10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 28, 2004

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-5260

REMEDYTEMP, INC.

(Exact name of registrant as specified in its charter)

California	95-2890471
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification Number)

101 Enterprise Aliso Viejo, California	92656
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 425-7600

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  x  No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨  No  x

As of May 7, 2004 there were 8,803,871 of Class A Common Stock and 800,312 shares of Class B Common Stock outstanding.

INDEX

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 28, 2004 (unaudited) and September 28, 2003	3
	Consolidated Statements of Operations for the three and six fiscal months ended March 28, 2004 and March 30, 2003 (unaudited)	4
	Consolidated Statements of Cash Flows for the six fiscal months ended March 28, 2004 and March 30, 2003 (unaudited)	5
	Condensed Notes to Consolidated Financial Statements (unaudited)	6
Item 2	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	27
Item 4.	Controls and Procedures	27
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Changes In Securities and Use of Proceeds	*
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	*
Item 6.	Exhibits and Reports on Form 8-K	30
SIGNATURES		32

* No information provided due to inapplicability of item.

2

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share amounts)

ASSETS

	(unaudited) March 28, 2004			September 28, 2003
Current assets:
Cash and cash equivalents	$	13,415		$	13,236
Investments		3,032			18,384
Accounts receivable, net of allowance for doubtful accounts of $2,686 and $2,627, respectively		51,675			60,594
Prepaid expenses and other current assets		5,245			6,679
Deferred and current income taxes		739			330
Total current assets		74,106			99,223
Fixed assets, net		10,116			12,337
Restricted cash and investments		37,941			21,615
Other assets		381			1,334
Intangible assets, net of accumulated amortization of $427 and $219, respectively		2,547			1,655
Goodwill		3,403			3,030
Total Assets	$	128,494		$	139,194
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,353		$	4,790
Accrued workers’ compensation, current portion (Note 9)		16,633			15,263
Accrued payroll, benefits and related costs		14,742			17,530
Accrued licensees’ share of gross profit		2,047			2,231
Other accrued expenses		2,871			3,335
Total current liabilities		37,646			43,149
Accrued workers’ compensation, non-current portion (Note 9)		22,374			20,681
Total liabilities		60,020			63,830
Commitments and contingent liabilities (Note 2)
Shareholders’ equity:
Preferred Stock, $0.01 par value; authorized 5,000 shares; none outstanding		—			—
Class A Common Stock, $0.01 par value; authorized 50,000 shares; 8,795 and 8,769 shares issued and outstanding at March 28, 2004 and September 28, 2003, respectively		88			88
Class B Non-Voting Common Stock, $0.01 par value; authorized 4,530 shares; 805 and 894 shares issued and outstanding at March 28, 2004 and September 28, 2003, respectively		8			9
Additional paid-in capital		41,846			42,674
Unearned compensation		(4,686	)		(6,031	)
Accumulated other comprehensive income		69			134
Retained earnings		31,149			38,490
Total shareholders’ equity		68,474			75,364
Total Liabilities and Shareholders’ Equity	$	128,494		$	139,194

See accompanying notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Six Months Ended
	March 28, 2004			March 30, 2003			March 28, 2004			March 30, 2003
Company-owned office revenues	$	75,426		$	73,300		$	157,616		$	143,568
Licensed franchise revenues		39,611			42,183			82,989			92,133
Franchise royalties		348			346			775			916
Initial franchise fees		—			6			16			12
Total revenues		115,385			115,835			241,396			236,629
Cost of Company-owned office revenues		64,280			64,777			135,147			122,558
Cost of licensed franchise revenues		31,833			33,605			66,487			73,492
Licensees’ share of gross profit		5,327			5,640			11,145			12,361
Selling and administrative expenses		16,634			16,369			33,075			31,514
Depreciation and amortization		1,514			1,299			3,262			2,508
Loss from operations		(4,203	)		(5,855	)		(7,720	)		(5,804	)
Other income:
Interest expense		(79	)		(189	)		(206	)		(197	)
Interest income		279			252			537			599
Other, net		181			228			375			377
Loss before income taxes		(3,822	)		(5,564	)		(7,014	)		(5,025	)
Provision for (benefit from) income taxes		203			(2,752	)		327			(2,663	)
Loss before cumulative effect of adoption of a new accounting standard		(4,025	)		(2,812	)		(7,341	)		(2,362	)
Cumulative effect of adoption of a new accounting standard, net of income taxes of $1,634		—			—			—			(2,421	)
Net loss	$	(4,025	)	$	(2,812	)	$	(7,341	)	$	(4,783	)
Earnings per share—basic and diluted:
Loss before cumulative effect of adoption of a new accounting standard	$	(0.45	)	$	(0.31	)	$	(0.81	)	$	(0.26	)
Cumulative effect of adoption of a new accounting standard, net of incomes taxes		—			—			—			(0.27	)
Net loss—basic and diluted	$	(0.45	)	$	(0.31	)	$	(0.81	)	$	(0.53	)
Weighted average shares:
Basic		9,019			9,042			9,019			9,039
Diluted		9,019			9,042			9,019			9,039

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

	Six Months Ended
Cash flows from operating activities:	March 28, 2004			March 30, 2003
Net loss	$	(7,341	)	$	(4,783	)
Adjustments to reconcile net loss to net cash from operating activities:
Cumulative effect of adoption of a new accounting standard, net of income taxes		—			2,421
Depreciation and amortization		3,262			2,508
Provision for losses on accounts receivable		617			759
Restricted stock compensation expense		451			635
Changes in assets and liabilities:
Trading investments		(378	)		(622	)
Accounts receivable		8,302			7,959
Prepaid expenses and other current assets		1,287			2,230
Other assets		953			192
Accounts payable		(3,467	)		(2,195	)
Accrued workers’ compensation		3,063			6,345
Accrued payroll, benefits and related costs		(2,788	)		(356	)
Accrued licensees’ share of gross profit		(184	)		(604	)
Other accrued expenses		(464	)		(986	)
Prepaid income taxes		(409	)		(3,303	)
Net cash provided by operating activities		2,904			10,200
Cash flows from investing activities:
Purchase of fixed assets		(686	)		(1,242	)
Purchase of available-for-sale investments		(14,629	)		(15,277	)
Proceeds from maturity of available-for-sale investments		30,295			12,000
Restricted cash and investments		(16,326	)		—
Acquisition of franchises		(1,443	)		(3,786	)
Net cash used in investing activities		(2,789	)		(8,305	)
Cash flows from financing activities:
Proceeds from stock option activity		8			—
Proceeds from Employee Stock Purchase Plan activity		57			53
Net cash provided by financing activities		65			53
Effect of exchange rate changes in cash		(1	)		—
Net increase in cash and cash equivalents		179			1,948
Cash and cash equivalents at beginning of period		13,236			26,101
Cash and cash equivalents at end of period	$	13,415		$	28,049

See accompanying notes to consolidated financial statements.

5

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share amounts)

(unaudited)

1.    Basis of Presentation

The Consolidated Financial Statements include the accounts of RemedyTemp, Inc. and its wholly-owned subsidiaries (collectively referred to herein as the “Company” or “Remedy”). These financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all material adjustments (consisting of normal recurring adjustments) necessary to fairly state the financial position of the Company as of March 28, 2004, and its results of operations and cash flows for the twenty-six weeks ended March 28, 2004 and March 30, 2003. All significant intercompany accounts and transactions have been eliminated in consolidation. As permitted under the applicable rules and regulations of the SEC, these financial statements do not include all disclosures and footnotes normally included with annual Consolidated Financial Statements and, accordingly, should be read in conjunction with the Consolidated Financial Statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2003 for the year ended September 28, 2003. The results of operations for the six fiscal months ended March 28, 2004 may not be indicative of the results of operations that can be expected for the full year.

Fiscal quarter

The Company’s fiscal quarters include 13 or 14 weeks. The second fiscal quarter of fiscal 2004 and 2003 included 13 weeks. The third fiscal quarter of fiscal 2004 will end June 27, 2004.

2.    Commitments and Contingent Liabilities

Litigation

Class Action

On October 16, 2001, GLF Holding Company, Inc. and Fredrick S. Pallas filed a Complaint in the Superior Court of the State of California, County of Los Angeles, against RemedyTemp, Inc., Remedy Intelligent Staffing, Inc., Remedy Temporary Services, Inc., Karin Somogyi, Paul W. Mikos, and Greg Palmer. The Complaint purports to be a class action brought by the individual plaintiffs on behalf of all of the Company’s franchisees. The Complaint alleges claims for fraud and deceit, negligent misrepresentation, negligence, breach of contract, breach of warranty, conversion, an accounting, unfair and deceptive practices, restitution and equitable relief. On or about December 3, 2002, plaintiffs filed an Amended Complaint alleging these same causes of action, but adding additional facts to the Complaint particularly with respect to the Company’s workers’ compensation program and adding claims regarding unfair competition on behalf of the general public in addition to their existing class action claim. The plaintiffs claim that Remedy wrongfully induced its franchisees into signing franchise agreements and took other action that caused the franchisees damage.

The Company believes that plaintiffs’ claims fall within the arbitration clause contained in the franchise agreements signed by plaintiffs. As a result, immediately after plaintiffs filed suit, the Company filed arbitration demands against plaintiffs with the American Arbitration Association. On or about April 1, 2003, the Company amended its arbitration demands to add claims against plaintiffs relating to workers’ compensation.

The Company denies and continues to deny the allegations in the Complaint. There has been no finding of wrongdoing by the Company. Nevertheless, to avoid costly, disruptive, and time-consuming litigation, and without admitting any wrongdoing or liability, the Company negotiated and agreed to a settlement with plaintiffs and stipulated to the certification of a settlement class comprised of all individuals or entities that entered into a Franchise Agreement (including renewals or amendments thereof) with RemedyTemp., Inc. and/or Remedy Intelligent Staffing, Inc. anytime prior to March 29, 2004.

On April 6, 2004, the Court preliminarily approved the parties’ settlement agreement and conditionally certified the Settlement Class. All discovery and other proceedings in this action are stayed until further order of this Court, except as

6

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

may be necessary to implement the Settlement Agreement. A hearing on final approval of the settlement is set forth for September 9, 2004.

CIGA

In early 2002, the California Insurance Guarantee Association (“CIGA”) began making efforts to join some of the Company’s customers and their workers’ compensation insurance carriers (collectively, “Customers”), in pending workers’ compensation claims filed by Remedy’s employees as a result of the liquidation of Remedy’s former carrier, Reliance National Insurance Company (“Reliance”). At the time of these injuries, from July 22, 1997 through March 31, 2001, Remedy was covered by workers’ compensation policies issued by Reliance. The Company believes that, under California law, CIGA is responsible for Reliance’s outstanding liabilities. Remedy initiated legal proceedings against CIGA in both Superior Court for the State of California, County of Los Angeles and the California Workers’ Compensation Appeals Board (“WCAB”) on February 15, 2002 and February 26, 2002, respectively. On April 5, 2002, the WCAB granted Remedy’s motion and consolidated the various workers’ compensation claims in which CIGA tried to join Remedy’s Customers. The WCAB also granted Remedy’s motion to stay CIGA’s efforts to join Remedy’s Customers in those claims. The WCAB selected a single test case from the consolidated pending cases to review and decide on the legal issues involved (i.e., whether it is proper for CIGA to join Remedy’s Customers in the pending claims). The trial occurred on September 20, 2002. The WCAB Administrative Law Judge ruled in favor of CIGA and dismissed it from the lawsuit, thus allowing the pending workers’ compensation matters to proceed against the Company’s Customers and their insurance carriers. Remedy then filed a motion for reconsideration of the decision by the WCAB Administrative Law Judge to the entire WCAB. On March 28, 2003, the entire WCAB affirmed the ruling of the Administrative Law Judge and as a result, the Company filed a petition for writ of review of the WCAB’s decision in the California Court of Appeal in May 2003. The WCAB continued the “stay” in effect since April 5, 2002, thus preventing CIGA from proceeding until the writ proceeding is concluded. In January 2004, the Court of Appeal granted the Company’s petition and undertook to review the WCAB’s decision; the Court will hear the matter on June 11, 2004 and a decision is expected within 90 days thereof.

Despite the Company’s determination to pursue the review process, there can be no assurance that the current proceeding will be successful, that further review will be granted, or that the Company will ultimately succeed in the overturning the WCAB decision. In the event of an unfavorable outcome, Remedy may be obligated to reimburse certain clients and believes that it would consider reimbursement of its other clients for actual losses incurred as a result of an unfavorable ruling in this matter. If CIGA is permitted to join Remedy’s Customers, thus triggering the clients’ insurance carriers’ obligation to pay for the claims, the exposure to Remedy becomes a function of the ultimate losses on the claims and the impact of such claims, if any, on the clients’ insurance coverage. Presently, the Company is unable to ascertain the specific details regarding the insurance coverage of its affected clients and the impact of an unfavorable ruling on such coverage. The Company has received data from the trustee for Reliance regarding outstanding claims that CIGA has attempted to pursue against the Company’s current and former clients. The information indicates incurred losses, as of September 28, 2003, for the claims in question amount to $38,700. The losses incurred to date represent amounts paid to date by the trustee and the remaining claim reserves on open files. At this time, the Company believes that it is unable to ascertain if the remaining reserves on the claims are appropriate or adequate since the Company has not been able to gain access to the files due to pending litigation. Further, as stated above, the Company cautions that: (i) it believes the Company’s exposure in this matter is not the remaining claims liability, but rather a function of the impact of such claims, if any, on the clients’ insurance costs; and (ii) it expects to ultimately prevail in this matter and that it will suffer no loss.

Other Litigation

From time to time, the Company becomes a party to other litigation incidental to its business and operations. The Company maintains insurance coverage that management believes is reasonable and prudent for the business risks that the Company faces. Based on current available information, management does not believe the Company is party to any legal proceedings that are likely to have a material adverse effect on its business, financial condition, cash flows or results of operations.

7

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

Other Contingency

On November 18, 2003, the Company was notified by the State of California Employment Development Department (the “EDD”) that the Company allegedly underpaid its state unemployment insurance by approximately $2,000 for the period January 1, 2003 through September 30, 2003. Based on preliminary evaluations and on advice of its outside counsel, the Company believes that its methodology in calculating its state unemployment insurance is in compliance with all applicable laws and regulations. The Company is currently working with outside counsel to resolve this issue. Given the preliminary stage of this matter, no amount has been accrued as of March 28, 2004. The EDD audit is ongoing as of March 28, 2004.

3.    Earnings Per Share

Basic earnings per share (“EPS”) is calculated using net loss divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated similar to basic EPS except that the weighted average number of common shares is increased to include the number of additional common shares that would have been outstanding if the potential dilutive common shares, such as options, had been issued and restricted shares had vested.

Potential common shares (including applicable outstanding options, restricted shares and shares in trust of 1,306 and 667 for the three fiscal months ended March 28, 2004 and March 30, 2003, and 1,320 and 568, for the six fiscal months then ended, respectively) have been excluded from the calculation of diluted shares because the effect of their inclusion would be anti-dilutive.

4.    Stock-based Incentive Compensation

The Company follows the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and, accordingly, accounts for its stock-based compensation plans using the intrinsic value method under APB No. 25, “Accounting for Stock Issued to Employees” and related interpretations.

The following table illustrates the effect on net loss and net loss per share, had compensation expense for the employee stock-based plans been recorded based on the fair value method using the Black-Scholes option pricing model under SFAS No. 123, as amended:

	For the Three Months Ended						For the Six Months Ended
	March 28, 2004			March 30, 2003			March 28, 2004			March 30, 2003
Net loss, as reported	$	(4,025	)	$	(2,812	)	$	(7,341	)	$	(4,783	)
Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects		(118	)		(106	)		(233	)		(204	)
Net loss, as adjusted	$	(4,143	)	$	(2,918	)	$	(7,574	)	$	(4,987	)
Basic and diluted net loss per share:
As reported	$	(0.45	)	$	(0.31	)	$	(0.81	)	$	(0.53	)
As adjusted	$	(0.46	)	$	(0.32	)	$	(0.84	)		(0.55	)

In arriving at an option valuation, the Black-Scholes model considers, among other factors, the expected life of an option and the expected volatility of the Company’s stock price. For pro forma purposes, the estimated fair value of the Company’s stock-based awards to employees is amortized over their respective vesting periods.

8

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

5.    Cumulative Effect of Adoption of a New Accounting Standard

Effective September 30, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 requires goodwill to no longer be amortized but instead be subject to an impairment test at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The impairment test for goodwill is comprised of two parts. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, the second step of the goodwill impairment test must be performed. The second step compares the implied fair value of the reporting unit’s goodwill with the respective carrying amount in order to determine the amount of impairment loss, if any.

In accordance with SFAS No. 142, the Company performed the two-step goodwill impairment test process and obtained assistance from a third-party in performing the valuations of its individual reporting units. The valuation methodologies considered included analyses of discounted cash flows at the reporting unit level, guidelines for publicly traded company multiples and comparable transactions. As a result of these impairment tests, during the first quarter of fiscal 2003 the Company recorded a non-cash charge of $2,421, net of income taxes of $1,634, to reduce the carrying value of the goodwill to its implied fair value. This charge is reflected as a cumulative effect of adoption of a new accounting standard in the Company’s Consolidated Statements of Operations for the six fiscal months ended March 30, 2003.

During the fourth quarter of fiscal 2003, the Company performed its annual goodwill impairment test following the methodology described above, and determined that the implied fair value of the goodwill was $31 less than the carrying value. And accordingly the Company recorded an impairment charge for that amount. This charge is reflected in selling and administrative expenses for the fiscal year ended September 28, 2003.

In accordance with SFAS No. 142, no amortization of goodwill was recorded for the six fiscal months ended March 28, 2004 and March 30, 2003.

6.    Goodwill and Other Intangible Assets

Goodwill increased $373 on a net basis at March 28, 2004 as compared to September 28, 2003 resulting from the acquisition of a traditional franchise operation during the second quarter of fiscal 2004 (see Note 8). The change in goodwill at September, 28, 2003 resulted from a goodwill impairment charge of $4,086 (see Note 5) and the purchase of two licensed franchise operations during the second and third quarters of fiscal 2003.

The following table summarizes the change in goodwill:

	March 28, 2004			September 28, 2003
Beginning of year	$	3,030		$	4,283
Additions		402			2,833
Impairment		—			(4,086	)
Other adjustments		(29	)		—
End of period	$	3,403		$	3,030

Other intangible assets with finite lives include franchise rights, client relationships and non-competition agreements and are amortized on a straight-line basis over their respective useful lives of three to six years. Amortization expense related to other intangible assets was $127 and $53 for the three fiscal months ended March 28, 2004 and March 30, 2003, respectively, and $208 and $56 for the six fiscal months ended March 28, 2004 and March 30, 2003, respectively.

9

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

The following table presents the details of the Company’s other intangible assets that are subject to amortization:

	March 28, 2004			September 28, 2003
Franchise rights	$	2,090		$	1,480
Client relationships		470			100
Non-competition agreements		414			294
		2,974			1,874
Less accumulated amortization		(427	)		(219	)
Total	$	2,547		$	1,655

At March 28, 2004, $273 of the unamortized balance of intangible assets is expected to be amortized in the remaining six months of fiscal 2004; and $544, $542, $493, $379, $241 and $75 in fiscal years 2005, 2006, 2007, 2008, 2009 and thereafter, respectively.

7.    Capitalized Software Costs

During the fourth quarter of fiscal 2003, the Company changed the estimated useful life of the capitalized software used to manage revenues and track client activities. The primary factor contributing to the change in the estimated useful life was that the software’s function was no longer consistent with the Company’s strategic plan and the Company’s offices were not fully utilizing the system. The Company discontinued use of the software in November 2003. The change in accounting estimate resulted in additional amortization expense of $507 during the first quarter of fiscal 2004. The additional amortization expense is included in depreciation and amortization expense for the six months ended March 28, 2004 in the accompanying Consolidated Statements of Operations.

8.    Purchase of Franchised Operations

From time to time, the Company may selectively purchase traditional and licensed franchise operations for strategic reasons, including facilitating its expansion plans of increased market presence in identified geographic regions. The Consolidated Financial Statements include the results of operations of these offices commencing as of their respective acquisition dates. Results of operations for the acquired licensed operations are recorded in accordance with the Company’s related revenue recognition policy until the acquisition date. Subsequent to the acquisition date, the Company-owned office revenue (“Company-owned office revenue” or “direct revenue”) recognition policy is utilized. Prior to the acquisitions, the revenues and related costs of revenues for licensed franchises are recognized as licensed franchise revenues and cost of licensed franchise revenues in the Consolidated Statement of Operations. For traditional franchise operations prior to acquisition, the revenues are recorded as franchise royalties. Subsequent to the acquisitions, the revenues and related costs of revenues are recognized as direct revenues and cost of direct revenues in the Consolidated Statement of Operations. These acquisitions were accounted for under the purchase method of accounting.

On January 12, 2004 (the “closing date”), the Company completed the acquisition of one of its traditional franchise operations consisting of two offices in Texas for $1,800. At the closing date, the Company paid $1,443 in cash ($57 in net amounts owed to the Company by the franchisee were deducted from the cash payment). The remaining $300 will be paid in cash two years from the closing date. Of the total purchase price, $402 was allocated to goodwill. Additionally, $1,100 was allocated to amortizable intangible assets consisting of franchise rights ($610), client relationships ($370) and non-competition agreements ($120) with a weighted average amortization period of approximately five years. The Asset Purchase Agreement includes provisions for contingent payments for the three years subsequent to the closing date and is based upon performance targets related to increases in earnings before interest, taxes, depreciation and amortization (“EBITDA”) over the prior year. Pro forma information is not materially different from the Company’s consolidated results of operations for the three and six months ended March 28, 2004 and March 30, 2003.

During March and April of fiscal 2003, the Company acquired a large licensed franchise operation in Tennessee consisting of several offices and purchased assets of a smaller licensed franchise in Texas consisting of one office, respectively. The combined purchase price was $3,763 ($3,720 for the Tennessee franchise and $43 for the Texas franchise). The Company recorded goodwill of $2,833 ($2,799 for the Tennessee franchise and $34 for the Texas franchise). In connection with the Tennessee acquisition, $1,840 of the purchase price was allocated to amortizable intangible assets consisting of franchise rights ($1,480), client relationships ($100) and non-competition agreement ($260)

10

RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

with a weighted average amortization period of approximately six years. The Stock Purchase Agreement for the Tennessee acquisition includes a provision for contingent payments for the two years subsequent to December 29, 2002. The contingent payments are based upon performance targets related to increases in the Tennessee offices’ EBITDA over the prior year. The Company was not required to make a payment for the twelve months ended December 28, 2003. Additionally, the Company is required to pay monthly royalties to the prior franchisee based upon revenues of a certain client of the Tennessee office for as long as Remedy services that client. The Company paid $177 and $494 in royalty payments which are included in selling and administrative expenses in the accompanying Consolidated Statements of Operations for the three and six months ended March 28, 2004, respectively.

9.    Workers’ Compensation

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

Remedy establishes a reserve for the estimated remaining deductible portion of its workers’ compensation claims, representing the estimated ultimate cost of claims and related expenses that have been reported but not settled, and that have been incurred but not reported. The estimated ultimate cost of a claim is determined by applying actuarially determined loss development factors to current claims information. These development factors are determined based upon a detailed actuarial analysis of historical claims experience of both the Company and the staffing industry. The Company periodically updates the actuarial analysis supporting the development factors utilized and revises those development factors, as necessary. Adjustments to the claims reserve are charged or credited to expense in the periods in which they occur. The estimated remaining deductible liability under the aforementioned contracts as of March 28, 2004 is approximately $33,772, of which $11,398 is recorded as current and $22,374 is recorded as non-current in the accompanying Consolidated Balance Sheets.

The Company is contractually required to collateralize its remaining obligation under each of these workers’ compensation insurance contracts through the use of irrevocable letters of credit, pledged cash and securities or a combination thereof. The level and type of collateral required for each policy year is determined by the insurance carrier at the inception of the policy year and may be modified periodically. As of March 28, 2004, the Company has outstanding letters of credit of $21,911 and pledged cash and securities totaling $21,941. However, due to the renewal of the current year insurance policy and review of existing policies for prior years, effective April 2004, the Company is required to increase its letter of credit for its current policy year an additional $15,000 to collateralize its obligation and is allowed to reduce the letter of credit for prior policy years by $2,250. The pledged cash and securities are restricted and cannot be used for general corporate purposes while the Company’s remaining obligations under the workers’ compensation program are outstanding. Accordingly, the Company has classified these pledged cash and securities as restricted in the accompanying Consolidated Balance Sheets.

The Company also has an aggregate $5,235 current liability recorded at March 28, 2004 for additional premiums due under previous guaranteed cost policies and for premiums due under current policies in states where the Company is statutorily required to participate in the state managed workers’ compensation fund.

From July 22, 1997 through March 31, 2001, the Company had a fully insured workers’ compensation program with Reliance. The annual premium for this program was based upon actual payroll costs multiplied by a fixed rate. Each year, the Company prepaid the premium based upon estimated payroll levels and an adjustment was subsequently made for differences between the estimated and actual amounts. Subsequent to March 31, 2001 (the end of Company’s final policy year with Reliance), Reliance became insolvent and was subsequently liquidated. The Company is currently in litigation with the California Insurance Guaranty Association regarding financial responsibility for all remaining open claims under the Reliance workers’ compensation program as discussed in Note 2.

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RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

10.    Line of Credit

The Company executed a new credit facility dated February 4, 2004 with Bank of America, which replaced its existing credit agreement with Bank of America and Union Bank of California. The new credit facility provides for aggregate borrowings not to exceed $40,000 including any letters of credit existing under the prior credit agreement. The Company’s obligation under the line of credit is secured by certain assets of the Company. In addition, the Company is required to maintain a $16,000 Bank of America Certificate of Deposit to satisfy the collateral requirement, which is classified as restricted cash and investments in the accompanying Consolidated Balance Sheets. The credit agreement expires on June 1, 2005. The interest rate is at the Company’s discretion, either the Bank of America’s prime rate plus 0.0% or 0.5% (depending on the amount of outstanding borrowings) or the London Inter Bank Offering Rate (“LIBOR”) plus 0.75% or 1.5% (depending on the amount of outstanding borrowings) and is paid monthly. The Company is required to pay quarterly fees of 0.25% per annum on the unused portion of the line of credit. Under the new agreement, the Company is also required to comply with certain restrictive covenants, the most restrictive of which limits the Company’s net loss for each fiscal quarter and on a fiscal year-to-date basis. As of March 28, 2004, the Company was in compliance with all restrictive covenants. However, if the Company is not profitable in the remaining six months of the fiscal year, it could be out of compliance on a fiscal year-to-date basis.

The Company has no borrowings outstanding as of March 28, 2004 and September 28, 2003. The Company had outstanding letters of credit totaling $21,911 as of March 28, 2004 and September 28, 2003, as contractually required under the terms of its workers’ compensation insurance agreements as discussed above. Quarterly, the Company is required to pay 0.75% in interest on the first $16,000 of the outstanding letters of credit and 1.50% on the remaining $5,911.

11.    Office Closures

The Company’s strategic plan focuses on increasing the percentage of business it receives from higher margin service lines, increasing revenues through targeted sales force and distribution channel expansion, and enhancing operating margins through continuous productivity improvements. As a result, and given overall industry and market conditions, the Company is continually reassessing its current operating structure. Consequently, during the third quarter of fiscal 2003, the Company implemented plans to close or consolidate certain Company-owned offices, specifically those that were under-performing or primarily dedicated to recruiting activities. During fiscal 2003, the Company recorded a $992 charge for costs in connection with these plans, including $689 related to contractual lease obligations and $303 for severance benefits, fixed asset disposals and other costs associated with these office closures. There were no additional charges related to the office closure plans for the six fiscal months ended March 28, 2004. At March 28, 2004, the remaining liability resulting from the charges in connection with this plan is $179, which is included in “Other Accrued Expenses,” and relates to estimated losses on subleases and the remaining net lease payments on closed locations that will be paid out through fiscal 2008. During the first six months of fiscal 2004, the Company closed two under performing Company-owned offices. The Company did not incur additional costs in connection with the fiscal 2004 closures, and accordingly no charges were recorded for the six months ended March 28, 2004.

12.    Restricted Stock Awards

At March 28, 2004, the Company has 580 shares of restricted Class A Common Stock issued and outstanding. During the first six months of fiscal 2004, the Leadership Development and Compensation Committee of the Board of Directors did not issue any additional shares of restricted Class A Common Stock (the “Restricted Stock”) under the Company’s 1996 Stock Incentive Plan. The Restricted Stock has no purchase price and cliff vests after five years. However, the Restricted Stock is subject to accelerated vesting after three years if certain performance goals are achieved. All unvested Restricted Stock shall be forfeited upon voluntary termination or termination for cause. Upon retirement or involuntary termination for other than cause, 20% vests one year from the grant date with the remaining unvested shares vesting at 1.66% each month thereafter. At the time of issuance, unearned compensation is recorded as a component of shareholders’ equity and is based upon the fair market value of the Company’s Class A Common Stock on the respective grant dates. The unearned compensation is currently being amortized and charged to operations over the initial five-year vesting period. During the first quarter of fiscal 2004, 70 shares of previously issued Restricted Stock were forfeited. No shares were forfeited during the second quarter of fiscal 2004.

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RemedyTemp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(amounts in thousands, except per share amounts)

(unaudited)

13.    Shareholders Equity

Comprehensive Loss

The components of comprehensive loss, net of taxes are as follows:

	Three Fiscal Months Ended						Six Fiscal Months Ended
	March 28, 2004			March 30, 2003			March 28, 2004			March 30, 2003
Net loss	$	(4,025	)	$	(2,812	)	$	(7,341	)	$	(4,783	)
Other comprehensive loss:
Change in unrealized loss on investments		(9	)		(80	)		(64	)		(172	)
Translation adjustments		(10	)		—			(1	)		—
Total comprehensive loss	$	(4,044	)	$	(2,892	)	$	(7,406	)	$	(4,955	)

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:

	March 28, 2004		September 28, 2003
Accumulated unrealized gain on investments	$	49	$	113
Translation adjustments		20		21
Total accumulated other comprehensive income	$	69	$	134

14.    Income Taxes

The income tax provision for the interim periods of fiscal year 2004 consists primarily of the Company’s state and foreign income tax obligations as compared with an income tax benefit provided for the interim periods presented for fiscal year 2003. The Company’s overall annual effective tax rate of (4.7%) for fiscal year 2004 differs from the statutory rate due to the current period valuation allowance against the deferred tax asset. The effective tax rate of 53.0% for fiscal year 2003 differs from the statutory rate due to the effect of Work Opportunity and Welfare to Work Tax Credits. The estimated annual effective tax rate is revised quarterly based upon actual operating results, the tax credits earned to date as well as current annual projections. The cumulative impact of any change in the estimated annual effective tax rate is recognized in the period the change in estimate occurs.

15.    New Accounting Standard

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities” (FIN 46-R). FIN 46-R provides the principles to consider in determining when variable interest entities (“VIE”) must be consolidated in the financial statements of the primary beneficiary. Variable interests are contractual, ownership or other monetary interests in an entity that change with changes in the fair value of the entity’s net assets exclusive of variable interests. An entity is considered to be a VIE when its capital is insufficient to permit it to finance its activities without additional subordinated financial support or its equity investors, as a group, lack the characteristics of having a controlling financial interest. FIN 46-R requires the consolidation of entities which are determined to be VIEs when the reporting company determines that it will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s residual returns, or both. The company that is required to consolidate the VIE is called the primary beneficiary. As revised, the provisions of FIN 46-R are to be applied no later than the end of the first reporting period that ends after March 15, 2004. The Company adopted FIN 46-R as of the beginning of the second quarter of fiscal 2004.

The Company has two forms of franchise arrangements, traditional and licensed and has determined that the franchise arrangements alone do not create a variable interest. However, the Company has provided limited financing to certain franchisees or licensees, which does create a potential variable interest relationship. Based on further analysis performed by the Company, management has determined that these franchisees or licensees are not VIEs. Accordingly, consolidation of these franchisees and licensees is not required.

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RemedyTemp, Inc.

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

In addition to historical information, management’s discussion and analysis includes certain forward-looking statements, including, but not limited to, those related to the growth and strategies, future operating results and financial position as well as economic and market events and trends of RemedyTemp, Inc., including its wholly-owned subsidiaries, (collectively, the “Company”). All forward-looking statements made by the Company, including such statements herein, include material risks and uncertainties and are subject to change based on factors beyond the control of the Company (certain of such statements are identified by the use of words such as “anticipate,” “believe,” “estimate,” “intend,” “plan,” “expect,” “will,” or “future”). Accordingly, the Company’s actual results may differ materially from those expressed or implied in any such forward-looking statements as a result of various factors, including, without limitation, the success of certain cost reduction efforts, the continued performance of the RemX^® specialty division, the Company’s ability to realize improvements in the months ahead, changes in general or local economic conditions that could impact the Company’s expected financial results, the availability of sufficient personnel, various costs relating to temporary workers and personnel, including but not limited to workers’ compensation, the Company’s ability to expand its sales capacity and channels, to open new points of distribution and expand in core geographic markets, attract and retain clients and franchisees/licensees, the outcome of litigation, software integration and implementation, application of deferred tax assets and other factors described in the Company’s filings with the Securities and Exchange Commission regarding risks affecting the Company’s financial condition and results of operations. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. The following should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto.

Company Overview

RemedyTemp, Inc. is a national provider of clerical, light industrial, information technology and financial temporary staffing services to industrial, service and technology companies, professional organizations and governmental agencies. The Company provides its services in 35 states, District of Columbia, Puerto Rico and Canada through a network of 240 offices, of which 132 are Company-owned and 108 are independently-managed franchises.

Executive Summary

The staffing industry is large and fragmented and is economically sensitive resulting in an industry-wide decline in the past two years due to the slow economy. It is also a highly competitive industry, which has contributed to significant price competition and lower margins as major staffing companies have attempted to maintain or gain market share. During the last twelve months, global economic conditions have continued to improve which has signaled a sustainable job-creating recovery. Additionally, the demand for temporary staffing has also started to grow as demonstrated by recent reports from the Bureau of Labor Statistics (the “BLS”) stating that America’s staffing companies employed 9.6% more workers in March 2004 than in the same period of 2003. According to the BLS, the staffing industry employment level in March 2004 experienced the tenth consecutive month of year-over-year improvements and the best rate of growth since April 2000. Historic trends in employment growth following a recession have been slowed, due in part to productivity gains and modest new job growth.

The increases in workers’ compensation costs the Company experienced in fiscal 2003 and the first six months of fiscal 2004 have been significant. However, the Company does not expect these increases to continue at such an exaggerated pace throughout the remaining six months of fiscal 2004. During the second quarter of fiscal 2004, the California legislature enacted sweeping reforms to its workers’ compensation laws. Although it is too early to determine the impact, the Company is optimistic the changes will have a positive effect on its profitability.

With long term positive prospects, the staffing industry has always been inherently difficult to forecast due to its dependence on economic factors and the strength of the labor market. However, the Company has developed a forecasting tool jointly with the A. Gary Anderson Center for Economic Research at Chapman University. The Quarterly Labor Forecast Report, which is based upon BLS and other economic factors, helps to predict total demand for temporary labor. The Company has been utilizing this tool for several years and has recently begun to publish the results on a quarterly basis.

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RemedyTemp, Inc.

During fiscal 2003, the Company re-engineered its revenues and marketing strategies, taking advantage of its strong brand name and infrastructure, and positioned itself for profitable growth. The Company’s long-term growth strategies include:

• Increasing the proportion of revenue from its Company-owned offices

• Increasing the proportion of revenue generated from outside of California to mitigate rising state unemployment costs and workers’ compensation costs

• Increasing Company-owned office revenues (“Company-owned office revenue” or “direct revenue”) in its higher margin clerical business to 35% of total revenues

• Increasing direct hire revenue

• Target small to midsize customers which typically generate higher margins

• Double the number of sales representatives in the field in the next several years (referred to as the Company’s investment hire goal)

The Company has been focused on these long-term strategies beginning in late fiscal 2003 and throughout fiscal 2004 and has experienced results demonstrated by a year-over-year 9.8% increase in direct revenues, inclusive of acquisitions, from its Company-owned offices for the six months ended March 28, 2004, an increase to 56.8% from 54.9% in revenues generated outside of California, and an increase in its RemX^® specialty staffing business to 4.5% of total revenue for the six months ended March 28, 2004 from 2.8% of total revenue for the same period of the prior year, and a 37.8% increase in sales representatives during the first six months of fiscal 2004.

Operations

The Company’s revenues are derived from Company-owned offices and independently-managed franchise offices. The Company’s franchise arrangements are structured in either a traditional franchise format or a licensed franchise format.

Traditional Franchise

Under the Company’s traditional franchise agreements, the franchisee pays all lease and working capital costs relating to its office, including funding payroll and collecting clients’ accounts. Generally, the franchisee pays the Company an initial franchise fee and continuing franchise fees, or royalties, equal to approximately 7.0% of its gross billings. Royalty fees are reduced when the franchisee serves a national client as these clients typically have lower margins. In addition, franchisees that have renewed their franchise agreement could qualify for a discounted rate (ranging from 5.5% - 6.5%) based on gross billings. The Company processes payroll and invoices clients, and the franchisee employs all management staff and temporary personnel affiliated with its office.

Licensed Franchise

Under the Company’s licensed franchise agreements, the licensee pays the Company an initial franchise fee and pays all lease and operating costs relating to its office. The licensee employs all management staff affiliated with its office, but the Company employs all temporary personnel affiliated with the licensed franchise office, handles invoicing and collecting clients’ accounts, and generally remits to the licensed franchisee 60% - 70% of the office’s gross profit. However, the Company’s share of the licensee’s gross profit, representing the continuing franchise fees, is generally not less than 7.5% of the licensed franchisee’s gross billings; with the exception of (i) national accounts on which the Company’s fee is reduced to compensate for lower gross margins, and (ii) licensees that have renewed their franchise agreement and qualify for a discounted rate (ranging from 6.0% - 7.0%) based on gross revenues. The percentage of gross profit paid to the licensee is generally based on the level of hours billed during the contract year.

The table below sets forth the number of Company-owned, traditional and licensed franchise offices:

	March 28, 2004	March 30, 2003
Company-owned offices	132	140
Licensed franchise offices	98	111
Traditional franchise offices	10	14
Total offices	240	265

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RemedyTemp, Inc.

In general, franchise offices opened from 1987 to 1990 are operated as traditional franchises, and independently-managed offices opened since 1990 are operated as licensed franchise offices. The Company moved from the traditional to the licensed franchise format to exercise more control over the collection and tracking of the receivables generated by the independently-managed offices and to allow the Company to grow without being limited by the financial resources of traditional franchisees. Accordingly, the number of traditional franchise offices is not anticipated to increase, except in certain circumstances when existing traditional franchisees open new franchise offices within their territory. The number of licensed franchise offices is expected to increase because new independently-managed offices will be opened in licensed franchise format and offices currently operated as traditional franchises may, depending upon various factors, convert to the licensed franchise format. If the number of traditional franchise offices is reduced, royalty revenues will likely decrease.

The Company opened 15 direct offices during the first six months of fiscal 2004 and closed two under performing offices. Ten of the new direct offices are located outside of California, which is consistent with the Company’s strategic plan and associated expansion efforts increasing the proportion of revenue generated from business outside of California to increase its national presence and mitigate the impact of rising unemployment insurance and workers’ compensation costs within California. Revenue generated in California decreased to 43.9% and 43.2% of total revenues for the three and six months ended March 28, 2004, respectively, as compared to 45.1% for the same periods in the prior year.

Results of Operations

For the Three Fiscal Months Ended March 28, 2004 Compared to the Three Fiscal Months Ended March 30, 2003

Revenue

	For the Three Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change			% Change
Company-owned office revenues	$	75,426	$	73,300	$	2,126		2.9	%
Licensed franchise revenues		39,611		42,183		(2,572	)	(6.1	)%
Franchise royalties		348		346		2		0.6	%
Initial franchise fees		—		6		(6	)	(100.0	)%
Total revenues	$	115,385	$	115,835	$	(450	)	(0.4	)%

• The mix between direct, licensed franchise and traditional royalty revenues shifted with direct revenues accounting for 65.4% of total revenues for the three fiscal months ended March 28, 2004 as compared to 63.3% for the same period of the prior year. This overall shift in business mix is consistent with the Company’s long-term strategy of generating a higher proportion of its overall revenues from its Company-owned offices.

• The primary factor contributing to the increase in direct office revenues is the acquisition of two licensed franchises during the second and third quarters of fiscal 2003 and the acquisition of one traditional franchise during the second quarter of fiscal 2004 (see Note 8 to the Consolidated Financial Statements). In aggregate, these acquisitions generated $7,964 of direct revenues for the second quarter of fiscal 2004. The franchise acquired during the second quarter of fiscal 2003 generated $1,936 of direct revenues for the one month ended March 30, 2003. Additionally, revenue for the Company’s RemX^® specialty staffing division increased $1,657 to $6,053 for the three fiscal months ended March 28, 2004 from $4,396 for the same period of the prior year; $724 of the increase in RemX^® is attributable to the acquisition of the traditional franchise office during the second quarter of fiscal 2004 as noted above. Exclusive of the acquisitions, direct revenues decreased $3,902 due to the net loss of several clients as a result of the Company’s strategy of exiting certain unprofitable accounts.

• The $2,572 decrease in the licensed franchise revenue is primarily due to the acquisition of franchise offices as noted above. The acquired licensed franchise offices combined generated $3,772 of licensed franchise revenue during the second quarter of fiscal 2003 and the traditional franchise acquired accounted for $75 of franchise royalties during the second quarter of fiscal 2003. Exclusive of these acquisitions, licensed franchise revenue increased $1,200 resulting from the addition of several new clients and increased revenue from existing clients.

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RemedyTemp, Inc.

The following table summarizes the Company’s business mix as a percent of revenue:

	For the Three Months Ended
	March 28, 2004		March 30, 2003
Light Industrial	66.8	%	65.6	%
Clerical	27.6	%	30.3	%
RemX®	5.2	%	3.8	%

• The slight increase in revenues generated from the light industrial sector during the second quarter of fiscal 2004 is primarily due to increased volume from existing clients, including a 32.4% increase in volume with the Company’s two largest light industrial clients. The increase was offset slightly by the loss of several smaller clients.

• The increase in the revenues generated from the RemX^® division is consistent with the Company’s long-term strategic plan to shift its overall business mix to higher margin services.

Cost of Revenues

	For the Three Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change		% Change
Cost of Company-owned office revenues	$	64,280	$	64,777	$	497	0.8	%
Cost of licensed franchise revenues		31,833		33,605		1,772	5.3	%
Total cost of revenues	$	96,113	$	98,382	$	2,269	2.3	%

• Total cost of direct and licensed franchise revenues consists of wages and other expenses related to temporary associates and as a percentage of revenues was 83.3% for the second quarter of fiscal 2004 as compared to 84.9% for the same period in the prior year. The overall decrease in cost of revenues is due to the lower workers’ compensation costs, which were $6,003 for the three months ended March 28, 2004 as compared to $8,194 for the three months ended March 30, 2003. The prior year workers’ compensation expense included a $3,837 cumulative adjustment to the claims reserves resulting from the completion of an actuarial analysis in March 2003, which resulted in revised loss development factors for all claims incurred since April 2001. Exclusive of the $3,837 cumulative adjustment in the prior year, workers’ compensation expense increased $1,646 for the three months ended March 28, 2004 as compared to the same period in the prior year, due to rate adjustments resulting from the actuarial analysis performed in fiscal 2003.

• The increase in gross margin was enhanced by a 16.4% increase in direct hire revenues, whereby the Company earns a fee for placing an associate in a permanent position. Direct hire revenue was 1.2% of total revenue for the three months ended March 28, 2004 as compared to 1.0% for the same period in the prior year. The direct hire revenue increase was primarily attributable to the RemX^® division.

Operating Expenses

	For the Three Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change			% Change
Licensees’ share of gross profit	$	5,327	$	5,640	$	313		5.5	%
Selling and administrative expenses		16,634		16,369		(265	)	(1.6	)%
Depreciation and amortization		1,514		1,299		(215	)	(16.6	)%
Total operating expenses	$	23,475	$	23,308	$	(167	)	(0.7	)%

• Licensees’ share of gross profit represents the net payments to licensed franchisees based upon a percentage of gross profit generated by the licensed franchise operation. The decrease in licensees’ share of gross profit is consistent with the decrease in licensed franchise revenues and cost of licensed franchise revenues. Licensees’ share of gross profit as a percentage of licensed gross profit increased to 68.5% for the three fiscal months ended

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RemedyTemp, Inc.

March 28, 2004 as compared to 65.7% for the three fiscal months ended March 30, 2003 and primarily resulted from the increase in direct hire revenues as discussed above.

• The following table summarizes the change in selling and administrative expenses for the three months ended March 28, 2004 as compared to the three months ended March 30, 2003:

	Consolidated Change			Tennessee Acquisition			RemX® Change			Other Offices
Colleague salary	$	(1,310	)	$	(208	)	$	(628	)	$	(474	)
Colleague payroll taxes		(318	)		(19	)		(101	)		(198	)
Royalty payments		(128	)		(128	)		—			—
Legal fees		(114	)		—			—			(114	)
Group insurance		(102	)		(10	)		(37	)		(55	)
Workers’ compensation		(93	)		—			(21	)		(72	)
Bad debt expense		665			—			—			665
Capitalized software costs write-off		304			—			—			304
Profit sharing		317			(7	)		(130	)		454
Rent		223			(30	)		(40	)		293
Other SG&A		291			(107	)		(248	)		646
Net change	$	(265	)	$	(509	)	$	(1,205	)	$	1,449

• Selling and administrative expenses as a percentage of total revenues were 14.4% for the three fiscal months ended March 28, 2004 as compared to 14.1% for the same period in the prior year. The primary factor contributing to the net increase was a $1,310 increase in field operations colleague salaries due to the Company’s investment hire goal, expansion of the RemX^® specialty staffing division and the franchise acquisitions as described in Note 8 to the Consolidated Financial Statements. The increase was offset by a $665 decrease in bad debt expense due to additional information management received during the second quarter regarding the bankruptcy status of one of its major customers during the first quarter of fiscal 2004.

• The following table summarizes the increase in depreciation and amortization expense for the three months ended March 28, 2004 as compared to the three months ended March 30, 2003:

	Consolidated Change
Write-off of fixed assets	$	(179	)
Amortization of licensed software agreement		(147	)
Amortizable intangible assets due to acquisitions		(80	)
Decrease due to fully amortized assets		191
Net change	$	(215	)

Loss from operations decreased $1,652 to an operating loss of $4,203 for the three fiscal months ended March 28, 2004 from an operating loss of $5,855 for the three fiscal months ended March 30, 2003. The primary reason for the Company’s improved operating loss is due to the increase in direct revenues in conjunction with a decrease in cost of direct revenues related to the lower workers’ compensation costs.

The Company’s interest expense decreased $110 during the second quarter of fiscal 2004 as compared to the same period in the prior year resulting from the decrease in the Company’s letters of credit contractually required under the terms of its workers’ compensation insurance agreements. The outstanding letters of credit decreased to $21,911 at March 28, 2004 from $28,528 at March 30, 2003.

An income tax provision of $203 was recorded in the second quarter of fiscal year 2004 consisting primarily of the Company’s state and foreign income tax obligations as compared with an income tax benefit of $2,752 for the second quarter of fiscal year 2003. The Company’s overall effective tax rate of (5.3%) for the second quarter of fiscal year 2004 differs from the statutory rate due to the current period valuation allowance against the deferred tax asset. The effective tax rate of 49.5% for the second quarter of fiscal year 2003 differs from the statutory rate due to the effect of Work Opportunity and Welfare to Work Tax Credits. The estimated annual effective tax rate is revised quarterly based upon actual operating results, the tax credits earned to date as well as current annual projections. The cumulative impact of any change in the estimated annual effective tax rate is recognized in the period the change in estimate occurs.

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RemedyTemp, Inc.

The Company generated a net loss of $4,025 for the three months ended March 28, 2004 as compared to a net loss of $2,812 for the three fiscal months ended March 30, 2003.

For the Six Fiscal Months Ended March 28, 2004 Compared to the Six Fiscal Months Ended March 30, 2003

Revenue

	For the Six Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change			% Change
Company-owned office revenues	$	157,616	$	143,568	$	14,048		9.8	%
Licensed franchise revenues		82,989		92,133		(9,144	)	(9.9	)%
Franchise royalties		775		916		(141	)	(15.4	)%
Initial franchise fees		16		12		4		33.3	%
Total revenues	$	241,396	$	236,629	$	4,767		2.0	%

• The mix between direct, licensed franchise and traditional royalty revenues shifted with direct revenues accounting for 65.3% of total revenues for the six fiscal months ended March 28, 2004 as compared to 60.7% for the same period of the prior year. This overall shift in business mix is consistent with the Company’s long-term strategy of generating a higher proportion of its overall revenues from its Company-owned offices.

• The primary factor contributing to the increase in direct office revenues is the acquisition of two licensed franchises during the second and third quarters of fiscal 2003 and the acquisition of a traditional franchise during the second quarter of fiscal 2004. In aggregate the acquisitions accounted for $19,325 in revenue for the first six months of fiscal 2004. The franchise acquired during the second quarter of fiscal 2003 generated $1,936 of direct revenues for the one month ended March 30, 2003. Additionally, revenue for the Company’s RemX^® specialty staffing division increased $4,217 to $10,929 for the six fiscal months ended March 28, 2004 from $6,712 for the same period of the prior year. $724 of the increase in RemX^® is attributable to the acquisition of the traditional franchise office during the second quarter of fiscal 2004 as noted above. Ten of the 15 direct offices opened during fiscal 2004 were RemX^® offices, contributing to the significant growth in the specialty staffing division. Exclusive of the acquisitions, direct revenues decreased $3,341 due to the net loss of several clients as a result of the Company’s strategy of exiting certain unprofitable accounts in addition to a major client filing for bankruptcy under chapter 11 of the U.S. Bankruptcy Code.

• The decrease in licensed franchise revenue is primarily due to the acquisition of the licensed franchise offices as described above. The acquired licensed franchise offices combined generated $13,115 of licensed franchise revenue during the first six months of fiscal 2003. Exclusive of these acquisitions, licensed revenues increased $3,971 and resulted from the addition of several new clients and increased revenue from existing clients.

The following table summarizes the Company’s business mix as a percent of revenue:

	For the Six Months Ended
	March 28, 2004		March 30, 2003
Light Industrial	67.9	%	67.6	%
Clerical	27.3	%	29.3	%
RemX®	4.5	%	2.8	%

• The slight increase in revenues generated from the light industrial sector during the second quarter of fiscal 2004 is primarily due to increased volume from existing clients. The decrease in the clerical sector is partially due to two of the clerical offices converting to RemX^® offices during the first quarter of fiscal 2004. The aggregate revenue from the two offices that converted was $963 for the first six months of fiscal 2003.

• The increase in the revenues generated from the RemX^® division is consistent with the Company’s long-term strategic plan to shift its overall business mix to higher margin services.

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RemedyTemp, Inc.

Cost of Revenues

	For the Six Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change			% Change
Cost of Company-owned office revenues	$	135,147	$	122,558	$	(12,589	)	(10.3	)%
Cost of licensed franchise revenues		66,487		73,492		7,005		9.5	%
Total cost of revenues	$	201,634	$	196,050	$	(5,584	)	2.8	%

• Total cost of direct and licensed franchise revenues consists of wages and other expenses related to temporary associates. Total cost of direct and licensed franchise revenues as a percentage of revenues was 83.5% for the first six months of fiscal 2004 as compared to 82.9% for the same period in the prior year. The increase in cost of direct revenues was primarily related to a $2,511 increase in state unemployment insurance costs, which accounted for 1.3 percentage points of the 2.8 percentage point increase in cost of revenues. The Company believes that the sharp increase in state unemployment insurance costs will continue to increase in fiscal 2004, both within and outside of California. Additionally, the Company experienced an increase in workers’ compensation costs of $383 and $369 increase in general insurance, which is based upon a percentage of wages. The decrease in the gross margin is also attributable to continued pricing pressures experienced throughout the staffing industry. The 9.5% decrease in cost of licensed franchise revenues is consistent with the 9.9% decrease in licensed franchise revenues.

• The decrease in gross margins was partially offset by an 17.1% increase in direct hire revenues, whereby the Company earns a fee for placing an associate in a permanent position. The direct hire revenue increase was primarily attributable to the RemX^® division and was 1.1% of consolidated revenues.

Operating Expenses

	For the Six Months Ended				Favorable (Unfavorable)
	March 28, 2004		March 30, 2003		$ Change			% Change
Licensees’ share of gross profit	$	11,145	$	12,361	$	1,216		9.8	%
Selling and administrative expenses		33,075		31,514		(1,561	)	(5.0	)%
Depreciation and amortization		3,262		2,508		(754	)	(30.1	)%
Total operating expenses	$	47,482	$	46,383	$	(1,099	)	(2.4	)%

• Licensees’ share of gross profit represents the net payments to licensed franchisees based upon a percentage of gross profit generated by the licensed franchise operation. The decrease in licensees’ share of gross profit for the six fiscal months ended March 28, 2004 is consistent with the overall decrease in licensed franchise revenues and cost of licensed franchise revenues. Licensees’ share of gross profit as a percentage of licensed gross profit was 67.5 % for the six fiscal months ended March 28, 2004 as compared to 66.3% for the six fiscal months ended March 30, 2003.

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RemedyTemp, Inc.

• The following table summarizes the change in selling and administrative expenses for the six months ended March 28, 2004 as compared to the six months ended March 30, 2003:

	Consolidated Change			Tennessee Acquisition			RemX® Change			Other Offices
Colleague salary	$	(1,914	)	$	(598	)	$	(957	)	$	(359	)
Colleague payroll taxes		(357	)		(45	)		(135	)		(177	)
Royalty payments		(445	)		(445	)		—			—
Group insurance		(190	)		(25	)		(56	)		(109	)
Workers’ compensation		(204	)		(8	)		(37	)		(159	)
Rent		408			(76	)		(70	)		554
Capitalized software costs write-off		366			—			—			366
Profit sharing		226			(33	)		(315	)		574
Bad debt expense		143			—			—			143
Other SG&A		406			(162	)		(492	)		1,060
Net change	$	(1,561	)	$	(1,392	)	$	(2,062	)	$	1,893

• Selling and administrative expenses as a percentage of total revenues were 13.7% for the six fiscal months ended March 28, 2004 as compared to 13.3% for the same period in the prior year. The primary factor contributing to the net increase was a $1,914 increase in field operations colleague salaries due to the Company’s investment hire goal, expansion of the RemX^® specialty staffing division and the franchise acquisitions as described in Note 8 to the Consolidated Financial Statements. The increase in selling and administrative expenses was offset by a $408 decrease in rent expense due to the offices the Company closed during fiscal 2003.

• The following table summarizes the increase in depreciation and amortization expense for the six months ended March 28, 2004 as compared to the six months ended March 30, 2003:

	Consolidated Change
Change in estimated useful life of capitalized software	$	(507	)
Amortizable intangible assets due to acquisitions		(207	)
Write-off of fixed assets		(179	)
Amortization of licensed software agreement		(147	)
Decrease due to fully amortized assets		286
Net change	$	(754	)

Loss from operations increased $1,916 to an operating loss of $7,720 for the six fiscal months ended March 28, 2004 from an operating loss of $5,804 for the six fiscal months ended March 30, 2003 due to the factors described above, which included significant increases in state unemployment insurance, an increase in selling and administrative expenses and increased depreciation and amortization expense.

The Company incurred a loss (before cumulative effect of adoption of a new accounting standard) of $7,341 for the six fiscal months ended March 28, 2004 as compared to a loss of $2,362 for the six fiscal months ended March 30, 2003.

An income tax provision of $327 was recorded in the first six months of fiscal year 2004 consisting primarily of the Company’s state and foreign income tax obligations as compared with an income tax benefit of $2,663 for the first six months of fiscal year 2003. The Company’s overall annual effective tax rate of (4.7%) for fiscal year 2004 differs from the statutory rate due to the current period valuation allowance against the deferred tax asset. The effective tax rate of 53.0% for fiscal year 2003 differs from the statutory rate due to the effect of Work Opportunity and Welfare to Work Tax Credits. The estimated annual effective tax rate is revised quarterly based upon actual operating results, the tax credits earned to date as well as current annual projections. The cumulative impact of any change in the estimated annual effective tax rate is recognized in the period the change in estimate occurs.

The cumulative effect of adoption of a new accounting standard of $2,421 (net of tax of $1,634) for the six fiscal months ended March 30, 2003 represents the goodwill impairment charge resulting from the Company’s adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, effective the beginning of fiscal 2003, as discussed in Note 5 to the Consolidated Financial Statements.

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RemedyTemp, Inc.

The Company generated a net loss of $7,341 for the six months ended March 28, 2004 as compared to a net loss of $4,783 for the six fiscal months ended March 30, 2003.

Liquidity and Capital Resources

The Company’s balance sheet remains strong with $54,388 in cash and investments as of March 28, 2004 (including restricted cash and investments discussed below), and it continues to be debt free. Historically, the Company has financed its operations through cash generated by operating activities and its credit facility, as necessary. Generally, the Company’s principal uses of cash are working capital needs, direct office openings, capital expenditures (including management information systems initiatives) and franchise acquisitions. Beginning in the third quarter of fiscal 2003, the Company collateralized $21,615 of its workers’ compensation liability with pledged cash and securities, as opposed to issuing additional letters of credit. During the second quarter of fiscal 2004, the Company used $16,000 in cash to collateralize its $40,000 line of credit as required by its new credit facility, as discussed below and in Note 10 to the Consolidated Financial Statements. The nature of the Company’s business requires payment of wages to its temporary associates on a weekly basis, while payments from clients are generally received 30-60 days after the related billing.

Cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized below:

	For the Six Months Ended
Cash provided by (used in)	March 28, 2004			March 30, 2003
Operating activities	$	2,904		$	10,200
Investing activities		(2,789	)		(8,305	)
Financing activities		65			53
Effect of exchange rate on cash		(1	)		—
Net increase in cash and cash equivalents		179			1,948
Cash and cash equivalents at beginning of period		13,236			26,101
Cash and cash equivalents at end of period	$	13,415		$	28,049

• Cash flows from operating activities, compared to the preceding year, were impacted by reduced operating margins, the timing of receivables collections, the timing of payroll disbursements (including incentive compensation payments), as well as the timing of vendor payments and realization of net tax benefits. Cash flows from operations were also impacted by the timing of the Company’s workers’ compensation claims payments. While the Company records its liability for open claims based upon the ultimate cost of the claims, the cash outflow for those recorded claims cost occurs over time.

• Cash used in investing activities is primarily related to the Company’s investment portfolio, which includes highly rated debt securities with maturities ranging from three months to three years. Net cash inflows related to available-for-sale investments were $15,666 during the first six months of fiscal 2004 as compared to $3,277 of net cash outflows in the corresponding prior year period. Cash used for purchases of fixed assets, including information systems development costs, was $686 for the six fiscal months ended March 28, 2004 and $1,242 for six fiscal months ended March 30, 2003. The Company continues to invest in computer-based technologies and direct office openings and anticipates approximately $2,000 in related capital expenditures for the remaining six months of fiscal 2004.

• Cash provided by financing activities is primarily a result of shares of the Company’s Class A Common Stock issued in accordance with the Employee Stock Purchase Plan.

Cash and cash equivalents decreased $14,634 from the prior year as a result of the Company’s collateralization of its workers’ compensation liability via restricted cash and investments commencing in the third quarter of fiscal 2003. See additional discussion below regarding collateralization of the worker’s compensation liability.

As discussed in Note 9 to the Consolidated Financial Statements, Remedy provides workers’ compensation insurance to its temporary associates and colleagues. The Company establishes a reserve for the deductible portion of its workers’ compensation claims using actuarial estimates of the ultimate cost of claims and related expenses that have been reported but not settled, and that have been incurred but not reported. The estimated remaining deductible liability under the aforementioned contracts as of March 28, 2004 is approximately $33,772 of which $11,398 is recorded as current and

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RemedyTemp, Inc.

$22,374 is recorded as non-current in the Consolidated Balance Sheets. The Company also has an aggregate $5,235 current liability recorded at March 28, 2004 for additional premiums due under previous guaranteed cost policies and for premiums due under current policies in states where the Company is statutorily required to participate in the state managed workers’ compensation fund.

The Company is contractually required to collateralize its obligation under each of these workers’ compensation insurance contracts through the use of irrevocable letters of credit, pledged cash and securities or a combination thereof. The level and type of collateral required for each policy year is determined by the insurance carrier at the inception of the policy year and may be modified periodically. The Company had outstanding letters of credit totaling $21,911 as of March 28, 2004 and September 28, 2003. However, due to the renewal of the current year insurance policy and review of existing policies for prior years, effective April 2004, the Company is required to increase its letters of credit for its current policy year an additional $15,000 to collateralize its obligation and is allowed to reduce the letter of credit for prior policy years by $2,250. Quarterly, the Company is required to pay 0.75% in interest on the first $16,000 of the outstanding letters of credit and 1.50% on the remaining $5,911.

The Company executed a new credit facility dated February 4, 2004 with Bank of America, which replaced its existing credit agreement with Bank of America and Union Bank of California. The new credit facility provides for aggregate borrowings not to exceed $40,000, including any letters of credit existing under the prior credit agreement. The Company’s obligation under the line of credit is secured by certain assets of the Company. In addition, the Company is required to maintain a $16,000 Bank of America Certificate of Deposit to satisfy the collateral requirement, which is classified as restricted cash and investments in the accompanying Consolidated Balance Sheets. The credit agreement expires on June 1, 2005. The interest rate is at the Company’s discretion, either the Bank of America’s prime rate plus 0.0% or 0.5% (depending on the amount of outstanding borrowings) or LIBOR plus 0.75% or 1.5% (depending on the amount of outstanding borrowings) and is paid monthly. The Company is required to pay quarterly fees of 0.25% per annum on the unused portion of the line of credit. Under the new agreement, the Company is also required to comply with certain restrictive covenants, the most restrictive of which limits the Company’s net loss for each fiscal quarter and on a fiscal year-to-date basis. As of March 28, 2004, the Company was in compliance with all restrictive covenants. However, if the Company is not profitable in the remaining six months of the fiscal year, it could be out of compliance on a fiscal year-to-date basis.

The Company has no borrowings outstanding as of March 28, 2004 and September 28, 2003.

The following table summarizes the letters of credit and pledged cash and securities at March 28, 2004 and September 28, 2003:

	March 28, 2004		September 28, 2003
Pledged cash and securities	$	21,941	$	21,615
Collateralized cash related to bank agreement		16,000		—
Total restricted cash and investments	$	37,941	$	21,615
Letters of credit	$	21,911	$	21,911

From July 22, 1997 through March 31, 2001, the Company had a fully insured workers’ compensation program with Reliance National Insurance Company (“Reliance”). Subsequent to March 31, 2001 (the end of Company’s final policy year with Reliance), Reliance became insolvent and is currently in liquidation. The Company is in litigation with the California Insurance Guaranty Association regarding financial responsibility for all remaining open claims under the Reliance workers’ compensation program as discussed in Part II, Item 1, Legal Proceedings and in Note 2 to the Consolidated Financial Statements. An unfavorable outcome in this matter could adversely affect the Company’s liquidity and results of operations.

On November 18, 2003, the Company was notified by the State of California Employment Development Department (the “EDD”) that the Company allegedly underpaid its state unemployment insurance by approximately $2,000 for the period January 1, 2003 through September 30, 2003. Based on preliminary evaluations and on advice of its outside counsel, the Company believes that its methodology in calculating its state unemployment insurance is in compliance with all applicable laws and regulations. The Company is currently working with outside counsel to resolve this issue. Given the preliminary stage of this matter, no amount has been accrued as of March 28, 2004. The EDD audit is ongoing at March 28,204.

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RemedyTemp, Inc.

From time to time, the Company may selectively purchase licensed and traditional franchise offices in certain territories with the intent of expanding the Company’s market presence in such regions. It continues to expand its RemX^® specialty staffing division into both new and existing markets which may have an impact on future liquidity. The Company anticipates capital expenditures related to its expansion efforts during the remaining six months of fiscal 2004 to be less than $500.

The Company may continue evaluating certain strategic acquisitions. Such acquisitions may have an impact on liquidity depending on the size of the acquisition.

Contractual Obligations

The Company has no significant contractual obligations not fully recorded in the Consolidated Balance Sheets or fully disclosed in the Notes to the Consolidated Financial Statements. The Company has no off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).

As of March 28, 2004, the Company’s contractual obligations included:

	Contractual Obligations Payment Due by Period
	Total		Remaining Fiscal 2004		Fiscal 2005-2006		Fiscal 2007-2008		Thereafter
Operating Leases	$	17,404	$	3,059	$	7,319	$	4,345	$	2,681
Workers’ Compensation*		39,007		10,711		9,772		9,747		8,777
Total	$	56,411	$	13,770	$	17,091	$	14,092	$	11,458

* Estimated obligation based upon actuarial analysis

The Company believes that its current and expected levels of working capital of $36,460 and line of credit are adequate to support present operations and to fund future growth and business opportunities for the foreseeable future. The Company would pursue other sources of capital, should it be necessary.

Critical Accounting Policies

The discussions and analyses of the Company’s consolidated financial condition and results of operations were based on the Company’s Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company’s management reviews and evaluates these estimates and assumptions, including those that relate to revenue recognition, accounts receivable, workers’ compensation costs, goodwill, intangible and other long-lived assets, income taxes including the valuation allowance for deferred tax assets, contingencies and litigation. These estimates are based on historical experience and a variety of other assumptions believed reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies are those most significantly affected by the judgment, estimates and/or assumptions used in the preparation of Remedy’s Consolidated Financial Statements.

Revenue Recognition – The Company generates revenue from the sale of temporary staffing and direct hire placements by its Company-owned and licensed franchise operations and from royalties on revenues of such services by its traditional franchise operations. Temporary staffing revenues and the related labor costs and payroll taxes are recorded in the period in which the services are performed. Direct hire revenues are recognized when the direct hire candidate begins full-time employment.

The Company accounts for the revenues and the related direct costs in accordance with Emerging Issues Task Force 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company is required to assess whether it acts as a principal in its transactions or as an agent acting on the behalf of others. Where the Company is the principal in a transaction and has the risks and rewards of ownership, the transaction is recorded gross in the Consolidated Statement of Operations, and where the Company acts merely as an agent, only the net fees earned are recorded in the income statement. Under the Company’s “traditional” franchised agreement, the franchisee has the direct contractual relationship with customers, holds title to the related customer receivables and is the legal employer of the temporary employees.

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RemedyTemp, Inc.

Accordingly, the Company does not include the revenues and direct expenses from these transactions in its Consolidated Statement of Operations and only records the royalty fee earned. Alternatively, under the Company’s “licensed” franchise agreements the Company has the direct contractual relationship with customers, holds title to the related customer receivables and is the legal employer of the temporary employees. As the Company retains the risks and rewards of ownership (such as the liability for the cost of temporary personnel and the risk of loss for collection), the revenues and direct expenses of its licensed franchise operations are included in the Company’s results of operations. The Company remits to each licensed franchisee a portion of the gross margin generated by its office(s).

Accounts Receivable – Remedy provides an allowance for doubtful accounts on its accounts receivable for estimated losses resulting from the inability of its customers to make required payments. This allowance is based upon management’s analysis of historical write-off levels, current economic trends, routine assessment of its customers’ financial strength and any other known factors impacting collectibility. If the financial condition of its customers were to deteriorate, which may result in the impairment of their ability to make payments, additional allowances may be required. Remedy’s estimates are influenced by the following considerations: the large number of customers and their dispersion across wide geographic areas, the fact that no single customer accounts for 10% or more of its net revenues and its continuing credit evaluation of its customers’ financial conditions.

Workers’ Compensation Costs – The Company maintains reserves for its workers’ compensation obligations using actuarial methods to estimate the remaining undiscounted liability for the deductible portion of all claims, including those incurred but not reported. This process includes establishing loss development factors, based on the historical claims experience of the Company and the industry, and applying those factors to current claims information to derive an estimate of the Company’s ultimate claims liability. The calculated ultimate liability is then reduced by cumulative claims payments to determine the required reserve. Management evaluates the reserve, and the underlying assumptions, regularly throughout the year and makes adjustments as needed. While management believes that the recorded amounts are adequate, there can be no assurance that changes to management’s estimates will not occur due to limitations inherent in the estimation process.

Goodwill and Other Intangible Assets – Effective the first quarter of fiscal 2003, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires goodwill to no longer be amortized but instead be subject to an impairment test at least annually or if events or circumstances change that may reduce the fair value of the reporting unit below its book value. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. In connection with the initial impairment test upon adoption, the Company obtained valuations of its individual reporting units from an independent third-party valuation firm. The valuation methodologies considered included analyses of discounted cash flows at the reporting unit level, guidelines for publicly traded company multiples and comparable transactions. As a result of these impairment tests, the Company recorded a non-cash charge of $2,421, net of income taxes of $1,634, to reduce the carrying value of the goodwill to its implied fair value (see Note 5 to the Consolidated Financial Statements). This charge is reflected as a cumulative effect of adoption of a new accounting standard in the Company’s Consolidated Statements of Operations for the six fiscal months ended March 30, 2003.

Other Long-Lived Assets – Effective the first quarter of fiscal 2003, the Company adopted SFAS No. 144, “Accounting for the Impairment or disposal of Long-Lived Assets.” In accordance with SFAS No. 144, the Company assesses the fair value and recoverability of its long-lived assets, whenever events and circumstances indicate the carrying value of an asset may not be recoverable from estimated future cash flows expected to result from its use and eventual disposition. In doing so, the Company makes assumptions and estimates regarding future cash flows and other factors. The fair value of the long-lived assets is dependent upon the forecasted performance of the Company’s business and the overall economic environment. When the Company determines that the carrying value of the long-lived assets may not be recoverable, it measures impairment based upon a forecasted discounted cash flow method. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized.

Income Taxes – In preparing the Company’s Consolidated Financial Statements, management estimates the Company’s income taxes in each of the taxing jurisdictions in which it operates. This includes estimating the Company’s actual current tax expense together with any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenues and expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheets.

Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. The Company is required to record a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. In assessing the need for a

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RemedyTemp, Inc.

valuation allowance, the Company considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.

The accounting guidance states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. As a result of this guidance, and the Company’s recent cumulative losses, management concluded that a full valuation allowance was appropriate during the fourth quarter of fiscal 2003 and for the first six months of fiscal 2004. While the Company hopes to be profitable in fiscal 2004 and beyond, in view of the recent losses there is no assurance that there will be sufficient future taxable income to realize the benefit of the deferred tax asset. If, after future assessments of the realizability of the deferred tax assets the Company determines a lesser allowance is required it would record a reduction to income tax expense and the valuation allowance in the period of such determination.

Contingencies and Litigation – There are various claims, lawsuits and pending actions against the Company incident to its operations. If a loss arising from these actions is probable and can be reasonably estimated, the Company must record the amount of the estimated liability. Based on current available information, management believes that the ultimate resolution of these actions will not have a material adverse effect on the Company’s Consolidated Financial Statements. As additional information becomes available, management will continue assessing any potential liability related to these actions and may need to revise its estimates.

Seasonality

The Company’s quarterly operating results are affected by the number of billing days in the quarter and the seasonality of its clients’ businesses. The first fiscal quarter has historically been relatively strong as a result of manufacturing and retail emphasis on holiday sales. Historically, the second fiscal quarter shows a decline in comparable revenues from the first fiscal quarter. Revenue growth has historically accelerated in each of the third and fourth fiscal quarters as manufacturers, retailers and service businesses increase their level of business activity.

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RemedyTemp, Inc.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risk resulting from changes in interest rates and equity prices and, to a lesser extent, foreign currency rates. Under its current policy, the Company does not engage in speculative or leveraged transactions to manage exposure to market risk. There were no material changes to the disclosures made in Item 7A in the Company’s Annual Report on Form 10-K for the year ended September 28, 2003 regarding quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 28, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, subject to the limitations noted above, the Company’s disclosure controls and procedures are effective to allow timely decisions regarding disclosures to be included in the Company’s periodic filings with the Securities and Exchange Commission.

Changes in Internal Control over Financial Reporting

There was no significant change in the Company’s internal controls over financial reporting during the period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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RemedyTemp, Inc.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Litigation

Class Action

On October 16, 2001, GLF Holding Company, Inc. and Fredrick S. Pallas filed a Complaint in the Superior Court of the State of California, County of Los Angeles, against RemedyTemp, Inc., Remedy Intelligent Staffing, Inc., Remedy Temporary Services, Inc., Karin Somogyi, Paul W. Mikos, and Greg Palmer. The Complaint purports to be a class action brought by the individual plaintiffs on behalf of all of the Company’s franchisees. The Complaint alleges claims for fraud and deceit, negligent misrepresentation, negligence, breach of contract, breach of warranty, conversion, an accounting, unfair and deceptive practices, restitution and equitable relief. On or about December 3, 2002, plaintiffs filed an Amended Complaint alleging these same causes of action, but adding additional facts to the Complaint particularly with respect to the Company’s workers’ compensation program and adding claims regarding unfair competition on behalf of the general public in addition to their existing class action claim. The plaintiffs claim that Remedy wrongfully induced its franchisees into signing franchise agreements and took other action that caused the franchisees damage.

The Company believes that plaintiffs’ claims fall within the arbitration clause contained in the franchise agreements signed by plaintiffs. As a result, immediately after plaintiffs filed suit, the Company filed arbitration demands against plaintiffs with the American Arbitration Association. On or about April 1, 2003, the Company amended its arbitration demands to add claims against plaintiffs relating to workers’ compensation.

The Company denies and continues to deny the allegations in the Complaint. There has been no finding of wrongdoing by the Company. Nevertheless, to avoid costly, disruptive, and time-consuming litigation, and without admitting any wrongdoing or liability, the Company negotiated and agreed to a settlement with plaintiffs and stipulated to the certification of a settlement class comprised of all individuals or entities that entered into a Franchise Agreement (including renewals or amendments thereof) with RemedyTemp., Inc. and/or Remedy Intelligent Staffing, Inc. anytime prior to March 29, 2004.

On April 6, 2004, the Court preliminarily approved the parties’ settlement agreement and conditionally certified the Settlement Class. All discovery and other proceedings in this action are stayed until further order of this Court, except as may be necessary to implement the Settlement Agreement. A hearing on final approval of the settlement is set forth for September 9, 2004.

CIGA

In early 2002, the California Insurance Guarantee Association (“CIGA”) began making efforts to join some of the Company’s customers and their workers’ compensation insurance carriers (collectively, “Customers”), in pending workers’ compensation claims filed by Remedy’s employees as a result of the liquidation of Remedy’s former carrier, Reliance National Insurance Company (“Reliance”). At the time of these injuries, from July 22, 1997 through March 31, 2001, Remedy was covered by workers’ compensation policies issued by Reliance. The Company believes that, under California law, CIGA is responsible for Reliance’s outstanding liabilities. Remedy initiated legal proceedings against CIGA in both Superior Court for the State of California, County of Los Angeles and the California Workers’ Compensation Appeals Board (“WCAB”) on February 15, 2002 and February 26, 2002, respectively. On April 5, 2002, the WCAB granted Remedy’s motion and consolidated the various workers’ compensation claims in which CIGA tried to join Remedy’s Customers. The WCAB also granted Remedy’s motion to stay CIGA’s efforts to join Remedy’s Customers in those claims. The WCAB selected a single test case from the consolidated pending cases to review and decide on the legal issues involved (i.e., whether it is proper for CIGA to join Remedy’s Customers in the pending claims). The trial occurred on September 20, 2002. The WCAB Administrative Law Judge ruled in favor of CIGA and dismissed it from the lawsuit, thus allowing the pending workers’ compensation matters to proceed against the Company’s Customers and their insurance carriers. Remedy then filed a motion for reconsideration of the decision by the WCAB Administrative Law Judge to the entire WCAB. On March 28, 2003, the entire WCAB affirmed the ruling of the Administrative Law Judge and as a result, the Company filed a petition for writ of review of the WCAB’s decision in the California Court of Appeal in May 2003. The WCAB continued the “stay” in effect since April 5, 2002, thus preventing CIGA from proceeding until the writ proceeding is concluded. In January 2004, the Court of Appeal granted the Company’s petition and undertook to review the WCAB’s decision; the Court will hear the matter on June 11, 2004 and a decision is expected within 90 days thereof.

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RemedyTemp, Inc.

Despite the Company’s determination to pursue the review process, there can be no assurance that the current proceeding will be successful, that further review will be granted, or that the Company will ultimately succeed in the overturning the WCAB decision. In the event of an unfavorable outcome, Remedy may be obligated to reimburse certain clients and believes that it would consider reimbursement of its other clients for actual losses incurred as a result of an unfavorable ruling in this matter. If CIGA is permitted to join Remedy’s Customers, thus triggering the clients’ insurance carriers’ obligation to pay for the claims, the exposure to Remedy becomes a function of the ultimate losses on the claims and the impact of such claims, if any, on the clients’ insurance coverage. Presently, the Company is unable to ascertain the specific details regarding the insurance coverage of its affected clients and the impact of an unfavorable ruling on such coverage. The Company has received data from the trustee for Reliance regarding outstanding claims that CIGA has attempted to pursue against the Company’s current and former clients. The information indicates incurred losses, as of September 28, 2003, for the claims in question amount to $38,700. The losses incurred to date represent amounts paid to date by the trustee and the remaining claim reserves on open files. At this time, the Company believes that it is unable to ascertain if the remaining reserves on the claims are appropriate or adequate since the Company has not been able to gain access to the files due to pending litigation. Further, as stated above, the Company cautions that: (i) it believes the Company’s exposure in this matter is not the remaining claims liability, but rather a function of the impact of such claims, if any, on the clients’ insurance costs; and (ii) it expects to ultimately prevail in this matter and that it will suffer no loss.

Other Litigation

From time to time, the Company becomes a party to other litigation incidental to its business and operations. The Company maintains insurance coverage that management believes is reasonable and prudent for the business risks that the Company faces. Based on current available information, management does not believe the Company is party to any legal proceedings that are likely to have a material adverse effect on its business, financial condition, cash flows or results of operations.

Other Contingency

On November 18, 2003, the Company was notified by the State of California Employment Development Department (the “EDD”) that the Company allegedly underpaid its state unemployment insurance by approximately $2,000 for the period January 1, 2003 through September 30, 2003. Based on preliminary evaluations and on advice of its outside counsel, the Company believes that its methodology in calculating its state unemployment insurance is in compliance with all applicable laws and regulations. The Company is currently working with outside counsel to resolve this issue. Given the preliminary stage of this matter, no amount has been accrued as of March 28, 2004. The EDD audit is ongoing as of March 28, 2004.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On February 25, 2004, the Company held its Annual Meeting of Shareholders (“the Annual Meeting”). The Company’s shareholders voted in favor of the matters voted upon at the Annual Meeting according to the following vote tabulations:

Proposal: Election of Directors.

	For	Against or Withheld	Abstentions and Broker Non-Votes
William D. Cvengros	7,519,287	927,317	—
James L. Doti	8,445,082	1,522	—
Robert A. Elliott	7,519,287	927,317	—
Mary George	8,445,082	1,522	—
J. Michael Hagan	8,445,082	1,522	—
Robert E. McDonough, Sr.	8,445,082	1,522	—
Paul W. Mikos	8,445,082	1,522	—
Greg D. Palmer	8,444,882	1,722	—
John B. Zaepfel	7,519,287	927,317	—

29

RemedyTemp, Inc.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8K

(a) Exhibits

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

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of the Company (a)
3.2	Amended and Restated Bylaws of the Company (e)
4.1	Specimen Stock Certificate (a)
4.2	Shareholder Rights Agreement (a)
10.1	Robert E. McDonough, Sr. Amended and Restated Employment Agreement (f)
10.2	*Paul W. Mikos Employment Agreement, as amended (i)
10.5	Registration Rights Agreement with R. Emmett McDonough and Related Trusts (a)
10.6	*Alan M. Purdy Change in Control Severance Agreement (h)
10.7	*Deferred Compensation Agreement for Alan M. Purdy (a)
10.9	Form of Indemnification Agreement (a)
10.11	*Amended and Restated RemedyTemp, Inc. 1996 Stock Incentive Plan (g)
10.12	*Amended and Restated RemedyTemp, Inc. 1996 Employee Stock Purchase Plan (a)
10.13	Form of Franchising Agreement for Licensed Offices (k)
10.14	Form of Franchising Agreement for Franchised Offices (a)
10.15	Form of Licensing Agreement for IntelliSearch® (a)
10.18	*Additional Deferred Compensation Agreement for Alan M. Purdy (b)
10.19	Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC (c)
10.22	*RemedyTemp, Inc. Deferred Compensation Plan (d)
10.23	*Amended and Restated Employment Agreement for Greg Palmer (m)
10.24	*1998 RemedyTemp, Inc. Amended and Restated Deferred Compensation and Stock Ownership Plan for Outside Directors (r)
10.25	Form of Licensing Agreement for i/Search 2000® (e)
10.27	*Paul W. Mikos Severance Agreement and General Release (j)
10.28	*Gunnar B. Gooding Employment and Severance Letter (l)
10.29	*Cosmas N. Lykos Employment and Severance Letter (l)
10.30	*Alan M. Purdy Retirement Agreement and General Release (n)
10.31	*Monty Houdeshell Employment Letter (o)
10.32	*Monty Houdeshell Change in Control Severance Agreement (p)
10.33	*Shawn Mohr Severance Agreement (p)
10.34	Amendment No. 2 to the Lease Agreement between RemedyTemp, Inc. and Parker – Summit, LLC (q)
10.36	Business Loan Agreement between Bank of America N.A. and RemedyTemp, Inc.

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RemedyTemp, Inc.

31.1	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Chief Executive Officer and Chief Financial Officer Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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

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

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

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

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

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

(g) Incorporated by reference to the exhibit of same number to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 1999.

(h) Incorporated by reference to the exhibit of same number to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 1999.

(i) Incorporated by reference to the exhibit of same number to the Registrant’s Quarterly Reports on Form 10-Q for the quarterly period ended June 28, 1999 (original agreement) and for the quarterly period ended December 31, 2000 (amendment).

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

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

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

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

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

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

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

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

(r) Incorporated by reference to the exhibit of same number to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2003.

(b)    Reports on Form 8-K.

The Company filed a current Report on Form 8-K on the following:

On February 5, 2004 in connection with the issuance of its press release announcing the financial results for the first fiscal quarter ended December 28, 2003.

31

RemedyTemp, Inc.

SIGNATURES

Pursuant to the requirements 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.

	REMEDYTEMP, INC.
May 12, 2004	/s/ GREG PALMER
	Greg Palmer, President and Chief
	Executive Officer
May 12, 2004	/s/ MONTY A. HOUDESHELL
	Monty A. Houdeshell, Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)
May 12, 2004	/s/ JOHN D. SWANCOAT
	John D. Swancoat, Controller
	(Principal Accounting Officer)

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EX-10.36

Exhibit 10.36

BUSINESS LOAN AGREEMENT

This Agreement dated as of February 4, 2004, is between Bank of America, N.A. (the “Bank”) and RemedyTemp, Inc. (the “Borrower”).

1. DEFINITIONS

In addition to the terms, which are defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes of this Agreement:

“Borrowing Base” means the sum of:

(a) 80% of the balance due on Acceptable Receivables less Five Million Dollars ($5,000,000); and

(b) 100% of the principal amount of Bank of America certificates of deposit pledged to the Bank.

In calculating the Borrowing Base as provided above, the Bank shall deduct as an offset against Acceptable Receivables (i) accrued payroll for temporary staffing, and (ii) the accrued gross margin split due licensees. After calculating the Borrowing Base as provided above, the Bank shall deduct from such portion of the Borrowing Base such reserves as Bank may establish from time to time in its reasonable credit judgment, including, without limitation, reserves for letters of credit issued hereunder, and the amount of estimated maximum exposure, as reasonably determined by Bank from time to time, under any interest rate contracts which Borrower enters into with Bank (including interest rate swaps, caps, floors, options thereon, combinations thereof, or similar contracts).

“Acceptable Receivable” means an account receivable which satisfies the following requirements:

a. The account has resulted from the sale of goods or the performance of services by the Borrower or any of its Subsidiaries in the ordinary course of the businesses of the Borrower or any such Subsidiary and without any further obligation on their part to service, repair, or maintain any such goods sold other than pursuant to any applicable warranty.

b. There are no conditions which must be satisfied before the Borrower and/or any Subsidiary is entitled to receive payment of the account. Accounts arising from COD sales, consignments or guaranteed sales are not acceptable.

c. The debtor upon the account does not claim any defense to payment of the account, whether well founded or otherwise, to the extent of the claim made.

d. The account balance does not include the amount of any counterclaims or offsets which have been or may be asserted against the Borrower or any

1

Subsidiary by the account debtor (including offsets for any “contra accounts” owed by the Borrower or any Subsidiary to the account debtor for goods purchased by the Borrower or any Subsidiary or for services performed for the Borrower or any Subsidiary). To the extent any counterclaims, offsets, or contra accounts exist in favor of the debtor, such amounts shall be deducted from the account balance.

e. The account represents a genuine obligation of the account debtor for goods sold to and accepted by the debtor, or for services performed for and accepted by the debtor. To the extent any credit balances exist in favor of the debtor, such credit balances shall be deducted from the account balance.

f. The Borrower or any Subsidiary has sent an invoice to the debtor in the amount of the account.

g. Neither the Borrower nor any Subsidiary is prohibited by the laws of the state where the account debtor is located from bringing an action in the courts of that state to enforce the debtor’s obligation to pay the account. The Borrower and its Subsidiaries have taken all appropriate actions to ensure access to the courts of the state where the account debtor is located, including, where necessary, the filing of a Notice of Business Activities Report or other similar filing with the applicable state agency or the qualification by the Borrower or such Subsidiary as a foreign corporation authorized to transact business in such state.

h. The account is owned by the Borrower or a Subsidiary free of any title defects or any liens or interests of others except the security interest in favor of the Bank.

i. The debtor upon the account is not any of the following:

(i) an employee, Affiliate, parent or Subsidiary of the Borrower, or an entity which has common officers or directors with the Borrower.

(ii) the U.S. government or any agency or department of the U.S. government unless the Borrower and its Subsidiaries comply with the procedures in the Federal Assignment of Claims Act of 1940 (41 U.S.C. §15) with respect to the obligation; provided however, accounts owed to Borrower by the Federal Reserve Bank, up to an aggregate amount of $200,000, shall be Acceptable Receivables.

(iii) any state, county, city, town or municipality; provided, however, accounts owed to Borrower by any state, county, city, town or municipality up to an aggregate amount of $300,000 shall be Acceptable Receivables.

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(iv) any person or entity located in a foreign country unless the account is supported by an irrevocable letter of credit issued by a bank acceptable to the Bank, and, if requested by the Bank, the original of such letter of credit and/or any usance drafts drawn under such letter of credit and accepted by the issuing or confirming bank have been delivered to the Bank, or the account is covered by foreign credit insurance acceptable to the Bank and the account is otherwise an Acceptable Receivable.

(v) any person or entity to whom the Borrower or any Subsidiary is obligated for goods purchased by the Borrower or any Subsidiary or for services performed by the Borrower or any Subsidiary, to the extent of the claim against the Borrower or any such Subsidiary.

j. The account is not in default. An account will be considered in default if any of the following occur:

(i) The account is not paid within 60 days from its invoice date or 30 days from its due date, which ever occurs first;

(ii) The debtor obligated upon the account suspends business, makes a general assignment for the benefit of creditors, or fails to pay its debts generally as they come due; or

(iii) Any petition is filed by or against the debtor obligated upon the account under any bankruptcy law or any other law or laws for the relief of debtors.

k. The account is not the obligation of a debtor who is in default (as defined above) on 50% or more of the accounts upon which such debtor is obligated.

l. The account does not arise from the sale of goods which remain in the Borrower’s or any Subsidiary’s possession or under the Borrower’s or any Subsidiary’s control.

m. The account is not evidenced by a promissory note or chattel paper.

n. The account is otherwise acceptable to the Bank in the exercise of its reasonable credit judgment.

o. In addition to the foregoing limitations, the dollar amount of accounts included as Acceptable Receivables which are the obligations of a single debtor shall not exceed the concentration limit established for that debtor. To the extent the total of such accounts exceeds a debtor’s concentration limit, the amount of any such excess shall be excluded. The concentration limit for each debtor shall be equal to 15% of the total amount of the gross accounts receivable of the Borrower and its Subsidiaries at that time.

3

“Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (i) the acquisition by the Borrower of all or substantially all of the assets of a person or entity or of any business or division of a person or entity; or (ii) the acquisition by the Borrower of in excess of fifty percent (50%) of the capital stock, partnership interests, membership interests or equity of any person or entity, or otherwise causing any entity to become a subsidiary of the Borrower.

“Acceptable Acquisition” means an Acquisition:

a. If the total value of the cash and other consideration paid for all Acquisitions made after the date of this Agreement will not exceed Twenty Two Million Dollars ($22,000,000), including the Acquisition of the business of John Edwards; provided, however, (1) in fiscal year 2004, the total amount of the cash and other consideration paid for all Acquisitions (including Acquisitions involving Personnel Services) will not exceed Thirteen Million Dollars ($13,000,000), including the Acquisition of the business of John Edwards and (2) in any fiscal year the total amount of cash and other consideration paid for all Acceptable Acquisitions involving Personnel Services shall not exceed an aggregate amount of One Million Five Hundred Thousand Dollars ($1,500,000):

(i) where the business being acquired is substantially the same as the Borrower’s present business (including Personnel Services);

(ii) which is undertaken in accordance with all applicable requirements of law;

(iii) where prior, effective written consent or approval of such Acquisition has been given by the board of directors or equivalent governing body of the Person (or the holder of the assets) to be acquired;

(iv) a statement showing that, on a pro forma consolidated basis immediately after the Acquisition, the Borrower will be in full compliance with this Agreement (including a break-out of the acquiree’s funded and contingent debts assumed by the Borrower in connection with any Acquisition);

(v) within 30 days after the closing of the Acquisition, the Borrower has delivered to the Bank a statement of sources and uses of funds;

(vi) each entity to be acquired has a positive EBIT for the four (4) fiscal quarters ending on the fiscal quarter ended immediately prior to the date of the consummation of the subject Acquisition. “EBIT” means net income, less income or plus loss from discontinued

4

operations and extraordinary items, plus income taxes, plus interest expense.

b. After giving effect to the proposed Acquisition, there exists available credit under this Agreement of at least Five Million Dollars ($5,000,000).

c. Where the Borrower has delivered to the Bank at least 15 days prior to the Acquisition with respect to an Acquisition in the amount greater than Two Hundred Thousand Dollars ($200,000):

(i) a compliance certificate showing, on a pro forma consolidated basis for the Borrower and the acquiree, compliance with this Agreement for the most recently ended fiscal quarter of the Borrower and the underlying calculations showing such compliance, including a break-out of the acquiree’s figures.

(ii) financial statements of the entity to be acquired, prepared by a certified public accountant (excluding licensees which may be entity prepared), for such entity’s last two fiscal years and the latest interim fiscal period, all in form and content reasonably acceptable to the Bank.

For purposes hereof, “consideration” paid for an Acquisition means all value given, including cash, stock of the Borrower, and all liabilities of the acquiree which are to be assumed by the Borrower, including all funded debt and contingent liabilities but excluding normal trade debt and accruals; provided, however, that “consideration” shall exclude contractual “earn out” obligations based on future financial performance benchmarks of the acquiree.

“Affiliate” means, as applied to any person or entity, any other person or entity directly or indirectly controlling, controlled by, or under common control with, that person or entity. For the purposes of this definition, “control” (including, with correlative meaning, the terms “controlling,” “controlled by,” and “under common control with”) as applied to any person or entity, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person or entity, whether through the ownership of voting securities or by contract or otherwise.

“Attributable Indebtedness” means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with generally acceptable accounting principles, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with generally acceptable accounting principles if such lease were accounted for as a capital lease.

“Change of Control” means, with respect to any Person, an event or series of events by which:

5

a. any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 25% or more of the equity securities of such Person entitled to vote for members of the board of directors or equivalent governing body of such Person on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); provided that a Change of Control shall not include the transfer of all of the ownership interest of Robert Emmett McDonough, Sr. to Georgetown University upon the death of Robert Emmett McDonough, Sr.

b. during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of such Person cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

“Credit Limit” means Forty Million Dollars ($40,000,000).

“ERISA” means the Employee Retirement Income Security Act of 1974.

“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

a. all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

6

b. all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

c. net payment obligations of such Person under any Swap Contract;

d. all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business);

e. indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

f. capital leases and Synthetic Lease Obligations; and

g. all Guarantees of such Person in respect of any of the foregoing.

For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net payment obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.

“Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person in any other Person, whether by means of (a) the purchase or other acquisition of capital stock or other securities of another Person, (b) a loan, advance or capital contribution to, Guarantee or assumption of debt of, or purchase or other acquisition of any other debt or equity participation or interest in, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit, in each case to the extent such Acquisition or investment would be classified as investments on a balance sheet prepared in accordance with generally accepted accounting principles. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.

“Guarantors” means, collectively, REMX, Inc., Remedy Temporary Services, Inc. and Remedy Intelligent Staffing, Inc. and shall include any additional Persons in accordance with Section 9.18 hereof.

“Loan Parties” means, collectively, the Borrower and each Guarantor.

7

“Material Adverse Effect” means:

a. a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole;

b. a material impairment of the ability of any Loan Party to perform its obligations under any loan document to which it is a party; or

c. a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any loan document to which it is a party.

“Material Subsidiary” means any Subsidiary of the Borrower that has more than One Million Dollars ($1,000,000) of assets or that has more than One Million Dollars ($1,000,000) of revenues for the four prior fiscal quarters; provided that the total consolidated assets of Subsidiaries of the Borrower that are not Material Subsidiaries shall not exceed Two Million Dollars ($2,000,000) at any time, and provided, further, that the total consolidated revenues for the prior four fiscal quarters of all Subsidiaries that are not Material Subsidiaries shall not exceed Two Million Dollars ($2,000,000).

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, governmental authority or other entity.

“Personnel Services” means any businesses that are incidental or related to Borrower’s temporary services business, including, without limitation, safety risk management, consultation for benefits administration, and psychological test consultation for prospective employees of clients.

“Subsidiary” of the Borrower means a corporation partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly or indirectly, through one or more intermediaries, or both by the Borrower.

“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any

8

master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.

“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include the Bank or any Affiliate of the Bank).

“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).

2. LINE OF CREDIT

2.1 Line of Credit Amount.

(a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the “Commitment”) is equal to the lesser of (i) the Credit Limit or (ii) the Borrowing Base.

(b) This is a revolving line of credit providing for cash advances with a within line facility for letters of credit. During the availability period, the Borrower may repay principal amounts and re-borrow them.

(c) The outstanding principal balance of all advances under the line of credit may not at any time exceed the Credit Limit.

(d) The Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the outstanding amounts of any letters of credit, including amounts drawn on letters of credit and not yet reimbursed, to exceed the Commitment. If the Borrower exceeds this limit, the Borrower will immediately pay the excess to the Bank upon the Bank’s demand. The Bank may apply payments received from the Borrower under this Paragraph to the obligations of the Borrower to the Bank in the order and the manner as the Bank, in its discretion, may determine.

9

2.2 Availability Period. The line of credit is available between the date of this Agreement and June 1, 2005, or such earlier date as the availability may terminate as provided in this Agreement (the “Expiration Date”).

2.3 Interest Rate.

(a) Unless the Borrower elects an optional interest rate as described below, the rate is a rate per year equal to the Bank’s Prime Rate plus the Applicable Margin as defined below.

(b) The Prime Rate is the rate of interest publicly announced from time to time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on various factors, including the Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Prime Rate. Any change in the Prime Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank’s Prime Rate.

2.4 Repayment Terms.

(a) Except as provided in Section 3.1, Borrower will pay interest in arrears on February 1, 2004, and then monthly thereafter until payment in full of any principal outstanding under this line of credit.

(b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. Any interest period for an optional interest rate (as described below) shall expire no later than the Expiration Date.

2.5 Optional Interest Rates. Instead of the interest rate based on the Bank’s Prime Rate, the Borrower may elect the optional interest rate listed below during interest periods agreed to by the Bank and the Borrower. The optional interest rate shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a “Portion.” The following optional interest rate is available: The LIBOR Rate plus the Applicable Margin as defined below.

2.6 Applicable Margin. The Applicable Margin shall be the following amounts per annum based upon the aggregate amount of credit outstanding under this Agreement as of the date of determination. For the purpose hereof, “credit outstanding” includes the aggregate amount of all cash advances and the undrawn and drawn and unreimbursed amount of all letters of credit:

Pricing Level	Credit Outstanding	Applicable Margin in Percentage Points Per Annum
		Prime Rate+		LIBOR+
1	Amounts greater than $16,000,000	0.50	%	1.50	%
2	Amounts equal to or less than $16,000,000	0.00	%	0.75	%

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2.7 Letters of Credit.

(a) This line of credit may be used for financing:

(i) standby letters of credit with a maximum maturity of 365 days but not to extend more than 365 days beyond the Expiration Date; provided, however, that any letter of credit having a maturity beyond the Expiration Date must be fully cash collateralized in a manner acceptable to the Bank no later than the Expiration Date.

(ii) The amount of the letters of credit outstanding at any one time (including amounts drawn on the letters of credit and not yet reimbursed) may not exceed the Credit Limit.

(iii) The letters of credit set forth below are outstanding from the Bank for the account of the Borrower. As of the date of this Agreement, these letters of credit shall be deemed to be outstanding under this Agreement, and shall be subject to all the terms and conditions stated in this Agreement.

Letter of Credit	Beneficiary	Amount		Expiry
3038261	Liberty Mutual Insurance Company	$	14,750,000.00	2/29/04
3048974	Pacific Employers Insurance Company	$	7,161,407.00	3/31/04

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(b) The Borrower agrees:

(i) any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement.

(ii) the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank’s written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary reasonably acceptable to the Bank.

(iii) to sign the Bank’s form or Application and Agreement for Standby Letter of Credit.

(iv) to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit for the Borrower.

(v) to allow the Bank to automatically charge it’s checking account for applicable fees, discounts, and other charges.

(vi) To pay the Bank a nonrefundable fee, calculated on the basis of the amount of letters of credit outstanding during the period, equal to the Applicable Margin for LIBOR Rate advances set forth in Section 2.6 hereof based upon the amount of credit outstanding (as defined in Section 2.6), payable quarterly in arrears. If there is a default under this Agreement, at the Bank’s option, the amount of the fee shall be two percentage points higher than the fee otherwise provided herein.

3. OPTIONAL INTEREST RATES

3.1 Optional Rates. Each optional interest rate is a rate per year. Interest will be paid on the last day of each interest period, in the case of an interest period of greater than three (3) months, on each three (3) month anniversary of the commencement of such interest period. At the end of any interest period, the interest rate will revert to the rate based on the Prime Rate, unless the Borrower has designated another optional interest rate for the Portion. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs.

3.2 LIBOR Rate. The election of LIBOR Rates shall be subject to the following terms and requirements:

(a) The interest period during which the LIBOR Rate will be in effect will be one, two, three, or six months. The first day of the interest period must be a day other than a Saturday or a Sunday on which the Bank is open for business in New York and London and dealing in offshore dollars (a “LIBOR Banking Day”). The last day of the interest period and the actual number of days during the interest period will be determined by the Bank using the practices of the London inter-bank market.

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(b) Each LIBOR Rate Portion will be for an amount not less than One Hundred Thousand Dollars ($100,000).

(c) The “LIBOR Rate” means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.)

LIBOR Rate =	London Inter-Bank Offered Rate
	(1.00 - Reserve Percentage)

Where,

(iv) “London Inter-Bank Offered Rate” means the average interest rate at which U. S. dollar deposits would be offered for the applicable interest period by major banks in the London inter-bank market, as shown on the Telerate Page 3750 (or any successor page) at approximately 11:00 a.m. London time two (2) London Banking Days before the commencement of the interest period. If such rate does not appear on the Telerate Page 3750 (or any successor page), the rate for that interest period will be determined by such alternate method as reasonably selected by the Bank. A “London Banking Day” is a day on which the Bank’s London Banking Center is open for business and dealing in offshore dollars.

(v) “Reserve Percentage” means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages.

(d) The Borrower shall irrevocably request a LIBOR Rate Portion no later than 12:00 noon Los Angeles time on the LIBOR Banking Day preceding the day on which the London Inter-Bank Offered Rate will be set, as specified above. For example, if there are no intervening holidays or weekend days in any of the relevant locations, the request must be made at least three days before the LIBOR Rate takes effect.

(e) The Borrower may not elect a LIBOR Rate with respect to any principal amount which is scheduled to be repaid before the last day of the applicable interest period.

(f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A “prepayment” is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement.

(g) The prepayment fee shall be in an amount sufficient to compensate the Bank for any loss, cost or expense incurred by it as a result of the prepayment, including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Portion or from

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fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by the Bank in connection with the foregoing. For purposes of this paragraph, the Bank shall be deemed to have funded each portion by a matching deposit or other borrowing in the applicable interbank market, whether or not such Portion was in fact so funded.

(h) The Bank will have no obligation to accept an election for a LIBOR Rate Portion if any of the following described events has occurred and is continuing:

(i) Dollar deposits in the principal amount, and for periods equal to the interest period, of a LIBOR Rate Portion are not available in the London inter-bank market; or

(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate Portion.

(i) If Borrower elects the LIBOR Rate option and if thereafter the LIBOR Rate becomes unavailable at any time, the outstanding principal balance of advances under the line of credit shall bear interest at the Prime Rate; provided however, in such event, the Borrower may have the option to elect to have the outstanding principal balance of advances under the line of credit bear interest at an alternate optional interest rate acceptable to Bank, so long as such interest rate is available to Bank.

4. FEES AND EXPENSES

4.1 Fees.

(a) The Borrower agrees to a fee equal to any difference between the Credit Limit and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period, calculated at 0.25% per annum. The calculation of credit outstanding shall include the undrawn amount of letters of credit. The fee is due on March 31, 2004, for the period from the date hereof to March 31, 2004, and on the last day of each following quarter thereafter for the fiscal quarter period then ended.

(b) Waiver Fee. If the Bank, at its discretion, agrees to waive or amend any terms of this Agreement, the Borrower will, at the Bank’s option, pay the Bank such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified for such waiver or amendment. Nothing in this paragraph shall imply that the Bank is obligated to agree to any waiver or amendment requested by the Borrower. The Bank may impose additional requirements as a condition to any waiver or amendment.

4.2 Expenses. The Borrower agrees to immediately repay the Bank for expenses that include, but are not limited to, filing, recording and search fees and documentation fees.

4.3 Reimbursement Costs.

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(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys’ fees, including any allocated costs of the Bank’s in-house counsel.

(b) The Borrower agrees to reimburse the Bank for the cost of periodic audits (including, without limitation, $7,109.00 for the audit performed in September, 2003) and appraisals of the personal property collateral securing this Agreement, at such intervals as the Bank may reasonably require not to exceed twice per year so long as no Event of Default has occurred and is continuing hereunder. The audits and appraisals may be performed by employees of the Bank or by independent appraisers.

5. COLLATERAL

5.1 Borrower Personal Property. The Borrower’s obligations to the Bank under this Agreement will be secured by personal property the Borrower now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the Borrower. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank (excluding any consumer credit covered by the federal Truth in Lending law, unless the Borrower has otherwise agreed in writing). All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Agreement.

(a) Bank of America certificate(s) of deposit, in an aggregate amount not less than $16,000,000 for which the Bank will provide the highest certificate of deposit rate available to it. Borrower may, after the date hereof, obtain and pledge to Bank additional Bank of America certificates of deposit in an aggregate amount exceeding $16,000,000; provided that if Borrower obtains and pledges to Bank more than two (2) additional certificates of deposit, Borrower shall pay to Bank a fee for such additional certificates of deposit in the amount of $500 per certificate of deposit. Such additional certificates of deposit pledged to Bank may be released by Bank so long as no Event of Default exists at the time of such release and after giving effect to such release, the outstanding balance of the line of credit does not exceed the Borrowing Base.

(b) Receivables.

5.2 Personal Property Supporting Guaranty. The obligations of each Guarantor to the Bank will be secured by personal property each Guarantor now owns or will own in the future as listed below. The collateral is further defined in security agreements executed by each Guarantor.

6. DISBURSEMENTS, PAYMENTS AND COSTS

6.1 Requests for Credit. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank.

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6.2 Disbursements and Payments.

(a) Each payment by the Borrower will be made in immediately available funds by direct debit to a deposit account as specified below or, for payments not required to be made by direct debit, by mail to the address shown on the Borrower’s statement or at one of the Bank’s banking centers in the United States.

(b) Each disbursement by the Bank and each payment by the Borrower will be evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes.

6.3 Telephone and Telefax Authorization.

(a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates and telefax requests for the issuance of letters of credit given, or purported to be given, by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers.

(b) Advances will be deposited in and repayments will be withdrawn from the Borrower’s account number 14969-01000 or such other of the Borrower’s accounts with the Bank as designated in writing by the Borrower.

(c) The Borrower will indemnify and hold the Bank harmless from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions the Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions. This paragraph will survive this Agreement’s termination, and will benefit the Bank and its officers, employees, and agents.

6.4 Direct Debit (Pre-Billing).

(a) The Borrower agrees that the Bank will debit the Borrower’s deposit account number 14969-01000 or such other of the Borrower’s accounts with the Bank as designated in writing by the Borrower (the “Designated Account”) on the date each payment of principal and interest and any fees from the Borrower becomes due (the “Due Date”). If the due date is not a banking day, the Designated Account will be debited on the next Banking Day.

(b) Prior to each Due Date, the Bank will mail to the Borrower a statement of the amounts that will be due on that Due Date (the “Billed Amount”). The bill will be mailed a specified number of calendar days prior to the Due Date, which number of days will be mutually agreed from time to time by the Bank and the Borrower. The calculation will be made on the assumption that no new extensions of credit or payments will be made between the date of the billing statement and the Due Date, and that there will be no changes in the applicable interest rate.

(c) The Bank will debit the Designated Account for the Billed Amount, regardless of the actual amount due on that date (the “Accrued Amount”). If the

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Billed Amount debited to the Designated Account differs from the Accrued Amount, the discrepancy will be treated as follows:

(i) If the Billed Amount is less than the Accrued Amount, the Billed Amount for the following Due Date will be increased by the amount of the discrepancy. The Borrower will not be in default by reason of any such discrepancy.

(ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount for the following Due Date will be decreased by the amount of the discrepancy.

Regardless of any such discrepancy, interest will continue to accrue based on the actual amount of principal outstanding without compounding. The Bank will not pay the Borrower interest on any overpayment.

(d) The Borrower will maintain sufficient funds in the Designated Account to cover each debit. If there are insufficient funds in the Designated Account on the date the Bank enters any debit authorized by this Agreement, the Bank may reverse the debit.

6.5 Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday, Sunday or other day on which commercial banks are authorized to close, or are in fact closed, in the state where the Bank’s lending office is located, and, if such day relates to amounts bearing interest at an offshore rate (if any), means any such day on which dealings in dollar deposits are conducted among banks in the offshore dollar interbank market. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day.

6.6 Taxes. If any payments to the Bank under this Agreement are made from outside the United States, the Borrower will not deduct any foreign taxes from any payments it makes to the Bank. If any such taxes are imposed on any payments made by the Borrower (including payments under this paragraph), the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. The Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. However, the Borrower will not pay the Bank’s net income taxes.

6.7 Additional Costs. The Borrower will pay the Bank, on demand, for the Bank’s costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following:

(a) any reserve or deposit requirements; and

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(b) any capital requirements relating to the Bank’s assets and commitments for credit.

6.8 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used.

6.9 Default Rate. Upon the occurrence of any default under this Agreement, principal amounts outstanding under this Agreement will, at the option of the Bank, bear interest at the Bank’s Prime Rate plus 2.00 percentage points. This will not constitute a waiver of any default.

6.10 Interest Compounding. At the Bank’s sole option in each instance, any interest, fees or costs which are not paid when due under this Agreement shall bear interest from the due date at the Bank’s Prime Rate plus 2 percentage points. This may result in compounding of interest.

6.11 Overdrafts. At the Bank’s sole option in each instance, the Bank may do one of the following:

(a) The Bank may make advances under this Agreement to prevent or cover an overdraft on any account of the Borrower with the Bank. Each such advance will accrue interest from the date of the advance or the date on which the account is overdrawn, whichever occurs first, at the interest rate described in this Agreement.

(b) The Bank may reduce the amount of credit otherwise available under this Agreement by the amount of any overdraft on any account of the Borrower with the Bank.

This paragraph shall not be deemed to authorize the Borrower to create overdrafts on any of the Borrower’s accounts with the Bank.

7. CONDITIONS

The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement:

7.1 Authorizations. Evidence that the execution, delivery and performance by each Loan Party of this Agreement and any instrument or agreement required under this Agreement have been duly authorized.

7.2 Governing Documents. A copy of the Borrower’s articles of incorporation.

7.3 Security Agreements. Signed original security agreements, assignments which the Bank requires.

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7.4 Perfection and Evidence of Priority. Financing statements and fixture filings (and any collateral in which the Bank requires a possessory security interest), together with evidence that the security interests and liens in favor of the Bank are valid, enforceable, and prior to all others’ rights and interests, except those the Bank consents to in writing.

7.5 Guaranty. Guaranty signed by each Guarantor.

7.6 Insurance. Evidence of insurance coverage, as required in the “Covenants” section of this Agreement.

7.7 Payment of Fees. Payment of all accrued and unpaid expenses incurred by the Bank as required by the paragraph entitled “Reimbursement Costs.”

7.8 Legal Opinion. A legal opinion from Cosmas N. Lykos, General Counsel of the Borrower, in form and substance satisfactory to Bank and its counsel.

7.9 Other Items. Any other items that the Bank reasonably requires.

8. REPRESENTATIONS AND WARRANTIES

The Borrower makes the following representations and warranties on and as of the date hereof and as of the date of each request for an extension of credit hereunder:

8.1 Organization of Borrower. Each Loan Party is a corporation, duly formed and existing under the laws of the state where organized.

8.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower’s powers, have been duly authorized, and do not conflict with any of its organizational papers.

8.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered by each Loan Party, will be similarly legal, valid, binding and enforceable.

8.4 Good Standing. In each state in which any Loan Party does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.

8.5 No Conflicts. This Agreement and any other loan document to which each Loan Party is a party, does not conflict with any law, agreement, or obligation by which such Loan Party is bound.

8.6 Financial Information. All financial and other information that has been or will be supplied to the Bank is sufficiently complete to give the Bank accurate knowledge of the Borrower’s (and any guarantor’s) financial condition, including all

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material contingent liabilities in form and content required by the Bank, and in compliance with all government regulations that apply. Since the date of the most recent financial statement provided to the Bank, there has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower or the Borrower and its Subsidiaries (taken as a whole).

8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or to the Borrower’s knowledge threatened against the Borrower and its Subsidiaries which, reasonably could be expected to impair the Borrower’s financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank.

8.8 Collateral. All collateral required in this Agreement is owned by the grantor of the security interest free of any title defects or any liens or interests of others, except as permitted hereby or by the Bank in writing.

8.9 Permits, Franchises. Each Loan Party possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged, except to the extent the failure to possess any such permits, memberships, franchises, contracts, licenses or rights could not reasonably be expected to result in a Material Adverse Effect.

8.10 Other Obligations. Neither the Borrower nor any guarantor is in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation.

8.11 Income Tax Matters. The Borrower has no knowledge of any pending assessments or adjustments of its income tax for any year.

8.12 No Tax Avoidance Plan. The Borrower’s obtaining of credit from the Bank under this Agreement does not have as a principal purpose the avoidance of U.S. withholding taxes.

8.13 No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement.

8.14 Insurance. The Borrower has obtained, and maintained in effect, the insurance coverage required in the “Covenants” section of this Agreement.

8.15 ERISA Plans.

(a) Each Plan (other than a multi-employer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA.

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(b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect.

(c) With respect to any Plan subject to Title IV of ERISA:

(i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30-day notice.

(ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA.

(iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding.

(d) The following terms have the meanings indicated for purposes of this Agreement:

(i) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(ii) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

(iii) “ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code.

(iv) “PBGC” means the Pension Benefit Guaranty Corporation.

(v) “Plan” means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multi-employer plan within the meaning of Section 4001(a)(3) of ERISA.

8.16 Location of Borrower. The Borrower’s place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower’s signature on this Agreement.

8.17 Environmental Matters. The Borrower (a) is not in violation of any health, safety, or environmental law or regulation regarding hazardous substances and (b) is not the subject of any claim, proceeding, notice, or other communication regarding hazardous substances. “Hazardous substances” means any substance, material or waste that is or becomes designated or regulated as “toxic,” “hazardous,” “pollutant,” or

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“contaminant” or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas.

9. COVENANTS

The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full:

9.1 Use of Proceeds. To use the proceeds of the credit only for general working capital and capital expenditures, (including the issuance of standby letters of credit), and for other lawful corporate purposes.

9.2 Financial Information. To provide the following financial information and statements in form and content reasonably acceptable to the Bank, and such additional information as reasonably requested by the Bank from time to time:

(a) Within 120 days of the Borrower’s fiscal year end, the Borrower’s annual financial statements. These financial statements must be audited with an unqualified opinion by a Certified Public Accountant reasonably acceptable to the Bank. These financial statements shall be prepared on a consolidated basis.

(b) Within 45 days of the period’s end, (other than in respect of a fiscal year end period), the Borrower’s quarterly financial statements, certified and dated by an authorized financial officer of the Borrower. These financial statements may be prepared by Borrower and shall be prepared on a consolidated basis.

(c) Within the periods provided in (a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto.

(d) Within 120 days of the Borrower’s fiscal year end, the Borrower’s financial projections or budget by quarter for the following fiscal year.

(e) A borrowing base certificate substantially in the form of Exhibit A hereto, setting forth the amount of Acceptable Receivables as of the last day of each month within twenty (20) days after month end, including a summary aging schedule, and, upon the Bank’s request, copies of the invoices or the record of invoices from the Borrower’s sales journal for such Acceptable Receivables, copies of the delivery receipts, purchase orders, shipping instructions, bills of lading and other documentation pertaining to such Acceptable Receivables, and copies of the cash receipts journal pertaining to the

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borrowing base certificate. For the purposes of calculating the Borrowing Base, the borrowing base certificate delivered at the end of each March, June, September and December will provide actual ineligibles, while interim monthly certificates will deduct, as an assumed ineligible percentage, 20% from gross receivables; provided, however, the Bank may, in its sole discretion upon written notice to the Borrower, reset the interim monthly assumed ineligible percentage to the actual quarter end ineligible percentage.

(f) Within 120 days of the Borrower’s fiscal year-end, a copy of the Borrower’s current insurance policy evidencing re-insurance coverage of workers’ compensation claims in excess of $750,000 per occurrence from an insurance company reasonably acceptable to the Bank, with an A.M. Best rating of not less than “A.”

(g) Within 90 days of the Borrower’s fiscal year end, if requested by the Bank, a company prepared workers’ compensation report stating, on a policy year or fiscal year basis, gross wages, claims filed, claims experience and losses as a percentage of temporary employer payroll by policy year.

(h) Promptly upon the Bank’s request, such other books, records, statements, lists of property and accounts, budgets, forecasts or reports as to the Borrower and as to each guarantor of the Borrower’s obligations to the Bank as the Bank may reasonably request.

9.3 Profitability.

(a) For fiscal year 2004: not to incur on a consolidated basis, net losses before taxes (including extraordinary losses and negative accounting adjustment, but excluding extraordinary gains and positive accounting adjustments) not to exceed (i) Four Million Five Hundred Thousand Dollars ($4,500,000) for each fiscal quarter, and (ii) Eight Million Five Hundred Thousand Dollars ($8,500,000) on a fiscal year-to-date basis.

(b) For fiscal year 2005: not to incur on a consolidated basis, net losses before taxes (including extraordinary losses and negative accounting adjustments, but excluding extraordinary gains and positive adjustments) not to exceed Three Million Dollars ($3,000,000) at any time (whether determined on a quarterly or fiscal-year-to-date basis).

(c) For the purposes of this Section 9.3 and notwithstanding anything set forth in the preceding clauses (a) or (b), during any quarterly period, extraordinary gains can offset extraordinary losses and positive dollar accounting adjustments can offset negative accounting adjustments.

9.4 Capital Expenditures. Not to spend or incur obligations (including the total amount of any capital leases) to acquire fixed assets of more than Three Million Five Hundred Thousand Dollars ($3,500,000) in any single fiscal year on a consolidated basis.

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9.5 Liens. Not to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following:

(a) Liens in favor of the Bank;

(b) Liens existing on the date hereof and listed on Schedule 9.5 and any renewals or extensions thereof, provided that the property covered thereby is not increased and any renewal or extension of the obligations secured or benefited thereby is permitted by Section 9.7(b);

(c) Liens for taxes not yet delinquent or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

(d) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person;

(e) pledges or deposits in the ordinary course of business in connection with unemployment insurance and other social security legislation, other than any Lien imposed by ERISA;

(f) Existing pledges or deposits in connection with workers compensation in the aggregate amount of $25,000,000, provided that no additional cash pledges for workers compensation are permitted.

(g) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, surety bonds (other than bonds related to judgments or litigation), performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(h) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person;

(i) Liens securing judgments for the payment of money not constituting an Event of Default or securing appeal or other surety bonds related to such judgments;

(j) Liens securing Indebtedness permitted under Section 9.7(e); provided that (i) such Liens do not at any time encumber any property other than the property financed by such Indebtedness and (ii) the Indebtedness secured thereby does not

24

exceed the cost or fair market value, whichever is lower, of the property being acquired on the date of acquisition; and

9.6 Investments. Not to make any Investments, except:

(a) Investments held by the Borrower or such Subsidiary as permitted under Schedule 9.6;

(b) advances to officers, directors and employees of the Borrower and Subsidiaries in an aggregate amount not to exceed $250,000 at any time outstanding, for travel, entertainment, relocation and analogous ordinary business purposes;

(c) Investments of the Borrower in any Guarantor and Investments of any Guarantor in the Borrower or in another Guarantor;

(d) Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss;

(e) Guarantees permitted by Section 9.7;

(f) Acceptable Acquisitions; and

(g) other Investments not exceeding $1,000,000 in the aggregate in any fiscal year of the Borrower.

9.7 Indebtedness. Not to create, incur, assume or suffer to exist any Indebtedness, except:

(a) Indebtedness under this Agreement;

(b) Indebtedness outstanding on the date hereof and listed on Schedule 9.7 and any refinancings, refundings, renewals or extensions thereof; provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing and by an amount equal to any existing commitments unutilized thereunder;

(c) Guarantees of the Borrower or any Guarantor in respect of Indebtedness otherwise permitted hereunder of the Borrower or any other Guarantor;

(d) obligations (contingent or otherwise) of the Borrower or any Subsidiary existing or arising under any Swap Contract, provided that (i) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments, investments, assets, or

25

property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person, and not for purposes of speculation or taking a “market view;” and (ii) such Swap Contract does not contain any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party;

(e) Indebtedness in respect of capital leases, Synthetic Lease Obligations and purchase money obligations for fixed or capital assets within the limitations set forth in Section 9.5(i); provided, however, that the aggregate amount of all such Indebtedness at any one time outstanding shall not exceed $5,000,000; and

(f) Indebtedness in an aggregate principal amount not to exceed $1,000,000 at any time outstanding.

9.8 Notices to Bank. To promptly notify the Bank in writing of:

(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower or any guarantor.

(b) any substantial dispute between the Borrower (or any guarantor) and any government authority.

(c) any event of default under this Agreement, or any event which, with notice or lapse of time or both, would constitute an event of default.

(d) any material adverse change in the Borrower’s (or any guarantor’s) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit.

(e) any change in the Borrower’s name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business.

(f) any actual material contingent liabilities of the Borrower (or any guarantor), and any such contingent liabilities which are reasonably foreseeable, where such liabilities are in excess of One Million Dollars ($1,000,000) in the aggregate.

9.9 Books and Records. To maintain adequate books and records.

9.10 Audits. To allow the Bank and its agents to inspect the Borrower’s properties and examine, audit, and make copies of books and records at any reasonable time. If any of the Borrower’s properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank’s requests for information concerning such properties, books and records so long as the Borrower is permitted to be involved in such discussions regarding the Bank’s requests for Borrower information; provided that if an Event of Default exists and is continuing, Bank is not required to provide any notice to Borrower and may exercise its right under this Section 9.10 whether or not Borrower is involved in the discussions regarding the Bank’s request for Borrower information.

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9.11 Compliance with Laws. To comply with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower’s business, except to the extent the failure to so comply could not reasonably be expected to result in a Material Adverse Effect.

9.12 Preservation of Rights. To maintain and preserve all rights, privileges, and franchises the Borrower now has.

9.13 Maintenance of Properties. To make any repairs, renewals, or replacements to keep the Borrower’s properties in good working condition, ordinary wear and tear excepted.

9.14 Perfection of Liens. To help the Bank perfect and protect its security interests and liens, and reimburse it for related costs it incurs to protect its security interests and liens.

9.15 Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement.

9.16 Insurance.

(a) General Business Insurance. To maintain insurance as is usual for the business it is in.

(b) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force.

9.17 Additional Negative Covenants. Not to, without the Bank’s written consent:

(a) engage in any business activities substantially different from or reasonably related to the Borrower’s present business.

(b) liquidate or dissolve the Borrower’s business.

(c) other than in connection with an Acceptable Acquisition, enter into any consolidation, merger, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company at a cost to Borrower in excess of $1,000,000 in the aggregate. Any sums expended by Borrower under this Section 9.17(c) shall reduce the limitation provided under Section 9.6(g) by such sums expended.

(d) sell, assign, lease, transfer or otherwise dispose of any assets in excess of Two Million Dollars ($2,000,000), or enter into any agreement to do so.

(e) enter into any sale and leaseback agreement covering any of its fixed assets.

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(f) make any Acquisitions; provided, however, that the Borrower may make any Acceptable Acquisition.

9.18 Additional Guarantors. To notify the Bank at the time that any Person becomes a Material Subsidiary, and promptly thereafter (and in any event within 30 days, cause such Person to (a) become a Guarantor by executing and delivering to the Bank a counterpart of the guaranty or such other document, including security agreements as required by the Bank and (b) deliver such evidence as required by the Bank as to the due authorization, validity, binding effect and enforceability of the documentation referred to in clause (a), all in form, content and scope reasonably acceptable to the Bank.

10. HAZARDOUS SUBSTANCES

10.1 Indemnity Regarding Hazardous Substances. The Borrower will indemnify and hold harmless the Bank from any loss or liability the Bank incurs in connection with or as a result of this Agreement, which directly or indirectly arises out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a hazardous substance. This indemnity will apply whether the hazardous substance is on, under or about the Borrower’s property or operations or property leased to the Borrower. The indemnity includes but is not limited to attorneys’ fees (including the reasonable estimate of the allocated cost of in-house counsel). The indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys and assigns.

10.2 Definition of Hazardous Substances. “Hazardous substances” means any substance, material or waste that is or becomes designated or regulated as “toxic,” “hazardous,” “pollutant,” or “contaminant” or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. This indemnity will survive repayment of the Borrower’s obligations to the Bank.

11. DEFAULT

If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled “Bankruptcy,” below, with respect to the Borrower, then the entire debt outstanding under this Agreement will automatically be due immediately.

11.1 Failure to Pay. The Borrower fails to make a payment under this Agreement when due and, in the case of any payment in respect of interest or any fee payable hereunder, such failure continues for three (3) business days.

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11.2 Lien Priority. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement (or any guaranty).

11.3 False Information. The Borrower or any guarantor or any party pledging collateral to the Bank (each an “Obligor”) has given the Bank materially false or misleading information or representations.

11.4 Bankruptcy. The Borrower (or any Obligor) files a bankruptcy petition, a bankruptcy petition is filed against the Borrower (or any Obligor) or the Borrower (or any Obligor) or any general partner of the Borrower or any Obligor makes a general assignment for the benefit of creditors, and, in the case of any bankruptcy petition filed against the Borrower (or any Obligor), such petition shall remain undismissed or unstayed for 60 days or more.

11.5 Receivers. A receiver or similar official is appointed for a substantial portion of the Borrower’s (or any Obligor’s) business, or the business is terminated.

11.6 Judgments. A final judgment or judgments for the payment of money in excess of $500,000 in the aggregate at any time are outstanding against the Borrower (or any Obligor) and the same are not, within 30 days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay.

11.7 Cross-default. Any default occurs under any agreement in connection with any credit in excess of Five Hundred Thousand Dollars ($500,000) the Borrower (or any Obligor) has obtained from anyone else or which the Borrower (or any Obligor) has guaranteed.

11.8 Default under Related Documents. Any default occurs under any guaranty, subordination agreement, security agreement, deed of trust, mortgage, or other document required by or delivered in connection with this Agreement or any such document is no longer in effect, or any guarantor purports to revoke or disavow the guaranty.

11.9 Other Bank Agreements. The Borrower (or any Obligor) fails to meet the conditions of, or fails to perform any obligation under any other agreement the Borrower (or any Obligor) has with the Bank or any affiliate of the Bank.

11.10 Other Breach Under Agreement. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article and, in the case of the failure to comply with Sections 9.9, 9.11, 9.12, 9.13, such failure continues for a period of 30 days following the earlier to occur of (x) the receipt of written notice by the Borrower of such failure from the Bank or (y) the knowledge of such failure by an officer of Borrower. This includes any failure or anticipated failure by the Borrower to comply with any financial covenants set forth in this Agreement, whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank.

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11.11 Change of Control. There occurs any Change of Control with respect to the Borrower.

12. ENFORCING THIS AGREEMENT; MISCELLANEOUS

12.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied.

12.2 California Law. This Agreement is governed by California law.

12.3 Successors and Assigns. This Agreement is binding on the Borrower’s and the Bank’s successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank’s prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees; provided that such actual or potential participants or assignees shall agree to treat all financial information exchanged as confidential. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower.

12.4 Arbitration and Waiver of Jury Trial.

(a) This paragraph concerns the resolution of any controversies or claims between the parties, whether arising in contract, tort or by statute, including but not limited to controversies or claims that arise out of or relate to: (i) this Agreement (including any renewals, extensions or modifications); or (ii) any document related to this Agreement (collectively a “Claim”). For the purposes of this arbitration provision only, the term “parties” shall include any parent corporation, subsidiary or affiliate of the Bank involved in the servicing, management or administration of any obligation described or evidenced by this Agreement.

(b) At the request of any party to this Agreement, any Claim shall be resolved by binding arbitration in accordance with the Federal Arbitration Act (Title 9, U. S. Code) (the “Act”). The Act will apply even though this Agreement provides that it is governed by the law of a specified state.

(c) Arbitration proceedings will be determined in accordance with the Act, the applicable rules and procedures for the arbitration of disputes of JAMS or any successor thereof (“JAMS”), and the terms of this paragraph. In the event of any inconsistency, the terms of this paragraph shall control.

(d) The arbitration shall be administered by JAMS and conducted in any U. S. state where real or tangible personal property collateral for this credit is located or if there is no such collateral, in California. All Claims shall be determined by one arbitrator; however, if Claims exceed Five Million Dollars ($5,000,000), upon the request of any party, the Claims shall be decided by three arbitrators. All arbitration hearings shall commence within ninety (90) days of the demand for arbitration and close within ninety

30

(90) days of commencement and the award of the arbitrator(s) shall be issued within thirty (30) days of the close of the hearing. However, the arbitrator(s), upon a showing of good cause, may extend the commencement of the hearing for up to an additional sixty (60) days. The arbitrator(s) shall provide a concise written statement of reasons for the award. The arbitration award may be submitted to any court having jurisdiction to be confirmed and enforced.

(e) The arbitrator(s) will have the authority to decide whether any Claim is barred by the statute of limitations and, if so, to dismiss the arbitration on that basis. For purposes of the application of the statute of limitations, the service on JAMS under applicable JAMS rules of a notice of Claim is the equivalent of the filing of a lawsuit. Any dispute concerning this arbitration provision or whether a Claim is arbitrable shall be determined by the arbitrator(s). The arbitrator(s) shall have the power to award legal fees pursuant to the terms of this Agreement.

(f) This paragraph does not limit the right of the Borrower or the Bank to:

(i) exercise self-help remedies, such as but not limited to, setoff;

(ii) initiate judicial or nonjudicial foreclosure against any real or personal property collateral;

(iii) exercise any judicial or power of sale rights, or

(iv) act in a court of law to obtain an interim remedy, such as but not limited to, injunctive relief, writ of possession or appointment of a receiver, or additional or supplementary remedies.

(g) The filing of a court action is not intended to constitute a waiver of the right of any party, including the suing party, thereafter to require submittal of the Claim to arbitration.

(h) By agreeing to binding arbitration, the parties irrevocably and voluntarily waive any right they may have to a trial by jury in respect of any Claim. Furthermore, without intending in any way to limit this Agreement to arbitrate, to the extent any Claim is not arbitrated, the parties irrevocably and voluntarily waive any right they may have to a trial by jury in respect of such Claim. This provision is a material inducement for the parties entering into this Agreement.

12.5 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing.

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12.6 Administration Costs. The Borrower shall pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement.

12.7 Attorneys’ Fees. The Borrower shall reimburse the Bank for any reasonable costs and attorneys’ fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and in connection with any amendment, waiver, “workout” or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys’ fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys’ fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, “attorneys’ fees” includes the allocated costs of the Bank’s in-house counsel.

12.8 One Agreement. This Agreement and any related security or other agreements required by this Agreement, collectively:

(a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit;

(b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and

(c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them.

In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail.

12.9 Disposition of Schedules, Reports, Etc. Delivered by Borrower. The Bank will not be obligated to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower. The Bank will destroy or otherwise dispose of such materials at such time as the Bank, in its discretion, deems appropriate.

12.10 Verification of Receivables. The Bank may at any time, in the name of the Borrower or if an Event of Default exists, in the name of the Bank, either orally or in writing, request confirmation from any debtor of the current amount and status of the accounts receivable upon which such debtor is obligated.

12.11 Waiver of Confidentiality. The Borrower authorizes the Bank to discuss the Borrower’s financial affairs and business operations with any accountants, auditors, business consultants, or other professional advisors employed by the Borrower, and authorizes such parties to disclose to the Bank such financial and business information or reports (including management letters) concerning the Borrower as the Bank may request, in each case so long as the Borrower is permitted to participate in such discussions

32

and receives such disclosure requests; provided that if an Event of Default exists and is continuing, Bank is not required to provide any notice to Borrower and may exercise its rights under this Section 12.11 whether or not Borrower participates in such discussions or receives such disclosure requests.

12.12 Indemnification. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, (c) any claim, whether well-founded or otherwise, that there has been a failure to comply with any law regulating the Borrower’s sales or leases to or performance of services for debtors obligated upon the Borrower’s accounts receivable and disclosures in connection therewith, and (d) any litigation or proceeding related to or arising out of this Agreement, any such document, any such credit, or any such claim, in each case excluding any claim resulting from the gross negligence or willful misconduct of the Bank. This indemnity includes but is not limited to attorneys’ fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower’s obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand.

12.13 Notices. Unless otherwise provided in this Agreement or in another agreement between the Bank and the Borrower, all notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, or by overnight courier, to the addresses on the signature page of this Agreement, or sent by facsimile to the fax numbers listed on the signature page, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Notices and other communications sent by (a) first class registered mail shall be deemed delivered on the earlier of actual receipt or on the fourth business day after deposit in the U.S. mail, postage prepaid, (b) overnight courier shall be deemed delivered on the next business day, and (c) telecopy shall be deemed delivered when transmitted.

12.14 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement.

12.15 Counterparts. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement.

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This Agreement is executed as of the date stated at the top of the first page.

Bank of America, N.A.	RemedyTemp, Inc.
By:	By:
Name:	Name:
Title:	Title:
Address where notices to the Bank are to be Sent:	Address where notices to Borrower are to be Sent:
675 Anton Boulevard, 2nd Floor Costa Mesa, CA 92626 Facsimile: (714) 850-6586	101 Enterprise Aliso Viejo, California 92656 Facsimile: (949) 425-7800

34

EXHIBIT A

REMEDYTEMP, INC.

BORROWING BASE CALCULATION

FOR THE PERIOD ENDING                     

(Attach completed Schedule of Ineligibles for periods ending March, June, September and December.)

[A] CASH PLEDGED FOR REVOLVER
GROSS ACCOUNTS RECEIVABLE—
LESS: INELIGIBLES (Minimum 20%)	20	%
a. Interim         %; See Note 1
b. Actual Quarter-end         %; See Note 2
INELIGIBLE ACCOUNTS RECEIVABLE			—
ELIGIBLE ACCOUNTS RECEIVABLE			—
ADVANCE RATE	80	%
[B] ACCOUNTS RECEIVABLE AVAILABILITY			—
CASH + ACCOUNTS RECEIVABLE AVAILABILITY ( [ A ] + [ B ] )			—
Less: $5,000,000 Reserve			(5,000,000	)
BORROWING BASE			(5,000,000	)
REVOLVER AVAILABILITY (Lesser of Borrowing Base or $40,000,000 Commitment)			40,000,000
less: LCs issued under the Revolver
less: Outstandings under the Revolver			—
TOTAL LCs + OUTSTANDINGS UNDER THE REVOLVER			—
Net Revolver Availability/<Overadvance>			40,000,000

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Note 1: Initial ineligible rate is 20%. This rate is subject to change, at Bank’s sole discretion, with written notice to Borrower.

Rate change may be based on actual Ineligibles calculated during Quarter-end periods.

Note 2: Schedule to calculate actual ineligibles is found on attached worksheet, and must accompany Borrowing Base submitted to Bank for Quarter-end periods (December, March, June, September).

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REMEDYTEMP, INC.

BORROWING BASE

SCHEDULE OF INELIGIBLES

FOR THE QUARTER ENDING                     

Include Summary A/R Aging
[ C ] GROSS ACCOUNTS RECEIVABLE AS OF MONTH-ENDING
LESS: A/R Ineligibles
Contra Accounts	—
Employee or Affiliates	—
Government, State, County, City, Town or Municipality	—
Foreign	—
Past Dues—over 60-days from invoice date, or 30-days from due date	—
50% Cross-Aged	—
15% Concentration	—
Accrued Payroll	—
Accrued Gross Margin Split for Licensees	—
Others	—
Others	—
[ D ] TOTAL A/R INELIGIBLES
% RATE OF INELIGIBLES ( [ D ] to [ C ] )

37

EX-31.1

Exhibit 31.1

RemedyTemp, Inc.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Greg D. Palmer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RemedyTemp, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 12, 2004

/s/    GREG D. PALMER        

Greg D. Palmer

President and Chief Executive Officer

RemedyTemp, Inc.

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

RemedyTemp, Inc.

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Monty A. Houdeshell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of RemedyTemp, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 12, 2004

/s/    MONTY A. HOUDESHELL

Monty A. Houdeshell

Senior Vice President and Chief Financial Officer

RemedyTemp, Inc.

(Principal Financial Officer)

EX-32

Exhibit 32

RemedyTemp, Inc.

CERTIFICATION

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of RemedyTemp, Inc., a California corporation (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended March 28, 2004 as filed with the Securities and Exchange Commission (the “10-Q Report”) that:

(1) the 10-Q Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the Information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 12, 2004	/s/ GREG D. PALMER
	Greg D. Palmer
	President and Chief Executive Officer
	RemedyTemp, Inc.
May 12, 2004	/s/ MONTY A. HOUDESHELL
	Monty A. Houdeshell
	Senior Vice President and Chief Financial Officer
	RemedyTemp, Inc.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.