**UNITED
STATES**




**SECURITIES
AND EXCHANGE COMMISSION**




**Washington,
D.C. 20549**






**FORM
10-K**




**(Mark
One)**




ý  **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE**




**ACT
OF 1934**




**For
the fiscal year ended December 26, 2004**




**OR**




o  **TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**




**EXCHANGE
ACT OF 1934**




**For
      the transition period from ____________ to
      ____________**
      
      **Commission
      File No. 001-31299**




**MEDICAL
STAFFING NETWORK HOLDINGS, INC.**




( *Exact
name of registrant as specified in its charter)*




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




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




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




Name
      of each exchangeTitle
      of each class:
    on
      which registered:Common
      Stock, par value $0.01
    New
      York Stock Exchange


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




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes ý No o







Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o




Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).




Yes ý No o




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of June 25, 2004 (the last business day of the registrant’s most
recently completed second fiscal quarter) was $188,940,319. As of March 9, 2005,
there were 30,231,708 shares of common stock, $0.01 par value,
outstanding.




Documents
Incorporated by Reference:


Part III
of this Form 10-K incorporates certain information by reference from the
registrant’s Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders, which will be filed no later than 120 days after December 26,
2004.

























**TABLE
OF CONTENTS**




**PAGE****PART
      I**Item
      1.
    Business
    1Item
      2.
    Properties
    14Item
      3.
    Legal Proceedings
    14Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    15**PART
      II**Item
      5.
    Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
    16Item
      6.
    Selected Financial Data
    16Item
      7.
    Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    18Item
      7A.
    Quantitative and Qualitative Disclosures About Market
      Risk
    28Item
      8.
    Financial Statements and Supplementary
    Data
    28Item
      9.
    Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
    28Item
      9A.
    Controls and Procedures
    29Item
      9B.
    Other Information
    29**PART
      III**Item
      10.
    Directors and Executive Officers of the
      Registrant
    30Item
      11.
    Executive Compensation
    30Item
      12.
    Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
    30Item
      13.
    Certain Relationships and Related
      Transactions
    30Item
      14.
    Principal Accounting Fees and Services
    30**PART
      IV**Item
      15.
    Exhibits, Financial Statement Schedules and Reports on Form
      8-K
    31SIGNATURES
    32







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

















**PART
I**




**Item 1. Business**




**General
Development of Business**




We are a
leading temporary healthcare staffing company and the largest provider of per
diem nurse staffing services (staffing assignments of less than thirteen weeks
in duration) in the United States as measured by revenues. Our per diem staffing
assignments place our professionals, predominately nurses, at hospitals and
other healthcare facilities to solve our clients’ temporary staffing needs. We
believe we are also a leading provider of specialized radiology and diagnostic
imaging specialists and clinical laboratory technicians, or “allied health”
professionals, as measured by revenues. We serve our clients through what we
believe to be the largest temporary healthcare staffing network in the United
States, which was comprised as of December 26, 2004 of over 125 per diem
branches that provide nurse staffing on a per diem basis in over
40 states. Our extensive client base includes over 7,000 healthcare
facilities including leading for-profit and not-for-profit hospitals, leading
teaching hospitals and regional healthcare providers. We do not receive a
material portion of our revenues from Medicare or Medicaid reimbursements or
similar state reimbursement programs.




Our
business has grown significantly since our founding in 1998. We call branches
that we have opened since our inception “ *de
novo* ”
branches, as opposed to branches acquired from third parties. Approximately 65%
of all existing branches as of December 26, 2004 were *de
novo* branches.




During
2004, we expanded our services to provide temporary general staffing. Our per
diem general staffing assignments place individuals in a variety of areas
including clerical, janitorial and food services. We feel the addition of per
diem general staffing services help make us a “full service” provider to our
clients, as well as attract new non-healthcare related clients.




For the
year ended December 26, 2004, we had revenues of $417.1 million and income from
operations of $1.6 million. During this period, we earned 75% of our revenues
from our per diem nurse staffing assignments, 16% from our specialized radiology
and diagnostic imaging technicians and clinical laboratory technicians, or our
“allied health” assignments, 9% from our travel nurse staffing assignments and
less than 1% from our per diem general staffing assignments.




We
believe the flexibility of our service offerings provides substantial value to
our clients and professionals. We provide our clients with significant
assistance in managing their profitability by giving them a high degree of
control in managing their labor costs without sacrificing clinical expertise. In
addition, working on a per diem basis allows our healthcare professionals
substantial flexibility in balancing their careers with their lifestyle
objectives.




We were
formed as a Delaware corporation in 1998. Our predecessor corporation, Southeast
Staffing Partners, Inc., a Florida corporation, was founded in
June 1997.





**Industry
Overview**




The
temporary nurse staffing market has two major components: per diem nursing and
travel nursing. Per diem nurse staffing is the largest sector of the temporary
healthcare staffing industry, providing healthcare 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 seasonal fluctuations in hospital volume. The per diem market operates
with many local operators and is highly fragmented. The per diem staffing model
requires a local presence in every market served because these short-term
staffing needs are typically filled on a local basis, and are dependant on the
relationship that exists between local operators, local professionals and the
healthcare facility.





1
 
 In the
travel nurse market, healthcare facilities hire travel nurses on a contract,
fixed-term basis to meet seasonal fluctuations in hospital admissions levels for
time periods ranging from several weeks to one year, but are typically thirteen
weeks long. Travel nurse companies coordinate travel and housing arrangements
for their professionals who typically relocate to the area in which they are
placed. The travel staffing model utilizes a centralized approach to serving its
clients.


Allied
staffing consists of highly specialized radiology and diagnostic imaging
specialties, clinical laboratory specialties, rehabilitation specialties,
pharmacists and respiratory therapists. These professionals are staffed on both
a per diem and travel basis.




Service
revenues and gross profit margins have been under pressure as demand for
temporary nurses is currently going through a period of contraction. Due to the
current difficult economic times, the unemployment rate, while slightly improved
over the past year, remains high. We believe this has resulted in nurses in many
households becoming a primary wage earner, which is causing such nurses to seek
more traditional full-time employment. Additionally, hospitals are experiencing
lower than projected admissions levels and are placing greater reliance on
existing full-time staff, resulting in increased overtime and nurse-patient
loads.




We cannot
predict when conditions will reverse, but we are confident in the long-term
growth of the industry. In a January 13, 2000 report, the U.S. Census Bureau,
Population Projections Bureau, projected that the number of Americans over 65
years of age is expected to grow from 34.5 million in 2000 to 53.7 million in
2020. In a July 2002 report, the U.S. Department of Health and Human Services
stated that the national supply of full-time equivalent registered nurses was
approximately 1.9 million while demand was approximately 2.0 million. This gap
between supply and demand for nurses is expected to grow from 0.1 million in
2000 to 0.8 million by 2020. Additionally, there is a growing trend to restrict
mandatory healthcare worker overtime requirements by employers and to establish
nurse-patient ratios. Several states have enacted legislation prohibiting
mandatory overtime and other states have similar legislation pending. In
conjunction with the aforementioned factors, as the economy rebounds, the
prospects for the healthcare staffing industry should improve as hospitals
experience higher admissions levels and increasing shortages of healthcare
workers.




**Description
of the Business**




We
provide hospitals and other healthcare facilities with a wide range of staffing
services, including per diem nurses, allied professionals and travel nurses.
While we have a national presence, we operate on a local basis through an
integrated network, which consisted of over 125 per diem branches in over 40
states as of December 26, 2004, so that we may develop significant
relationships with our clients and healthcare professionals and provide the
highest level of service. We have provided services to over 7,000 healthcare
facilities that have paid us directly for the services we provide.




***Temporary
Staffing Services Provided***




The per
diem nurse staffing portion of our business provides nurses for assignments with
durations ranging from a single shift to a 13-week assignment and represented
approximately 75% of our 2004 fiscal year revenues. We offer our clients all
major classifications of nurses, including registered nurses and licensed
practical nurses, across all specialties such as pediatric, geriatric, intensive
care unit and cardiovascular. We provide per diem personnel to a variety of
healthcare facilities including acute care hospitals, nursing homes, clinics and
surgical and ambulatory care centers. We serve both for-profit and
not-for-profit organizations that range in scope from one facility to national
chains with over 100 facilities. The allied staffing portion of our business,
which represented approximately 16% of our 2004 fiscal year revenues,
specializes in providing allied professionals to hospitals, nursing homes,
clinics and surgical and ambulatory care centers, both on a per diem and a
travel basis. We believe our allied healthcare business to be among the largest
in the country as measured by revenues. Allied staffing specialties that we
staff include diagnostic imaging and radiology technicians, clinical laboratory
technicians, rehabilitation specialists, pharmacists and respiratory therapists.
The travel nurse staffing portion of our business, which represents
approximately 9% of our 2004 fiscal year revenues, provides nurses and surgical
technicians to hospitals across the country for assignments lasting over
thirteen weeks. The per diem general staffing portion of our business, which
represents less than 1% of our 2004 fiscal year revenues, places individuals in
a variety of areas including clerical, janitorial and food services.





2


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




***National
Branch Network***




We
currently operate an integrated network, which consists of over 125 per diem
branches located in over 40 states as of December 26, 2004. Our
branches are organized into several geographic regions, each of which is
coordinated by a regional director. These branches serve as our direct contact
with our healthcare professionals and clients and are active in recruiting,
scheduling, and sales and marketing. Each branch is responsible for covering a
specific local geographic region. Our typical branch is staffed with four or
five professionals who are responsible for the day-to-day operations of the
business. These professionals include a branch manager, two to three staffing
coordinators, and a payroll administrator.




The cost
structure of our typical branch is primarily fixed, consisting of limited
personnel, office space rent, information systems infrastructure and supplies.
We have been able to develop a highly efficient branch management model that is
easily scaleable to meet increasing demand.




***Recruitment
and Retention***




Our
ability to recruit and retain a pool of talented, motivated and highly
credentialed healthcare professionals is critical to our success. Our active
pool of professionals was greater than 31,000 in 2004. We typically attract new
recruits via word of mouth. Over 80% of our senior operations management have
nursing or other clinical backgrounds. We believe this depth of clinical
experience helps us understand the needs of clinical personnel and enhances our
reputation in the industry as an advocate for nurses and other healthcare
professionals, improving our ability to recruit such personnel. In addition, we
offer competitive benefits packages that differentiate us from the smaller,
local per diem staffing companies with which we compete, and which are typically
unable to offer the package of services and benefits that we offer. We believe
our competitive advantages in recruiting skilled personnel include the ability
to offer the following opportunities to our personnel:




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




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




·
    *Choice
      of Pay Frequency—Including Daily*.
      Our ability to offer pay as frequently as daily provides our professionals
      with another key element of flexibility. Rather than waiting for the end
      of a traditional weekly or biweekly pay period, our professionals can be
      paid immediately after completing their shifts. This allows our branch
      staff to maintain an active dialogue with our professionals regarding
      future assignments. This consistent interaction fosters unique
      relationships that distinguish us from our competition.




3




·
    *Leading
      Continuing Educational Programs*.
      We also offer continuing education courses as a means to improve our pool
      of nurses as well as to maintain proper compliance. We have a unique
      relationship with Florida Atlantic University’s College of Nursing. The
      College of Nursing faculty develops continuing education courses that we
      offer online through our website. Our nurses can obtain continuing
      education units (CEUs) that many states require to educate our nurses
      regarding changing technology and clinical practices. Our courses are
      fully accredited by the American Nurses Credentialing Center of Excellence
      and the Florida Board of Nursing.




We have
several proven recruitment channels that consistently augment our pool of
healthcare professionals at low marginal cost. In 2004, we spent approximately
1% of our revenues on recruitment activities. Our recruiting activities include
print advertisements in local newspapers and in trade journals, mailings,
Internet listings and solicitations at trade conventions.





***Quality
Management***




We have
developed a substantial clinical quality improvement program to uphold our high
standards in recruiting healthcare professionals. Our two-step internal process
ensures that all of our temporary professionals have the proper credentials,
skills and experience for their assignments. We have found that our adherence to
high quality management standards is an integral component of satisfying both
clients and professionals with our placements. Our two-step process for quality
management includes the following:




***Pre-employment
Qualifications*** **.** All of
our healthcare professionals undergo a rigorous screening process that includes
requirements such as a minimum of one year of related work experience and the
successful completion of written tests specific to their area of specialty. Each
applicant is then interviewed in person by a local branch manager. This sets us
apart from our competitors who often do not conduct face-to-face interviews. We
also check prior work references, confirm the validity of the applicant’s
professional license(s) and screen the applicant for any criminal activity and
drug abuse. All of these standards comply with or exceed those required by
Occupational Safety & Health Administration (OSHA) and Joint Commission
on Accreditation of Healthcare Organizations (JCAHO).




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




***Sales
and Marketing***




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




Our first
level of business development and relationship management is with the purchasing
manager, administrator(s) or chief nursing officer at a group of facilities we
service. Commonly-owned hospitals, nursing home chains and healthcare group
alliances often purchase temporary staffing services for multiple facilities
under a single contract, and a single person typically manages the selection
process. A senior member of our staff, the regional director and, in certain
circumstances, the Executive Vice President of Nurse Per Diem Operations,
negotiate contractual terms and pricing with such groups of facilities.





4


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




Our third
level of relationship management is with the facility staffing coordinators and
the after-hours and weekend supervisors who are the actual users of the
services. Our branch managers and local staffing coordinators regularly contact
these buyers to coordinate the daily staffing and scheduling of personnel.





***Information
Systems***




Our
information system for our per diem staffing operation, for which we hold an
exclusive twenty-five year license and which we refer to as MSN HealthWorks, is
customized to our recruiting, regulatory credentialing, scheduling and billing
needs. Not only is the database used as a management tool, but it is also used
by our staffing coordinators in each branch to respond quickly to client
questions and requests. MSN HealthWorks’ applications and its supporting
infrastructure house and organize all of our client and employee information.
Electronic files are maintained on our client facilities, detailing historical
and prospective requests for staffing. These files also contain
facility-specific procedures and protocols so that we can ensure that our
healthcare professionals integrate quickly. Each employee’s electronic file
contains the employee’s credentials, test scores, employment record and
availability. This data enables our branch-office staff to automatically match
open requests with qualified candidates.




MSN
HealthWorks also monitors billing records using time cards to generate invoices
for our clients and paycheck information for our employees. MSN HealthWorks
operates as a single entry system, meaning that the initial shift confirmation
entry enables our payroll to be generated at the branch level on a daily basis
and the invoicing to be generated at our corporate office. This system enables
us not only to monitor costs and compliance, but also to ensure that we respond
to client requests as quickly as possible. We typically fill a client staffing
request in less than 15 minutes.




We have
adapted MSN HealthWorks to provide our clients with functionality for budgeting
and access to nurse and employee credentials via the Internet




***Competition***




The
temporary healthcare staffing industry is highly competitive. We compete with
both national firms and local and regional firms. We compete with these firms to
attract nurses and other healthcare professionals as temporary healthcare
professionals and to attract hospital and healthcare facility clients. We
compete for temporary healthcare professionals on the basis of the quantity,
diversity and quality of assignments available, compensation packages, and the
benefits that we provide to temporary healthcare professionals while they are on
assignment. We compete for hospital and healthcare facility clients on the basis
of the quality of our temporary healthcare professionals, the timely
availability of our professionals with the requisite skills, quality and scope,
price and geographic reach of our services.




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




Some of
our large competitors in the temporary healthcare staffing industry include AMN
Healthcare Services, Inc., Cross Country Healthcare, Inc. and InteliStaf
Healthcare, Inc.





5


**Professional
Liability Insurance**




We retain
the first $1.0 million, per occurrence, of risk associated with professional
liability. We maintain a professional liability insurance policy for losses in
excess of this per occurrence amount. We believe this is sufficient for the
risks associated with our business. Medical malpractice claims against us
relating to our healthcare professionals are defended by our insurance carrier.
We have indemnity agreements with approximately 80% of our clients which state
that we will defend, indemnify and hold harmless those clients against any act
of omission or willful or reckless acts, including negligence and misconduct. A
majority of such agreements are reciprocal.




**Trademarks
and Service Marks**




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




**Government
Regulation**




The
healthcare industry is subject to extensive and complex federal and state laws
and regulations relating to professional licensure, conduct of operations,
payment for services and payment for referrals. The extensive and complex laws
that apply to our hospital and healthcare facility clients, including laws
related to Medicare, Medicaid and other federal and state healthcare programs,
could indirectly affect the demand or the prices paid for our services. For
example, our hospital and healthcare facility clients could suffer civil and/or
criminal penalties and/or be excluded from participating in Medicare, Medicaid
and other healthcare programs if they fail to comply with the laws and
regulations applicable to their businesses.




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




Some
states require state licensure for businesses that employ and/or assign
healthcare personnel to provide healthcare services on-site at hospitals and
other healthcare facilities. We hold a Temporary Healthcare Staffing License in
the following jurisdictions in which we do business that require such licenses:
Connecticut, Delaware, the District of Columbia, Florida, Illinois, Iowa,
Kentucky, Maine, Maryland, Massachusetts, Minnesota, New Jersey, Nevada, North
Carolina, Rhode Island, Tennessee, Texas and Washington.




Most of
our temporary healthcare professionals are required to be individually licensed
or certified under applicable state laws. We take reasonable steps to ensure
that our professionals possess all necessary licenses and certifications in all
material respects. These steps include: each employee must present an original
version of a state issued license; we validate each employee’s identity through
government issued photo identification; we call or verify online each employee’s
license with the applicable state board prior to assignment; and, a copy of the
license is maintained in the employee’s personnel file and expiration dates are
monitored through MSN HealthWorks.




**Seasonality**




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





6


Historically,
the number of temporary healthcare professionals on assignment has increased
from December through March followed by declines or minimal growth from April
through November. This pattern may 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 be expected for any other quarter or for any year.




**Employees**




As of
December 26, 2004, we employed 1,132 people in the following areas: 852 in
branch and regional operations staff and 280 in corporate office staff. In
addition, during 2004 we employed over 31,000 temporary staff and healthcare
professionals. We do not have any organized labor unions. We believe we have
excellent relationships with our employees.




Generally,
our per diem and travel staff are our employees. However, our certified
registered nurse anesthetists and anesthesiologists are, and before
discontinuation of our physician staffing business our physicians were,
independent contractors. We have not entered into any employment agreements with
any of our healthcare professionals.




**Available
Information**




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




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




**Risk
Factors**




*There
are a number of factors, including those specified below, which may adversely
affect our business, financial results or stock price. Additional risks that we
do not know about or that we currently view as immaterial may also impair our
business or adversely impact our financial results or stock
price.*




***Risks
Related to Our Business and Industry***




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




We rely
significantly on our ability to attract and retain nurses and allied healthcare
professionals who possess the skills, experience and licenses necessary to meet
the requirements of our hospital and healthcare facility clients. We compete for
healthcare staffing personnel with other temporary healthcare staffing companies
and with hospitals and healthcare facilities. We must continually evaluate and
expand our temporary healthcare professional network to keep pace with our
hospital and healthcare facility clients’ needs. Currently, there is a shortage
of qualified nurses in most areas of the United States, competition for nursing
personnel is increasing, and salaries and benefits have risen. We may be unable
to continue to increase the number of temporary healthcare professionals that we
recruit, thereby decreasing the potential for growing our business. Our ability
to attract and retain temporary healthcare professionals depends on several
factors, including our ability to provide temporary healthcare professionals
with assignments that they view as attractive and to provide them with
competitive benefits and wages. We cannot assure you that we will
be





7
 
 successful
in any of these areas. The cost of attracting temporary healthcare professionals
and providing them with attractive benefits packages may be higher than we
anticipate and, as a result, if we are unable to pass these costs on to our
hospital and healthcare facility clients, our profitability could decline.
Moreover, if we are unable to attract and retain temporary healthcare
professionals, the quality of our services to our hospital and healthcare
facility clients may decline and, as a result, we could lose clients.




***Contraction
of demand for our temporary nurses may continue if unemployment rates remain
high or increase and hospital admissions levels remain lower than
projected.***




Demand
for temporary nurses is currently experiencing a period of contraction. Due to
the current difficult economic times, while slightly improved over the past
year, the unemployment rate remains high, which we believe has resulted in
nurses in many households becoming a primary wage earner, and which is causing
such nurses to seek more traditional full-time employment. Additionally,
hospitals are experiencing lower than projected admissions levels and are
placing greater reliance on existing full-time staff, resulting in increased
overtime and nurse-patient loads. Consequently, our service revenues and gross
profit margins have been under pressure. In June 2003, we completed a plan to
restructure our operations by closing 29 branches. The restructuring was in
response to the current contraction in demand for our services and was necessary
to adjust the infrastructure we had put in place to support multiple growth
initiatives. If these industry trends continue, our revenues and gross profit
margins may decline.




***We
operate in a highly competitive market and our success depends on our ability to
remain competitive in obtaining and retaining hospital and healthcare facility
clients and temporary healthcare professionals.***




The
temporary healthcare staffing business is highly competitive. We compete in
national, regional and local markets with full-service staffing companies and
with specialized temporary staffing agencies. Some of our competitors in the
temporary nurse staffing sector are AMN Healthcare Services, Inc., Cross Country
Healthcare, Inc. and InteliStaf Healthcare, Inc. Some of our competitors may
have greater marketing and financial resources than we do. Competition for
hospital and healthcare facility clients and temporary healthcare professionals
may increase in the future and, as a result, we may not be able to remain
competitive. To the extent competitors seek to gain or retain market share by
reducing prices or increasing marketing expenditures, we could lose revenues or
hospital and healthcare facility clients. Furthermore, our margins could
decline, which could seriously harm our operating results and cause the price of
our stock to decline. In addition, the development of alternative recruitment
channels could lead our hospital and healthcare facility clients to bypass our
services, which would also cause our revenues and margins to decline.




***Our
business depends upon our continued ability to secure 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 exclusive guaranteed order contracts with our
hospital and healthcare facility clients. The success of our business depends
upon our ability to continually secure new orders from hospitals and other
healthcare facilities and to fill those orders with our temporary healthcare
professionals. Our hospital and healthcare facility clients are free to place
orders with our competitors and may choose to use temporary healthcare
professionals that our competitors offer them. Therefore, we must maintain
positive relationships with our hospital and healthcare facility clients. If we
fail to maintain positive relationships with our hospital and healthcare
facility clients, we may be unable to generate new temporary healthcare
professional orders and our business may be adversely affected.




Reacting
to concerns over agency utilization in prior years, hospitals and other
healthcare facilities have devised strategies to reduce agency expenditure and
limit overall agency utilization. If current pressures to control agency usage
continue and escalate, we will have fewer business opportunities, which could
harm our business.





8


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




Demand
for our temporary healthcare staffing services is significantly affected by the
general level of patient occupancy at our hospital and healthcare facility
clients. When occupancy increases, hospitals and other healthcare facilities
often add temporary employees before full-time employees are hired. As occupancy
decreases, hospitals and other healthcare facilities typically reduce their use
of temporary employees before undertaking layoffs of their regular employees. In
addition, we may experience more competitive pricing pressure during periods of
occupancy downturn. Occupancy at our hospital and healthcare facility clients
also fluctuates due to the seasonality of some elective procedures. We are
unable to predict the level of patient occupancy at any particular time and its
effect on our revenues and earnings.


******


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




The U.S.
government has undertaken efforts to control increasing healthcare costs through
legislation, regulation and voluntary agreements with medical care providers and
drug companies. In the recent past, the U.S. Congress has considered several
comprehensive healthcare reform proposals. The proposals were generally intended
to expand healthcare coverage for the uninsured and reduce the growth of total
healthcare expenditures. While the U.S. Congress did not adopt any comprehensive
reform proposals, members of Congress may raise similar proposals in the future.
If any of these proposals are approved, hospitals and other healthcare
facilities may react by spending less on healthcare staffing, including nurses.
If this were to occur, we would have fewer business opportunities, which could
seriously harm our business.




Several
state governments have also attempted to control increasing healthcare costs.
For example, the state of Massachusetts has implemented a regulation that limits
the hourly rate billable by and payable to temporary nursing agencies for
registered nurses, licensed practical nurses and certified nurses’ aides. The
state of Minnesota has also implemented a statute that limits the amount that
nursing agencies may charge nursing homes. Several states have also proposed
legislation that would limit the amounts that temporary staffing companies may
charge. Any such current or proposed laws could seriously harm our business,
revenues and margins.




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




There is
a growing trend to restrict mandatory healthcare worker overtime requirements by
employers and to establish nurse-patient ratios. The state of California has
already enacted such legislation and several other states have similar
legislation pending. This legislation could ultimately have a potential positive
or negative impact on our business.




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




The
healthcare industry is subject to extensive and complex federal and state laws
and regulations related to professional licensure, conduct of operations,
payment for services and payment for referrals. If we fail to comply with the
laws and regulations that are directly applicable to our business, we could
suffer civil and/or criminal penalties or be subject to injunctions or cease and
desist orders.




The
extensive and complex laws that apply to our hospital and healthcare facility
clients, including laws related to Medicare, Medicaid and other federal and
state healthcare programs, could indirectly affect the demand or the prices paid
for our services. For example, our hospital and healthcare facility clients
could suffer civil and/or criminal penalties and/or be excluded from
participating in Medicare, Medicaid and other healthcare programs if they fail
to comply with the laws and regulations applicable to their businesses. In
addition, our hospital and healthcare facility clients could receive reduced
reimbursements, or be excluded from coverage, because of a change in the rates
or conditions set by federal or state governments. In turn, violations of or
changes to these laws and regulations that





9
 
 adversely
affect our hospital and healthcare facility clients could also adversely affect
the prices that these clients are willing or able to pay for our services.




JCAHO is
creating a set of standards by which to certify healthcare staffing providers.
Healthcare staffing companies will be reviewed by JCAHO to ensure that they are
compliant with the standards. Healthcare facilities could potentially use only
those providers that obtain certification. If we do not meet the standards
created by JCAHO, it could potentially have a material effect on our
business.




***We
are dependent on the proper functioning of our information
systems.***




We are
dependent on the proper functioning of our information systems in operating our
business. Critical information systems used in daily operations identify and
match staffing resources and client assignments and regulatory credentialing
scheduling. They also perform billing and accounts receivable functions. Our
information 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 functions would have to be accomplished
manually, which could impact our ability to identify business 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 restrict our future growth by limiting our
ability to make acquisitions at reasonable
valuations.***




Since our
founding in 1998, we have completed 26 acquisitions. Our business strategy
includes increasing our market share and presence in the temporary healthcare
staffing industry through strategic acquisitions of companies that complement or
enhance our business. We have historically faced competition for acquisitions.
In the future, this could limit our ability to grow by acquisitions or could
raise the prices of acquisitions and make them less accretive to us. In
addition, restrictive covenants in our credit facility, including a covenant
that requires us to obtain the approval of our lenders for any acquisition with
a purchase price over $3 million, may limit our ability to complete
desirable acquisitions. If we are unable to secure necessary financing under our
credit facility or otherwise, we may be unable to complete desirable
acquisitions.




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




We
continually evaluate opportunities to acquire healthcare staffing companies that
complement or enhance our business and frequently have preliminary acquisition
discussions with some of these companies.




These
acquisitions involve numerous risks, including:




·
    potential
      loss of key employees or clients of acquired companies;




·
    difficulties
      integrating acquired personnel and distinct cultures into our business;




·
    difficulties
      integrating acquired companies into our operating, financial planning and
      financial reporting systems;




·
    diversion
      of management attention from existing operations; and




·
    assumption
      of 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 cash expenditures, debt incurrence and
integration expenses that could seriously harm our financial condition and
results of operations. Any acquisition may ultimately have a negative impact on
our business and financial condition.





10


***Our
ability to borrow under our new credit facility may be limited.***




On
December 22, 2003, we entered into a new credit facility, consisting of a
three-year $65 million asset-based revolving credit facility and a two-year $17
million term loan. On June 25, 2004, we amended the credit facility to reduce
the revolver capacity from $65.0 million to $60.0 million. In conjunction with
the amendment, on July 1, 2004, we repaid $5.0 million of borrowings under the
term loan. The $5.0 million can not be re-borrowed under the terms of the term
loan. On February 24, 2005 we amended the terms of the Senior Credit Facility
whereby the term loan was reduced to $6.0 million, the applicable margin for the
term loan was reduced to 4.5%, the maturity of the term loan was extended to
December 2006 and certain financial covenants were amended. The $6.0 million
term loan repayment was funded with borrowings under the Revolver. Our ability
to borrow under the new credit facility is based upon, and thereby limited by,
the amount of our accounts receivable. Any material deterioration in our service
revenues could reduce our borrowing base, which could cause us to lose our
ability to borrow additional amounts under the new credit facility. In such a
circumstance, the borrowing availability under the new credit facility may not
be sufficient for our capital needs.




***Significant
legal actions could subject us to substantial uninsured
liabilities.***




In recent
years, healthcare providers have become subject to an increasing number of legal
actions alleging malpractice, product liability or related legal theories. Many
of these actions involve large claims and significant defense costs. In
addition, we may be subject to claims related to torts or crimes committed by
our employees or temporary healthcare professionals. In some instances, we are
required to indemnify our clients against some or all of these risks. A failure
of any of our employees or healthcare professionals to observe our policies and
guidelines intended to reduce these risks, relevant client policies and
guidelines or applicable federal, state or local laws, rules and regulations
could result in negative publicity, payment of fines or other damages. We retain
the first $1.0 million, per occurrence, of risk associated with professional
liability. We maintain a professional liability insurance policy for losses in
excess of this per occurrence amount. Our
professional malpractice liability insurance and general liability insurance
coverage may not cover all claims against us or continue to be available to us
at a reasonable cost. If we are unable to maintain adequate insurance coverage
or if our insurers deny coverage we may be exposed to substantial liabilities.




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




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




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




We
provide workers compensation coverage through a program that is partially
self-insured. We retain
the first $0.5 million, per occurrence, of risk associated with professional
liability. We maintain a professional liability insurance policy for losses in
excess of this per occurrence amount or $12.0 million in aggregate per annum. In
addition, we provide medical coverage to our employees through a partially
self-insured preferred provider organization. If we become subject to
substantial uninsured workers compensation or medical coverage liabilities, our
financial results may be adversely affected.





11


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




Our
success depends upon the performance of our sales personnel, especially regional
directors, branch managers and staffing coordinators. The number of individuals
who meet our qualifications for these positions is limited and we may experience
difficulty in attracting qualified candidates. In addition, we commit
substantial resources to the training, development and support of these
individuals. Competition for qualified sales personnel in the line of business
in which we operate is strong and there is a risk that we may not be able to
retain our sales personnel after we have expended the time and expense to
recruit and train them.




***Our
entry into the general staffing market may not be
successful.***




During
2004, we expanded our services to provide temporary per diem general staffing.
Our success depends on our ability to attract experienced managers and to hire
general staffing employees. Competition is strong and there is a risk we may not
be able to attract the appropriate individuals to make this venture
successful.




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




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




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





As of
December 26, 2004, we had $129.5 million of goodwill, net on our
balance sheet, which represents the excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. At
December 26, 2004, goodwill represented approximately 61% of our total
assets.
  Historically,
we amortized goodwill on a straight-line basis 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 for all
business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS
No. 142 requires that, subsequent to January 1, 2002, goodwill not be
amortized but rather that it be reviewed annually for impairment. We are
currently evaluating our determination of operating segments, which could change
the level at which we test for goodwill impairment. A change in the level in
which the impairment of goodwill is tested, could result in a noncash impairment
charge to earnings, based on the results of the testing performed. We have
adopted the provisions of SFAS No. 141 and SFAS No. 142 as of
December 31, 2001. Although it does not affect our cash flow, an impairment
charge to earnings has the effect of decreasing our earnings or increasing our
losses, as the case may be. If we are required to take an impairment charge to
earnings, our stock price could be adversely affected.


******


***Our
costs of providing housing for nurses and other healthcare personnel in our
travel business may be higher than we anticipate and, as a result, our margins
could decline.***




We
currently have approximately 85 apartments on lease throughout the United
States. If the costs of renting apartments and furniture for our nurses and
other healthcare personnel increase more than we anticipate and we are unable to
pass such increases on to our clients, our margins may decline. To the extent
the length of a nurse’s or other professional’s housing lease exceeds the term
of the nurse’s or other professional’s staffing contract, we bear the risk that
we will be obligated to pay rent for housing we do not use. To limit the costs
of unutilized housing, we try to secure leases with term lengths that match the
term lengths of our staffing contracts, which typically last thirteen weeks. In
some housing markets we have had, and believe we will continue to have,
difficulty identifying short-term leases. If we cannot identify a sufficient
number of appropriate short-term leases in regional markets, or if, for any





12
 reason, we are unable to efficiently utilize the apartments we do lease,
we may be required to pay rent for unutilized housing or, to avoid such risk, we
may forego otherwise profitable opportunities.


**


***Demand
for healthcare staffing services is significantly affected by the general level
of economic activity and unemployment in the United
States.***




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




***Our
executive officers, directors and significant stockholders will be able to
influence matters requiring stockholder approval and could discourage the
purchase of our outstanding shares at a premium.***




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




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




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




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




Provisions
in our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition involving us that our stockholders may consider
favorable. For example, our certificate of incorporation authorizes our Board of
Directors to issue up to 15 million shares of “blank check” preferred
stock. Without stockholder approval, the Board of Directors has the authority to
attach special rights, including voting and dividend rights, to this preferred
stock. With these rights, preferred stockholders could make it more difficult
for a third party to acquire us. Applicable Delaware law may also discourage,
delay or prevent someone from acquiring or merging with us.




***Our
stock price may be volatile and your investment in our common stock could suffer
a decline in value.***




With the
current uncertainty about healthcare policy, reimbursement and coverage in the
United States, there has been significant volatility in the market price and
trading volume of securities of healthcare and other companies, which is
unrelated to the financial performance of these companies. These broad market
fluctuations may negatively affect the market price of our common stock.





13


Some
specific factors that may have a significant effect on our common stock market
price include:




·
    actual
      or anticipated fluctuations in our operating results;




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




·
    actual
      or anticipated changes in healthcare policy in the United States and
      internationally;




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




·
    our
      inability to raise additional capital;




·
    conditions
      of other healthcare staffing companies or the medical staffing industry
      generally; and




·
    changes
      in stock market analyst recommendations regarding our common stock, other
      comparable companies or the healthcare staffing industry
      generally.




**Item 2. Properties**




Our U.S.
corporate headquarters is located in Boca Raton, Florida and has an aggregate of
50,000 square feet. We operate on a national basis with a presence in over 40
states and over 125 locations as of December 26, 2004. The facilities at
our headquarters and at each of our locations are leased. The lease to our
headquarters expires in 2013. We believe that our properties are adequate for
our current needs. In addition, we believe that adequate space can be obtained
to meet our foreseeable business needs. As of December 26, 2004, with the
exception of our corporate headquarters, we have no material operating leases.




**Item 3. Legal Proceedings**




On
February 20, 2004, Joseph and Patricia Marrari, and on April 16, 2004, Tommie
Williams, filed class action lawsuits against Medical Staffing Network in the
United States District Court for the Southern District of Florida, on behalf of
themselves and purchasers of our common stock pursuant to or traceable to our
initial public offering in April 2002. These lawsuits also named as defendants
certain of our directors and executive officers (collectively with Medical
Staffing Network, the “Defendants”). The complaints allege that certain
disclosures in the Registration Statement/Prospectus filed in connection with
our initial public offering on April 17, 2002 were materially false and
misleading 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 lawsuit brought on behalf of the same class of
our stockholders, making claims under the Securities Act similar to those in the
lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams,
was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants
removed this case to the United States District Court for the Southern District
of Florida and Plaintiff moved to remand the case back to the Florida Circuit
Court of the Fifteenth Judicial Circuit, which motion Defendants opposed. On
September 16, 2004 the federal district court entered an order granting
Plaintiff’s motion to remand. On January 6, 2005, the state court stayed the
state court proceedings until further order of the court. The Zia complaint
seeks rescission or damages as well as certain equitable relief and costs and
attorney fees.




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





14


On July
2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated,
although, as noted above, the Zia action was subsequently remanded to state
court. Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated
action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed
Lead Counsel for Plaintiffs. 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 purchasers of 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 Staffing
Network’s stockholders who purchased stock during the period from April 18, 2002
through June 16, 2003, for purposes of the Exchange Act claims. The Complaint
alleges that certain of our public disclosures during the class period were
materially false and misleading in violation of Section 11 of the Securities Act
and Section 10(b) of the Exchange Act. The Complaint seeks compensatory damages
as well as costs and attorney fees. Defendants have filed a motion to dismiss
the Complaint.




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




From time
to time, we are subject to lawsuits and claims that arise out of our operations
in the normal course of business. We are plaintiffs or defendants in various
litigation matters in the ordinary course of business, some of which involve
claims for damages that are substantial in amount. We believe that the
disposition of any claims that arise out of operations in the normal course of
business will not have a material adverse effect on our financial position or
results of operations.




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




There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 26, 2004.





15


**PART
II**




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




The
following table sets forth, for the fiscal quarters indicated, the high and low
sales prices per share of our common stock, as reported by the New York Stock
Exchange (NYSE).




****
    
    
    **High**
    
    
    **Low****2003:**First
      Quarter
    
    $
    18.04
    
    $
    8.40Second
      Quarter
    
    $
    10.80
    
    $
    6.78Third
      Quarter
    
    $
    9.28
    
    $
    6.88Fourth
      Quarter
    
    $
    10.65
    
    $
    7.35**2004**First
      Quarter
    
    $
    12.31
    
    $
    7.10Second
      Quarter
    
    $
    8.82
    
    $
    5.35Third
      Quarter
    
    $
    7.10
    
    $
    5.16Fourth
      Quarter
    
    $
    8.75
    
    $
    5.87





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




As of
December 26, 2004, there were 24 holders of record of our common stock, which
numbers do not reflect stockholders who beneficially own common stock held in
nominee or street name.




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




We did
not repurchase any shares of our common stock during the fourth quarter of the
fiscal year ended December 26, 2004.




**Item 6. Selected Financial Data**




The
selected Consolidated Statement of Operations data for the years ended December
26, 2004, December 28, 2003 and December 29, 2002 and the selected Consolidated
Balance Sheet data as of December 26, 2004 and December 28, 2003 are derived
from our audited consolidated financial statements included elsewhere in this
annual report. The selected Consolidated Statement of Operations data for the
years ended December 30, 2001 and December 31, 2000 and the selected
Consolidated Balance Sheet data as of December 29, 2002, December 30, 2001 and
December 31, 2000 are derived from our audited consolidated financial statements
not included in this annual report. Certain reclassifications have been made to
prior year amounts to conform to the 2004 presentation.





16


In the
following tables, we provide you with select consolidated financial data and
other operating information of Medical Staffing Network which should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our audited consolidated financial statements and
accompanying notes included in this annual report.




**Fiscal Years
      Ended****2004**
    
    
    2003(5)
    
    
    2002(6)
    
    
    2001(7)
    
    
    2000(8)(in
      thousands, except percentages and per share data)**Consolidated
      Statement of Operations Data**:Service
      revenues(1)
    
    **$******
    ******417,058**
    
    $
    512,985
    
    $
    478,827
    
    $
    338,229
    
    $
    178,375Cost
      of services rendered(1)
    
    
    **327,075**
    
    
    398,224
    
    
    358,394
    
    
    253,139
    
    
    133,039Gross
      profit
    
    
    **89,983**
    
    
    114,761
    
    
    120,433
    
    
    85,090
    
    
    45,336Selling,
      general and administrative expenses
    
    
    **66,576**
    
    
    78,771
    
    
    70,716
    
    
    46,793
    
    
    26,531Corporate
      and administrative expenses
    
    
    **15,491**
    
    
    11,748
    
    
    7,386
    
    
    6,428
    
    
    4,711Depreciation
      and amortization expenses(2)
    
    
    **6,316**
    
    
    6,773
    
    
    4,486
    
    
    5,870
    
    
    3,796Recapitalization
      expenses
    
    
    **-**
    
    
    -
    
    
    -
    
    
    7,160
    
    
    -Income
      from operations
    
    
    **1,600**
    
    
    17,469
    
    
    37,845
    
    
    18,839
    
    
    10,298Loss
      on early extinguishment of debt(3)
    
    
    **-**
    
    
    3,555
    
    
    -
    
    
    4,380
    
    
    -Interest
      expense, net
    
    
    **3,541**
    
    
    4,685
    
    
    7,603
    
    
    14,312
    
    
    5,007Income
      (loss) from continuing operations before provision for
      (benefit
      from) income taxes
    
    
    **(1,941**
    **)**
    
    9,229
    
    
    30,242
    
    
    147
    
    
    5,291Provision
      for (benefit from) income taxes
    
    
    **(615******
    ******)**
    
    3,708
    
    
    12,400
    
    
    1,794
    
    
    1,931Income
      (loss) from continuing operations
    
    
    **(1,326**
    **)**
    
    5,521
    
    
    17,842
    
    
    (1,647
    )
    
    3,360Income
      (loss) from discontinued operations, net of taxes
    
    
    **-**
    
    
    (506
    )
    
    52
    
    
    341
    
    
    160Net
      income (loss)
    
    
    **(1,326**
    **)**
    
    5,015
    
    
    17,894
    
    
    (1,306
    )
    
    3,520Deduct
      required dividends on convertible preferred stock(4)
    
    
    **-**
    
    
    -
    
    
    3,099
    
    
    1,804
    
    
    -Income
      (loss) available to common stockholders
    
    **$**********
    ******(1,326******
    **********)**
    $
    5,015
    
    $
    14,795
    
    $
    (3,110
    )
    $
    3,520Income
      (loss) per share - basic:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.70
    
    $
    (0.54
    )
    $
    0.44Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.01
    )
    
    -
    
    
    0.05
    
    
    0.02Basic
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.70
    
    $
    (0.49
    )
    $
    0.46Income
      (loss) per share - diluted:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.62
    
    $
    (0.54
    )
    $
    0.12Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -
    
    
    0.05
    
    
    0.01Diluted
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.16
    
    $
    0.62
    
    $
    (0.49
    )
    $
    0.13Weighted
      average common shares outstanding:Basic
    
    
    **30,228**
    
    
    30,190
    
    
    21,177
    
    
    6,338
    
    
    7,581Diluted
    
    
    **30,228**
    
    
    30,807
    
    
    28,637
    
    
    6,338
    
    
    26,817Other
      Operating Data:Number
      of per diem branches at year end
    
    
    **126**
    
    
    146
    
    
    181
    
    
    136
    
    
    74




17




****
    
    **As
      of Fiscal Years Ended****2004**
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in
      thousands)**Balance
      Sheet Data:**Cash
      and cash equivalents
    
    **$******
    ******345**
    
    $
    825
    
    $
    4,595
    
    $
    11,253
    
    $
    205Total
      assets
    
    
    **210,903**
    
    
    228,870
    
    
    248,083
    
    
    162,019
    
    
    111,836Total
      liabilities and redeemable preferred stock
    
    
    **60,877**
    
    
    77,583
    
    
    102,415
    
    
    319,741
    
    
    101,929Total
      common stockholders’ equity (deficit)
    
    
    **150,026**
    
    
    151,287
    
    
    145,668
    
    
    (157,722
    )
    
    9,907


___________




(1)
    Emerging
      Issues Task Force (EITF) Issue No. 01-14,*Income
      Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’
      Expenses Incurred*(EITF 01-14), requires that reimbursements received for out-of-pocket
      expenses incurred generally be characterized as revenue in the statement
      of income. We adopted EITF 01-14 in the quarter ended June 30, 2002. We
      historically recorded reimbursements for out-of-pocket expenses as net
      amounts in cost of services rendered in the consolidated statement of
      operations. In accordance with the transition guidance included in EITF
      01-14, our adoption required the reclassification of financial statements
      for prior periods presented for comparative purposes. There is no change
      in gross profit as both service revenues and cost of services increased by
      approximately $4.6 million for the fiscal year ended 2001. There was no
      impact on service revenue or cost of services rendered in fiscal year
      ended 2000.




(2)
    Pursuant
      to provisions of SFAS No. 142, in 2002 we ceased amortizing goodwill and
      certain intangible assets with an indefinite useful life
      period.




(3)
    Pursuant
      to the provisions of SFAS No. 145, which we adopted December 29, 2002, we
      were required to reclassify our extraordinary loss on early extinguishment
      of debt of $2.7 million, net of tax benefit of $1.7 million, related to
      the October 2001 recapitalization transaction into income from continuing
      operations.




(4)
    Reflects
      8% dividends accrued on the Series I Convertible Preferred Stock
      issued in connection with the recapitalization. This preferred stock was
      converted into common stock upon completion of our initial public
      offering.




(5)
    Includes
      post acquisition results of Saber-Salisbury Group acquired in March 2003,
      which has been accounted for in accordance with the purchase method of
      accounting.




(6)
    Includes
      the post acquisition results of STAT Medical Services, Inc. acquired in
      July 2002, Medical Staffing Services, Inc. acquired in July 2002, Pro Med,
      Inc. acquired in July 2002, Pharmstaff, Ltd. acquired in August 2002,
      B&G Nurse Registry acquired in October 2002, Clinical Resource
      Services, Inc. and Health Search International, Inc. acquired in November
      2002, and Travel Nurse International acquired in December 2002, all of
      which were accounted for in accordance with the purchase method of
      accounting.




(7)
    Includes
      the post acquisition results of Excel Staffing Services, Inc. acquired in
      June 2001, which has been accounted for in accordance with the purchase
      method of accounting.




(8)
    Includes
      the post acquisition results of Medix Resources, Inc. acquired in February
      2000, Best Nursing acquired in March 2000, American Anesthesia Services,
      Inc. acquired in October 2000, NursingCare USA acquired in October 2000,
      and Health Med, Inc. acquired in November 2000, all of which were
      accounted for in accordance with the purchase method of
      accounting.




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




**Introduction**




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




·
    *Overview.*This section provides a general description of our business, trends in our
      industry, as well as significant transactions that have occurred that we
      believe are important in understanding our financial condition and results
      of operations.




·
    *Recent
      accounting pronouncements.*This section provides an analysis of relevant recent accounting
      pronouncements issued by the Financial Accounting Standards Board (FASB)
      and the effect of those pronouncements.




18




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




·
    *Liquidity
      and capital resources.*This section provides an analysis of our cash flows, capital resources,
      off-balance sheet arrangements and our outstanding debt and commitments as
      of December 26, 2004.




·
    *Critical
      accounting policies.*This section discusses those accounting policies that are both considered
      important to our financial condition and results of operations, and
      require significant judgment and estimates on the part of management in
      their application. In addition, all of our significant accounting
      policies, including the critical accounting policies, are summarized in
      Note 1 to the accompanying consolidated financial
    statements.




·
    *Caution
      concerning forward-looking statements.*This section discusses how certain forward-looking statements made by us
      throughout this discussion and analysis are based on management’s present
      expectations about future events and are inherently susceptible to
      uncertainty and changes in circumstance.




**Overview**




***Business
Description***




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




Our per
diem nurse staffing division currently operates in an integrated network of
branches that are organized into several geographic regions. These branches
serve as our direct contact with our healthcare professionals and clients. The
cost structure of a typical branch is substantially fixed, consisting of limited
personnel, office space rent, information systems infrastructure and office
supplies. We have been able to develop 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 of areas including clerical, janitorial and food
services. We believe that general staffing compliments our temporary healthcare
staffing and makes us a full service provider to our existing
clients.




***Industry
Trends***




Service
revenues and gross profit margins have been under pressure as demand for
temporary nurses is currently going through a period of contraction. Due to the
current difficult economic times, the unemployment rate, while slightly improved
over the past year, remains high. We believe this has resulted in nurses in many
households becoming a primary wage earner, which is causing such nurses to seek
more traditional full-time employment. Additionally, hospitals are experiencing
lower than projected admissions levels and are placing greater reliance on
existing full-time staff, resulting in increased overtime and nurse-patient
loads.




We cannot
predict when conditions will reverse, but we are confident in the long-term
growth of the industry. In a January 13, 2000 report, the U.S. Census Bureau,
Population Projections Bureau, projected that the number of Americans over 65
years of age is expected to grow from 34.5 million in 2000 to 53.7 million in
2020. In a July 2002 report, the U.S. Department of Health and Human Services
stated that the national supply of full-time equivalent registered nurses was
approximately 1.9 million while demand was approximately 2.0 million. This gap
between supply and demand for nurses is expected to grow from 0.1 million in
2000 to 0.8 million by 2020. Additionally, there is a growing trend to restrict
mandatory healthcare worker overtime requirements by employers and to establish
nurse-patient ratios. Several states have enacted legislation prohibiting
mandatory overtime and other stateshave similar legislation pending. In
conjunction with the aforementioned factors, as the economy





19
 
 rebounds,
the prospects for the healthcare staffing industry should improve as hospitals
experience higher census levels and increasing shortages of healthcare workers.




***Acquisitions***




In 2004,
we made no acquisitions. In 2003, we purchased substantially all of the assets
of one healthcare staffing company for an aggregate purchase price of $10.8
million. In 2002, we purchased substantially all of the assets of seven
healthcare staffing companies for an aggregate purchase price of
$56.4 million. All such acquisitions were accounted for as purchases and,
accordingly, the results of these acquired businesses are included in our
consolidated financial statements from the acquisition dates or the dates when
we assumed substantial control.




***Discontinued
Operations***




We
discontinued our physician staffing services in the second quarter of 2003.
Pursuant to the provisions of the FASB Statement of Financial Accounting
Standards (SFAS) No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* (SFAS
No. 144), results of operations are to be 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 is shown 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, of approximately $0.5
million. For the year ended December 29 , 2002,
we had income from discontinued operations, net of taxes, of approximately $0.1
million. Net assets of the discontinued operations were less than approximately
$10,000 at December 28 , 2003
and consisted solely of current assets. No reclassification of current or prior
year balance sheet presentation was made to reflect the net assets of the
discontinued operations, due to immateriality.




***Restructuring
Charge***




On June
16, 2003, we completed our plan to restructure our operations by closing 29
branches. The restructuring was necessary to adjust the infrastructure we had
put in place to support multiple growth initiatives and was in response to the
current contraction in demand for our services. As a result, in the second
quarter of 2003, we recorded a pre-tax charge, of approximately $0.8 million,
relating to employee severance costs, branch closing costs and lease termination
costs. The restructuring charge is included in selling, general and
administrative expenses 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 subsequent
quarters relating to this restructuring.




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




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




***Initial
Public Offering***




On April
23, 2002, we completed our initial public offering of 7.8 million shares of
common stock at $19.00 per share. Additionally, the underwriters exercised the
over-allotment option of 1.2 million shares, bringing the total number of shares
issued to 9.0 million. Total proceeds received by us, net of expenses related to
the initial public offering were $156.3 million. The proceeds were used to repay
$62.9 million of our outstanding balance under the senior unsecured notes, and
approximately $93.4 million of our outstanding loans under the senior credit
facility. Immediately prior to the completion of the initial public offering,
the outstanding shares of Series I Preferred Stock were converted into 21.1
million shares of common stock.





20


**Recent
Accounting Pronouncements**




***Stock-Based
Compensation***




In
December 2004, the FASB issued Statement of Financial 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-Based Compensation* (SFAS
No. 123). Statement 123(R) supersedes Accounting Principles Board (APB) Opinion
No. 25, *Accounting
for Stock Issued to Employees,* (APB No.
25). SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative.
Additionally, SFAS No. 123(R) amends the presentation of the statement of cash
flows and requires additional annual disclosures. SFAS No. 123(R) is effective
for public companies beginning with the first interim period that begins after
June 15, 2005. We expect to adopt SFAS No. 123(R) on June 27, 2005, but we have
not yet determined if we will use the modified prospective method or one of the
modified-retrospective methods. As permitted by SFAS No. 123, we currently
account for share-based payments to employees using the intrinsic value method
in accordance with the recognition and measurement principles of APB No. 25,
and, as such, generally recognize no compensation cost for employee stock
options, as options granted under our plans have an exercise price equal to or
greater than the fair value of the underlying common stock on the date of grant.
The impact of adoption of SFAS No. 123(R), which may be material, cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted SFAS No. 123(R) in prior periods,
its impact would have approximated the impact of SFAS No. 123 as described in
the disclosure of pro forma net income and earnings per share in Stock-Based
Compensation (Note 1 to the consolidated financial statements).




**Results
of Operations**




The
following table sets forth, for the periods indicated, certain selected
financial data:




****
    
    **Fiscal
      Year Ended****2004**
    
    
    2003
    
    
    2002Service
      revenues
    
    
    **100.0**
    **%**
    
    100.0
    %
    
    100.0
    %Cost
      of services rendered
    
    
    **78.4**
    
    
    77.6
    
    
    74.8Gross
      profit
    
    
    **21.6**
    
    
    22.4
    
    
    25.2Selling,
      general and administrative expenses
    
    
    **16.0**
    
    
    15.4
    
    
    14.8Corporate
      and administrative expenses
    
    
    **3.7**
    
    
    2.3
    
    
    1.5Depreciation
      and amortization expenses
    
    
    **1.5**
    
    
    1.3
    
    
    1.0Income
      from operations
    
    
    **0.4**
    
    
    3.4
    
    
    7.9Loss
      on early extinguishment of debt
    
    
    **-**
    
    
    0.7
    
    
    -Interest
      expense, net
    
    
    **0.9**
    
    
    0.9
    
    
    1.6Income
      (loss) from continuing operations before provision for (benefit from)
      income taxes
    
    
    **(0.5**
    **)**
    
    1.8
    
    
    6.3Provision
      for (benefit from) income taxes
    
    
    **(0.2**
    **)**
    
    0.7
    
    
    2.6Income
      (loss) from continuing operations
    
    
    **(0.3**
    **)**
    
    1.1
    
    
    3.7Income
      (loss) from discontinued operations, net of taxes
    
    
    **-**
    
    
    (0.1
    )
    
    -Net
      income (loss)
    
    
    **(0.3**
    **)**
    
    1.0
    
    
    3.7




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






***Service
Revenues.*** Service
revenues decreased $95.9 million, or 18.7%, to $417.1 million for the
year ended December 26, 2004 as compared to $513.0 million for the
comparable prior year period. The decrease was due to a lower number of hours
worked by professionals caused by the current weak demand for temporary
healthcare staffing, partially offset by revenues from the acquisition we made
in the first quarter of 2003. Average hourly billing rates remained relatively
consistent with those in the comparable prior year period.





21


Per diem
nurse staffing revenues decreased $59.0 million, or 15.9%, to
$311.2 million for the year ended December 26, 2004 as compared to
$370.2 million for the comparable prior year period. The decrease was
primarily due to a decrease in the number of hours worked by
professionals.




Revenues
from other than per 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 comparable
prior year period. The decrease was the result of a lower number of hours worked
by professionals.




***Cost
of Services Rendered.*** Cost of
services rendered decreased $71.1 million, or 17.9%, to $327.1 million
for the year ended December 26, 2004 as compared to $398.2 million for the
comparable prior year period. The decrease was due to a lower number of hours
worked by professionals, partially offset by higher compensation and benefits
associated with 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
comparable prior year period. The decrease was primarily due to the reduction in
service revenues coupled with a decrease in gross margin. Gross margin for the
year ended December 26, 2004 was 21.6% as compared with 22.4% for the comparable
prior year period. The decrease was primarily due to higher benefits and
insurance costs associated with our healthcare professionals and other direct
costs.




***Selling,
General and Administrative.*** Selling,
general and administrative expenses decreased to $66.6 million, or 16.0% of
revenues for the year ended December 26, 2004, as compared to
$78.8 million, or 15.4% of revenues for the comparable prior year period.
The decrease was primarily due to the elimination of expenses associated with
locations closed and other cost reduction programs implemented as part of a
restructuring initiative that was implemented in the second quarter of 2003.
Additionally, the second quarter of 2003 included a $0.8 million restructuring
charge associated with the restructuring initiative.




***Corporate
and Administrative.*** Corporate and administrative expenses increased to $15.5 million, or 3.7%
of revenues for the year ended December 26, 2004, as compared to
$11.7 million, or 2.3% of revenues for the comparable prior year period.
The increase was primarily due to increased professional fees including those
associated with Sarbanes-Oxley implementation and compliance, a charge recorded
in the second quarter of 2004 associated with executive severance and search
costs and an increase in employee benefits.




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




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




***Interest
Expense, Net.*** Interest
expense, net, decreased to $3.5 million for the year ended December 26,
2004 as compared to $4.7 million for the comparable prior year period. The
decrease was primarily due to lower average outstanding borrowings.




***Provision
for (Benefit from) Income Taxes.***  Our
effective income tax benefit rate for the year
ended December 26, 2004 was
31.7% as compared to an effective income tax provision rate of 40.2% in the
comparable prior year period. The decrease in the effective tax benefit rate is
due to nondeductible items having a greater percentage impact on the rate than
on the actual tax dollar amount.




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




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





22


***Comparison
of Year Ended December 28, 2003 to Year Ended December 29,
2002***




***Service
Revenues.*** Our
service revenues for 2003 increased $34.2 million, or 7.1%, from
$478.8 million in 2002 to $513.0 million in 2003. Our revenue growth
for the year ended December 28, 2003 was primarily the result of acquisitions,
which more than offset an organic decline of 7.6%. The organic decline was
attributable to a decrease in the number of hours worked by professionals due to
the current weak demand for temporary healthcare staffing. For the year ended
December 28, 2003, we had an organic decline from our continuing branch
locations of 3.2%. For the year ended December 28, 2003, price rates increased
less than 1% over the same period in 2002.




A portion
of the increase in revenues for the year ended December 28, 2003 was
attributable to a $4.0 million, or 1.1% increase in our per diem nurse
staffing revenues from $366.2 million for the year ended December 29, 2002
to $370.2 million for the year ended December 28, 2003. Of the
increase of $4.0 million in per diem nurse staffing revenues, growth from
acquisitions completed in 2002 and 2003 contributed $36.0 million, offset by an
organic decline from continuing locations of $16.7 million, and an organic
decline of $15.3 million attributable to the locations closed in the second
quarter restructuring.




The
remainder of the increase in service revenues is from our staffing divisions
other than the per diem nurse staffing division, which collectively increased
$30.2 million, or 26.7%, from $112.6 million for the year ended
December 29, 2002 to $142.8 million for the year ended
December 28, 2003. Of the increase of $30.2 million, acquisitions completed
in 2002 and 2003 contributed $34.6 million, offset by an organic decline of $4.4
million.




***Cost
of Services Rendered.*** Cost of
services rendered increased $39.8 million, or 11.1%, from
$358.4 million in 2002 to $398.2 million in 2003. The increase was
attributable to the increase in service revenues and higher compensation,
benefits and insurance costs associated with our healthcare professionals.




***Gross
Profit.*** Gross
profit decreased $5.6 million, or 4.7%, from $120.4 million in 2002 to
$114.8 million in 2003, driven primarily by higher compensation, benefits
and insurance costs associated with our healthcare professionals and other
direct costs, partially offset by the growth in service revenues. This resulted
in a gross margin percentage of 22.4% for the year ended December 28, 2003, as
compared to 25.2% for the year ended December 29, 2002.




***Selling,
General and Administrative Expenses.*** Selling,
general and administrative expenses increased $8.1 million, or 11.4%, from
$70.7 million in 2002 to $78.8 million in 2003. As a percentage of
revenue, selling, general and administrative expenses were 14.8% and 15.4% for
the years ended December 29, 2002 and December 28, 2003, respectively. The
increase is primarily attributable to the restructuring initiative completed
during the second quarter of 2003, the expansion of the branch-in-branch (BiB)
program prior to May 2003, and the acquisitions that the we made in the latter
half of 2002 and the early portion of 2003, partially offset by a $3.8 million
pre-tax charge we recorded in the fourth quarter of 2002 related to a client
bankruptcy.




***Corporate
and Administrative Expenses.*** Corporate and administrative expenses increased $4.3 million, or 59.1%,
from $7.4 million in 2002 to $11.7 million in 2003. The increase was
primarily due to increased infrastructure associated with the aforementioned
acquisitions and expansion of the BiB program. As a percentage of revenue,
corporate and administrative expenses were 1.5% and 2.3% for the years ended
December 29, 2002 and December 28, 2003, respectively.




***Depreciation
and Amortization Expenses.*** Depreciation and amortization expenses increased $2.3 million, or 51.0%,
from $4.5 million in 2002 to $6.8 million in 2003. The increase was
attributable to an increase in depreciation expense of $2.0 million related to
depreciation on fixed asset additions and an increase in amortization expense of
$0.3 million related to certain intangibles acquired in
acquisitions.




***Loss
on Early Extinguishment of Debt.*** ** There was
a loss on early extinguishment of debt of $3.6 million in 2003 due to the
December 2003 refinancing. There was no loss from the early extinguishment of
debt in 2002.





23


***Interest
Expense, Net.*** Net
interest expense decreased $2.9 million, or 38.4%, from $7.6 million
in 2002 to $4.7 million in 2003. The decrease was attributable to lower
average debt levels and lower interest rates for the year ended
December 28, 2003 as compared to the comparable period of 2002. The average
debt balance decreased as the proceeds from our initial public offering, which
was completed on April 23, 2002, was used to pay down a portion of our
outstanding debt.




***Provision
for Income Taxes.*** Our
provision for income taxes was $12.4 million in 2002 and $3.7 million
in 2003 representing effective tax rates of 41.0% in 2002 and 40.2% in 2003. The
decrease in our effective tax rate is attributable to lower expected state tax
expense.




***Income
(Loss) from Discontinued Operations, Net of Taxes.*** Income
(loss) from discontinued operations was income of $0.1 million in 2002 and
a loss of $0.5 million in 2003.




***Net
Income.*** As a
result of the above, net income decreased $12.9 million from
$17.9 million in 2002 to $5.0 million in 2003.




***Seasonality***




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




Historically,
the number of temporary healthcare professionals on assignment has increased
from December through March followed by declines or minimal growth from April
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 not necessarily
indicative of the results to be expected for any other quarter or for any year.





**Liquidity
and Capital Resources**




***Discussion
on Liquidity and Capital Resources***




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




Cash flow
from operations was $26.7 million for the year ended December 26, 2004
as compared to $36.7 million for the year ended December 28, 2003. During
the year ended December 26, 2004, we used cash generated from operations to
repay $24.3 million of borrowings under our senior credit facility and capital
lease obligations.




As of
December 26, 2004, we had net working capital of $49.9 million as compared to
$68.5 million as of December 28, 2003. The decrease was primarily due to a
significant reduction in accounts receivable.




Available
borrowings under our 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 2006 and a $17.0 million term loan (the Term
Loan) which was due in December 2005.




On June
25, 2004, we amended the Senior Credit Facility to reduce the Revolver capacity
from $65.0 million to $60.0 million. The amendment also favorably modified
certain financial covenants while increasing the applicable margin on the
Revolver by 0.5% and on the Term Loan by 1.0%. In conjunction with the
amendment, on July 1, 2004, we repaid $5.0 million of borrowings under the Term
Loan. The $5.0 million can not be re-borrowed





24
 
 under the
terms of the Term Loan. The impact of repaying the higher average interest rate
borrowings under the Term Loan, offset partially by the marginally higher
interest rates, will reduce the overall cost of capital under the Senior Credit
Facility going forward.




T he amount
that can be borrowed at any given time under the Revolver is based on a formula
that takes into account, among other things, eligible accounts receivable and an
availability reserve, which can result in borrowing availability of less than
the full capacity of the Revolver. The Revolver
bears interest at either prime rate or LIBOR plus an applicable margin (4.7% at
December 26, 2004) with interest payable monthly or as interest rate contracts
expire. The Term Loan bears interest at LIBOR plus an applicable margin (11.8%
at December 26, 2004) with interest payable as interest rate contacts expire.
Unused capacity under the Revolver bears interest at 0.5% and is payable
monthly. The Senior Credit Facility is secured by substantially all of our
assets and contains certain covenants that, among other things, limit the
payment of dividends, restrict additional indebtedness and obligations, and
require maintenance of certain financial ratios. As of December 26, 2004, we
were in compliance with all covenants.




As the
borrower under the Senior 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 on our subsidiary’s ability to distribute cash to us will limit our
ability to obtain and service any additional debt at the holding company level.
In addition, our subsidiary is subject to restrictions under the Senior Credit
Facility against incurring additional indebtedness.




For the
year ended December 26, 2004, the weighted average interest rate for the
loans under the Senior Credit Facility was 6.5%. As of December 26, 2004, the
blended rate for loans outstanding under the Senior Credit Facility was
7.4%.




As of
December 26, 2004, $12.0 million was outstanding on the Term Loan and $19.8
million was outstanding under the Revolver. As of December 26, 2004, an
additional $20.6 million was immediately available for borrowing under the
Revolver and we had cash and cash equivalents of $0.3 million.




On
February 24, 2005 we amended the terms of the Senior Credit Facility whereby the
Term Loan was reduced 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
certain financial covenants were amended. The $6.0 million Term Loan repayment
was funded with borrowings under the Revolver.




Capital
expenditures were $2.9 million for the year ended December 26, 2004 and were
$4.6 million for the comparable prior year period. The expenditures primarily
relate to the upgrade or replacement of various computer systems including
hardware, and purchased and internally developed software. We expect a similar
rate and type of capital expenditures on a going forward basis.




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




We
believe that our current cash balances, together with borrowing capacity under
the Senior Credit Facility and other available sources of liquidity, will be
sufficient for us to meet our current and future financial obligations, as well
as to provide us with funds for working capital, anticipated capital
expenditures and other needs 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 additional equity and debt financing to meet our working capital needs,
or to fund our acquisition activities, if any. There can be no assurance that
additional financing will be available when required or, if available, will be
available on satisfactory terms.





25


***Off-Balance
Sheet Arrangements***




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




***Contractual
Obligations***




The
following table reflects our significant contractual obligations and other
commitments as of December 26, 2004 (in thousands):




****
    
    **Payments
      due by period******
    
    
    
    
    **Less
      than**
    
    
    **2-3**
    
    
    **4-5**
    
    
    **After****Total**
    
    
    **1
      year**
    
    
    **years**
    
    
    **years**
    
    
    **5
      years**Long-term
      debt obligations
    
    $
    31,760
    
    $
    -
    
    $
    31,760
    
    $
    -
    
    $
    -Operating
      leases
    
    
    17,377
    
    
    4,753
    
    
    5,432
    
    
    2,591
    
    
    4,601Capital
      lease obligations
    
    
    418
    
    
    385
    
    
    33
    
    
    -
    
    
    -Total
    
    $
    49,555
    
    $
    5,138
    
    $
    37,225
    
    $
    2,591
    
    $
    4,601







**Critical
Accounting Policies**




In
response to the Securities and Exchange Commission (SEC) Release Number 33-8040
“Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and
SEC Release Number 33-8056, “Commission Statement about Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” we have
identified the following critical accounting policies that affect the more
significant judgments and estimates used in the preparation of the consolidated
financial statements. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
requires that we make estimates and judgments that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, we will evaluate our
estimates, including those related to asset impairment, accruals for
self-insurance and compensation and related benefits, allowance for doubtful
accounts, and contingencies and litigation. These estimates are based on the
information that is currently available to us and on various other assumptions
that we believe to be reasonable under the circumstances. Actual results could
vary from those estimates under different assumptions or conditions. For a
summary of all our significant accounting policies, including the critical
accounting policies discussed below, see Note 1 to the consolidated financial
statements included in this Annual Report on Form 10-K.




We
believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements:




·
    We
      maintain an allowance for doubtful accounts for estimated losses resulting
      from the inability of our customers to make required payments, which
      results in a provision for bad debt expense. The adequacy of this
      allowance is determined by continually evaluating customer receivables,
      considering the customers’ financial condition, credit history and current
      economic conditions. If the financial condition of our customers were to
      deteriorate, resulting in an impairment of their ability to make payments,
      additional allowances would be required.




26




·
    We
      have recorded goodwill and other intangibles resulting from our
      acquisitions through December 26, 2004. Through December 30, 2001,
      goodwill and other intangibles were amortized on a straight-line basis
      over their lives of 6 to 20 years. Pursuant to the provisions of SFAS No.
      142,*Goodwill
      and Other Intangible Assets*,
      which we adopted in 2002, goodwill and intangible assets deemed to have an
      indefinite life are no longer amortized. We evaluate the recovery of the
      carrying amount of costs in excess of net tangible assets acquired by
      determining if an impairment has occurred. This evaluation is done
      annually or more frequently if indicators of an impairment arise.
      Indicators of an impairment include duplication of resources resulting
      from acquisitions, instances in which the estimated undiscounted cash
      flows of the entity are less than the remaining unamortized balance of the
      underlying intangible assets and other factors. At such time that
      impairment is determined, the intangible assets are written off during
      that period. If we are required to record an impairment charge in the
      future, it would have an adverse impact on results of
      operations.




·
    We
      maintain an accrual for our health, workers compensation and professional
      liability that are either self-insured or partially self-insured and are
      classified in accounts payable and accrued expenses. The adequacy of these
      accruals is determined by periodically evaluating our historical
      experience and trends related to health, workers compensation, and
      professional liability claims and payments, based on company-specific
      actuarial computations and industry experience and trends. If such
      information indicates that the accruals are overstated or understated, we
      will adjust the assumptions utilized in the methodologies and reduce or
      provide for additional accruals as
appropriate.




·
    We
      are subject to various claims and legal actions in the ordinary course of
      our business. Some of these matters include professional liability and
      employee-related matters. Hospital and healthcare facility clients may
      also become subject to claims, governmental inquiries and investigations
      and legal actions to which we may become a party relating to services
      provided by our professionals. From time to time, and depending upon the
      particular facts and circumstances, we may be subject to indemnification
      obligations under our contracts with hospital and healthcare facility
      clients relating to these matters. Although we are currently not aware of
      any such pending or threatened litigation that we believe is reasonably
      likely to have a material adverse effect on our financial condition or
      results of operations, if we become aware of such claims against us, we
      will evaluate the probability of an adverse outcome and provide accruals
      for such contingencies as necessary.




**Caution
Concerning Forward-Looking Statements**




The SEC
encourages companies to disclose forward-looking information so that investors
can better understand a company’s future prospects and make informed investment
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, operating income and cash
flow. Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar
expressions are forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results
and performance to be materially different from any future results or
performance expressed or implied by these forward-looking statements. These
factors include the following:




·
    Our
      ability to attract and retain qualified nurses and other healthcare
      personnel;




·
    The
      overall level of demand for services provided by temporary
      nurses;




·
    Our
      ability to enter into contracts with hospital and healthcare facility
      clients on terms attractive to us;




·
    The
      willingness of hospital and healthcare facility clients to utilize
      temporary healthcare staffing services;




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




·
    The
      functioning of our information systems;




27




·
    The
      effect of existing or future government regulation and federal and state
      legislative and enforcement initiatives on our
business;




·
    Our
      clients’ ability to pay for services;




·
    Our
      ability to successfully implement our acquisition and integration
      strategies;




·
    The
      effect of liabilities and other claims asserted against
  us;




·
    The
      effect of competition in the markets we serve;
and




·
    Our
      ability to carry out our business strategy.




Although
we believe that these statements are based upon reasonable assumptions, we
cannot guarantee future results. Given these uncertainties, the forward-looking
statements discussed herein might not occur.




**Item 7A. Quantitative and Qualitative Disclosures About Market
Risk**




**Interest
Rate Risk**




Our
exposure to interest rate risk arises principally from the variable rates
associated with our credit facility. On December 26, 2004, we had
borrowings of $31.8 million under our credit facility that were subject to
variable rates, with a blended rate of 7.4%. As of December 26, 2004, an
adverse change of 1.0% in the interest rate of all such borrowings outstanding
would have caused us to incur an increase in interest expense of approximately
$0.3 million on an annual basis.




**Foreign
Currency Risk**




We have
no foreign currency risk as we have no revenue outside the United States and all
of our revenues are in U.S. dollars.




**Inflation**




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




**Item 8. Financial Statements and Supplementary
Data**




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




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




We have
had no disagreements with our independent accountants on any matter of
accounting principles or practices or financial statement
disclosure.





28


**Item 9A. Controls and Procedures**


****




The term
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) refers to the controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this annual report (the "Evaluation Date"). Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, such controls and procedures were
effective.
****
**Management’s
Report on Internal Control Over Financial Reporting**




Management's
Report on Internal Control Over Financial Reporting, which appears on page F-2 of this Annual Report on Form 10-K, is
incorporated by reference herein.




**Changes
in Internal Controls**




The term
"internal control over financial reporting" (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) refers to the process of a company that is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our management, with
the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated our internal control over financial reporting and concluded that no
changes in internal control over financial reporting occurred during the quarter
ended December 26, 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.


**Item 9B. Other Information**




None





29


**PART
III.**




**Item 10. Directors and Executive Officers of the
Registrant**




Information
regarding our directors and executive officers is included in our Proxy
Statement for the 2005 Annual Meeting of Stockholders under the captions “Board
Nominees Proposal-Directors and Executive Officers”, “ *—* Class I
Directors-Term Expiring 2008”, “ *—* Class III
Directors-Term Expiring 2007”, “ *—* Nominees
for Class II Directors *—* Term
Expiring 2006”, “ *—* Non-Director
Executive Officers”, “ *—* Board of
Directors and Committees”, “ *—* Compliance
with Section 16(a) of the Exchange Act” and “ *—* Code of
Business Conduct and Ethics” and is incorporated herein by reference.




**Item 11. Executive Compensation**




Information
regarding executive compensation is included in our Proxy Statement for the 2005
Annual Meeting of Stockholders under the captions “Board Nominees
Proposal *—* Board of
Directors and Committees”, “Director Compensation,” “ *—* Executive
Compensation”, “ *—* Employment
Agreements”, and “ *—* Compensation
Committee Interlocks and Insider Participation” and is incorporated herein by
reference.




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




Information
regarding security ownership of certain beneficial owners and management and
related stockholder matters is included in our Proxy Statement for the 2005
Annual Meeting of Stockholders under the caption “Board Nominees
Proposal-Principal Stockholders” and is incorporated herein by
reference.




**Item 13. Certain Relationships and Related
Transactions**




Information
regarding certain relationships and related transactions is included in our
Proxy Statement for the 2005 Annual Meeting of Stockholders under the caption
“Board Nominees Proposal *—* Certain
Transactions” and is incorporated herein by reference.




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




Information
regarding principal accounting fees and services is included in our Proxy
Statement for the 2005 Annual Meeting of Stockholders under the caption
“Independent Public Accountants” and is incorporated herein by
reference.





30


**PART
IV.**




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




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




1.  Financial
Statements




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




2.  Financial
Statement Schedules




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




3.  Exhibits:




See the
Exhibit Index on page 33 of this Annual Report on
Form 10-K.





31


**SIGNATURES**




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




Medical
      Staffing Network Holdings, Inc.By:/s/ Robert
      J. AdamsonRobert
      J. AdamsonChairman
      of the Board, Chief Executive Officer and
Director




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




**Signature**
    **Title**
    **Date**/s/
      Robert J. Adamson
      Robert
      J. Adamson
    Chairman
      of the Board, Chief Executive Officer and Director
      (Principal
      Executive Officer)
    March
      11, 2005/s/
      N. Larry McPherson
      N.
      Larry McPherson
    Chief
      Financial Officer (Principal Financial Officer and
      Principal
      Accounting Officer)
    March
      11, 2005/s/
      Joel
      Ackerman
      Joel
      Ackerman
    Director
    March
      11, 2005/s/
      Anne
      Boykin
      Anne
      Boykin
    Director
    March
      11, 2005/s/
      C. Daryl
      Hollis
      C.
      Daryl Hollis
    Director
    March
      11, 2005/s/
      Philip
      Incarnati
      Philip
      Incarnati
    Director
    March
      11, 2005/s/
      David J. Wenstrup
      David
      J. Wenstrup
    Director
    March
      11, 2005/s/
      David
      Wester
      David
      Wester
    Director
    March
      11, 2005





32


**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)).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)).





33




**Exhibit
      No.**
    **Description**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)).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)).





34




**Exhibit
      No.**
    **Description**10.17+
    Employment
      Agreement, among Medical Staffing Network, Inc., Medical Staffing Network
      Holdings, Inc. and Gary Peck, dated March 10, 2005 (filed
      herewith).10.18+
    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)).10.19+
    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)).10.20+
    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)).10.21+
    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)).10.22
    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)).10.23
    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)).10.24
    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)).10.25
    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)).10.26
    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)).10.27
    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)).


35




**Exhibit
      No**
    **Description**10.28
    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)).10.29
    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)).10.30
    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)).10.31
    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)).10.32
    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)).10.33
    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)).10.34
    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)).10.35
    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)).10.36
    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)).10.37
    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)).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).
  36
  **Exhibit
      No.**
    **Description**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).
 ___________


+  Management
contract or compensatory plan.








37




**INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS**


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**Contents**









Management's Report on Internal Control Over
      Financial Reporting
    
    
    F-2Reports of Independent Registered Public
      Accounting Firm
    
    
    F-3Consolidated
      Balance Sheets as of December26,
      2004 and December28,
      2003
    
    
    F-5Consolidated
      Statements of Operations for the years ended December26,
      2004, December28,
      2003 and December29,
      2002
    
    
    F-6Consolidated Statements of Changes in
      Redeemable Preferred Stock and Common Stockholders’ (Deficit) Equity for
      the years
      ended
      Deecember29,
      2002,December28,
      2003 and December26,
      2004
    
    
    F-7Consolidated
      Statements of Cash Flows for the years ended December26,
      2004, December28,
      2003 and December29,
      2002
    
    
    F-9Notes to Consolidated Financial
    Statements
    
    
    F-11












F-1




**MANAGEMENT'S
REPORT ON INTERNAL CONTROL****OVER
FINANCIAL REPORTING**


Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, and for performing an assessment of the effectiveness of
internal control over financial reporting as of December 26, 2004. Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company's system of internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company's assets that could have a material effect on the
financial statements.
  Management
performed an assessment of the effectiveness of the Company's internal control
over financial reporting as of December 26, 2004 based upon criteria in *Internal
Control - Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, management determined that the Company's internal
control over financial reporting was effective as of December 26, 2004
based on the criteria in *Internal
Control-Integrated Framework* issued
by COSO.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 26, 2004 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
which is included herein.


Dated
February 24, 2005




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

















F-2




**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**
  The Board
of Directors and Shareholders


Medical
Staffing Network Holdings, Inc.





We have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Medical Staffing
Network Holdings, Inc. maintained effective internal control over financial
reporting as of December 26, 2004, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Medical Staffing Network
Holdings, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.




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




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




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




In our
opinion, management’s assessment that Medical Staffing Network Holdings, Inc.
maintained effective internal control over financial reporting as of December
26, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Medical Staffing Network Holdings, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 26, 2004, based on **** the COSO
criteria **.**




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2004 consolidated financial statements of
Medical Staffing Network Holdings, Inc. and our report dated February 24, 2005
expressed an unqualified opinion thereon.




/s/ Ernst
& Young LLP


Certified
Public Accountants




Fort
Lauderdale, Florida


February
24, 2005





F-3




**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**


Board of
Directors and Stockholders


Medical
Staffing Network Holdings, Inc.




We have
audited the accompanying consolidated balance sheets of Medical Staffing Network
Holdings, Inc. and Subsidiaries (the Company) as of December 26, 2004 and
December 28, 2003, and the related consolidated statements of operations,
changes in redeemable preferred stock and common stockholders’ equity (deficit),
and cash flows for each of the three years in the period ended December 26,
2004. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.




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




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Medical Staffing
Network Holdings, Inc. and Subsidiaries at December 26, 2004 and December 28,
2003, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 26, 2004, in conformity
with U.S. generally accepted accounting principles.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Medical Staffing Network
Holdings, Inc.’s internal control over financial reporting as of December 26,
2004, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 24, 2005, expressed an unqualified opinion
thereon.




/s/ Ernst
& Young LLP


Certified
Public Accountants




Fort
Lauderdale, Florida


February
24, 2005





F-4


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED BALANCE SHEETS**
 **(in
thousands, except per share amounts)**


**December
      26,**
    
    
    December
      28,**2004**
    
    
    2003**ASSETS**Current
      assets:Cash
      and cash equivalents
    
    **$******
    ******345**
    
    $
    825Accounts
      receivable, net of allowance for doubtful accounts of**$1,064**and $1,920 at**December
      26, 2004**
      and
      December 28, 2003, respectively
    
    
    **57,478**
    
    
    68,602Prepaid
      expenses
    
    
    **6,406**
    
    
    9,140Other
      current assets
    
    
    **4,758**
    
    
    4,645Total
      current assets
    
    
    **68,987**
    
    
    83,212Furniture
      and equipment, net of accumulated depreciation of**$18,650**and $13,112 at**December
      26, 2004**
      and
      December 28, 2003, respectively
    
    
    **8,481**
    
    
    11,377Goodwill,
      net of accumulated amortization of**$8,545**at
      both**December
      26, 2004**and December 28, 2003
    
    
    **129,474**
    
    
    125,028Intangible
      assets, net of accumulated amortization of**$1,663**and $1,174 at**December
      26, 2004**and
      December
      28, 2003, respectively
    
    
    **2,438**
    
    
    3,187Other
      assets
    
    
    **1,523**
    
    
    6,066Total
      assets
    
    **$******
    ******210,903**
    
    $
    228,870**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      liabilities:Accounts
      payable and accrued expenses
    
    **$******
    ******12,072**
    
    $
    7,048Accrued
      payroll and related liabilities
    
    
    **6,597**
    
    
    6,616Current
      portion of capital lease obligations
    
    
    **385**
    
    
    1,090Total
      current liabilities
    
    
    **19,054**
    
    
    14,754Long-term
      debt
    
    
    **31,760**
    
    
    54,978Deferred
      income taxes
    
    
    **9,808**
    
    
    7,115Capital
      lease obligations, net of current portion
    
    
    **33**
    
    
    418Other
      liabilities
    
    
    **222**
    
    
    318Total
      liabilities
    
    
    **60,877**
    
    
    77,583Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.01 par value, 75,000 authorized:**30,231**and 30,209 issued and outstanding
      at**December
      26, 2004**and December 28, 2003, respectively
    
    
    **302**
    
    
    302Additional
      paid-in capital
    
    
    **284,411**
    
    
    284,346Accumulated
      deficit
    
    
    **(134,687******
    ******)**
    
    (133,361
    )Total
      stockholders’ equity
    
    
    **150,026**
    
    
    151,287Total
      liabilities and stockholders’ equity
    
    **$******
    ******210,903**
    
    $
    228,870





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





F-5


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF
OPERATIONS**
 **(in
thousands, except per share amounts)**


****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Service
      revenues
    
    **$******
    ******417,058**
    
    $
    512,985
    
    $
    478,827Cost
      of services rendered
    
    
    **327,075**
    
    
    398,224
    
    
    358,394Gross
      profit
    
    
    **89,983**
    
    
    114,761
    
    
    120,433Operating
      expenses:Selling,
      general and administrative
    
    
    **66,576**
    
    
    78,771
    
    
    70,716Corporate
      and administrative
    
    
    **15,491**
    
    
    11,748
    
    
    7,386Depreciation
      and amortization
    
    
    **6,316**
    
    
    6,773
    
    
    4,486Income
      from operations
    
    
    **1,600**
    
    
    17,469
    
    
    37,845Loss
      on early extinguishment of debt
    
    
    **-**
    
    
    3,555
    
    
    -Interest
      expense, net
    
    
    **3,541**
    
    
    4,685
    
    
    7,603Income
      (loss) from continuing operations before income taxes
    
    
    **(1,941**
    **)**
    
    9,229
    
    
    30,242Provision
      for (benefit from) income taxes
    
    
    **(615******
    ******)**
    
    3,708
    
    
    12,400Income
      (loss) from continuing operations
    
    
    **(1,326**
    **)**
    
    5,521
    
    
    17,842Income
      (loss) from discontinued operations, net of taxes
    
    
    **-**
    
    
    (506
    )
    
    52Net
      income (loss)
    
    
    **(1,326**
    **)**
    
    5,015
    
    
    17,894Deduct
      required dividends on convertible preferred stock
    
    
    **-**
    
    
    -
    
    
    3,099Income
      (loss) available to common stockholders
    
    **$**********
    ******(1,326******
    **********)**
    $
    5,015
    
    $
    14,795Income
      (loss) per share - basic:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.70Discontinued
      operations, net of taxes
    
    
    -
    
    
    (0.01
    )
    
    **-**Basic
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.70Income
      (loss) per share - diluted:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.62Discontinued
      operations, net of taxes
    
    
    -
    
    
    (0.02
    )
    
    **-**Diluted
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.16
    
    $
    0.62Weighted
      average number of common shares outstanding:Basic
    
    
    **30,228**
    
    
    30,190
    
    
    21,177Diluted
    
    
    **30,228**
    
    
    30,807
    
    
    28,637




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





F-6


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE
PREFERRED STOCK**
 **AND
COMMON STOCKHOLDERS’ EQUITY (DEFICIT)**
 **(in
thousands)**


**Redeemable**
    **Common
      Stockholders’****Preferred
      Stock**
    **Equity
      (Deficit)******
    
    
    **Additional****Series I**
    **Common
      Stock**
    
    **Paid-in******
    
    
    **Shares**
    
    
    **Dollars**
    
    
    **Shares**
    
    
    **Par**
    
    
    **Capital****Balance
      at December 30, 2001**
    
    
    **6,603**
    
    **$******
    ******124,617**
    
    
    **27**
    
    **$******
    ******-**
    
    **$******
    ******-**Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Unrealized
      loss on derivative, net of taxes
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Comprehensive
      incomeDividends
      on Series I Convertible Preferred Stock
    
    
    -
    
    
    3,099
    
    
    -
    
    
    -
    
    
    -Conversion
      of redeemable preferred stock into common stock
    
    
    (6,603
    )
    
    (127,716
    )
    
    21,076
    
    
    211
    
    
    127,505Sale
      of common stock under public offering, net of expenses
    
    
    -
    
    
    -
    
    
    8,984
    
    
    90
    
    
    156,189Stock
      subscription payment
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Exercise
      of stock options
    
    
    -
    
    
    -
    
    
    32
    
    
    -
    
    
    154**Balance
      at December 29, 2002**
    
    
    **-**
    
    
    **-**
    
    
    **30,119**
    
    
    **301**
    
    
    **283,848**Net
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Unrealized
      loss on derivative, net of taxes
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Comprehensive
      incomeExercise
      of stock options
    
    
    -
    
    
    -
    
    
    90
    
    
    1
    
    
    498**Balance
      at December 28, 2003**
    
    
    **-**
    
    
    **-**
    
    
    **30,209**
    
    
    **302**
    
    
    **284,346**Net
      loss and comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Exercise
      of stock options
    
    
    -
    
    
    -
    
    
    22
    
    
    -
    
    
    65**Balance
      at December 26, 2004**
    
    
    **-**
    
    **$******
    ******-**
    
    
    **30,231**
    
    **$******
    ******302**
    
    **$******
    ******284,411**







*Continued
on next page.*




F-7




**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CHANGES IN REDEEMABLE PREFERRED STOCK**
 **AND
COMMON STOCKHOLDERS’ EQUITY (DEFICIT) - (Continued)**
 **(in
thousands)**


**Common
      Stockholders’ Equity (Deficit)****Promissory**
    
    
    **Accumulated
      Other Comprehensive**
    
    
    **Retained**
      **Earnings
      (Accumulated****Notes**
    
    
    **Loss**
    
    
    **Deficit)**
    ****
    
    **Total****Balance
      at December 30, 2001**
    
    **$******
    ******(4,551**
    ******)**
    **$******
    ******-**
    
    **$******
    ******(153,171**
    ******)**
    **$******
    ******(157,722**
    ******)**Net
      income
    
    
    -
    
    
    -
    
    
    17,894
    
    
    17,894Unrealized
      loss on derivative, net of taxes
    
    
    -
    
    
    (105
    )
    
    -
    
    
    (105
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    17,789Dividends
      on Series I Convertible Preferred Stock
    
    
    -
    
    
    -
    
    
    (3,099
    )
    
    (3,099
    )Conversion
      of redeemable preferred stock into common stock
    
    
    -
    
    
    -
    
    
    -
    
    
    127,716Sale
      of common stock under public offering, net of expenses
    
    
    -
    
    
    -
    
    
    -
    
    
    156,279Stock
      subscription payment
    
    
    4,551
    
    
    -
    
    
    -
    
    
    4,551Exercise
      of stock options
    
    
    -
    
    
    -
    
    
    -
    
    
    154**Balance
      at December 29, 2002**
    
    
    **-**
    
    
    **(105**
    **)**
    
    **(138,376**
    **)**
    
    **145,668**Net
      income
    
    
    -
    
    
    -
    
    
    5,015
    
    
    5,015Unrealized
      loss on derivative, net of taxes
    
    
    -
    
    
    105
    
    
    -
    
    
    105Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    5,120Exercise
      of stock options
    
    
    -
    
    
    -
    
    
    -
    
    
    499**Balance
      at December 28, 2003**
    
    
    **-**
    
    
    **-**
    
    
    **(133,361**
    **)**
    
    **151,287**Net
      loss and comprehensive loss
    
    
    -
    
    
    -
    
    
    (1,326
    )
    
    (1,326
    )Exercise
      of stock options
    
    
    -
    
    
    -
    
    
    -
    
    
    65**Balance
      at December 26, 2004**
    
    **$******
    ******-**
    
    **$******
    ******-**
    
    **$**********
    ******(134,687******
    **********)**
    **$******
    ******150,026**





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





F-8


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(in
thousands)**


****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002**Operating
      activities**Net
      income (loss)
    
    **$******
    ******(1,326**
    ******)**
    $
    5,015
    
    $
    17,894Loss
      (income) from discontinued operations, net of taxes
    
    
    **-**
    
    
    506
    
    
    (52
    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Loss
      on early extinguishment of debt
    
    
    **-**
    
    
    3,555
    
    
    -Depreciation
      and amortization
    
    
    **6,316**
    
    
    6,773
    
    
    4,486Amortization
      of debt issuance cost
    
    
    **694**
    
    
    1,094
    
    
    851Deferred
      income taxes
    
    
    **2,568**
    
    
    4,618
    
    
    1,526Provision
      for doubtful accounts
    
    
    **1,213**
    
    
    3,226
    
    
    6,259Other
    
    
    **55**
    
    
    91
    
    
    364Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    **9,911**
    
    
    22,396
    
    
    (28,216
    )Prepaid
      expenses and other current assets
    
    
    **2,511**
    
    
    (5,440
    )
    
    (2,554
    )Other
      assets
    
    
    **(132**
    **)**
    
    (564
    )
    
    (1,395
    )Accounts
      payable and accrued expenses
    
    
    **5,024**
    
    
    (1,458
    )
    
    (3,039
    )Accrued
      payroll and related liabilities
    
    
    **(19**
    **)**
    
    (2,787
    )
    
    (682
    )Other
      liabilities
    
    
    **(96******
    ******)**
    
    194
    
    
    (1,473
    )Cash
      provided by (used in) continuing operations
    
    
    **26,719**
    
    
    37,219
    
    
    (6,031
    )Cash
      provided by (used in) discontinued operations
    
    
    **-**
    
    
    (500
    )
    
    163Cash
      provided by (used in) operating activities
    
    
    **26,719**
    
    
    36,719
    
    
    (5,868
    )**Investing
      activities**Cash
      paid for acquisitions, net of cash acquired
    
    
    **(24**
    **)**
    
    (10,803
    )
    
    (58,095
    )Purchases
      of furniture and equipment, net
    
    
    **(1,179**
    **)**
    
    (3,516
    )
    
    (4,144
    )Capitalized
      internal software costs
    
    
    **(1,753******
    ******)**
    
    (1,113
    )
    
    (2,299
    )Net
      cash used in investing activities
    
    
    **(2,956**
    **)**
    
    (15,432
    )
    
    (64,538
    )**Financing
      activities**Net
      repayments under revolving credit facility
    
    
    **(18,218**
    **)**
    
    (15,575
    )
    
    (2,000
    )Proceeds
      from borrowings on term loan
    
    
    **-**
    
    
    12,000
    
    
    90,000Principal
      payments on term loan
    
    
    **(5,000**
    **)**
    
    (20,877
    )
    
    (125,000
    )Payment
      on promissory note and other debt
    
    
    **-**
    
    
    -
    
    
    (59,354
    )Proceeds
      from sale of common stock, net of issuance costs
    
    
    **-**
    
    
    -
    
    
    156,279Proceeds
      from exercise of stock options
    
    
    **65**
    
    
    499
    
    
    154Principal
      payments under capital lease obligations
    
    
    **(1,090**
    **)**
    
    (1,104
    )
    
    (882
    )Proceeds
      from promissory notes
    
    
    **-**
    
    
    -
    
    
    4,551Net
      cash provided by (used in) financing activities
    
    
    **(24,243******
    ******)**
    
    (25,057
    )
    
    63,748




*Continued
on next page.*





F-9


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS - (Continued)**
 **(in
thousands)**


****
    
    **Years
      Ended******
    
    
    **December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Net
      decrease in cash
    
    **$******
    ******(480**
    ******)**
    $
    (3,770
    )
    $
    (6,658
    )Cash
      and cash equivalents at beginning of year
    
    
    **825**
    
    
    4,595
    
    
    11,253Cash
      and cash equivalents at end of year
    
    **$******
    ******345**
    
    $
    825
    
    $
    4,595Supplemental
      disclosure of noncash investing and financing activities: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
    
    $
    -Purchases
      of equipment through capital leases
    
    **$******
    ******-**
    
    $
    185
    
    $
    2,076Capital
      leases assumed in connection with acquisitions
    
    **$******
    ******-**
    
    $
    -
    
    $
    213Additional
      consideration to be paid relating to acquisitions
    
    **$******
    ******-**
    
    $
    113
    
    $
    -Supplemental
      disclosures of cash flow information:Interest
      paid
    
    **$******
    ******23**
    
    $
    3,982
    
    $
    4,871Income
      taxes paid
    
    **$******
    ******58**
    
    $
    3,394
    
    $
    7,882




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





F-10


**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 **1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES**




***Organization***




Medical
Staffing Network Holdings, Inc. (the Company), a Delaware corporation, is a
provider of temporary staffing services in the United States. The Company's per
diem healthcare staffing assignments place professionals, predominately nurses,
at hospitals and other healthcare facilities to solve temporary staffing needs.
The Company also provides staffing of allied health professionals such as
specialized radiology and diagnostic imaging specialists and clinical laboratory
technicians. During 2004, the Company expanded its services to provide temporary
general staffing. The Company’s per diem general staffing assignments place
individuals in a variety of areas including clerical, janitorial and food
services. The Company's temporary healthcare staffing client base includes
for-profit and non-profit hospitals, teaching hospitals, and regional healthcare
providers. The Company considers the different services described above to be
one segment as each of these services relate solely to providing temporary
staffing to customers and the Company utilizes similar distribution methods,
common systems, databases, procedures, processes and similar methods of
identifying and serving these customers. The operating results of the services
provided within this segment are reviewed in the aggregate by the Company's
chief operating decision maker when making resource allocation decisions and
assessing performance of the individual components. The Company does not prepare
financial information other than limited information on a branch by branch
basis, and as such the chief operating decision maker generally does not review
information at any level other than the temporary staffing business in total.
Temporary staffing services represent 100% of the Company's consolidated revenue
for years ended December 26, 2004, December 28, 2003 and
December 29, 2002.




***Recent
Accounting Pronouncements***




**Stock-Based
Compensation**




In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial 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-Based Compensation* (SFAS
No. 123). Statement 123(R) supersedes Accounting Principles Board (APB) Opinion
No. 25, *Accounting
for Stock Issued to Employees,* (APB No.
25). SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure is no longer an alternative.
Additionally, SFAS No. 123(R) amends the presentation of the statement of cash
flows and requires additional annual disclosures. SFAS No. 123(R) is effective
for public companies beginning with the first interim period that begins after
June 15, 2005. The Company expects to adopt SFAS No. 123(R) on June 27, 2005,
but has not yet determined if it will use the modified prospective method or one
of the modified-retrospective methods. As permitted by SFAS No. 123, the Company
currently accounts for share-based payments to employees using the intrinsic
value method in accordance with the recognition and measurement principles of
APB No. 25, and, as such, generally recognizes no compensation cost for employee
stock options, as options granted under the Company’s plans have an exercise
price equal to or greater than the fair value of the underlying common stock on
the date of grant. The impact of adoption of SFAS No. 123(R), which may be
material, cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, its impact would have approximated the impact
of SFAS No. 123 as described in the disclosure of pro forma net income and
earnings per share in *Stock-Based
Compensation* (below).




***Summary
of Significant Accounting Policies***




**Use
of Estimates**




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. The most
significant areas requiring the use of management estimates relate to the
determination of allowance for doubtful accounts, the





F-11
 
 **MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 determination
of required accruals for health, workers compensation and professional liability
that are partially self funded and the determination of estimates used in the
impairment analysis of goodwill and other intangible assets.




**Principles
of Consolidation**




The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Medical Staffing Holdings, LLC (MSN LLC), Medical
Staffing Network, Inc. (MSN Inc.), a wholly-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 intercompany transactions and balances have been eliminated in
consolidation.




The
Company’s fiscal year consists of 52/53 weeks ending on the last Sunday in
December in each year. Each of the years ended December 26, 2004, December 28,
2003 and December 29, 2002 consisted of 52 weeks.




**Cash
and Cash Equivalents**




For
purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Deposits in banks may exceed the amount of insurance provided
on such deposits. The Company performs reviews of the creditworthiness of its
depository banks. The Company has not experienced any losses on
deposits.




**Accounts
Receivable and Concentrations of Credit Risk**




Financial
instruments that potentially subject the Company to concentrations of credit
risk as defined by SFAS No. 105, *Disclosure
of Information About Financial Instruments With Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk* , consist
principally of accounts receivable. Concentrations of credit risk with respect
to trade accounts receivable are limited due to the large number of customers
and their dispersion across a number of geographic areas. However, essentially
all trade receivables are concentrated in the hospital and healthcare sectors in
the United States and, accordingly, the Company is exposed to their respective
business and economic variables. Although the Company does not currently foresee
a concentrated credit risk associated with these receivables, repayment is
dependent upon the financial stability of these industry sectors. The Company
does not generally require collateral. The allowance for doubtful accounts
represents the Company’s estimate for uncollectible receivables based on a
review of specific accounts and the Company’s historical collection experience.
The Company writes off specific accounts based on an ongoing review of
collectibility as well as management’s past experience with the customer.




**Furniture
and Equipment**




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




Certain
software development costs for internally developed software have been
capitalized in accordance with the provisions of Statement of Position 98-1, *Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.* These
capitalized costs include purchased software for internal use, consulting
services and costs for personnel associated with programming, coding and testing
such software during the application development stage. Amortization of
capitalized software costs begins when the software is placed into service and
is included in depreciation expense in the accompanying consolidated statements
of operations. Software development costs are being amortized using the
straight-line method over its estimated useful life of three years.





F-12


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


**Goodwill
and Other Intangible Assets**





Goodwill
represents the excess of purchase price over the fair value of net assets
acquired. Identifiable intangible assets are being amortized using the
straight-line method over their estimated useful lives ranging 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 intangible assets
deemed to have an indefinite useful life. Per SFAS No. 142, impairment for
goodwill and intangible assets deemed to have an indefinite life exists if the
net book value of the goodwill or intangible asset exceeds its fair value. The
Company estimates the fair value of the Company (including goodwill) in its
entirety, its only reporting unit, based on the market value of the Company’s
publicly traded common stock. Using this methodology, the estimated fair value
of the Company exceeded its carrying amount and the second step in testing for
impairment of goodwill was not necessary. The Company is currently evaluating
the determination of operating segments, which could effect the level at which
it tests for goodwill impairment. A change in the level in which the impairment
of goodwill is tested, may result in a noncash impairment charge to earnings,
based on the results of the testing performed. An impairment test is performed
annually, in the fourth quarter, or more frequently if circumstances indicate a
test is necessary. The Company’s identifiable intangibles are comprised of
noncompete agreements, contractor databases, trademarks, trade names and
customer relationships (see Note 5). The Company completed its annual impairment
test for all intangible assets during the fourth quarter of 2004 and determined
that there were no impairment indicators present.

The
Company accounts for long-lived assets with definite useful lives pursuant toSFAS No.
144,*Accounting
for the Impairment or Disposal of Long-Lived Assets*(SFAS
No. 144), which
requires impairment losses to be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of intangible assets
with a definite useful life is determined by comparison of the carrying amount
of the asset to net future cash flows expected to be generated from the asset.
Management reviews long-lived assets for impairment whenever events or changes
in circumstances indicate the assets may be impaired. An impairment loss is
recorded when the net book value of the assets exceeds the fair value, as
measured by projected undiscounted future cash flows. No impairment charges were
recorded in any of the years ended December 26, 2004, December 28, 2003 and
December 29, 2002.




**Reserves
for Claims**




Workers’
compensation, healthcare benefits and professional liability are provided under
self-insured and partially self-funded plans. The Company records its estimate
of the ultimate cost of, and reserves for, workers’ compensation and
professional liability based on actuarial computations and the Company’s loss
history as well as industry statistics. Furthermore, in determining its
reserves, the Company includes reserves for estimated claims incurred but not
reported. The ultimate cost of workers’ compensation, healthcare benefits and
professional liability will depend on actual costs incurred to settle the claims
and may differ from the amounts reserved by the Company for those claims.




**Debt
Issuance Costs**




Deferred
costs related to the issuance of debt are being amortized using the effective
interest method over the terms of the respective debt. Debt issuance costs of
$1.7 million, less accumulated amortization of $0.7 million at December 26,
2004, and $1.4 million, less accumulated amortization of $12,000 at
December 28, 2003, are recorded in other assets in the consolidated balance
sheets.




**Revenue
Recognition**




Revenue
from services consists of temporary staffing revenues. Revenues are recognized
when services are rendered. Reimbursable expenses, including those related to
travel and out-of-pocket expenses, are recorded as service revenues with an
equal amount in cost of services rendered.





F-13


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


**Stock-Based
Compensation**




The
Company grants stock options for a fixed number of common shares to employees
and directors from time to time. The Company accounts for employee stock options
using the intrinsic value method as prescribed by APB Opinion No. 25, *Accounting
for Stock Issued to Employees* , and,
accordingly, currently recognizes no compensation expense for stock option
grants when the exercise price of the options equals, or is greater than, the
market value of the underlying stock on the date of grant *.* Accordingly, the Company did not recognize any compensation cost during each of
the years ended December 26, 2004, December 28, 2003 and
December 29, 2002 for stock-based employee compensation awards. The Company
follows the accounting and disclosure provisions of SFAS No. 123 as amended
by SFAS No. 148, for stock options issued to employees and
directors.




The
effect of applying the fair value method prescribed by SFAS No. 123, as
amended by SFAS No. 148, to the Company’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
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Net
      income (loss) as reported
    
    **$******
    ******(1,326**
    ******)**
    $
    5,015
    
    $
    17,894Fair
      value method of stock based compensation, net of tax
    
    
    **(965******
    ******)**
    
    (1,257
    )
    
    (1,068
    )Pro
      forma net income (loss)
    
    **$**********
    ******(2,291******
    **********)**
    $
    3,758
    
    $
    16,826As
      reported basic income (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.70Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.01
    )
    
    -As
      reported basic income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.70As
      reported diluted income (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.62Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -As
      reported diluted income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.16
    
    $
    0.62Pro
      forma basic income (loss) from continuing operations
    
    **$******
    ******(0.08**
    ******)**
    $
    0.14
    
    $
    0.65Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -Pro
      forma basic income (loss) per share
    
    **$**********
    ******(0.08******
    **********)**
    $
    0.12
    
    $
    0.65Pro
      forma diluted income (loss) from continuing operations
    
    **$******
    ******(0.08**
    ******)**
    $
    0.14
    
    $
    0.59Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -Pro
      forma diluted income (loss) per share
    
    **$**********
    ******(0.08******
    **********)**
    $
    0.12
    
    $
    0.59






F-14


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


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




**Years
      Ended******
    
    **December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Expected
      life
    
    
    **3
      - 8**
    
    
    3 -
      8
    
    
    3 -
      8Risk-free
      interest rate
    
    
    **4.25%
      - 4.44%**
    ****
    
    3.25%
      - 4.19%
    
    
    2.02%
      - 3.68%Volatility
    
    
    **63%**
    ****
    
    70%
    
    
    65%Dividend
      yield
    
    
    **0%**
    ****
    
    0%
    
    
    0%




**Income
(Loss) Per Share**




In
accordance with the requirements of SFAS No. 128, *Earnings
Per Share* (SFAS No.
128), basic earnings per share is computed by dividing net income or loss by the
weighted average number of shares outstanding and diluted earnings per share
reflects the dilutive effects of stock options and other common stock
equivalents (as calculated utilizing the treasury stock or reverse treasury
stock method, as appropriate). Shares of common stock that are issuable upon the
exercise of options have been excluded from the 2004 per share calculation
because their effect would have been anti-dilutive. See Note 14 for the
calculation of income (loss) per share.




**Income
Taxes**




The
Company accounts for income taxes under SFAS No. 109, *Accounting
for Income Taxes* (SFAS
No. 109). Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.




**Derivative
Financial Instruments**




The
Company is exposed to market risks arising from changes in interest rates. To
protect against such risks, the Company had one derivative financial instrument,
an interest rate swap agreement, which is more fully disclosed in Note 17.




SFAS
No. 133, *Accounting
for Derivative Instruments and Hedging Activities* (SFAS No.
133), requires companies to recognize all of their derivative instruments as
either assets or liabilities in the statement of financial position 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 been designated and qualifies as
part of a hedging relationship and on the type of hedging relationship. For
those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, 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 the Company’s derivative
instrument was designated and qualified as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that was attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument was reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, was recognized in current earnings during
the period of change.




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





F-15


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


**Comprehensive
Income (Loss)**




SFAS
No. 130, *Comprehensive
Income* (SFAS
No. 130), requires that an enterprise (a) classify items of other
comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The items of other comprehensive income (loss)
that are typically required to be displayed are foreign currency items, minimum
pension liability adjustments, unrealized gains and losses on certain
investments in debt and equity securities and the effective portion of certain
derivative instruments. There are no components of comprehensive income (loss)
other than the Company’s net income (loss) and unrealized income (loss) on the
derivative instrument for the years ended December 26, 2004,
December 28, 2003 and December 29, 2002.




The
following table sets forth the computation of comprehensive income (loss) for
the periods indicated (in thousands):




****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Net
      income (loss)
    
    **$******
    ******(1,326**
    ******)**
    $
    5,015
    
    $
    17,894Other
      comprehensive income (loss):Income
      (loss) on derivative, net of taxes
    
    
    **-**
    
    
    105
    
    
    (105
    )Total
      comprehensive income (loss)
    
    **$**********
    ******(1,326******
    **********)**
    $
    5,120
    
    $
    17,789




**Reclassifications**




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




**2.
DISCONTINUED OPERATIONS**




The
Company discontinued its physician staffing services in the second quarter of
2003. Pursuant to the provisions of SFAS No. 144, results of operations are to
be 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 is
shown separately in the line item, income (loss) from discontinued operations,
net of taxes, in the Company’s consolidated statements of operations for the
years ended December 28, 2003 and December 29, 2002. There were no revenues or
cost of services rendered from physician staffing services during the year ended
December 26, 2004. There were no net assets of the discontinued operations at
December 26, 2004. Net assets of the discontinued operations were less than
approximately $10,000 at December 28, 2003 and consisted solely of current
assets. No reclassification of prior year balance sheet presentation was made to
reflect the net assets of the discontinued operations, due to immateriality.





F-16


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


Service
revenues, cost of services, gross profit (loss) and income (loss) from
discontinued operations, net of taxes, are as follows (in
thousands):




****
    
    **Years
      Ended**December
      28,
    
    
    December
      29,2003
    
    
    2002Service
      revenues
    
    $
    495
    
    $
    4,682Cost
      of service revenues
    
    
    (1,095
    )
    
    (3,604
    )Gross
      profit (loss)
    
    $
    (600
    )
    $
    1,078Income
      (loss) before benefit from (provision for) income taxes
    
    $
    (845
    )
    $
    88Benefit
      from (provision for) income taxes
    
    
    339
    
    
    (36
    )Income
      (loss) from discontinued operations, net of taxes
    
    $
    (506
    )
    $
    52




**3.
RESTRUCTURING CHARGE**




As
announced on June 16, 2003, the Company completed its plan to restructure its
operations by closing 29 branches. The restructuring was necessary to adjust the
infrastructure the Company had put in place to support multiple growth
initiatives and was in response to the current contraction in demand for its
services. Approximately 130 branch staff and corporate employees were terminated
as part of the restructuring. As a result, in the second quarter of 2003, the
Company recorded a pre-tax charge, of approximately $0.8 million, relating to
employee severance costs, branch closing costs and lease termination costs. The
restructuring charge is included in selling, general and administrative expenses
in the Company’s consolidated statement of operations for the year ended
December 28, 2003. No amounts have been or are expected to be incurred or paid
in subsequent quarters relating to this restructuring. A breakdown of the
restructuring charge is as follows (in thousands):




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




**4.
ACQUISITIONS**




In March
2003, the Company acquired certain assets of Saber-Salisbury Group (SSG), a
temporary healthcare staffing company, for approximately $10.8 million in cash,
of which approximately $2.2 million was held in escrow and the potential for
additional consideration contingent upon SSG achieving certain financial
results. Approximately $10.4 million of the purchase price was allocated to
goodwill. The primary reason for the acquisition was to expand service offerings
within the temporary healthcare industry. The acquisition was accounted for in
accordance with SFAS No. 141, and, accordingly, the results of operations have
been included in the consolidated statements of operations beginning from March
1, 2003, the date when the Company assumed substantial control over
SSG.




In
December 2002, the Company acquired substantially all of the assets and certain
of the liabilities of Travel Nurse International (TNI), a temporary healthcare
staffing company, for approximately $5.5 million in cash, of which approximately
$3.5 million was held in escrow, and the potential for additional consideration
contingent upon TNI achieving certain financial results. Additionally, $4.0
million was loaned to the seller pursuant to a promissory note in favor of the
Company bearing an interest rate of 6% per annum. Approximately $4.0 million and
$1.0 million were allocated to goodwill and certain intangible assets,
respectively. The primary reason for the acquisition was to expand our service
offerings within the temporary healthcare industry. The acquisition was





F-17
 
 **MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
****
 a ccounted
for in accordance with SFAS No. 141 and, accordingly, the results of operations
have been included in the consolidated statements of operations from its date of
acquisition.




In
November 2002, the Company acquired substantially all of the assets and certain
of the liabilities of Clinical Resource Services, Inc. and Health Search
International, Inc. (collectively, CRS/HSI), both of which operate healthcare
staffing businesses under common control and ownership, for approximately $13.8
million in cash, of which approximately $2.1 million was held in escrow, with
the potential for additional consideration contingent upon CRS/HSI achieving
certain financial results. Approximately $12.0 million and $0.5 million were
allocated to goodwill and certain intangible assets, respectively. The primary
reason for the acquisition was to expand our service offerings within the
temporary healthcare industry. The acquisition was accounted for in accordance
with SFAS No. 141 and, accordingly, the results of operations have been included
in the consolidated statements of operations from its date of
acquisition.




In
October 2002, the Company acquired certain assets and liabilities of B&G
Nurse Registry (B&G), a temporary healthcare staffing company, for
approximately $8.6 million in cash, of which approximately $1.7 million was held
in escrow, and the potential for additional consideration contingent upon
B&G achieving certain financial results. Approximately $6.8 million and $0.5
million were allocated to goodwill and certain intangible assets, respectively.
The primary reason for the acquisition was to expand our geographic scope of
services. The acquisition was accounted for in accordance with SFAS No. 141 and,
accordingly, the results of operations have been included in the consolidated
statements of operations from its date of acquisition.




In August
2002, the Company acquired certain assets and liabilities of Pharmstaff, Ltd., a
provider of temporary pharmacists and pharmacy technicians to hospitals and
other facilities, for approximately $8.5 million in cash, of which approximately
$0.4 million was held in escrow, and the potential for additional consideration
contingent upon Pharmstaff achieving certain financial results. Approximately
$8.5 million was allocated to goodwill. The primary reason for the acquisition
was to expand our service offerings within the temporary healthcare industry.
The acquisition was accounted for in accordance with SFAS No. 141 and,
accordingly, the results of operations have been included in the consolidated
statements of operations from its date of acquisition.




In July
2002, the Company acquired substantially all of the assets and certain of the
liabilities of STAT Medical Services, Inc. (STAT), a temporary healthcare
staffing company, for approximately $10.1 million in cash, of which
approximately $2.0 million was held in escrow, and the potential for additional
consideration contingent upon STAT achieving certain financial results.
Approximately $8.9 million and $0.5 million were allocated to goodwill and
certain intangible assets, respectively. The primary reason for the acquisition
was to expand our geographic scope of services. The acquisition was accounted
for in accordance with SFAS No. 141 and, accordingly, the results of operations
have been included in the consolidated statements of operations beginning from
its date of acquisition.




In July
2002, the Company acquired substantially all of the assets and certain of the
liabilities of Medical Staffing Services, Inc. (MSS), a temporary healthcare
staffing company, for approximately $0.8 million in cash, of which $0.2 million
was held in escrow, and the potential for additional consideration contingent
upon MSS achieving certain financial results. Approximately $0.7 million was
allocated to goodwill. The primary reason for the acquisition was to expand our
geographic scope of services and market penetration within the temporary
healthcare industry. The acquisition was accounted for in accordance with SFAS
No. 141 and, accordingly, the results of operations have been included in the
consolidated statements of operations beginning from its date of
acquisition.




In July
2002, the Company acquired certain assets and liabilities of Pro Med, Inc. (Pro
Med), a temporary healthcare staffing company, for approximately $5.1 million in
cash, of which approximately $0.5 million was held in escrow, and the potential
for additional consideration contingent upon Pro Med achieving certain financial
results. Approximately $4.9 million and $0.3 million were allocated to goodwill
and certain intangible assets, respectively. The primary reason for the
acquisition was to expand our geographic scope of services. The acquisition was
accounted for in accordance with SFAS No. 141 and, accordingly, the results of
operations have been included in the consolidated statements of operations
beginning from its date of acquisition.





F-18


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


In
addition, during 2004, the Company paid approximately $0.1 million of additional
consideration related to prior year acquisitions. In 2004, the Company also had
additional consideration pursuant to the TNI acquisition as the earnout amount
due under the purchase agreement was set off against the $4.0 million note
receivable and associated interest receivable of $0.2 million. In 2003, the
Company made no payments of additional consideration related to prior year
acquisitions but the Company accrued $0.1 million for additional consideration
to be paid. In 2002, the Company paid approximately $1.7 million of additional
consideration related to the seven acquisitions.




All
acquisitions were accounted for as purchases and, accordingly, the accompanying
consolidated financial statements include the results of the acquired operations
from the acquisition dates or from the date the Company assumed substantial
control.




The
following unaudited pro forma financial information reflects the results of
operations for the years ended December 26, 2004, December 28, 2003
and December 29, 2002, as if the acquisitions had occurred at the beginning
of the respective periods presented. The pro forma financial information, in the
schedule below, does not purport to be indicative of the results of operations
that would have occurred had the transactions taken place at the beginning of
the periods presented or of future results of operations (in
thousands, except per share information) :




****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Net
      revenues
    
    **$******
    ******417,058**
    
    $
    515,892
    
    $
    571,422Income
      from operations
    
    
    **1,441**
    
    
    17,754
    
    
    43,622Income
      (loss) from continuing operations
    
    
    **(1,941**
    **)**
    
    5,690
    
    
    20,618Income
      (loss) from discontinued operations, net of taxes
    
    
    **-**
    
    
    (506
    )
    
    52Net
      income (loss)
    
    
    **(1,326**
    **)**
    
    5,184
    
    
    20,670Net
      income (loss) available to common shares
    
    
    **(1,326**
    **)**
    
    5,184
    
    
    17,571Income
      (loss) per share - basic:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.19
    
    $
    0.83Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -Basic
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.83Income
      (loss) per share - diluted:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.72Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.01
    )
    
    -Diluted
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.72




**5.
GOODWILL AND INTANGIBLE ASSETS**




As
discussed in Note 1, pursuant to the provisions of SFAS No. 142, the Company
does not amortize goodwill or intangible assets deemed to have an indefinite
useful life. Identifiable intangibles with definite lives are amortized. SFAS
No. 142 requires that goodwill be separately disclosed from other
intangible assets on the balance sheet and tested for impairment on a periodic
basis, or more frequently if certain indicators arise. The Company performed its
annual review in the fourth quarter of 2004 and determined that there was no
impairment of goodwill. The Company will perform its annual impairment review
during the fourth quarter of each year.




Goodwill
increased by $4.5 million from $125.0 million at December 28, 2003 to $129.5
million at December 26, 2004. The $4.5 million increase is primarily associated
with additional consideration relating to the TNI acquisition.





F-19


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


The
following reflects the changes to goodwill for the years ended December 26, 2004
and December 28, 2003 (in thousands):




****
    
    **Years
      Ended******
    
    
    **Dec.
      26, 2004**
    
    
    Dec.
      28, 2003Balance
      at beginning of year
    
    **$******
    ******125,028**
    
    $
    114,437Goodwill
      acquired during year
    
    
    **4,446**
    
    
    10,591Impairment
      losses
    
    
    **-**
    
    
    -Goodwill
      written off related to sale of business unit
    
    
    **-**
    
    
    -Balance
      at end of year
    
    **$******
    ******129,474**
    
    $
    125,028







As of
December 26, 2004 and December 28, 2003, the Company’s intangible assets, other
than goodwill, and related accumulated amortization, were as follows (in
thousands):




****
    
    **December
      26, 2004**
    December
      28, 2003****
    
    
    **Gross**
      **Carrying**
    
    
    **Accumulated**
    
    
    **Net**
      **Carrying**
    
    
    Gross
      Carrying
    
    
    Accumulated
    
    
    Net
      Carrying****
    
    
    **Amount**
    
    
    **Amortization**
    
    
    **Amount**
    
    
    Amount
    
    
    Amortization
    
    
    AmountIntangible
      assets subject to amortization:Noncompete
      agreements (6-7.5 years)
    
    **$******
    ******3,348**
    
    **$******
    ******(1,408**
    ******)**
    **$******
    ******1,940**
    
    $
    4,361
    
    $
    (1,174
    )
    $
    3,187Contractor
      database (5 years)
    
    
    **612**
    
    
    **(224**
    **)**
    
    **388**
    
    
    -
    
    
    -
    
    
    -Customer
      relationships (3 years)
    
    
    **39**
    
    
    **(31******
    ******)**
    
    **8**
    
    
    -
    
    
    -
    
    
    -Total
      intangibles subject to amortization
    
    
    **3,999**
    
    
    **(1,663**
    **)**
    
    **2,336**
    
    
    4,361
    
    
    (1,174
    )
    
    3,187Intangible
      assets not subject to amortization:Trademarks,
      trade names
    
    
    **102**
    
    
    **-**
    
    
    **102**
    
    
    -
    
    
    -
    
    
    -Total
      intangible assets
    
    **$******
    ******4,101**
    
    **$**********
    ******(1,663******
    **********)**
    **$******
    ******2,438**
    
    $
    4,361
    
    $
    (1,174
    )
    $
    3,187





During
the current year, the Company reevaluated the initial recording of certain of
its goodwill and intangible assets. As a result of this reevaluation, the
Company reduced the gross value of noncompete agreements by approximately $1.0
million and increased contractor database by $0.6 million, trademarks, trade
names by $0.1 million, and customer relationships by less than $0.1 million. The
cumulative net effect of these adjustments resulted in an increase to goodwill
of approximately $0.3 million and a pre-tax decrease in amortization expense of
approximately $0.2 million. Such adjustments were recorded in the fourth quarter
of 2004 as they are not material to any period
effected.


In 2004
and 2003, the Company did not purchase any intangible assets. The Company
recorded amortization expense on intangible assets of $0.5 million, $0.7 million
and $0.3 million for the years ended December 26, 2004, December 28, 2003 and
December 29, 2002, respectively.





F-20


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


The
estimated annual amortization expense for intangible assets for the next five
fiscal years as of December 26, 2004 is as follows (in thousands):




2005
    
    $
    6162006
    
    
    6102007
    
    
    5962008
    
    
    2862009
    
    
    184




**6.
FURNITURE AND EQUIPMENT**




Furniture
and equipment consist of the following (in thousands):




**December
      26,**
    
    
    December
      28,**2004**
    
    
    2003Leasehold
      improvements
    
    **$******
    ******1,287**
    
    $
    1,146Furniture
      and equipment
    
    
    **14,015**
    
    
    13,211Internally
      developed software
    
    
    **8,296**
    
    
    6,560Equipment
      held under capital leases
    
    
    **3,533**
    
    
    3,572Total
    
    
    **27,131**
    
    
    24,489Less
      accumulated depreciation and amortization
    
    
    **(18,650******
    ******)**
    
    (13,112
    )Furniture
      and equipment, net
    
    **$******
    ******8,481**
    
    $
    11,377




Accumulated
amortization on assets held under capital leases was **$3.2** million
and $2.2 million at **December 26,
2004** and
December 28, 2003, respectively.




**7.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES**




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




**December
      26,**
    
    
    December
      28,**2004**
    
    
    2003Insurance
      related accrued expenses
    
    **$******
    ******7,835**
    
    $
    4,052Accounts
      payable
    
    
    **1,694**
    
    
    1,404Other
      accrued expenses
    
    
    **1,584**
    
    
    1,128Other
    
    
    **959**
    
    
    464Total
    
    **$******
    ******12,072**
    
    $
    7,048




**8.
INCOME TAXES**




As of
December 26, 2004, December 28, 2003 and December 29, 2002, the
Company had temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and such amounts measured by the
tax laws.





F-21


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


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


****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Current
      income taxesFederal
    
    **$******
    ******(2,865**
    ******)**
    $
    (819
    )
    $
    9,787State
    
    
    **(318******
    ******)**
    
    (91
    )
    
    1,087Total
      current income taxes
    
    
    **(3,183**
    **)**
    
    (910
    )
    
    10,874Deferred
      income taxes
    
    
    **2,568**
    
    
    4,618
    
    
    1,526Provision
      for (benefit from) income taxes
    
    **$**********
    ******(615******
    **********)**
    $
    3,708
    
    $
    12,400




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





****
    
    
    **December
      26,**
    
    
    December
      28,**2004**
    
    
    2003Current
      deferred tax assets:Provision
      for doubtful accounts
    
    **$******
    ******523**
    
    $
    722State
      NOL carryforwards
    
    
    **330**
    
    
    -Accrued
      expenses
    
    
    **162**
    
    
    168Total
      current deferred tax assets
    
    **$******
    ******1,015**
    
    $
    890Noncurrent
      deferred tax assets:Accrued
      expenses
    
    **$******
    ******154**
    
    $
    -Noncurrent
      deferred tax liabilities:Goodwill
      and intangible assets
    
    
    **(9,325**
    **)**
    
    (6,045
    )Furniture
      and equipment
    
    
    **(637******
    ******)**
    
    (1,070
    )Total
      noncurrent deferred tax liabilities
    
    
    **(9,962******
    ******)**
    $
    (7,115
    )Total
      noncurrent deferred tax liabilities, net
    
    **$**********
    ******(9,808******
    **********)**
    $
    (7,115
    )







Current
deferred tax assets are included in other current assets in the Company’s
consolidated balance sheets. SFAS No. 109 requires 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 some portion or all of the deferred tax asset
will not be realized. After consideration of all the evidence, both positive and
negative, management has determined that no valuation allowance is required as
of December 26, 2004 and December 28, 2003.




The
reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense is as follows:




****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002Tax
      at U.S. statutory rate
    
    
    **34.0**
    **%**
    
    34.0
    %
    
    35.0
    %State
      taxes, net of federal benefit
    
    
    **3.6**
    
    
    3.6
    
    
    3.6Nondeductible
      items
    
    
    **(10.7**
    **)**
    
    2.9
    
    
    1.6Other,
      net
    
    
    **4.8**
    
    
    (0.3
    )
    
    0.8Effective
      income tax rate
    
    
    **31.7******
    ******%**
    
    40.2
    %
    
    41.0
    %




F-22


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


**9.
LONG-TERM DEBT**




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 million term note due in October 2007 and a
$20.0 million revolving credit facility due to expire in October 2006.
In connection with the Company’s initial 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 senior unsecured notes.




On July
3, 2002, the Company amended the facility by 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 the borrowing capacity of its revolving credit
facility from $20.0 million to $15.0 million. On March 21, 2003, the Company
amended the facility by replacing the $65.0 million term note with a $77.0
million term note and a new term note facility that allowed for borrowings of up
to $13.0 million.




On
December 22, 2003, the Company 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 2006 and a $17.0 million term loan (the Term
Loan) which was due in December 2005.




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




T he amount
that can be borrowed at any given time under the Revolver is based on a formula
that takes into account, among other things, eligible accounts receivable and an
availability reserve, which can result in borrowing availability of less than
the full capacity of the Revolver. The Revolver
bears interest at either prime rate or LIBOR plus an applicable margin (4.7% at
December 26, 2004) with interest payable monthly or as interest rate contracts
expire. The Term Loan bears interest at LIBOR plus an applicable margin (11.8%
at December 26, 2004) with interest payable as interest rate contracts expire.
Unused capacity under the Revolver bears interest at 0.5% and is payable
monthly. The Senior Credit Facility is secured by substantially all of the
Company’s assets and contains certain covenants that, among other things, limit
the payment of dividends, restrict additional indebtedness and obligations, and
require maintenance of certain financial ratios. As of December 26, 2004, the
Company was in compliance with all covenants.




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




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




As of
December 26, 2004, $12.0 million was outstanding on the Term Loan and $19.8
million was outstanding under the Revolver. As of December 26, 2004, an
additional $20.6 million was immediately available for borrowing under the
Revolver.





F-23


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


A summary
of long-term debt as of December 26, 2004 and December 28, 2003 is as
follows (in thousands):




**December
      26,**
    
    
    December
      28,**2004**
    
    
    2003Senior
      facility
    
    **$******
    ******19,760**
    
    $
    37,978Term
      loan
    
    
    **12,000**
    
    
    17,000**31,760**
    
    
    54,978Less
      current portion
    
    
    **-**
    
    
    -**$******
    ******31,760**
    
    $
    54,978




Scheduled
maturities of long-term debt as of December 26, 2004 are as follows (in
thousands):




2005
    
    $
    -2006
    
    
    31,760




**10.
EMPLOYEE BENEFIT PLANS**




The
Company has a voluntary defined contribution 401(k) profit-sharing plan covering
all eligible employees as defined in the plan documents. The Plan allows for its
participants to defer up to 15% of annual salary up to the adjusted 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’ contribution and
provides for a discretionary matching contribution, which would be allocated to
each employee based on the employee’s annual pay divided by the total annual pay
of all participants eligible to receive such contribution. The Company’s
matching contribution was approximately $1.2 million, $1.4 million and
$1.1 million for the years ended December 26, 2004, December 28,
2003 and December 29, 2002, respectively.




In 2003,
the Company established a Deferred Compensation Plan covering senior management
who have executive-level decision making responsibilities. The plan allows for
its participants to defer up to 100% of annual salary up to the adjusted 401(k)
maximum that individuals can defer in the Company’s existing 401(k) plan (see
above). In addition, the Company will match 50% of the participant’s
contributions up to a maximum of 7% of the participant’s contribution, a match
that is consistent with the Company’s existing 401(k) plan. Participants may
also contribute 100% of any excess contributions, excess company match and
potential earnings from the prior year’s 401(k) discrimination testing refunds.
The plan is a nonqualified funded deferred compensation plan and all
participants’ contributions are held in trust in the Company’s name. As such,
the Company recorded the fair value of the trust of $0.4 million and
$0.1 million, in the other current assets and accounts payable and accrued
expenses within the consolidated balance sheets for the years ended December 26,
2004 and December 28, 2003, respectively. The Company’s matching contribution
was $0.1 million for the year ended December 26, 2004.




**11.
COMMITMENTS AND CONTINGENCIES**




**Capital
Leases**




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





F-24


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


Future
minimum lease payments under capital leases are as follows as of December 26,
2004 (in thousands):




2005
    
    $
    4392006
    
    
    302007
    
    
    42008
      and thereafter
    
    
    -473Less
      amount representing interest
    
    
    (55
    )Less
      amount classified as current
    
    
    (385
    )$
    33




**Operating
Leases**




The
Company has entered into noncancelable operating lease agreements for the rental
of space and equipment. Certain of these leases include options to renew as well
as rent escalation clauses. Future minimum lease payments as of
December 26, 2004 associated with these agreements are as follows (in
thousands):




2005
    
    $
    4,7532006
    
    
    3,3492007
    
    
    2,0832008
    
    
    1,3852009
    
    
    1,206Thereafter
    
    
    4,601




Total
operating lease expense was approximately $5.8 million, $6.3 million and $4.3
million for the years ended December 26, 2004, December 28, 2003 and
December 29, 2002, respectively.




**Litigation**




On
February 20, 2004, Joseph and Patricia Marrari, and on April 16, 2004, Tommie
Williams, filed class action lawsuits against the Company in the United States
District Court for the Southern District of Florida, on behalf of themselves and
purchasers of the Company’s common stock pursuant to or traceable to the
Company’s initial public offering in April 2002. These lawsuits also named as
defendants certain of the Company’s directors and executive officers
(collectively with the Company, the “Defendants”). The complaints allege that
certain disclosures in the Registration Statement/Prospectus filed in connection
with the Company’s initial public offering on April 17, 2002 were materially
false and misleading 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 lawsuit brought on behalf of the same class of
the Company’s stockholders, making claims under the Securities Act similar to
those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie
Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of
the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants
removed this case to the United States District Court for the Southern District
of Florida and Plaintiff moved to remand the case back to the Florida Circuit
Court of the Fifteenth Judicial Circuit, which motion Defendants opposed. On
September 16, 2004 the federal district court entered an order granting
Plaintiff’s motion to remand. On January 6, 2005, the state court stayed the
state court proceedings until further order of the court. The Zia complaint
seeks rescission or damages as well as certain equitable relief and costs and
attorney fees.




On March
2, 2004, another class action complaint was filed against the Company and
certain of its directors and executive officers in the United States District
Court for the Southern District of Florida by Jerome Gould, individually and on
behalf of a class of the Company's stockholders who purchased stock during the
period





F-25
 
 **MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
****
 from
April 18, 2002 through June 16, 2003. The complaint alleges that certain of the
Company’s public disclosures during the class period were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The complaint seeks
compensatory damages, costs and attorney fees.




On July
2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated,
although, as noted above, the Zia action was subsequently remanded to state
court. Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated
action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed
Lead Counsel for Plaintiffs. 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 purchasers of the Company’s
common stock pursuant to or traceable to the Company’s initial public offering
in April 2002, for purposes of the Securities Act claims, and on behalf of the
Company’s stockholders who purchased stock during the period from April 18, 2002
through June 16, 2003, for purposes of the Exchange Act claims. The Complaint
alleges that certain of the Company’s public disclosures during the class period
were materially false and misleading in violation of Section 11 of the
Securities Act and Section 10(b) of the Exchange Act. The Complaint seeks
compensatory damages as well as costs and attorney fees. Defendants have a
motion to dismiss the Complaint.




The
Company believes that these lawsuits are without merit and it intends to defend
itself against them vigorously. Due to their preliminary status, the Company is
unable to predict the outcome of these lawsuits or reasonably estimate a range
of possible loss.




From time
to time, the Company is subject to lawsuits and claims that arise out of its
operations in the normal course of business. The Company is a plaintiff or a
defendant in various litigation matters in the ordinary course of business, some
of which involve claims for damages that are substantial in amount. The Company
believes that the disposition of any claims that arise out of operations in the
normal course of business will not have a material adverse effect on the
Company’s financial position or results of operations.




**12.
REDEEMABLE PREFERRED STOCK**




In
October 2001, in connection with a recapitalization, the Company authorized 15.0
million shares of preferred stock, par value $0.01, of which 7.0 million shares
were designated as Series I Convertible Preferred Stock. The Series I
Convertible Preferred Stock had a stated value of $18.60 and 6.6 million shares
were issued in connection with the recapitalization. The holders of the Series I
Convertible Preferred Stock were entitled to receive dividends at a rate of 8%
per annum of the stated value compounded quarterly, which were cumulative and
accrued whether or not declared by the Board of Directors and were payable when
and as declared by the Board of Directors pursuant to certain restrictions as
defined by the Company’s credit agreement. The Series I Convertible Preferred
Stock could be converted at any time, at the option of the holder on a
one-for-one basis by the holder upon written notice into fully paid and
nonassessable shares of the Company’s common stock at an initial conversion
price of $6.06, which was subject to adjustment pursuant to anti-dilution
provisions. Upon completion of a Qualified Public Offering (as defined), each
share of Series I Convertible Preferred Stock was to be automatically converted
into common stock at its then effective conversion price. At any time after
October 26, 2009, or upon consummation of a Change in Control (as defined), the
holders of the Series I Convertible Preferred Stock could require the Company to
redeem any or all of the outstanding shares of the Series I Convertible
Preferred Stock at a price in cash equal to the stated value per share plus any
accrued but unpaid dividends. As discussed in Note 13, the outstanding shares of
Series I Convertible Preferred Stock were converted into 21.1 million shares of
common stock in connection with the completion of the Company’s initial public
offering on April 23, 2002.




**13.
COMMON STOCKHOLDERS’ EQUITY (DEFICIT)**




**Common
Shares**




On April
12, 2002, the Company approved an amendment to its Certificate of Incorporation
increasing the Company’s authorized shares of common stock to 75.0 million
shares and a stock split in the form of a stock dividend of 3.069375 for 1, each
of which took effect immediately prior to the closing of the Company’s initial





F-26
 
 **MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
****
 public
offering. The consolidated financial statements have been restated to give
retroactive recognition to the stock split in the prior periods, including all
references in the consolidated financial statements to number of shares and per
share amounts.




**Initial
Public Offering**




On April
23, 2002, the Company completed its initial public offering of 7.8 million
shares of common stock at $19.00 per share. Additionally, the underwriters
exercised the over-allotment option of 1.2 million shares, bringing the total
number of shares issued to 9.0 million. Total proceeds received by the Company,
net of expenses related to the initial public offering were $156.3 million. The
proceeds were used to repay $62.9 million of the Company’s outstanding balance
under the senior unsecured notes, and approximately $93.4 million of the
Company’s outstanding loans under the senior credit facility. Immediately prior
to the completion of the initial public offering, the outstanding shares of
Series I Preferred Stock were converted into 21.1 million shares of common
stock.




**Promissory
Notes Due for Purchases of Common Stock**




During
Fiscal Year 2000, certain executives of the Company, pursuant to the Executive
Incentive Stock Ownership Plan, executed promissory notes in exchange for the
purchase of 2.7 million restricted common shares ranging in price from $1.63 to
$2.20. The promissory notes were repaid in full by the executives in 2002. While
the promissory notes were outstanding, these restricted common shares were
included in diluted earnings per share using the treasury stock method. The
promissory notes were secured by the common shares. The notes were due ten years
from date of issuance and bore interest at the published prime rate.




**Stockholders’
Agreement**




The
Company and certain of its stockholders entered into a stockholders agreement
conferring certain rights and restrictions, including among others, restrictions
on transfers of shares, rights to acquire shares, and designation of Board of
Director seats. This agreement terminated upon the Company’s initial public
offering except that:




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




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




**Stock
Options**




The
Company has a stock option plan (the Plan), under which 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 Plan. The Plan is designed
to serve as an incentive for retaining qualified and competent employees. The
Compensation Committee of the Board of Directors administers the Plan and is
authorized to grant options thereunder to all eligible employees of the Company,
including officers and directors of the Company and consultants. The Plan
provides for the granting of both “incentive stock options” (as defined in
Section 422A of the Internal Revenue Code) and nonqualified stock options.
Each option is exercisable after the period or periods specified in the option
agreement, but no option can be exercised after the expiration of ten years and
one day from the date of grant.




The
Company’s 2001 Stock Incentive Plan (the 2001 Plan) was adopted by the Board on
November 14, 2001. Under the terms of the 2001 Plan, the Company is
authorized to grant incentive stock options and nonqualified stock options, make
stock awards and provide the opportunity to purchase stock to employees,





F-27
 
 **MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
****
 directors,
officers and consultants of the Company. The 2001 Plan provides for the issuance
of a maximum of 2.3 million shares of common stock. On June 17, 2003 the
shareholders of the Company approved an amendment to the 2001 Plan which
increased the maximum number of shares for issuance by 0.5 million, to 2.8
million. The Compensation Committee of the Board of Directors administers the
2001 Plan and is authorized to grant options thereunder to all eligible
employees of the Company, including officers and directors of the Company and
consultants. The 2001 Plan provides for the granting of both “incentive stock
options” (as defined in Section 422A of the Internal Revenue Code) and
nonqualified stock options. The options granted under the 2001 Plan are
exercisable upon vesting ratably over time ranging from three to eight years,
but no option can be exercised after the expiration of ten years and one day
from the date of grant.




A summary
of the Company’s stock option activity and related information is as follows:




****
    
    
    **Weighted****Average****Shares**
    
    
    **Exercise
      Price**Outstanding
      at December 30, 2001
    
    
    2,033,080
    
    $
    5.55Granted
    
    
    243,750
    
    $
    16.23Exercised
    
    
    (32,058
    )
    $
    2.58Forfeited
    
    
    (145,833
    )
    $
    5.48Outstanding
      at December 29, 2002
    
    
    2,098,939
    
    $
    6.84Granted
    
    
    235,788
    
    $
    8.94Exercised
    
    
    (90,362
    )
    $
    4.00Forfeited
    
    
    (272,304
    )
    $
    7.21Outstanding
      at December 28, 2003
    
    
    1,972,061
    
    $
    7.16Granted
    
    
    165,000
    
    $
    7.27Exercised
    
    
    (21,633
    )
    $
    2.22Forfeited
    
    
    (222,619
    )
    $
    10.14Outstanding
      at December 26, 2004
    
    
    1,892,809
    
    $
    6.88Exercisable
      at end of year
    
    
    1,395,795
    
    $
    6.60




****
    
    
    **Weighted****Average******
    
    
    **Fair
      Value**Options
      granted during the year:Issued
      at market price
    
    $
    4.50




Information
about options outstanding as of December 26, 2004 is as follows:




****
    
    **Options
      Outstanding**
    **Options
      Exercisable****Weighted****Average**
    
    
    
    
    
    **Weighted**
    
    
    
    
    
    **Weighted****Remaining**
    
    
    
    
    
    **Average**
    
    
    
    
    
    **Average****Range****of
      Exercise**
    
    
    **Contractual**
    
    
    
    
    
    **Exercise**
    
    
    
    
    
    **Exercise****Prices**
    
    
    **Life
      (Years)**
    ****
    
    **Shares**
    
    
    **Price**
    
    
    **Shares**
    
    
    **Price**$1.87
      to $2.20
    
    
    5.9
    
    
    96,195
    
    $
    2.18
    
    
    37,636
    
    $
    2.19$6.06
    
    
    6.9
    
    
    1,408,576
    
    $
    6.06
    
    
    1,251,883
    
    $
    6.06$7.00
      to $10.00
    
    
    9.5
    
    
    247,538
    
    $
    8.18
    
    
    27,694
    
    $
    10.00$14.00
      to $21.00
    
    
    8.2
    
    
    140,500
    
    $
    15.96
    
    
    78,572
    
    $
    16.121,892,809
    
    $
    6.88
    
    
    1,395,795
    
    $
    6.60






F-28


****MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES****


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**14.
INCOME (LOSS) PER SHARE**




****
    
    **Years
      Ended****December
      26,**
    
    
    December
      28,
    
    
    December
      29,**2004**
    
    
    2003
    
    
    2002(in
      thousands, except per share information)Numerator:Net
      income (loss) before preferred stock dividends
    
    **$******
    ******(1,326**
    ******)**
    $
    5,015
    
    $
    17,894Less
      preferred stock dividends
    
    
    **-**
    
    
    -
    
    
    3,099Numerator
      for basic income (loss) per share-available to common
      stockholders
    
    
    **(1,326**
    **)**
    
    5,015
    
    
    14,795Effect
      of dilutive securities:Add
      back preferred stock dividends
    
    
    **-**
    
    
    -
    
    
    3,099Numerator
      for diluted income (loss) per share-available to common
      stockholders
    
    **$**********
    ******(1,326******
    **********)**
    $
    5,015
    
    $
    17,894Denominator:Denominator
      for basic income (loss) per share-weighted-average shares
    
    
    **30,228**
    
    
    30,190
    
    
    21,177Effect
      of dilutive shares:Employee
      stock options
    
    
    **-**
    
    
    617
    
    
    1,289Convertible
      preferred stock
    
    
    **-**
    
    
    -
    
    
    6,171Dilutive
      potential common shares
    
    
    **-**
    
    
    617
    
    
    7,460Denominator
      for diluted income (loss) per share-adjusted weighted-average shares
      and
      assumed conversions
    
    
    **30,228**
    
    
    30,807
    
    
    28,637Income
      (loss) per share - basic:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.70Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.01
    )
    
    -Basic
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.17
    
    $
    0.70Income
      (loss) per share - diluted:Income
      (loss) from continuing operations
    
    **$******
    ******(0.04**
    ******)**
    $
    0.18
    
    $
    0.62Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    (0.02
    )
    
    -Diluted
      net income (loss) per share
    
    **$**********
    ******(0.04******
    **********)**
    $
    0.16
    
    $
    0.62




For the
year ended December 26, 2004, approximately 1.9 million options were excluded
from the calculation of diluted shares as the impact of their conversion was
anti-dilutive due to the net loss. For the years ended December 28, 2003 and
December 29, 2002, approximately 0.3 million and approximately 0.2 million
incremental options, respectively, were excluded from the denominator for
diluted income per share as the impact of conversion was
anti-dilutive.





F-29


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


**15.
RELATED PARTY TRANSACTIONS**




The
Company provides staffing services to a healthcare system of which one of the
Company’s directors, Philip A. Incarnati, is the President and Chief Executive
Officer. During the years ended December 26, 2004, December 28, 2003 and
December 29, 2002, the Company billed approximately $3.3 million, $2.2 million
and $1.0 million, respectively, for its services. The Company had a receivable
balance from the healthcare system of approximately $0.3 million, at both
December 26, 2004 and December 28, 2003.




The
Company paid approximately $0.1 million during each of the years ended December
26, 2004, December 28, 2003 and December 29, 2002, to Florida Atlantic
University (FAU) in connection with a continuing education program for the
Company’s nurses. One of the Company’s directors, Dr. Anne Boykin, is the Dean
of the College of Nursing at FAU, a university located in Boca Raton,
Florida.




During
2001, the Company entered into senior unsecured promissory notes of
approximately $59.3 million with certain related parties. The senior
unsecured promissory notes were repaid in 2002 when the Company completed its
initial public offering.




During
2000, certain executives of the Company, pursuant to the Executive Incentive
Stock Ownership Plan, executed promissory notes in exchange for restricted
common shares. The promissory notes were repaid in full by the executives in
2002 (see Note 13).




**16.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS**




The
carrying amounts reported in the consolidated balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short duration of maturity. The carrying amounts of the revolving
credit note and term note approximate fair value because the interest rate is
tied to a quoted variable index.




**17.
INTEREST RATE SWAP**




The
Company’s former senior credit facility required that the Company maintain an
interest rate protection agreement to manage the impact of interest rate changes
on a portion of 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 of floating interest rate payments based on the U.S. Dollar London
Interbank Offered Rate, which was reset quarterly and the payment of fixed
interest rate payments of 4.34% over the life of the Swap Agreement without an
exchange of the underlying notional amount, which was set at $50.0 million. The
interest rate swap was scheduled to mature on December 24, 2004.




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




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





F-30


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


**18.
UNAUDITED QUARTERLY RESULTS OF OPERATIONS**





The
following table presents a summary of the Company’s unaudited quarterly
operating results for each of the four quarters in 2004 and 2003. This
information was derived from unaudited interim financial statements that have
been prepared on a basis consistent with the consolidated financial statements
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information when read in conjunction
with our audited financial statements and accompanying notes. The operating
results for any quarter are not necessarily indicative of results for any future
period.


****
    
    **Quarters
      Ended******(in
      thousands, except per share**amounts)**
    
    
    **Dec.
      26,**
    
    
    **Sept.
      26,**
    
    
    **June
      27,**
    
    
    **Mar.
      28,**
    
    
    Dec.
      28,
    
    
    Sept.
      28,
    
    
    June
      29,
    
    
    Mar.
      30,**2004**
    
    
    **2004**
    
    
    **2004**
    
    
    **2004**
    
    
    2003
      (1)
    
    
    2003
    
    
    2003
    
    
    2003Service
      revenues
    
    **$**
    **98,459**
    
    **$**
    **106,204**
    
    **$**
    **106,002**
    
    **$**
    **106,393**
    
    $
    107,831
    
    $
    123,686
    
    $
    137,455
    
    $
    144,013Gross
      profit
    
    
    **22,099**
    
    
    **23,037**
    
    
    **22,678**
    
    
    **22,169**
    
    
    24,159
    
    
    26,539
    
    
    29,492
    
    
    34,571Income
      (loss) from continuing operations
    
    
    **(78**
    **)**
    
    **288**
    
    
    **(939**
    **)**
    
    **(597**
    **)**
    
    (1,623
    )
    
    1,097
    
    
    737
    
    
    5,310Loss
      from discontinued operations, net of taxes
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (402
    )
    
    (104
    )Net
      income (loss)
    
    
    **(78**
    **)**
    
    **288**
    
    
    **(939**
    **)**
    
    **(597**
    **)**
    
    (1,623
    )
    
    1,097
    
    
    335
    
    
    5,206Income
      (loss) per share - basic:Income
      (loss) from continuing operations
    
    
    **-**
    
    
    **0.01**
    
    
    **(0.03**
    **)**
    
    **(0.02**
    **)**
    
    (0.05
    )
    
    0.04
    
    
    0.02
    
    
    0.18Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (0.01
    )
    
    (0.01
    )Basic
      net income (loss) per share
    
    
    **-**
    
    
    **0.01**
    
    
    **(0.03**
    **)**
    
    **(0.02**
    **)**
    
    (0.05
    )
    
    0.04
    
    
    0.01
    
    
    0.17Income
      (loss) per share - diluted:Income
      (loss) from continuing operations
    
    
    **-**
    
    
    **0.01**
    
    
    **(0.03**
    **)**
    
    **(0.02**
    **)**
    
    (0.05
    )
    
    0.04
    
    
    0.02
    
    
    0.17Discontinued
      operations, net of taxes
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (0.01
    )
    
    -Diluted
      net income (loss) per share
    
    
    **-**
    
    
    **0.01**
    
    
    **(0.03**
    **)**
    
    **(0.02**
    **)**
    
    (0.05
    )
    
    0.04
    
    
    0.01
    
    
    0.17
 ___________




(1)
    Includes
      a noncash pre-tax charge of $3.6 million resulting from the write-off of
      certain fees associated with the early extinguishment of a former
      credit facility.




**19.
SUBSEQUENT EVENT**




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




F-31





**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**
  Board of
Directors and Stockholders


Medical
Staffing Network Holdings, Inc.




We have
audited the consolidated financial statements of Medical Staffing Network
Holdings, Inc. as of December 26, 2004 and December 28, 2003, and for each of
the three years in the period ended December 26, 2004, and have issued our
report thereon dated February 24, 2005 (included elsewhere in this Form 10-K).
Our audits also included 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. Our responsibility is to express an opinion based on our
audits.




In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.




/s/ Ernst
& Young LLP


Certified
Public Accountants




Fort
Lauderdale, Florida


February
24, 2005







S-1





**MEDICAL
STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES**
 **SCHEDULE
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 29, 2002
    
    $
    2,182
    
    $
    6,259
    
    $
    (5,684
    )
    $
    2,757Year
      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**








S-2