayments of 4.34% over the life of the Swap Agreement without an exchange ofthe underlying notional amount, which was set at $50.0 million. The interestrate swap was scheduled to mature on December 24, 2004.

The Company entered intothe Swap Agreement to reduce the exposure to adverse fluctuations in floatinginterest rates on the underlying debt obligation and not for trading purposes.Any differences paid or received under the terms of the Swap Agreement wererecognized as adjustments to interest expense over the life of the interest rateswap, thereby adjusting the effective interest rate on the underlying debtobligation.

The Swap Agreement wasterminated on May 9, 2002 with the Company incurring a charge ofapproximately $0.5 million. The charge was amortized over the remaining life ofthe underlying debt agreement. As the underlying debt agreement was repaid infull in December 2003, the Company recorded a charge of approximately $0.1million to write off the remaining unamortized balance.

**17.**          UNAUDITEDQUARTERLY RESULTS OF OPERATIONS

Thefollowing table presents a summary of the Company’s unaudited quarterlyoperating results for each of the four quarters in 2005 and 2004. Thisinformation was derived from unaudited interim financial statements that havebeen prepared on a basis consistent with the consolidated financial statementsand include all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation of such information when read in conjunctionwith our audited financial statements and accompanying notes. The operatingresults for any quarter are not necessarily indicative of results for anyfuture period. 

| ** **                                                        | ** ** | **Quarters Ended** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                        | ** ** | **Dec. 25,**       | ** ** | **Sept. 25,** | ** ** | **June 26,** | ** ** | **Mar. 27,** | ** ** | **Dec. 26,** | ** ** | **Sept. 26,** | ** ** | **June 27,** | ** ** | **Mar. 28,** | ** ** |
| **(in thousands, except  per share amounts)** | ** ** | **2005**                | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** |
| Service revenues                                                  | ** ** | **$**                   | **97,651** | ** ** | **$** | **102,408** | ** ** | **$** | **101,872** | ** ** | **$** | **100,576** |   | $ | 98,459 |   | $ | 106,204 |   | $ | 106,002 |   | $ | 106,393 |   |
| Gross profit                                                      | ** ** | **21,426**              | ** ** | **22,472** | ** ** | **22,824** | ** ** | **21,444** |   | 22,099 |   | 23,037 |   | 22,678 |   | 22,169 |   |
| Net income (loss)                                                 | ** ** | **(292**                | **)**      | **220** | ** ** | **263** | ** ** | **(990** | **)** | (78 | ) | 288 |   | (939 | ) | (597 | ) |
| Basic net income (loss) per share                                 | ** ** | **(0.01**               | **)**      | **0.01** | ** ** | **0.01** | ** ** | **(0.03** | **)** | 0.00 |   | 0.01 |   | (0.03 | ) | (0.02 | ) |
| Diluted net income  (loss) per share                              | ** ** | **(0.01**               | **)**      | **0.01** | ** ** | **0.01** | ** ** | **(0.03** | **)** | 0.00 |   | 0.01 |   | (0.03 | ) | (0.02 | ) |
|                                                                   |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

----

**MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)**

**18.**          SUBSEQUENTEVENT

On February 1, 2006,the Company announced a plan to reorganize the infrastructure in its perdiem nursing staffing business. Certain per diem branch locations will beclosed as part of the Company’s ongoing efforts to increase productivity andreduce costs. The branch closures will allow management to focus on thosemarkets in which there are better near-term opportunities. As a result of theseinitiatives, the Company expects to incur a charge of approximately $6.0million in the first quarter of 2006. The charge will be comprised ofapproximately $3.0 million primarily related to severance costs and leasetermination fees and approximately $3.0 million in non-cash goodwill impairmentrelated to the branch closures.

F-32

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and Stockholders

Medical Staffing NetworkHoldings, Inc.

We have audited the consolidated financial statementsof Medical Staffing Network Holdings, Inc. as of December 25, 2005,and December 26, 2004, and for each of the three years in the period endedDecember 25, 2005, and have issued our report thereon dated February 24,2006 (included elsewhere in this Form 10-K). Our audits alsoincluded the financial statement schedule listed in Item 15(a)2 of this Form 10-K.This schedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion based on our audits.

In ouropinion, the financial statement schedule referred to above, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

|        | /s/ Ernst & Young LLP |
|--------|--------------------------------|
|   | Certified Public Accountants   |

 

Fort Lauderdale, Florida

February 24, 2006

S-1

----

**MEDICALSTAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

| **(in thousands)**                | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Writeoffs** | ** ** | **Balance at** | ** ** |
|----------------------------------------|------------|---------------------|------------|---------------------|------------|---------------|------------|---------------------|------------|
| ** **                             | ** ** | **Beginning**       | ** ** | **Costs and**  | ** ** | **and**       | ** ** | **End**             | ** ** |
| **Description**                        | ** ** | ** **          | ** ** | **of Period**  | ** ** | **Expenses**  | ** ** | **Adjustments**     | ** ** | **of Period** | ** ** |
| Allowance for  doubtful accounts:      |       |                |       |                |       |          |       |                |       |   |   |   |   |   |   |   |   |
| Year ended December 28, 2003      |       |                | $          | 2,757               |       |          |       | $                   | 3,226      |   |   |   | $ | (4,063 | ) |   |   | $ | 1,920 |   |   |
| Year ended December 26, 2004      |       |                | $          | 1,920               |       |          |       | $                   | 1,213      |   |   |   | $ | (2,069 | ) |   |   | $ | 1,064 |   |   |
| **Year  ended December 25, 2005** | ** ** | ** **          | **$**      | **1,064**           |       | ** **    | ** ** | **$**               | **486**    |   | ** ** | ** ** | **$** | **(778** | **)** | ** ** | ** ** | **$** | **772** |   |   |
|                                        |            |                     |            |                     |            |               |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

S-2

----