PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that is important to you. You should read this entire prospectus carefully, especially the discussion of “Risk Factors” and our consolidated financial statements and related notes, before deciding to invest in shares of our common stock. Unless context indicates otherwise, the terms “the Company”, “we”, “us”, or “our” in this prospectus refer to Crdentia Corp.

General

We are a provider of healthcare staffing services, focusing on the areas of travel nursing, per diem staffing, contractual clinical services, and private duty home care. Our travel nurses are recruited domestically as well as internationally and placed on temporary assignments at healthcare facilities across the United States. Our per diem nurses are local nurses placed at healthcare facilities on short-term assignments. Our contractual clinical services group provides complete clinical management and staffing for healthcare facilities, and our private duty home care group provides nursing case management and staffing for skilled and non-skilled care in the home.

In 2004 and for the nine months ended September 30, 2005, approximately 58% and 38%, respectively, of our revenue was derived from the placement of travel nurses on assignment, typically 13 weeks in length. Such assignments generally involve temporary relocation to the geographic area of the assignment. We also provide per diem nurses to satisfy the very short-term needs of healthcare facilities. Per diem services provided 29% of our revenue in 2004 and 51% of our revenue for the nine months ended September 30, 2005. We believe this market presents a significant growth opportunity. The balance of our revenue in 2004 and in the nine months ended September 30, 2005 came from providing clinical management and staffing to healthcare facilities and private duty home care. We anticipate there are growth opportunities in these areas as well and intend to pursue such opportunities as they arise.

With the existing and growing shortage of nurses in the United States, we believe there is an opportunity to build a significant company in the field of healthcare staffing services. We intend to pursue this opportunity through organic growth of our existing businesses and through the continued acquisition of complementary companies in this sector. We believe that temporary staffing companies must consolidate in order to thrive. The success of the large industry leaders is indicative of the efficiency, both in operations as well as capital formation, of this strategy. Smaller companies in this sector will increasingly be at a competitive disadvantage in the marketplace because technology, operating efficiency and breadth of service will soon be the key to successful operations.

Growth Strategy

Prior to 2003, we were a development stage company with no commercial operations. We did not have any revenue in 2002 and did not have any revenue in 2003 until we completed our first acquisition in August 2003. During 2003, we pursued our operational plan of acquiring companies in the healthcare staffing field and completed acquisitions of four companies. In 2004, we purchased two additional companies, and in 2005 we purchased three additional companies. As a result, we have contracted with more than 1,500 healthcare facilities across 49 states and the District of Columbia. We anticipate continuing our plan to acquire specialized companies in the healthcare staffing field for the foreseeable future. Our goal is to further expand our position within the temporary healthcare staffing sector in the United States.

Corporate Information

We were incorporated under the laws of the State of Delaware on November 10, 1997 under the name of Digivision International, Ltd. Our name was changed to Lifen, Inc. on June 22, 2000 and to Crdentia Corp. on May 28, 2003. Our principal executive offices are located at 14114 Dallas Parkway, Suite 600, Dallas, Texas 75254 and our telephone number is (972) 850-0780. This prospectus, and any prospectus supplements issued in relation to it, contain trademarks of Crdentia Corp. and its affiliates and may contain trademarks, trade names and service marks of other parties.

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about the risks described below, together with the other information contained in this prospectus, before you decide whether to buy our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In those circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

Risks Related to Our Business and Ownership of Our Common Stock

If we fail to raise additional capital in the near future, our business will fail.

We were formed in November 1997 and commenced operations on August 7, 2003 with our acquisition of Baker Anderson Christie, Inc. We are a newly created operation and subject to all the risks inherent in a new business venture, many of which are beyond our control, including the ability to implement successful operations, lack of capital to finance acquisitions and failure to achieve market acceptance. In addition, as a newly created venture we face significant competition from many companies, virtually all of which are larger, better financed and have significantly greater market recognition than us.

As a newly created operation, we have limited cash resources and will need to raise additional capital through public or private financings or other arrangements in order to meet current commitments and continue development of our business. We cannot assure you that additional capital will be available to us when needed, if at all, or, if available, will be obtained on terms attractive to us. Our failure to raise additional capital when needed could cause us to cease our operations.

We have financed our operations since inception primarily through the private placement of equity and debt securities and loan facilities. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any fundraising transaction, or if we do consummate such a transaction, that its terms and conditions will not require us to give investors warrants or other valuable rights to purchase additional interest in our company, or be otherwise unfavorable to us. Among other things, the agreements under which we issued some of our existing securities include, and any securities that we may issue in the future may also include, terms that could impede our ability to raise additional funding. The issuance of additional securities could impose additional restrictions on how we operate and finance our business. In addition, our current debt financing arrangements involve significant interest expense and restrictive covenants that limit our operations.

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

We will need to raise additional capital. One possibility for raising additional capital is the public or private sale of our common stock or securities convertible into or exercisable for our common stock.

If we sell additional shares of our common stock, such sales will further dilute the percentage of our equity that our existing stockholders own. In addition, our recent private placement financings have involved the issuance of securities at a price per share (or conversion price per share) that represented a discount to the trading prices listed for our common stock on the Over-the-Counter Bulletin Board and it is possible that we will close future private placements involving the issuance of securities at a discount to prevailing trading prices. Depending upon the price per share of securities that we sell in the future, a stockholder’s interest in us could be further diluted by any adjustments to the number of shares and the applicable exercise price required pursuant to the terms of the agreements under which we previously issued securities. No assurance can be given that previous or future investors, finders or placement agents will not claim that they are entitled to additional anti-dilution adjustments or dispute our calculation of any such adjustments. Any such claim or dispute could require us to incur material costs and expenses regardless of the resolution and, if resolved unfavorably to us, to effect dilutive securities issuances or adjustments to previously issued securities. In addition, future financings may include provisions requiring us to make additional payments to the investors if we fail to obtain or maintain the effectiveness of SEC registration statements by specified dates or take other specified

There is no active public market for our common stock, and the trading price of our common stock is subject to volatility.

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

The trading price of our common stock is likely to be subject to wide fluctuation. Factors affecting the trading price of our common stock may include:

• variations in our financial results;

• announcements of innovations, new solutions, strategic alliances or significant agreement by us or by our competitors;

• recruitment or departure of key personnel;

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

• market conditions in our industry, the industries of our customers and the economy as a whole; and

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

Our credit facility imposes significant expenses and restrictive covenants upon us.

In June 2004 we obtained a $15.0 million revolving credit facility, which was reduced in 2005 to $10.0 million (the “Revolving Facility”) from Bridge Healthcare Finance, LLC. In August 2004 we obtained a $10.0 million term loan credit facility from Bridge Opportunity Finance, LLC (the “Term Facility” and together with the Revolving Facility, the “Credit Facility”). Bridge Opportunity Finance, LLC is an affiliate of Bridge Healthcare Finance, LLC.

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

The Credit Facility imposes various restrictions on our activities without the consent of the lenders, including a prohibition on fundamental changes to us or our direct or indirect subsidiaries (including certain consolidations, mergers and sales and transfer of assets, and limitations on our ability or any of our direct or indirect

subsidiaries to grant liens upon our property or assets). In addition, under the Credit Facility we must meet certain net worth, earnings and debt service coverage requirements. The Credit Facility includes events of default (with grace periods, as applicable) and provides that, upon the occurrence of certain events of default, payment of all amounts payable under the Credit Facility, including the principal amount of, and accrued interest on, the Credit Facility may be accelerated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the Credit Facility, including the principal amount of, and accrued interest on, the Credit Facility will automatically become immediately due and payable.

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

The agreements governing the convertible debentures contain covenants and restrictions that may limit our ability to operate our business.

The terms of our outstanding convertible debentures limit our ability to, among other things: declare or pay dividends or distributions on any equity securities, create or incur additional indebtedness, create additional liens on our assets and repurchase common stock. These restrictions could adversely effect our ability to borrow additional funds or raise additional equity to fund our future operations. In addition, if we fail to comply with any of the covenants contained in the agreements or otherwise default on the convertible debentures, the holders may accelerate the indebtedness, and we may not have sufficient funds available to make the required payments.

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

MedCap Partners, L.P., a selling stockholder under this prospectus, controls approximately 65% of our outstanding capital stock, on an as-converted basis. As a result, MedCap is able to exercise control over matters requiring stockholder approval, such as the election of directors and the approval of significant corporate transactions. These types of transactions include transactions involving an actual or potential change of control of our company or other transactions that the non-controlling stockholders may deem to be in their best interests and in which such stockholders could receive a premium for their shares. C. Fred Toney, a member of our Board of Directors, is the managing member of MedCap Management & Research LLC, the general partner of MedCap Partners, L.P.

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

With respect to our planned operations, management cannot accurately project or give any assurance with respect to our ability to control development and operating costs and/or expenses in the future. Consequently, as we expand our commercial operations, management may not be able to control costs and expenses adequately, and such operations may generate losses.

The ability to attract and retain highly qualified personnel to operate and manage our operations and qualified sales personnel is extremely important and our failure to do so could adversely affect us.

Presently, we are dependent upon the personal efforts of our management team. The loss of any of our officers or directors could have a material adverse effect upon our business and future prospects. We do not presently have key-person life insurance upon the life of any of our officers or directors. Additionally, as we continue our planned expansion of commercial operations, we will require the services of additional skilled personnel. There can be no assurance that we can attract persons with the requisite skills and training to meet our future needs or, even if such persons are available, that they can be hired on terms favorable to us.

In addition, execution of our business strategy and continued growth of our business are substantially dependent upon our ability to attract, develop and retain qualified and skilled sales personnel who engage in selling and business development for our services. The available pool of qualified sales personnel candidates is limited. We commit substantial resources to the recruitment, training, development and operational support of our sales personnel. There can be no assurance that we will be able to recruit, develop and retain qualified sales personnel in sufficient numbers or that our sales personnel will achieve productivity levels sufficient to enable growth of our business. Failure to attract and retain productive sales personnel could adversely affect our business, financial condition and results of operations.

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

We rely significantly on our ability to attract and retain nurses and healthcare professionals who possess the skills, experience and licenses necessary to meet the requirements of our hospital and healthcare facility clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies and with hospitals and healthcare facilities. We must continually evaluate and expand our temporary healthcare professional network to keep pace with our hospital and healthcare facility clients’ needs. Currently, there is a shortage of qualified nurses in most areas of the United States, competition for nursing personnel is increasing, and salaries and benefits have risen. We may be unable to continue to increase the number of temporary healthcare professionals that we recruit, decreasing the potential for growth of our business. Our ability to attract and retain temporary healthcare professionals depends on several factors, including our ability to provide temporary healthcare professionals with assignments that they view as attractive and to provide them with competitive benefits and wages. We cannot assure you that we will be successful in any of these areas. The cost of attracting temporary healthcare professionals and providing them with attractive benefit packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our hospital and healthcare facility clients, our profitability could decline. Moreover, if we are unable to attract and retain temporary healthcare professionals, the quality of our services to our hospital and healthcare facility clients may decline and, as a result, we could lose clients.

The temporary staffing industry is highly competitive and the success and future growth of our business depend upon our ability to remain competitive in obtaining and retaining temporary staffing clients.

The temporary staffing industry is highly competitive and fragmented, with limited barriers to entry. We compete in national, regional and local markets with full-service agencies and in regional and local markets with specialized temporary staffing agencies. Some of our competitors include AMN Healthcare Services, Inc., Cross Country, Inc., Medical Staffing Network Holdings, Inc. and On Assignment, Inc. All of these companies have significantly greater marketing and financial resources than we do. Our ability to attract and retain clients is based on the value of the service we deliver, which in turn depends principally on the speed with which we fill assignments and the appropriateness of the match based on clients’ requirements and the skills and experience of our temporary employees. Our ability to attract skilled, experienced temporary professionals is based on our ability to pay competitive wages, to provide competitive benefits, to provide multiple, continuous assignments and thereby increase the retention rate of these employees. To the extent that competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenues and our margins could decline, which could seriously harm our operating results and cause the trading price of our stock to decline. As we expand into new geographic markets, our success will depend in part on our ability to gain market share from competitors. We expect competition for clients to increase in the future, and the success and growth of our business depend on our ability to remain competitive.

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

We generally do not have long-term agreements or exclusive guaranteed order contracts with our hospital and healthcare facility clients. The success of our business depends upon our ability to continually secure new orders from hospitals and other healthcare facilities and to fill those orders with our temporary healthcare professionals. Our hospital and healthcare facility clients are free to place orders with our competitors and may choose to use temporary healthcare professionals that our competitors offer them. Therefore, we must maintain positive relationships with our hospital and healthcare facility clients. If we fail to maintain positive relationships with our hospital and healthcare facility clients, we may be unable to generate new temporary healthcare professional orders and our business may be adversely affected.

Fluctuations in patient occupancy at our clients’ hospitals and healthcare facilities may adversely affect the demand for our services and therefore the profitability of our business.

Demand for our temporary healthcare staffing services is significantly affected by the general level of patient occupancy at our clients’ hospital and healthcare facilities. When occupancy increases, hospitals and other healthcare facilities often add temporary employees before full-time employees are hired. As occupancy decreases,

hospitals and other healthcare facilities typically reduce their use of temporary employees before undertaking layoffs of their regular employees. In addition, we may experience more competitive pricing pressure during periods of occupancy downturn. Occupancy at our clients’ hospitals and healthcare facilities also fluctuates due to the seasonality of some elective procedures. We are unable to predict the level of patient occupancy at any particular time and its effect on our revenues and earnings.

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

As of September 30, 2005, we had $25.0 million of goodwill and other unamortized intangible assets on our balance sheet, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At September 30, 2005, goodwill and other intangible assets represented 77% of our total assets.

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

We could be difficult to acquire due to anti-takeover provisions in our charter documents and Delaware law.

Provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of our company. These provisions may make it more difficult for stockholders to take corporate actions and may have the effect of delaying or preventing a change in control. We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Subject to specified exceptions, this section provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could have the effect of delaying or preventing a change of control of our company. The foregoing factors could limit the price that investors or an acquiror might be willing to pay in the future for shares of our common stock.

Risks Related to Our Industry

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

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

Our business is generally not subject to the extensive and complex laws that apply to our hospital and healthcare facility clients, including laws related to Medicare, Medicaid and other federal and state healthcare programs. However, these laws and regulations could indirectly affect the demand or the prices paid for our services. For example, our hospital and healthcare facility clients could suffer civil or criminal penalties or be excluded from participating in Medicare, Medicaid and other healthcare programs if they fail to comply with the laws and regulations applicable to their businesses. In addition, our hospital and healthcare facility clients could receive reduced reimbursements, or be excluded from coverage, because of a change in the rates or conditions set by federal or state governments. In turn, violations of or changes to these laws and regulations that adversely affect our

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

In addition, improper actions by our employees and other service providers may subject us to regulatory and litigation risk.

Further government regulations or healthcare reform could negatively impact our business opportunities, revenues and margins.

Although our operations are currently not subject to any significant government regulations, it is possible that, in the future, such regulations may be legislated. Although we cannot predict the extent of any such future regulations, a possibility exists that future or unforeseen changes may have an adverse impact upon our ability to continue or expand our operations as presently planned.

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

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

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

Significant legal actions could subject us to substantial uninsured liabilities.

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

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

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

USE OF PROCEEDS

All net proceeds from the disposition of the common shares covered by this prospectus or interests therein will go to the selling stockholders. We will not receive any proceeds from the disposition of the common stock or interests therein by the selling stockholders. However, certain of the shares of common stock covered hereby will be issued only upon the exercise of warrants. Upon exercise of these warrants, we will receive the proceeds of the exercise prices of such warrants if they are exercised other than on a net exercise basis. To the extent we receive cash upon any exercise of the warrants, we intend to use that cash for general corporate purposes.

MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

On June 3, 2003, our common stock began quotation on the OTC Bulletin Board under the symbol “CRNC”. In connection with a 1-for-3 reverse split of our common stock (the “Reverse Split”), on June 29, 2004 our symbol was changed to “CRDE”. There is currently a very limited public market for our common stock and no assurance can be given that a large public market will develop in the future. The trading market for our common stock is extremely thin. In view of the lack of an organized or established trading market for our common stock and the extreme thinness of whatever trading market may exist, the prices reflected on the chart as reported on the OTC Bulletin Board may not be indicative of the price at which any prior or future transactions were or may be effected in the common stock. Stockholders are cautioned against drawing any conclusions from the data contained herein, as past results are not necessarily indicative of future stock performance.

The following table sets forth the high and low bid price for our common stock for each quarter for the period from inception of trading on June 3, 2003 through December 31, 2005, as quoted on the OTC Bulletin Board. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The quotations were derived from Bloomberg L.P. All per share prices have been restated as though the Reverse Split had been in effect for all periods presented.

	2005				2004				2003
Period	High		Low		High		Low		High		Low
First Quarter	$	3.00	$	1.90	$	13.35	$	3.60	—		—
Second Quarter	$	2.40	$	1.20	$	5.25	$	2.40	$	15.30	$	15.00
Third Quarter	$	2.20	$	1.05	$	4.25	$	2.97	$	15.15	$	14.25
Fourth Quarter	$	2.30	$	1.15	$	4.50	$	2.40	$	15.90	$	6.00

We estimate that as of December 31, 2005, there were approximately 344 holders of record of our common stock.

DIVIDEND POLICY

We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business. We do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our Board of Directors, in its discretion, and will depend on our financial condition, operating results, capital requirements and other factors that our Board of Directors considers significant.

• We are expanding our home health business in an effort to improve gross margins through a better mix of the services provided.

• We are devoting constant attention toward achieving growth both organically and through acquisitions so that we can spread our corporate overhead over a larger base of business and achieve economies of scale.

• We are currently working to raise $1 million to $4 million of debt and equity for working capital needs, for debt retirement and for acquisitions.

• We are working to resolve the significant (in excess of $92 million) Series C Preferred Stock liquidation preference (assuming exercise of all Series C warrants).

• We are seeking to list our common stock on the Nasdaq National Market or another national exchange (our common stock is currently quoted on the OTC Bulletin Board).

LIQUIDITY AND CAPITAL RESOURCES

Although we have raised approximately $13 million since the beginning of 2005, we will need to raise additional capital during the next twelve months to satisfy debt service requirements and working capital needs. We are currently working to raise $1.5 million to $4 million in a combination of debt and equity in a private placement transaction with qualified investors. If we are successful in raising more than the $1 million to $2 million needed to satisfy debt service requirements and working capital needs, we will employ additional funds for internal growth, retirement of higher cost debt, and to a lesser extent targeted acquisitions which satisfy our due diligence review.

In June 2004, we obtained a $15 million revolving line of credit facility from Bridge Healthcare Finance, LLC (reduced to $10 million in March 2005). In August 2004, we obtained a $10 million term loan credit facility from Bridge Opportunity Finance, LLC. Bridge Opportunity Finance, LLC is an affiliate of Bridge Healthcare Finance, LLC. During the third quarter of 2005, Bridge Healthcare finance, LLC made a $600,000 credit line available to us in the form of an over-advance on our revolving line of credit. We had $2,521,598 and $5,057,451 outstanding at December 31, 2004 and September 30, 2005, respectively, under our revolving line of credit facility (including any over-advances) and $2,697,802 of principal (after adding back the discount) of term loan outstanding at December 31, 2004 and September 30, 2005. Agreements for both the revolving line of credit facility and the term loan facility contain financial covenants for the maintenance of minimum net worth, minimum EBITDA, maximum capital expenditure limits and maximum operating lease obligations. At March 31, 2005, we were out of compliance with financial covenants in both agreements, and we received waivers from the lenders. In May 2005 we renegotiated covenants related to both the revolving line of credit facility and the term loan; however, at September 30, 2005, we were not in compliance with the revised covenants. Bridge Healthcare Finance, LLC waived compliance with the covenants for the three months ended September 30, 2005. Failure to satisfy these covenants would severely restrict or eliminate our ability to obtain additional funding under these agreements. The term loan (which matures on April 30, 2007) has been classified as a long-term liability at September 30, 2005.

We generated a net loss of $3,378,199 for the nine months ended September 30, 2005 and used cash in operations of $3,691,159 during the first nine months of 2005. Additionally, although we ended the first nine months of 2005 with a working capital deficit of $2.2 million, we were able to secure additional funding during 2004 and the first nine months of 2005 to finance our operations as we continue to execute our business plan to acquire and grow companies involved in healthcare staffing. We will need to raise $1.5 million to $2 million in the first quarter of 2006 and additional capital during the next twelve months to satisfy debt service requirements and other working capital needs.

In March 2005 our majority stockholder exercised warrants to purchase 108,333 shares of Series C Convertible Preferred Stock, providing $6.4 million to us. Also, in May 2005 our majority stockholder exercised warrants to purchase 22,187 shares of Series C Convertible Preferred Stock, providing $1.3 million to us. The infusion of $7.7 million enabled us to acquire additional companies and to retire certain liabilities. Following the three acquisitions during the first nine months of 2005, we increased our borrowings under our accounts receivable line, but at September 30, 2005, there was no additional borrowing availability under this line. In the third

quarter of 2005, additional short-term funding of $600,000 in the form of an over-advance on the accounts receivable line was secured from Bridge Healthcare Finance, LLC.

In December 2005 and January 2006 we completed a private placement totaling $4.75 million. The financing consists of $2.75 million, or 4,583,333 shares of common stock and $2 million of 8% convertible debentures. The common stock was priced at $0.60 per share. The convertible debentures have a term of three years and bear interest at a rate of 8.0% per year, payable semi-annually in cash or registered stock at our option. The debentures are convertible at a price of $0.60 per share. The sale of convertible debentures included 50% warrant coverage. The warrants have a five year term and an exercise price of $0.75 per share. In addition, purchasers of convertible debentures were granted the right to purchase additional common stock in the form of warrants at an exercise price of $0.60 per share. Such warrants are exercisable, subject to extension, for a period of 60 days from the effective date of a registration statement filed by us covering the shares (including the shares issuable upon conversion of the debentures and exercise of the warrants). The warrants are for cash exercise only unless after one year there is no effective registration statement. We are obligated to register the shares (including the shares issuable upon conversion of the debentures and exercise of the warrants) for resale on a registration statement to be filed within 30 days. The shares, debentures and warrants (and the shares issuable upon conversion of the debentures and exercise of the warrants) were not registered under the Securities Act of 1933, as amended, or any state securities law and were sold in a private transaction pursuant to Regulation D promulgated under the Securities Act. Unless the shares, debentures and warrants (and the shares issuable upon conversion of the debentures and exercise of the warrants) are registered, they may not be offered or sold within the United States absent exemption from such registration requirements and compliance with applicable state laws. We have used the proceeds from the private placement for working capital and the retirement of 50% of our outstanding $2.7 million term debt as well as retirement of the $600,000 over-advance facility.

Although we have raised approximately $13 million since the beginning of 2005, we will need to raise additional funding during the next twelve months to satisfy debt service requirements and working capital needs. There is no assurance that we will be able to raise the amount of debt or equity capital required to meet our objectives. Our challenging financial circumstances may make the terms, conditions and cost of any available capital relatively unfavorable. If additional debt or equity capital is not readily available, we will be forced to scale back our acquisition activities and our operations until our income exceeds our expenses. This would result in an overall slowdown of our development. Our short-term need for capital may force us to consider and potentially pursue other strategic options sooner than we might otherwise have desired.

Since October 31, 2005 we have not made debt service payments required by terms of the $3.2 million of notes payable to sellers. Accordingly, we received a notice of default in early November 2005. The due date of the notes has been accelerated such that the entire balance of the notes payable to sellers is due. We have six months to cure the default. If cured, payment due dates revert back to the original non-accelerated terms. The default under the notes payable to sellers triggers defaults under the revolving loan and term loan discussed above. Also, as a result of this default, Bridge Healthcare Finance, LLC has an option to discontinue making revolving credit loans to us on receivables of TravMed USA, Inc., the acquisition which gave rise to the notes payable to sellers.

At September 30, 2005, we had $25.0 million of goodwill and other unamortized intangible assets on our balance sheet, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At September 30, 2005, goodwill and other intangible assets represented 77% of our total assets. These assets will be analyzed for impairment at year end. If an impairment charge is needed at year end, the charge could partially or totally eliminate stockholders’ equity.

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

CRITICAL ACCOUNTING POLICIES AND MANAGEMENT JUDGMENT

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Areas that require significant judgments, estimates, and assumptions include the assignment of fair values upon acquisition of goodwill and other intangible assets, testing for impairment of long-lived assets and valuation of the stock used to consummate our acquisitions. We use historical experience, qualified independent consultants and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the company’s financial statements at any given time.

Accounts Receivable

Accounts receivable are reduced by an allowance for doubtful accounts that provides a reserve with respect to those accounts for which revenue was recognized but which management subsequently determines that payment is not expected to be received. We analyze the balances of accounts receivable to ensure that the recorded amounts properly reflect the amounts expected to be collected. This analysis involves the application of varying percentages to each accounts receivable category based on the age of the uncollectible accounts receivable. The amount ultimately recorded as the reserve is determined after management also analyzes the collectibility of specific large or problematic accounts on an individual basis, as well as the overall business climate and other factors. Our estimate of the percentage of uncollectible accounts may change from time to time and any such change could have a material impact on our financial condition and results of operations.

Purchase Accounting, Goodwill and Intangible Assets

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

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

RESULTS OF OPERATIONS

The following condensed financial information includes Crdentia Corp. plus the results of operations of all companies acquired from their respective dates of acquisition (in thousands).

							Nine months
	Year ended December 31,						ended September 30,
	2004			2003			2005			2004

Revenue from services	$	23,018		$	4,712		$	23,883		$	17,234
Direct operating expenses	18,251			3,571			18,743			13,522
Gross profit	4,767			1,141			5,140			3,712

Operating expenses:
Selling, general and administrative expenses	9,517			3,410			6,362			6,767
Loss on impairment of customer related intangibles	1,800			—			—			121
Non-cash stock based compensation	394			51,638			672			300
Total operating expenses	11,711			55,048			7,034			7,188

Loss from operations	(6,944		)	(53,907		)	(1,894		)	(3,476		)

Non-cash expense for conversion of debt	(24,541		)	—			—			(7,497		)
Interest expense, net	(2,218		)	(409		)	(1,484		)	(1,712		)

Loss before income taxes	(33,703		)	(54,316		)	(3,378		)	(12,685		)

Income tax expense	—			—			—			—

Net loss	(33,703		)	(54,316		)	(3,378		)	(12,685		)

Deemed dividends	(4,648		)	(1,750		)	—			(4,521		)
Non-cash preferred stock dividends	(3,636		)	—			(2,363		)	—
Net loss attributable to common stockholders	$	(41,987	)	$	(56,066	)	$	(5,741	)	$	(17,206	)

The $7,497,000 non-cash charge for conversion of debt in 2004 represents a charge related to inducement to convert seller debt to preferred stock. The amount was calculated by considering the fair market value of the preferred stock issued upon conversion of the seller debt.

Interest costs decreased from $1,712,000 in the first nine months of 2004 compared to $1,484,000 in the first nine months of 2005 which decrease reflects lower overall rates on the new debt facilities we obtained in 2004 (which were restructured in the first quarter of 2005).

Deemed dividends were $4,521,000 in the first nine months of 2004. The deemed dividends relate to beneficial conversion features of our Series A, Series B, Series B-1 and Series C convertible preferred stock and beneficial conversion features of Series B-1 warrants.

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

Comparison of Years Ended December 31, 2004 and 2003.

At the beginning of 2003, we were a development stage company with no commercial operations. We pursued our operational plan and acquired four companies in 2003, with our first acquisition in August 2003. We purchased two more companies in August 2004. Below, we discuss operating results for 2004 compared to 2003. However, because of the various purchase dates of our subsidiaries throughout 2003 and 2004 and the inclusion of different periods of operating results for each of our subsidiaries, it is not possible to make meaningful comparisons of revenue and expense categories between 2004 and 2003.

Revenues in 2004 were $23,018,000 compared to revenues of $4,712,000 in 2003. In 2004, approximately 58% (61% in 2003) of our revenue was derived from the placement of travel nurses on assignment, typically 13 weeks in length. Such assignments generally involve temporary relocation to the geographic area of the assignment. In 2004, we also provided per diem nurses to satisfy the very short-term needs of healthcare facilities. Per diem services provided 29% of our revenue in 2004 (11% in 2003). The balance of our revenue in 2004 and 2003 came from providing clinical management and staffing to healthcare facilities and private duty homecare. During 2004 and 2003, most of our customers were acute care hospitals located throughout the continental United States. For 2004, sales to one customer group, Rhode Island Hospital and Newport Hospital, represented approximately 16.3% of our revenue. In the third quarter of 2004, we experienced a decline in revenue at these facilities and travel nurse assignments have not been renewed to date. Our top ten customers accounted for 48% of revenues in 2004.

Our overall gross profit margin in 2004 was $4,767,000 or 20.7% of revenues compared to $1,141,000 or 24.2% of revenues in 2003. Our gross margin is the difference between the revenue we realize when we bill our customers for the services of our healthcare professionals and our direct operating costs, which include the cost of the healthcare professionals and the related housing and travel costs, certain employment related taxes and workers compensation insurance coverage. Competitive pressures on pricing and higher medical insurance costs, higher workers compensation insurance costs, particularly in our California markets, and higher professional liability costs are reasons for the lower margins in 2004. Also, internal management reporting systems need to be improved to provide more timely information on individual nurse margins to enable more effective management of gross profit.

Our selling, general and administrative costs were $9,517,000 or 41.3% of revenues in 2004 compared to $3,410,000 or 72.4% of revenues in 2003. Selling, general and administrative expenses are comprised primarily of personnel costs, legal and audit fees related to being a public company and various other office and administrative expenses. Approximately 17.5% or $595,000 of the selling, general and administrative expense in 2003 was incurred when the company was still in its formative stage, prior to the completion of our first acquisition, and 2003 included a long-term bonus to our Chief Executive Officer. We consider the long-term bonus payable to be a one-time event that is unlikely to be repeated.

BUSINESS

Company Overview and History

We are a provider of healthcare staffing services, focusing on the areas of travel nursing, per diem staffing, contractual clinical services, and private duty home care. Our travel nurses are recruited domestically as well as internationally and placed on temporary assignments at healthcare facilities across the United States. Our per diem nurses are local nurses placed at healthcare facilities on short-term assignments. Our contractual clinical services group provides complete clinical management and staffing for healthcare facilities and our private duty home care group provides nursing case management and staffing for skilled and non-skilled care in the home.

At the beginning of 2003 we were a development stage company with no commercial operations. We did not have any revenue in 2002 and did not have any revenue in 2003 until we completed our first acquisition in August 2003. During 2003, we pursued our operational plan of acquiring companies in the healthcare staffing field and completed acquisitions of four companies. In 2004, we purchased two additional companies and in 2005 purchased three additional companies. As a result, we are now providing temporary healthcare workers in 20 states and have contracts with approximately 136 healthcare facilities. We anticipate continuing our plan to acquire specialized companies in the healthcare staffing field for the foreseeable future.

In August 2003, we completed our acquisition of Baker Anderson Christie, Inc., a California corporation, which operated a healthcare staffing business in Northern California. The transaction, for which we paid 160,000 shares of our common stock, was consummated pursuant to the terms of the Agreement and Plan of Reorganization dated June 19, 2003, as amended on July 31, 2003.

In September 2003, we completed our acquisition of New Age Staffing, Inc., a Delaware corporation, which operated healthcare staffing operations in Louisiana, Alabama and Tennessee. The transaction, for which we paid 2,294,871 shares of our common stock, was consummated pursuant to the terms of the Agreement and Plan of Reorganization dated September 15, 2003. This acquisition provided us entry into the area of travel nursing and resulted in our first significant revenue.

In October 2003, we completed our acquisition of Nurses Network, Inc, a California corporation, which operated a healthcare staffing operation in Northern California. The transaction, for which we paid 39,361 shares of our common stock, was consummated pursuant to the terms of the Agreement and Plan of Reorganization dated July 16, 2003, as amended on September 9, 2003.

In December 2003, we completed our acquisition of PSR Nurse Recruiting, Inc., a Texas corporation, and PSR Nurses Holdings Corp., a Texas corporation, which hold the limited partner and general partner interests in PSR Nurses, Ltd., which operated a healthcare staffing business in Texas. The transactions, for which we paid 1,139,595 shares of our common stock, were consummated pursuant to the terms of the Agreement and Plan of Reorganization dated November 4, 2003. This acquisition expanded our presence in travel nursing and provided us with a complete back-office operation.

In August 2004, we purchased Care Pros Staffing, Inc., a Texas corporation which operated a per diem nurse staffing business in Texas. The transaction, for which we paid $275,000 in cash, $275,000 in notes payable and $39,706 of net acquisition costs, was consummated pursuant to the terms of the Agreement and Plan of Reorganization dated August 13, 2004.

In August 2004, we purchased Arizona Home Health Care/Private Duty, Inc., an Arizona corporation which operated per diem and home health care staffing businesses in Arizona. The transaction, for which we paid $3,900,000 in cash, 200,000 shares of our stock, and $77,154 of net acquisition costs was consummated pursuant to the terms of the Agreement and Plan of Reorganization dated August 31, 2004.

On March 29, 2005, we acquired TravMed USA, Inc. and Health Industry Professionals, LLC. On May 4, 2005, we acquired PrimeStaff, LP and Mint Medical Staffing Odessa.

On March 29, 2005, we acquired Health Industry Professionals, LLC (HIP) in exchange for $1,350,900 in cash, 1,283,684 shares of our common stock valued at $2,601,600, (determined by the average of $2.03 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date), and $30,653 of net acquisition costs.

On May 4, 2005, we acquired Prime Staff, LP and Mint Medical Staffing Odessa in exchange for $150,000 in cash, 165,042 shares of our common stock valued at $287,264 (determined by the average of $1.74 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date), and $78,638 of net acquisition costs.

We have put in place a plan to seek Joint Commission on Accreditation of Healthcare Organizations (JCAHO) certification for all of our staffing offices. We anticipate that those surveys will be held in early 2006. Although certification is not required by any of our current customers, we feel that attaining certification in each of our offices will demonstrate our commitment to quality and demonstrate best practices in client service, employee credentialing, and over all monitoring of quality outcomes.

Industry Overview

The Staffing Industry Report, an independent staffing industry publication, estimates that the healthcare segment of the temporary staffing industry was $10.6 billion in 2002, an increase of 25% from $8.5 billion in 2001. Nurse staffing represents over 70% of the revenue generated in the temporary medical staffing industry.

The most common temporary nurse staffing alternatives available to hospital administrators are travel nurses and per diem nurses.

• Travel nurse staffing involves placement of registered nurses on a contracted, fixed-term basis. Assignments may range from several weeks to one year, but are typically 13 weeks long and involve temporary relocation to the geographic area of the assignment. The staffing company generally is responsible for providing travel nurses with customary employment benefits and for coordinating and providing travel and housing arrangements.

• Per diem staffing involves placement of locally based healthcare professionals on very short-term assignments, often for daily shift work, with little advance notice of assignments by the client.

Supply and Demand Factors

Beginning in the mid-1990s, changes in the healthcare industry prompted a fundamental shift in staffing models that led to an increased usage of temporary staffing at hospitals and other healthcare facilities. We believe that these changes in the healthcare industry will continue over the long-term because of the following factors:

Shortage of Nurses. Notwithstanding the recent two-year increase in the nurse workforce, the nursing shortage is expected to grow over the coming decades. The nursing workforce is projected to shrink to 2.2 million by 2020, yet the latest government forecast reflects that 2.8 million full-time equivalent RNs will be required by 2020. A U.S. Bureau of Labor Statistics report (February 2004) stated that, for the first time, nurses represented the largest projected 10-year job growth occupation, putting the demand for RNs at 2.9 million in 2012, up from 2.3 million in 2002. A study by the U.S. Department of Health and Human Services (July 2002) estimated there will be a 20% shortage of nurses by 2015 and 29% by 2020 that equates to a vacancy of 810,000 RNs. A similar report in 2002 to Joint Commission on Accreditation of Healthcare Organizations (JCAHO) quantified this shortage to be at least 400,000 fewer nurses available to provide care than will be needed by 2020. Meanwhile, the current national nurse vacancy rate is estimated to be approximately 7%. A year earlier, the vacancy rate was 13.9% according to a survey conducted by Bernard Hodes Group. The 2004 Health Affairs study, however, stated that despite the recent increase in nurses in the workforce, there is no empirical evidence that the nursing shortage has ended, citing a national survey of RNs and physicians conducted in 2004 which found that a majority of RNs (82%) and doctors (81%) perceived shortages of RNs in the hospitals where they worked or admitted most of their patients. Further, the national shortage of RNs is not evenly distributed across the country. The 2003 Nursing Shortage Update by Fitch,

all hospitals. Maine, New Jersey and Oregon have passed legislation limiting mandatory overtime for nurses. Several states are considering, or have already introduced similar legislation.

Growth Strategy

Our goal is to expand our position within the temporary healthcare staffing sector in the United States. The key components of our business strategy include:

• Expanding Our Network of Qualified Temporary Healthcare Professionals. Through our recruiting efforts both in the United States and internationally, we continue to expand our network of qualified temporary healthcare professionals. We have a staff of professional recruiters who establish contact with qualified healthcare professionals by phone, by email and through the internet. Our best source, however, is by referrals from satisfied healthcare professionals already associated with our company.

• Strengthening and Expanding Our Relationships with Hospitals and Healthcare Facilities. We continue to strengthen and expand our relationships with our hospital and healthcare facility clients, and to develop new relationships. Hospitals and healthcare facilities are seeking a strong business partner for outsourcing who can fulfill the quantity and quality of their staffing needs and help them develop strategies for the most cost-effective staffing methods. We believe we are well positioned to offer our hospital and healthcare facility clients effective solutions to meet their staffing needs.

• Increasing Our Market Presence in the Per Diem Staffing Market. We intend to expand our per diem services to the acute care hospital market by opening or acquiring new per diem staffing offices in selected markets. While we have not historically had a significant presence in per diem staffing services, we believe that this market presents a substantial growth opportunity.

• Acquiring Complementary Businesses. We continually evaluate opportunities to acquire complementary businesses to strengthen and broaden our market presence and suite of products.

• Expanding Service Offerings Through New Staffing Solutions. In order to further enhance the growth in our business and improve our competitive position in the healthcare staffing sector, we continue to explore new service offerings. In addition, we believe there are opportunities for growth in allied health (technicians and therapists) and we have begun to pursue new initiatives in this area as well.

Competition

The healthcare staffing industry is highly competitive, with low barriers to entry. We compete with both national firms as well as local and regional firms to attract nurses and other healthcare professionals and to attract hospital and healthcare facility clients. We compete for temporary healthcare professionals on the basis of service and expertise, the quantity, diversity and quality of assignments available, compensation packages, and the benefits that we provide to a temporary healthcare professional while they are on an assignment. We compete for hospital and healthcare facility clients on the basis of the quality of our temporary healthcare professionals, the timely availability of our professionals with requisite skills, the quality, scope and price of our services, our recruitment expertise and the geographic reach of our services. Although we believe we compete favorably with respect to these factors, we expect competition to continue to increase.

We also compete with national, regional and local firms who also seek to acquire temporary healthcare companies. Many of these firms have greater financial resources and market recognition than we do. However, we believe that the combination of our management team and the growth plan that we have established will be attractive to many of the acquisition candidates that we encounter and that we will compete favorably in this environment.

Regulatory Issues

legislation was introduced in 2005. Our business, however, is not generally impacted because we provide services on a contract basis and are paid directly by our hospital and healthcare facility clients.

Some states require state licensure for businesses that employ and/or assign healthcare personnel to provide healthcare services on-site at hospitals and other healthcare facilities. We have applied for or are currently licensed in all states in which we do business that require such licenses.

Most of the temporary healthcare professionals that we employ are required to be individually licensed or certified under applicable state laws. We take reasonable steps to ensure that our employees possess all necessary licenses and certifications in all material respects.

With respect to our recruitment of international temporary healthcare professionals, we must comply with certain United States immigration law requirements, including the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

Employees

At December 31, 2005, we employed 714 employees, including 337 full-time healthcare professionals, 74 full-time corporate and field office employees, 300 part-time healthcare professionals and 3 part-time corporate and field office employees. None of our employees, including our temporary healthcare professionals, are represented by a labor union. We believe we have excellent relations with our employees.

LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

MANAGEMENT

Executive Officers, Directors, and Key Employees

The following are our executive officers and directors and their respective ages and positions as of January 25, 2006:

Name	Age	Position

James D. Durham	58	Director, Chief Executive Officer and Chairman of the Board
James J. TerBeest	58	Chief Financial Officer
Joseph M. DeLuca	49	Director
Thomas F. Herman	65	Director
Robert J. Kenneth	69	Director
Robert P. Oliver	78	Director
C. Fred Toney	40	Director

The following is a brief description of the business background of each of the named executive officers and directors of the Company:

James D. Durham

Director since 2002

Mr. Durham has been our Chief Executive Officer and the Chairman of our Board of Directors since his founding of Crdentia in August 2002. From September 1993 to June 2000, Mr. Durham served as Chairman and Chief Executive Officer of QuadraMed Corporation, a public company which offers a suite of software products and services focused on the financial and clinical needs of hospitals. Mr. Durham received a Bachelor of Science degree in industrial engineering from the University of Florida and a masters degree in business administration from the University of California at Los Angeles. Mr. Durham is a certified public accountant.

James J. TerBeest

Mr. TerBeest has served as our Chief Financial Officer since November 2004. Mr. TerBeest served in public accounting in the audit department of Ernst & Young for 23 years. The last nine years of his tenure with Ernst & Young was as a partner supervising large national and international audit clients. From January 1993 until November 2004 Mr. TerBeest served as Chief Financial Officer for companies in the health care and home improvement industries. Mr. TerBeest has been a partner in a small CPA firm that he co-founded in 2000. He has also functioned as a contract CFO from time to time over the past 11 years. Mr. TerBeest graduated from the University of Wisconsin—Whitewater with a B.S. degree in accounting. He has been a Certified Public Accountant since 1973. He is a member of the American Institute of Certified Public Accountants and several state societies.

Joseph M. DeLuca

Director since 2002

Mr. DeLuca has served as a member of our Board of Directors since October 2002. Since March 1996, Mr. DeLuca has served as a managing member of Healthcare Investment Visions LLC, a research, business development and management consultancy located in the San Francisco, California area. From 1985 to 1995, Mr. DeLuca served as President of JDA, a consulting firm he founded which provided information systems strategy, vendor selection, development, implementation and management services to healthcare provider organizations. From 1984 to 1985, Mr. DeLuca served as a senior manager with Computer Synergy Inc., a public company which developed hospital information systems. Mr. DeLuca received a Bachelor of Science degree in biology from Lawrence University and a masters degree of arts-health services administration from the University of Wisconsin at Madison.

Thomas F. Herman

Director since 2003

Mr. Herman has served as a member of our Board of Directors since September 2003. Since January 2004, Mr. Herman has served as the managing partner of Oak Harbor Partners, LLC, a boutique financial services firm that specializes in mergers, acquisitions and financed business expansion. From June 2003 to January 2004, Mr. Herman served as Chief Operating Officer of Good Guys, Inc., a consumer electronics retailer. From July 2001 to June 2003, Mr. Herman served as managing partner of Oak Harbor Partners, LLC. From December 1998 to July 2001, Mr. Herman served as President and Chief Executive Officer of Employment Law Learning Tech, a distance learning company focused on employment law. Mr. Herman received a Bachelor of Science degree in political science from the University of Oregon and a masters degree in business administration from the University of California at Berkeley.

Robert J. Kenneth

Director since 2002

Mr. Kenneth has served as a member of our Board of Directors since October 2002. Since March 1971, Mr. Kenneth has served as President of Kenneth Associates, a privately held company that he founded which provides staffing and professional services to hospitals and physicians in California, focused on on-site billing staff and management as well as off-site billing services with a goal of reducing accounts receivable. Mr. Kenneth has served on the Board of Trustees of St. Francis Memorial Hospital and the Board of Overseers for the University of California School of Nursing and is a member of the Healthcare Financial Management Association and the American Guild of Patient Accounts Managers. Mr. Kenneth received a Bachelor of Arts degree in business administration from Roosevelt University and a masters degree in business administration from Golden Gate University.

Robert P. Oliver

Director since 2002

Mr. Oliver has served as a member of our Board of Directors since October 2002. Since 1970, Mr. Oliver has served as the President of CorDev Financial, Inc., a privately held company that he founded specializing in growth-oriented executive and operational consulting, as well as mergers and acquisitions. Mr. Oliver has also served in a variety of management positions in companies in the fields of computer service and software, automotive manufacturing and distribution, publishing, international pipeline construction and real estate development. Mr. Oliver received a Bachelor of Science degree in engineering from the United States Naval Academy.

C. Fred Toney

Director since 2003

Mr. Toney has served as a member of our Board of Directors since December 2003. Since December 2001, Mr. Toney has served as a managing member of MedCap Management & Research, LLC, the general partner of MedCap Partners, L.P. and MedCap Partners Offshore, Ltd. MedCap Management & Research LLC is an investment advisory firm specializing in healthcare, life sciences and medical technology and devices. From February 2001 to November 2001, Mr. Toney served as President and Chief Executive Officer, and from July 1999 to February 2001 as Executive Vice President and Chief Financial Officer of HealthCentral.com, Inc., a provider of healthcare e-commerce to consumers, through the sale of its five primary operating divisions. Mr. Toney previously served as senior managing partner, director of research and research analyst at Pacific Growth Equities, Inc., an investment banking and institutional brokerage firm. Mr. Toney has also served as research analyst or associate at Volpe, Welty & Company, an investment banking firm; RCM Capital Management, an investment management firm; Donaldson, Lufkin & Jenrette Securities Corporation, an investment banking and institutional brokerage firm; and Phamavite Pharmaceuticals Corporation, a pharmaceutical manufacturing firm. Mr. Toney received a Bachelor of Arts degree in economics and English from the University of California at Davis.

Pamela G. Atherton, our former President, resigned on January 7, 2006.

Board Committees and Meetings

Our Board of Directors held 16 meetings and acted by written consent three times during our fiscal year ended December 31, 2005. Our Board of Directors has an audit committee and a compensation committee. Each director attended 75% or more of the aggregate of (i) the total number of meetings of our Board of Directors (held during the period for which such person was a director) and (ii) the total number of meetings held by all committees of our Board of Directors on which the director served (during the periods that he served).

Although the Board of Directors does not have a formal policy regarding attendance by members of the Board of Directors at the Annual Meeting, it encourages directors to attend. Each of our then-current directors attended the 2005 Annual Meeting of Stockholders.

Our compensation committee currently consists of two directors, Mr. Kenneth, who serves as chairman of the committee, and Mr. Herman, and is primarily responsible for reviewing and approving our general compensation policies and setting compensation levels for our executive officers. The committee held six meetings during our 2005 fiscal year.

Our audit committee currently consists of three directors, Mr. DeLuca, who serves as chairman of the committee, Mr. Oliver and Mr. Herman. Each of the members of the audit committee is independent as defined pursuant to Rule 4200 of the National Association of Securities’ Dealers listing standards and as required by applicable law and the SEC. Our Board of Directors has designated Mr. Herman as the audit committee’s financial expert.

The audit committee generally meets at least quarterly to review our financial statements and to perform its other functions. The audit committee held nine meetings during our 2005 fiscal year.

Given our limited operating history, our Board of Directors has not yet formed a nominating committee for the election of directors. Currently, our full Board of Directors designates nominees for election to the Board of Directors at each Annual Meeting of Stockholders.

The Board of Directors has not adopted a formal policy concerning stockholder recommendations regarding the election of directors. The absence of such a policy does not mean, however, that a recommendation would not have been considered had one been received. Although our Board of Directors has historically designated nominees for election, the Board of Directors will consider nominations submitted by our stockholders, and our Bylaws contain provisions which address the process by which a stockholder may nominate an individual to stand for election to the Board of Directors at the Annual Meeting. To date, the Board of Directors has not received any recommendations from stockholders requesting that it consider a candidate for inclusion among the slate of nominees in the Proxy Statement.

In evaluating director nominees, the Board of Directors considers a number of factors, including the appropriate size of the Board of Directors; the knowledge, skills and experience of nominees, including experience in business, finance, administration or healthcare in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of the Board of Directors; experience with accounting rules and practices; and the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members. The Board of Directors’ goal is to assemble a Board of Directors that brings a variety of perspectives and skills derived from high quality business and professional experience. In doing so, the Board of Directors also considers candidates with appropriate non-business backgrounds. Other than the foregoing there are no stated minimum criteria for director nominees, although the Board of Directors and any nominating committee may also consider such other factors as it may deem are in the best interests of the Company and its stockholders.

The Board of Directors identifies nominees by first evaluating the current members of the Board of Directors willing to continue in service. Current members of the Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board of Directors with that of obtaining a new perspective. If any member of the Board of Directors does not wish to continue in service or if the Board of Directors decides not to re-nominate a member for re-election, the Board of Directors then identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Board of Directors are polled for suggestions as to individuals meeting the desired criteria. Research may also be performed to identify qualified individuals. To date, the Board of Directors has not engaged third parties to identify or evaluate or assist in identifying potential nominees, although it reserves the right in the future to retain a third party search firm, if necessary.

Historically, we have not adopted a formal process for stockholder communications with the Board of Directors. Nevertheless, every effort has been made to ensure that the views of stockholders are heard by the Board of Directors or individual directors, as applicable, and that appropriate responses are provided to stockholders in a timely manner.

Code of Ethics

The Board of Directors has adopted a Code of Ethics that applies to all of our employees, officers and directors. The Code of Ethics contains general guidelines for conducting the business of our company consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K.

Compensation Committee Interlocks And Insider Participation

There were no interlocking relationships between us and other entities that might affect the determination of the compensation of our directors and executive officers.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of our common stock as of January 25, 2006 unless otherwise noted, by:

• each of our named executive officers;

• each of our directors and nominees;

• each person known by us to beneficially own more than 5% of our common stock; and

• all of our executive officers, directors and nominees as a group.

Information with respect to beneficial ownership has been furnished by each executive officer, director, nominee or beneficial owner of more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

Percentage of beneficial ownership is based on 33,802,815 shares of our common stock outstanding as of January 25, 2006. The number of shares of common stock beneficially owned by each person and the percentage ownership of each person include any shares of common stock issuable upon conversion of shares of our Series C convertible preferred stock held by such persons or underlying options or warrants held by such persons that are exercisable within 60 days of January 25, 2006, if any.

Unless otherwise indicated, the address for the following stockholders is c/o Crdentia Corp., 14114 Dallas Parkway, Suite 600, Dallas, Texas 75254.

Name and Address of Beneficial Owner	Number of Shares Beneficially Owned	Percentage of Shares Beneficially Owned
Executive Officers, Directors and Nominees:
James D. Durham (1)	6,516,217	17.6	%
James J. TerBeest	500,000	1.5	%
Joseph M. DeLuca (2)	132,578	*
Thomas F. Herman (3)	25,231	*
Robert J. Kenneth (4)	231,738	*
Robert P. Oliver (5)	146,922	*
C. Fred Toney (6)	39,981,709	64.7	%
5% Stockholders:
Alpha Capital AG (7) Pradafant 7, 9490 Furstentums Vaduz, Lichtenstein	2,187,500	6.1	%
Chestnut Ridge Partners LP (8) 50 Tice Boulevard Woodcliff Lake, NJ 07677	2,083,333	5.8	%
MedCap Partners, L.P. (9) 500 Third Street, Suite 535 San Francisco, CA 94107	39,940,043	64.7	%
Cynthia Permenter 12107 Leuders Lane Dallas, Texas 75230	4,847,250	12.6	%
Robin D. Riddle 14114 Dallas Parkway, Suite 600 Dallas, Texas 75240	2,068,055	5.4	%
Whalehaven Capital Fund Limited (10) c/o Research Capital 564-1055 Dunsmuir Street Four Bentall Centre Vancouver, BC V7X 1L4	3,125,000	8.5	%
All directors, executive officers and nominees as a group (10 persons) (11)	48,767,960	74.4	%

(9) Includes (i) 10,735,143 shares of common stock held by MedCap Partners L.P.; (ii) 173,438 shares of Series C convertible preferred stock convertible into 17,343,800 shares of common stock held by MedCap Partners L.P.; (iii) warrants to purchase 100,111 shares of Series C preferred stock which are convertible into 10,011,100 shares of common stock; and (iv) warrants to purchase 6,000 shares of Series B-1 convertible preferred stock which are convertible into 600,000 shares of common stock.

(10) Includes 1,250,000 shares issuable upon conversion of an outstanding 8% Convertible Debenture and 1,875,000 shares issuable upon exercise of warrants currently outstanding.

(11) Includes (i) 178,855 shares of Series C convertible preferred stock convertible into 17,885,500 shares of common stock; (ii) 20,833 shares of common stock issuable within 60 days of January 25, 2006 upon conversion of a certain convertible secured promissory note in the aggregate principal amount of $12,500 issued to the DeLuca Trust dated 1/7/2000; (iii) warrants to purchase 113,654 shares of Series C convertible preferred stock which are convertible into 11,365,400 shares of common stock; (iv) warrants to purchase 6,000 shares of Series B-1 convertible preferred stock which are convertible into 600,000 shares of common stock and (v) 1,844,703 shares subject to options and purchase rights exercisable within 60 days of January 25, 2006.

Equity Compensation Plan Information

The following table provides information as of December 31, 2005 with respect to the shares of our common stock that may be issued under currently outstanding equity compensation plans.

	A	B	C
Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A)
Equity Compensation Plans Approved by Security Holders (1)	875,516	$ 1.94	622,474
Equity Compensation Plans not Approved by Security Holders (2)	4,178,498	$ 0.84	—

(1) Consists of our 2004 Stock Incentive Plan.

(2) Consists of (i) an option to purchase 33,333 shares of common stock granted to Thomas F. Herman on December 16, 2003; (ii) an option to purchase 33,333 shares of common stock granted to C. Fred Toney on December 16, 2003; (iii) an option to purchase 206,074 shares of common stock granted to Pamela Atherton on December 22, 2003; (iv) an option to purchase 2,333,333 shares of common stock granted to James D. Durham on December 31, 2003; (v) rights of Mr. Durham to purchase up to 922,426 shares of our common stock pursuant to a Common Stock Purchase Agreement dated May 15, 2002; (vi) an option to purchase 433,333 shares of common stock granted to James D. Durham on August 3, 2004; and (vii) an option to purchase 216,666 shares of common stock granted to Pamela G. Atherton on August 3, 2004.

In December 2003, we issued to each of Thomas F. Herman and C. Fred Toney, members of our Board of Directors, an option to purchase 33,333 shares of our common stock with an exercise price of $2.88 in connection with their respective appointments to our Board of Directors. Such options have a ten year term and vest over a three year period, with one third of the shares subject to the option vesting after the first year and the remainder of the shares subject to the option vesting in equal amounts over the next twenty-four months thereafter.

In April 2004 William S. Leftwich was granted an option to purchase up to 110,504 shares of common stock. In connection with a Separation Agreement and General Release, in September 2004, Mr. Leftwich’s rights with respect to all but 27,626 shares covered by such options were terminated. All of such options have since expired unexercised.

On December 22, 2003, we issued Pamela G. Atherton an option to purchase up to 206,074 shares of our common stock at an exercise price of $2.88 per share. On August 3, 2004 we granted Ms. Atherton an option to purchase up to 216,666 shares of common stock at an exercise price per share of $3.10.

On August 3, 2004, we granted James D. Durham an option to purchase up to 433,333 shares of common stock at an exercise price per share of $3.10. In May 2002, we entered into a Common Stock Purchase Agreement with Mr. Durham pursuant to which he is entitled to purchase 922,426 shares of our common stock at $0.0003 per share. In December 2002, we issued to Mr. Durham an option to purchase up to 2,333,333 shares of our common stock at an exercise price of $0.30 per share.

For further discussion of these options, please see “Certain Relationships and Related Party Transactions — Employment, Bonus and Option Agreements with Executive Officers.”

EXECUTIVE COMPENSATION AND OTHER MATTERS

Summary Compensation Table

The following table summarizes the compensation paid to or earned by our Chief Executive Officer, our former President and our Chief Financial Officer and Secretary. We refer to our Chief Executive Officer and these other executive officers as our “named executive officers” in this Prospectus.

Summary Compensation Table

						Long-Term Compensation Award
						Restricted		Securities
	Annual Compensation					Stock		Underlying	All Other
Name and Principal Position	Year	Salary			Bonus	Award(s)		Options/SARs	Compensation
James D. Durham	2005	$	320,000		—	2,000,000		—	—
Chairman and Chief	2004	$	316,103		—	—		433,333	—
Executive Officer	2003	$	200,000		—	—		2,333,333	—

Pamela G. Atherton(1)	2005	$	175,000		—	900,000	(2)	—	—
Former President	2004	$	175,000		—	—		216,666	—
	2003	$	71,934	(3)	—	—		206,074	—

James J. TerBeest	2005	$	175,000		—	500,000		—	—
Chief Financial Officer and Secretary	2004	$	20,192	(4)	—	—		—	—

(1) Ms. Atherton resigned effective January 7, 2006.

(2) All 900,000 shares were to vest upon the achievement of certain performance targets. Those targets were not achieved as of December 31, 2005 and therefore the restricted stock has been forfeited.

(3) Ms. Atherton did not begin to receive salary from us until August 2003.

(4) Mr. TerBeest began employment in November 2004.

Option Grants in Last Fiscal Year

The Company did not grant any stock options to the named executive officers during the fiscal year ended December 31, 2005.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table sets forth certain information, with respect to the named executive officers, concerning the exercise of options during our fiscal year ended December 31, 2005 and unexercised options held by them at the end of that fiscal year. No stock appreciation rights were exercised by the named executive officers during such fiscal year, and no stock appreciation rights were held by them at the end of such fiscal year.

	Number of Shares Acquired on	Value	Number of Shares Underlying Unexercised Options as of December 31, 2005		Value of Unexercised In-the-Money Options as of December 31, 2005 (1)
Name	Exercise	Realized	Exercisable	Unexercisable	Exercisable		Unexercisable

James D. Durham	—	—	1,355,759	2,333,333	$	1,567,847	$	3,266,666

Pamela G. Atherton	—	—	422,742	—	—		—

James J. TerBeest	—	—	—	—	—		—

(1) Based on the market price of $1.70 per share, which was the average of the high and low bid prices per share of our common stock on the OTC Bulletin Board on the last day our common stock was traded during the fiscal year ended December 31, 2005, less the exercise price payable upon exercise of such options.

Compensation of Directors

Non-employee directors receive an annual payment of $50,000, payable quarterly, for their service as members of the Board of Directors, including attending meetings of the Board of Directors. Members of the audit committee receive an annual payment of $55,000, payable quarterly, for their service as members of the audit committee. The chairman of the audit committee receives an annual payment of $62,500, payable quarterly, for his service. All directors are reimbursed for reasonable expenses incurred in connection with serving as a director. The directors have agreed that the cash compensation payable to the directors shall be accrued indefinitely (but not forgiven) and not paid until such time as the board determines that the Company has sufficient cash flow, provided that Mr. Toney has waived-accrued of any cash compensation with respect to himself.

In addition, non-employee directors are issued 33,333 shares of common stock (or options to purchase such shares) upon their election to our Board of Directors. Such non-employee directors are thereafter issued 8,333 shares of common stock (or options to purchase such shares) in each of the next two years of their three year term, except for the chairman of the audit committee, who receives an aggregate of 16,667 shares of common stock (or

options to purchase such shares) in each of the next two years. Each such grant will have a purchase price or exercise price per share equal to the fair market value per share of our common stock on the date of such grant.

Employment Contracts, Severance Agreements and Change of Control Arrangements

Employment Agreement with James D. Durham

We have entered into an Employment Agreement with James D. Durham, our Chairman and Chief Executive Officer. Pursuant to the Employment Agreement, as amended to date, we have agreed to pay Mr. Durham a base salary $320,000 for the 2004 calendar year, subject to adjustment each calendar year thereafter by the Board of Directors. In the event that Mr. Durham becomes subject to an “Involuntary Termination,” we have agreed to pay severance to Mr. Durham in one lump sum within thirty (30) days of the date of such Involuntary Termination in an aggregate amount equal to two times his then-current rate of base salary. In addition, for a period of twenty-four months, Mr. Durham would also be provided with life, health and disability plan benefits.

As used in the Employment Agreement, the term “Involuntary Termination” means the termination of Mr. Durham’s employment with us involuntarily upon his discharge, dismissal or our failure to renew the Employment Agreement. In addition, the term “Involuntary Termination” also means his termination, voluntarily or involuntarily, provided such termination occurs in connection with (i) a change in his position with us or any successor which materially reduces his level of responsibility or changes his title from Chairman and Chief Executive Officer, (ii) a reduction in his level of compensation, (iii) a relocation of his principal place of employment by more than forty-five (45) miles without his written consent, (iv) our failure to qualify for trading on the OTC Bulletin Board within ninety (90) days of the date of the Employment Agreement or to continuously be listed for trading on the OTC Bulletin Board or another national securities exchange at all times thereafter, or (v) the commencement of any action, arbitration, audit, hearing, investigation, litigation or suit conducted or heard by or before, or otherwise involving, the SEC, the National Association of Securities Dealers or any other federal or state governmental body which has a material adverse effect on the price at which our securities trade and is not principally attributable to his actions or omissions.

Under the Employment Agreement, if Mr. Durham receives the benefit of any payment or distribution of any type from the Company, any of its affiliates, any person who acquires ownership or effective control of the Company or ownership of a substantial portion of the Company’s assets (within the meaning of Section 280G of the Code and the regulations thereunder) or any affiliate of such person, pursuant to the terms of the Employment Agreement or otherwise (the “Total Payments”), that is subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (collectively, the “Excise Tax”), then Mr. Durham will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Mr. Durham of all taxes imposed upon the Gross-Up Payment, including any Excise Tax, Mr. Durham will retain an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Total Payments.

In addition, under the Employment Agreement, in the event that, during the term of the Employment Agreement, the Company closes a sale transaction which constitutes a “Change in Control” thereunder (such transaction, a “Corporate Transaction”), Mr. Durham will be entitled to receive a bonus in the amount of one and one-half percent (1.5%) of the Total Consideration actually paid to the Company’s stockholders in connection therewith. As used therein, the term “Total Consideration” means the aggregate consideration actually paid to the stockholders of the Company in respect of capital stock of the Company owned by such stockholders and will not include “earn-out”, escrow, hold back or similar contingent payments unless and until such amounts are actually paid to the stockholders of the Company. Such payment(s) will be made at the same time(s) and in the same form and combination (whether in cash, securities or other property) as the form and combination in which the Total Consideration is paid to the stockholders in respect of their ownership of the Company’s capital stock.

Option Grant to James D. Durham

Mr. Durham was granted an option to purchase 866,666 shares of common stock, at a price per share of $3.10, on August 3, 2004. This option is exercisable with respect to 433,333 shares and, due to the failure to satisfy certain vesting provisions, the option terminated with respect to the remaining 433,333 shares on December 31, 2004. This option terminates in full on August 2, 2014 and is exercisable for a period of three (3) months following

the termination of Mr. Durham’s employment or service to Crdentia, provided that the option may be exercised for a period of twelve (12) months following the termination of Mr. Durham’s employment or service to Crdentia as a result of Mr. Durham’s disability or death.

Restricted Stock Bonus Agreement with James D. Durham

We entered into a Restricted Stock Bonus Agreement with Mr. Durham dated May 31, 2005. Pursuant to the agreement, we issued Mr. Durham 2,000,000 shares of our common stock with an aggregate fair market value of $3,400,000. The shares of restricted stock vest in accordance with the following schedule: In the event that the average daily trading volume for our common stock over any consecutive thirty (30) day period equals or exceeds 100,000 shares (the “Trading Volume Goal”), one fortieth (1/40) of the shares shall vest on Wednesday of each week following the achievement of the Trading Volume Goal for a period of forty (40) weeks until the shares are fully vested. In the event of a “Corporate Transaction” (as defined in the agreement), the shares shall immediately become fully vested if, within five years after the Corporation Transaction, Mr. Durham’s service is terminated by the successor company, the Company or a related entity without “Cause” or voluntarily by Mr. Durham with “Good Reason.”

For purposes of the agreement, Mr. Durham may be terminated for “Cause” in the event of Mr. Durham’s: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or related entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a related entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. Mr. Durham may voluntarily terminate his services for “Good Reason” for: (i) any reduction in his base salary to a level below that in effect at any time within the preceding six (6) months; or (ii) being required to be based at any place outside a 45-mile radius from his job location, except for reasonably required business travel.

Bonus and Other Agreement with James D. Durham

On December 31, 2003, we entered into a Bonus and Other Agreement with Mr. Durham, pursuant to which we agreed, among other things, to pay to Mr. Durham cash bonuses in the amount of $540,000 on each of December 31, 2006 and January 4, 2007. On November 17, 2005 we entered into an Amendment to Bonus and Other Agreement with Mr. Durham, pursuant to which the Bonus and Other Agreement was amended to provide that we will pay to Mr. Durham cash bonuses in the amount of $540,000 on each of December 31, 2008 and January 4, 2009.

Employment Agreement with Pamela G. Atherton.

We entered into an Executive Employment Agreement with Ms. Atherton dated December 22, 2003. Pursuant to the agreement, we agreed to pay Ms. Atherton a base salary at the rate of $175,000 per year, which salary will be reviewed from time to time in accordance with our procedures for adjusting salaries for similarly situated employees and may be adjusted in our sole discretion. In addition, we agreed to issue to Ms. Atherton one or more options to purchase a number of shares of our common stock equal to 5.209% of that aggregate number of shares of our common stock issued or issuable in connection with any acquisitions that we completed on or prior to August 7, 2004. Any such option(s) shall have an exercise price equal to the then current fair market value of our common stock on the date of the issuance of such option(s), as determined in good faith by our Board of Directors.

Except for situations in which we terminate Ms. Atherton for “Cause” (as defined in the agreement), in the event that we terminate Ms. Atherton’s employment or in the event that she resigns for “Good Reason” she will be eligible to receive an amount, payable in a lump sum, equal to (i) six (6) months of her then-current base salary plus (ii) one month of the base salary for each month of employment beginning on August 7, 2003 in excess of six months but not to exceed twelve months. For purposes of the employment agreement, we may terminate Ms. Atherton for “Cause” in the event that she (i) is indicted for or charged with a crime involving dishonesty, breach of trust, or physical harm to any person (except for misdemeanor resulting from harm caused through the operation of a motor vehicle); (ii) willfully engages in conduct that is in bad faith and materially injurious to us (including misappropriation of trade secrets, fraud or embezzlement); (iii) commits a material, uncured breach of the employment agreement; (iv) willfully refuses to implement or follow a lawful policy or directive that is consistent with the terms of the employment agreement; or (v) engages in misfeasance or malfeasance demonstrated by a

pattern of failure to perform job duties diligently and professionally. Ms. Atherton may terminate the employment agreement for “Good Reason” upon (i) a change in her position which materially reduces her level of responsibility; (ii) a reduction in her base salary (unless the base salaries of all executive employees are also proportionately reduced); (iii) a relocation of her principal place of employment by more than fifty (50) miles (excluding her relocation to Dallas, Texas); or (iv) a material breach of the employment agreement by us.

Ms. Atherton resigned effective on January 7, 2006. In connection with such resignation, we entered into the Separation Agreement and General Release of Claims described below.

Restricted Stock Issuance Agreement with Pamela G. Atherton

We entered into a Restricted Stock Issuance Agreement with Ms. Atherton dated November 1, 2002, pursuant to which we issued her 133,310 shares of our common stock at a purchase price of approximately $0.0201 per share. Ms. Atherton vests in such shares of common stock over a four year period, pursuant to which she vested in 25% of the shares of common stock on November 1, 2002 and thereafter vests in the remaining shares in equal installments over the thirty-six months beginning one year after the grant. In the event that Ms. Atherton is subject to an “Involuntary Termination” within 18 months of our acquisition, she will immediately accelerate vesting in the remaining shares of common stock. As defined in the agreement, an “Involuntary Termination” shall mean the termination of Ms. Atherton’s service which occurs by reason of her involuntary dismissal or discharge for reasons other than “Misconduct,” or her voluntary resignation following a reduction in her level of compensation (including base salary, fringe benefits) by more than 15% or a relocation of her place of employment by more than fifty miles without her consent. “Misconduct” means the commission of any act of fraud, embezzlement or dishonesty, any unauthorized use or disclosure of confidential information or trade secrets or any other intentional misconduct adversely affecting our business or affairs.

Pursuant to the Separation Agreement described below, we have agreed to allow Ms. Atherton to continue vesting under the Restricted Stock Issuance Agreement for a one year period beginning on January 7, 2006.

Option Grants to Pamela G. Atherton

On December 22, 2003, we issued Ms. Atherton an option to purchase up to 206,074 shares of our common stock at an exercise price of $2.88 per share. Ms. Atherton vested in 100% of the shares subject to option on the date of the grant.

Ms. Atherton was granted an option to purchase 433,333 shares of common stock, at a price per share of $3.10, on August 3, 2004. This option is exercisable with respect to 216,667 shares and, due to the failure to satisfy certain vesting provisions, the option terminated with respect to the remaining 216,666 shares on December 31, 2004. This option terminates in full on August 2, 2014 and is exercisable for a period of three (3) months following the termination of Ms. Atherton’s employment or service to Crdentia, provided that the option may be exercised for a period of twelve (12) months following the termination of Ms. Atherton’s employment or service to Crdentia as a result of Mr. Durham’s disability or death.

Pursuant to the Separation Agreement described below, we have agreed to allow Ms. Atherton to continue vesting in her option grants for a one year period beginning on January 7, 2006.

Restricted Stock Bonus Agreement with Pamela G. Atherton

We entered into a Restricted Stock Bonus Agreement with Ms. Atherton dated May 31, 2005. Pursuant to the agreement, we issued Ms. Atherton 900,000 shares of our common stock with an aggregate fair market value of $1,530,000. The shares of restricted stock vest in accordance with the following schedule: In the event that the average daily trading volume for our common stock over any consecutive thirty (30) day period equals or exceeds 100,000 shares (the “Trading Volume Goal”), one fortieth (1/40) of the shares shall vest on Wednesday of each week following the achievement of the Trading Volume Goal for a period of forty (40) weeks until the shares are fully vested. In the event of a “Corporate Transaction” (as defined in the agreement), the shares not subject to a Clawback shall immediately become fully vested if within five years after the Corporation Transaction Ms.

Atherton’s service is terminated by the successor company, the Company or a related entity without “Cause” or voluntarily by Ms. Atherton with “Good Reason.”

For purposes of the agreement, Ms. Atherton may be terminated for “Cause” in the event of Ms. Atherton’s: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or related entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a related entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. Ms. Atherton may voluntarily terminate her services for “Good Reason” for: (i) any reduction in her base salary to a level below that in effect at any time within the preceding six (6) months; or (ii) being required to be based at any place outside a 45-mile radius from his job location, except for reasonably required business travel.

The shares of Ms. Atherton’s restricted stock are also subject to a clawback provision. Subject to Ms. Atherton’s continuous service and other limitations set forth in the Notice of Restricted Stock Bonus Award and the Restricted Stock Bonus Agreement, Ms. Atherton will forfeit 300,000 of the shares granted on each of June 30th, September 30th, and December 31st of 2005, unless we have achieved certain amounts of both revenue and earnings before interest, taxes, depreciation and amortization (and excluding stock compensation expense) during the three months ending on such dates.

Pursuant to the Separation Agreement described below, Ms. Atherton agreed to forfeit her rights to the shares of restricted stock granted pursuant to the Restricted Stock Bonus Agreement.

Separation Agreement and General Release of Claims with Pamela G. Atherton

On January 7, 2006, we executed a Separation Agreement and a General Release of Claims with Pamela G. Atherton, our former President. The Separation Agreement provides Ms. Atherton with certain benefits in exchange for, among other things, her providing us with consulting services for a one year period (the “Severance Period”) and executing a general release of claims. Pursuant to the terms of the Separation Agreement, we agreed to continue to pay Ms. Atherton her current base salary of $175,000 per year during the Severance Period. In addition, we agreed to allow Ms. Atherton to continue to vest, during the Severance Period, (i) the options she holds to purchase 422,741 shares of our common stock and (ii) 133,310 restricted shares she holds. Unvested options remaining at the end of the Severance Period shall accelerate and vest in full.

Employment Agreement with James J. TerBeest

We entered into an Executive Employment Agreement with James J. TerBeest, our Chief Financial Officer, pursuant to which Mr. TerBeest will receive $175,000 in salary for his service to the Company. In addition, pursuant to the arrangement, we agreed to issue Mr. TerBeest a restricted stock bonus of 500,000 shares of our common stock, the principal terms of which are discussed below. In the event that we terminate Mr. TerBeest’s employment at any time without “Cause” (as defined in the agreement), he will be eligible to receive a severance payment equal to (i) six (6) months of his base salary plus (ii) one (1) month of his base salary for each month of employment beginning on January 1, 2005 in excess of six (6) months but not to exceed twelve (12) months.

For purposes of the employment agreement, we may terminate Mr. TerBeest for “Cause” in the event that he (i) is indicted for or charged with a crime involving dishonesty, breach of trust, or physical harm to any person (except for misdemeanor resulting from harm caused through the operation of a motor vehicle); (ii) willfully engages in conduct that is in bad faith and materially injurious to us (including misappropriation of trade secrets, fraud or embezzlement); (iii) commits a material, uncured breach of the employment agreement; (iv) willfully refuses to implement or follow a lawful policy or directive that is consistent with the terms of the employment agreement; (v) engages in misfeasance or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally; or (vi) fails to relocate his principal residence as contemplated by the agreement. Mr. TerBeest may terminate the employment agreement for “Good Reason” upon (i) a change in his position which materially reduces his level of responsibility; (ii) a reduction in his base salary

(unless the base salaries of all executive employees are also proportionately reduced); (iii) a relocation of his principal place of employment by more than fifty (50) miles (excluding his relocation to Dallas, Texas); or (iv) a material breach of the employment agreement by us.

Restricted Stock Bonus Agreement with James J. TerBeest

We entered into a Restricted Stock Bonus Agreement with Mr. TerBeest dated May 31, 2005. Pursuant to the agreement, we issued Mr. TerBeest 500,000 shares of our common stock with an aggregate fair market value of $850,000. The shares of restricted stock vest in accordance with the following schedule: In the event that the average daily trading volume for our common stock over any consecutive thirty (30) day period equals or exceeds 100,000 shares (the “Trading Volume Goal”), one fortieth (1/40) of the shares shall vest on Wednesday of each week following the achievement of the Trading Volume Goal for a period of forty (40) weeks until the shares are fully vested. In the event of a “Corporate Transaction” (as defined in the agreement), the shares shall immediately become fully vested if within five years after the Corporation Transaction Mr. TerBeest’s service is terminated by the successor company, the Company or a related entity without “Cause” or voluntarily by Mr. TerBeest with “Good Reason.”

For purposes of the agreement, Mr. TerBeest may be terminated for “Cause” in the event of Mr. TerBeest’s: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or related entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a related entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person. Mr. TerBeest may voluntarily terminate his services for “Good Reason” for: (i) any reduction in his base salary to a level below that in effect at any time within the preceding six (6) months; or (ii) being required to be based at any place outside a 45-mile radius from his job location, except for reasonably required business travel.

Indemnification of Directors and Officers

Section 145 of the Delaware Corporation Law provides that a Delaware corporation may indemnify any person against expenses, judgments, fines and settlements actually and reasonably incurred by any such person in connection with a threatened, pending or completed action, suit or proceeding in which he is involved by reason of the fact that he is or was a director, officer, employee or agent of such corporation, provided that (i) he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and (ii) with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. If the action or suit is by or in the name of the corporation, the corporation may indemnify such person against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit is brought determines upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

As permitted by Section 102 of the Delaware General Corporation Law, the Company has adopted provisions in its restated certificate of incorporation and amended and restated bylaws that limit or eliminate the personal liability of its directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the Company, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to the Company or its stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

• any breach of the director’s duty of loyalty to the Company or its stockholders;

• any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

• any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or

• any transaction from which the director derived an improper personal benefit.

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission.

As permitted by Section 145 of the Delaware General Corporation Law, the Company’s amended and restated bylaws provide that:

• the Company may indemnify its directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;

• the Company may advance expenses to its directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

• the rights provided in its amended and restated bylaws are not exclusive.

We have entered into indemnification agreements with each of our directors and executive officers. These indemnification agreements provide that we hold harmless and indemnify each such director and executive officer to the fullest extent authorized or permitted by law. In addition, subject to certain conditions, these indemnification agreements provide for payment of expenses (including attorney’s fees) actually and reasonably incurred in connection with any threatened, pending or completed proceeding to which the indemnified director or executive officer or employee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that he or she is, was or at any time becomes a director or executive officer of us, or is or was serving or at any time serves at the request of us as a director or executive officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. In addition, we have purchased policies of directors’ and officers’ liability insurance, which insure our directors and executive officers against the cost of defense, settlement or payment of a judgment in some circumstances.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the small business issuer to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since January 1, 2004, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $60,000 and in which any director, executive officer or beneficial holder of more than 5% of any class of our voting securities or members of such person’s immediate family had or will have a direct or indirect material interest other than the transactions described below.

Issuance of Series A Convertible Preferred Stock

In December 2003, we issued an aggregate of 1,000,000 shares of Series A convertible preferred stock to MedCap Partners L.P. (“MedCap”) and 750,000 shares of Series A convertible preferred stock to SF Capital, Ltd. C. Fred Toney, a member of the Board of Directors, is the managing member of MedCap Management & Research LLC, the general partner of MedCap. In January 2004, we issued an additional 1,000,000 shares of Series A convertible preferred stock to MedCap. These shares of Series A convertible preferred stock were issued at a per share price of $1.00. On September 30, 2004, all outstanding shares of Series A convertible preferred stock were voluntarily converted into 4,583,333 shares of common stock. Such conversion was effected pursuant to the provisions of the Company’s Amended and Restated Certificate of Incorporation and the Certificate of Designations,

Preferences and Rights of Series A Convertible Preferred Stock. The holders of our Series A convertible preferred stock (and the common stock issued upon conversion of the Series A convertible preferred stock) were granted certain registration rights set forth in an Amended and Restated Registration Rights Agreement dated August 31, 2004 by and among Crdentia and the investors listed on Schedule A thereto.

Issuance of Series B Convertible Preferred Stock

On June 16, 2004, we issued 6,250,000 shares of Series B convertible preferred stock at a cash price per share of $0.20 to MedCap. On September 30, 2004, 2,500,000 shares of Series B convertible preferred stock were voluntarily converted in 833,333 shares of common stock. On March 29, 2005, the remaining 3,750,000 shares of Series B convertible preferred stock were voluntarily converted into 1,250,000 shares of common stock. Such conversions were effected pursuant to the provisions of the Company’s Amended and Restated Certificate of Incorporation and the Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock. The holder of our Series B convertible preferred stock (including the common stock issued upon conversion of the Series B convertible preferred stock) was granted certain registration rights set forth in an Amended and Restated Registration Rights Agreement dated August 31, 2004 by and among Crdentia and the investors listed on Schedule A thereto.

Issuance of Series B-1 Convertible Preferred Stock and Warrant to Purchase Series B-1 Convertible Preferred Stock

Effective as of August 9, 2004, we (i) issued approximately 29,841 shares of Series B-1 convertible preferred stock, (ii) issued approximately 40,822 shares of common stock, and (iii) paid approximately $225,000 in cash in exchange for the cancellation of all outstanding principal and accrued and unpaid interest under certain promissory notes issued in 2003. Nick Liuzza, Jr., who at the time was an employee of Crdentia, received a portion of such cash and shares of Series B-1 convertible preferred stock.

In addition, effective as of August 9, 2004, we issued approximately 7,916 shares of Series B-1 convertible preferred stock at a cash price per share of $60.00 to investors, including James D. Durham, our Chairman and Chief Executive Officer, who purchased 4,166 shares of Series B-1 convertible preferred stock.

On September 30, 2004, we issued 12,644 shares of Series B-1 convertible preferred stock in exchange for the cancellation of $758,640 in outstanding principal plus accrued and unpaid interest under certain convertible subordinated promissory notes issued in 2003. The holders of such notes included James D. Durham, the Company’s Chairman and Chief Executive Officer, Robert P. Oliver, a member of the Company’s Board of Directors, and Health Care Investment Visions, LLC, an entity in which Joseph M. DeLuca, a member of the Company’s Board of Directors, is a managing member.

Effective as of September 30, 2004, the holders of 4,112 shares of Series B-1 convertible preferred stock voluntarily converted those shares into 411,200 shares of common stock. Such conversion was effected pursuant to the provisions of the Company’s Amended and Restated Certificate of Incorporation and the Certificate of Designations, Preferences and Rights of Series B-1 Convertible Preferred Stock. The holders of such shares included Mr. Durham, Mr. Oliver, and Health Care Investment Visions, LLC.

In consummation of discussions that began in July 2004, on November 10, 2004, we issued 45,450 shares of Series B-1 convertible preferred stock in exchange for the cancellation of approximately $2.7 million in outstanding principal plus accrued and unpaid interest under certain subordinated promissory notes issued in December 2003. In connection with such conversion, we entered into a release with Cynthia F. Permenter, Professional Staffing Resources, Inc. and Nursing Services Registry of Savannah, Inc.

The holders of such shares of Series B-1 convertible preferred stock (and the common stock issued upon conversion of the Series B-1 convertible preferred stock) were granted certain registration rights set forth in a Registration Rights Agreement dated August 9, 2004 by and among the Company and the investors listed on Schedule A thereto.

Interest accrued on the unpaid principal balance at a rate of ten percent (10%) per annum, simple interest, and is payable in quarterly payments.

Three of the purchasers of the notes included Joseph M. DeLuca, Robert P. Oliver and James D. Durham. Messrs. DeLuca and Oliver are current members of our Board of Directors and our audit committee. Messrs. DeLuca and Oliver purchased, together with an affiliate of Mr. DeLuca’s, notes in the aggregate principal amount of $125,000. Mr. Durham, a member of our Board of Directors and our Chairman and Chief Executive Officer, purchased a note in the principal amount of $50,000.

Effective September 2, 2004, Mr. DeLuca extended the maturity of his $50,000 convertible subordinated promissory note to March 2, 2005, and effective March 2, 2005, Mr. DeLuca extended the maturity of his convertible subordinated note to March 2, 2006. We subsequently paid $25,000 in principal outstanding under the note. Effective September 30, 2004, Crdentia issued 12,611 shares of Series B-1 convertible preferred stock in exchange for the cancellation of $758,640 in outstanding principal plus accrued and unpaid interest under certain of the convertible subordinated promissory notes. In November 2004 Crdentia paid the remaining $120,000 of outstanding principal and accrued and unpaid interest under the convertible subordinated promissory notes.

Acquisition of Nurses Network, Inc.

In October 2003, we completed our acquisition of Nurses Network, Inc., a California corporation, pursuant to an Agreement and Plan of Reorganization dated July 16, 2003, as amended on September 9, 2003. The aggregate merger consideration was equal to sixty percent of the sum of Nurses Network, Inc.’s revenue for the six consecutive fiscal quarters commencing with the fiscal quarter ending September 30, 2003 and was payable solely in shares of our common stock. Subject to the terms and conditions of the merger agreement, we made an advance closing payment of 39,361 shares of our common stock to the former stockholders of Nurses Network, Inc. at the closing. Robert Kenneth, a member of our Board of Directors, was a director, officer and stockholder of Nurses Network, Inc., and at closing 19,680 shares of common stock were issued to the Kenneth Family Trust U/A 3/11/87.

Two notes were due to the sellers of Nurses Network. The first note amounted to $64,000 and was due in three equal installments on October 2, 2004, October 2, 2005 and October 2, 2006. Interest was accrued at a financial institution’s Base Rate plus 1%. The second note, in the amount of $50,432 plus interest accrued at a financial institution’s Base Rate plus 1% was due and payable on July 2, 2004. Of the original note, $91,932 was payable to a member of the Company’s Board of Directors. Remaining amounts due on the notes were converted into shares of Series B-1 Preferred Stock in August 2004.

Separation Agreement and General Release of Claims

Separation Agreement and General Release

In September 2004 we entered into a Separation Agreement and General Release with William S. Leftwich, our former Chief Financial Officer and Secretary. This agreement provides Mr. Leftwich with certain benefits in exchange for, among other things, our receipt of a general release of claims and his cooperation in helping us with the transition of his successor. Pursuant to the terms of the Separation Agreement, we agreed to continue to pay Mr. Leftwich his current base salary of $175,000 per year for a period of one month. In addition, we agreed to accelerate Mr. Leftwich’s vesting in twenty-five percent of the options he holds to purchase 110,504 shares of our

common stock and agreed to provide Mr. Leftwich until September 10, 2005 in which to exercise the options. All of such options have expired unexecised.

Stock Purchase Agreement

On May 18, 2004, we and MedCap entered into a Stock Purchase Agreement pursuant to which we and MedCap agreed to purchase an aggregate of 1,766,014 shares of our common stock from certain of our stockholders. Under the Stock Purchase Agreement, MedCap purchased 1,016,014 shares of common stock for $762,010.50 on May 18, 2004. The remaining 750,000 shares of common stock were delivered to an escrow agent. These shares will be released from escrow as follows: (i) beginning on July 1, 2004 and continuing on the first day of each month through and including June 1, 2005, we, or our assign(s), shall pay $31,250 to the escrow agent, and the escrow agent shall cause 31,250 shares to be transferred to us or our assign(s); and (ii) beginning on July 1, 2005 and continuing on the first day of each month through and including June 1, 2006, we, or our assign(s), shall pay $46,875 to the escrow agent, and the escrow agent shall cause 31,250 shares to be released to us or our assign(s). The escrow agent shall distribute funds received from us, or our assign(s), to the stockholders who are parties to the Stock Purchase Agreement. For July, 2004 and December, 2004, we assigned our right to purchase under the Stock Purchase Agreement to an existing stockholder. Neither we nor our assignee purchased shares subsequent to December, 2004, and the escrow agent was authorized to return all remaining shares to the parties who initially tendered their shares to the escrow agent.

Employment, Bonus and Option Agreements with Executive Officers

We entered into an Employment Agreement with James D. Durham, our Chairman and Chief Executive Officer. For a description of the agreement, please see “Executive Compensation and Other Matters — Employment Contracts, Severance Agreements and Change of Control Arrangements.”

We entered into a Common Stock Purchase Agreement dated May 15, 2002 with Mr. Durham, pursuant to which Mr. Durham had the right to purchase, at a purchase price of $0.0003 per share, up to a number of additional shares of our common stock equal to 25% of the aggregate number of additional shares of our common stock and other securities convertible into common stock issued or issuable in connection with any acquisitions we complete on or before August 7, 2004. We have issued an aggregate of 3,689,703 shares as consideration for our four completed acquisitions of Baker Anderson Christie, Inc., New Age Staffing, Inc., Nurses Network, Inc., PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. As a result of the completion of these acquisitions, Mr. Durham has the right to purchase up to 922,426 shares of our common stock at $0.0003 per share.

In December 2003, our Board of Directors approved certain modifications to our current equity arrangements with Mr. Durham. In connection with these modifications, Mr. Durham agreed to relinquish certain rights pursuant to the Common Stock Purchase Agreement to purchase additional shares of our common stock that accrue to him after December 31, 2003 in connection with acquisitions that occur either before or after December 31, 2003. With respect to Mr. Durham’s rights to purchase an additional 922,426 shares of Common Stock that accrued to him prior to such date, we agreed to extend Mr. Durham’s right to purchase such additional shares to fifteen years after the Vesting Expiration Date (as defined in the Common Stock Purchase Agreement). In consideration for Mr. Durham’s modification of his purchase right, our Board of Directors approved the issuance to him of an option (the “Option”) to purchase up to 2,333,333 shares of our common stock at an exercise price of $0.30 per share, which expires on December 31, 2018. Mr. Durham is fully vested in the Option, which is exercisable by him in accordance with the following schedule: One hundred percent (100%) of the shares of our common stock subject to the Option shall be exercisable by Mr. Durham on December 31, 2008. Notwithstanding the foregoing, a certain number of shares of common stock subject to the Option may be exercised prior to December 31, 2008 upon the closing of certain acquisitions by us. In addition to the issuance of the Option, we also entered into a Bonus and Other Agreement with Mr. Durham pursuant to which we agreed to pay to Mr. Durham two cash bonuses in the amount of $540,000 on each of December 31, 2006 and January 4, 2007. The Bonus and Other Agreement was amended on November 17, 2005 to provide that Mr. Durham will receive two cash bonuses in the amount of $540,000 on each of December 31, 2008 and January 4, 2009.

In May 2004 we issued the following options, with an exercise price of $5.10 per share: (i) an option to purchase 8,333 shares of common stock to Mr. Oliver; (ii) an option to purchase 16,667 shares of common stock to Mr. DeLuca; (iii) an option to purchase 8,333 shares of common stock to Mr. Kenneth; and (iv) an option to purchase 8,333 shares of common stock to Mr. Toney; and (v) an option to purchase 8,333 shares of common stock to Mr. Herman.

In November 2005 we issued the following options, with an exercise price of $2.00 per share: (i) an option to purchase 8,333 shares of common stock to Mr. Oliver; (ii) an option to purchase 8,333 shares to Mr. Kenneth; (iii) an option to purchase 8,333 shares to Mr. Herman; and (iv) an option to purchase 16,667 shares to Mr. DeLuca.

DESCRIPTION OF PROPERTY

We believe that our properties are adequate for our current needs. In addition, we believe that adequate space can be obtained to meet our foreseeable business needs. We currently lease office space in 10 locations, as identified in the chart below:

Location		Square Feet
Dallas, Texas (corporate headquarters and staffing administration)		16,522
San Francisco, California (staffing administration)		1,500
Birmingham, Alabama (staffing administration)		1,875
New Orleans, Louisiana (unoccupied)		2,276
Nashville, Tennessee (subleased)		1,170
McKinney, Texas (staffing administration)		550
Temple, Texas (staffing administration)		346
Phoenix, Arizona (staffing administration)		1,534
Tucson, Arizona (staffing administration)		1,039
Orlando, Florida (unoccupied)		375
TOTAL		27,187

SELLING STOCKHOLDERS

The following table sets forth, as of January 25, 2006, the name of each of the selling stockholders, the number of shares of our common stock beneficially owned by such selling stockholders before and after this offering and the number of shares that may be offered pursuant to this prospectus. This information is based on information provided by or on behalf of the selling stockholders and, with regard to the beneficial holdings of the selling stockholders, is accurate only to the extent beneficial holdings information was disclosed to us by or on behalf of the selling stockholders. The selling stockholders and holders listed in any supplement to this prospectus, and any transferors, pledgees, donees or successors to these persons, may from time to time offer and sell, pursuant to this prospectus and any subsequent prospectus supplement, any and all of these shares or interests therein. Any supplement to this prospectus may contain additional or varied information about the selling stockholder and/or additional holders, and any of their transferors, pledgees, donees or successors, the names of natural persons with voting or investment control over the shares covered hereby, and the aggregate amount of the shares offered that is beneficially owned by each person. This information will be obtained from the selling stockholder and/or additional holders.

As of January 25, 2006, 33,802,815 shares of our common stock were outstanding.

Shares listed under the column “Shares Offered by this Prospectus” represent the number of shares that may be sold by the selling stockholders pursuant to this prospectus. Pursuant to Rule 416 of the Securities Act of 1933, the registration statement of which this prospectus is a part also covers any additional shares of our common stock which become issuable in connection with such shares because of any stock split, stock dividend, or similar transaction which results in an increase in the number of outstanding shares of our common stock.

The information under the heading “Shares Beneficially Owned After the Offering” assumes the selling stockholder sells all of its shares covered hereby to unaffiliated third parties, that the selling stockholders will acquire no additional Crdentia Corp. common stock prior to the completion of this offering, and that any other shares of our common stock beneficially owned by the selling stockholders will continue to be beneficially owned. The selling stockholders may dispose of all, part or none of its shares.

For purposes of the table below, beneficial ownership is determined in accordance with the rules of the SEC, and includes voting and investment power with respect to shares. Shares of common stock subject to options, warrants or issuable upon conversion of convertible securities currently exercisable or exercisable within 60 days from January 25, 2006 are deemed outstanding for computing the percentage ownership of the person holding the options, warrants or convertible securities, but are not deemed outstanding for computing the percentage of any other person.

The selling stockholders identified below may have sold, transferred or otherwise disposed of all or a portion of its shares of common stock in transactions exempt from the registration requirements of the Securities Act of 1933 since the date on which it provided to us the information regarding its shares of common stock.

C. Fred Toney, a member of our Board of Directors, is the managing member of MedCap Management & Research, LLC, the general partner of MedCap Partners, L.P. Other than Vestal Venture Capital, which is an affiliate of a broker-dealer, none of the selling stockhlders is a registered broker-dealer or an affiliate of a registered broker-dealer.

	Shares Beneficially Owned Prior to the Offering				Shares Offered by		Shares Beneficially Owned After the Offering
Name of Selling Stockholder	Number		Percent(1)		this Prospectus		Number	Percent

MedCap Partners, L.P.(2) 500 Third Street, Suite 535 San Francisco, CA 94107	39,940,043	(2)	64.7	%	4,603,703		36,202,530	58.6	%

Alpha Capital AG Pradafant 7, 9490 Furstentums Vaduz, Lichtenstein	2,187,500	(3)	6.1	%	2,397,500	(4)	0	—

Vestal Venture Capital 6471 Enclave Way Boca Raton, FL 33496	416,667	(5)	1.2	%	456,667	(6)	0	—

Nite Capital LP 100 East Cook Avenue, Suite 201 Libertyville, IL 60048	520,833	(7)	1.5	%	570,833	(8)	0	—

Chestnut Ridge Partners LP 50 Tice Boulevard Woodcliff Lake, NJ 07677	2,083,333	(9)	5.8	%	2,283,333	(10)	0	—

Whalehaven Capital Fund Limited c/o Research Capital 564-1055 Dunsmuir Street Four Bentall Centre Vancouver, BC V7X 1L4	3,125,000	(11)	8.5	%	3,425,000	(12)	0	—

* Less than one percent.

(1) Percentage ownership is based on 33,802,815 shares of our common stock outstanding as of January 25, 2006.

DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

We are authorized to issue 160,000,000 shares of capital stock, consisting of 150,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share, of which 2,750,000 shares have been designated Series A convertible preferred stock, 6,250,000 shares have been designated Series B convertible preferred stock, 100,000 shares have been designated Series B-1 convertible preferred stock and 325,000 shares have been designated Series C convertible preferred stock.

The following is a summary of the material terms of our capital stock. You should refer to our Restated Certificate of Incorporation, as amended, and Restated Bylaws and the agreements described below for more detailed information.

Common Stock

As of January 25, 2006, 33,802,815 shares of our common stock were outstanding. Holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to limitations under Delaware law and preferences that apply to any outstanding shares of preferred stock, holders of our common stock are entitled to receive ratably such dividends or other distribution, if any, as may be declared by our board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preference of any outstanding preferred stock. The common stock has no preemptive, conversion or other rights to subscribe for additional securities. There are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. All outstanding shares of our common stock are, and all shares of common stock to be outstanding upon completion of the offering will be, validly issued, fully paid and nonassessable.

Preferred Stock

Series C Convertible Preferred Stock

As of January 25, 2006, 183,028 shares of our Series C convertible preferred stock were outstanding. Pursuant to the Certificate of Designations, Preferences and Rights of Series C Preferred Stock, holders of Series C convertible preferred stock were entitled to receive a dividend on each of September 30, 2004, December 31, 2004, March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005 in an amount equal to 2.5 shares of common stock for each outstanding share of Series C convertible preferred stock held by them. In the event of any liquidation or winding up of the company, the holders of Series C convertible preferred stock will be entitled to receive in preference to the holders of our Series A convertible preferred stock, Series B convertible preferred stock, Series B-1 convertible preferred stock and common stock an amount equal to five times their initial purchase price, or $300.00 per share, plus any declared but unpaid dividends. Any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of our common stock and any other series of preferred stock expressly entitled to participate in such distribution. Unless previously voluntarily converted prior to such time, the shares of Series C convertible preferred stock will be automatically converted into common stock at an initial conversion ratio of one hundred (100) shares of common stock for each share of Series C convertible preferred stock upon the earlier of (i) the closing of an underwritten public offering of our common stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series C convertible preferred stock.

Series B-1 Convertible Preferred Stock

As of January 25, 2006, no shares of our Series B-1 convertible preferred stock were outstanding. Pursuant to the Certificate of Designations, Preferences and Rights of Series B-1 Preferred Stock, holders of Series B-1 convertible preferred stock were entitled to receive a dividend on each of September 30, 2004, December 31, 2004, March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005 in an amount equal to 2.5 shares of

common stock for each share of outstanding Series B-1 convertible preferred stock held by them. In the event of any liquidation or winding up of the company, the holders of the Series B-1 convertible preferred stock will be entitled to receive in preference to the holders of common stock an amount equal to their initial purchase price plus any declared but unpaid dividends. Any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of the Series B-1 convertible preferred stock (on an as-if-converted into common stock basis), common stock and any other series of preferred stock expressly entitled to participate in such distribution, until the holders of Series B-1 convertible preferred stock shall have received, in the aggregate, an amount equal to five times the amount of their purchase price. Unless previously voluntarily converted prior to such time, the Series B-1 convertible preferred stock will be automatically converted into common stock at an initial conversion ratio of one hundred (100) shares of common stock for each share of Series B-1 convertible preferred stock upon the earlier of (i) the closing of an underwritten public offering of our common stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series B-1 convertible preferred stock.

Series B Convertible Preferred Stock

As of January 25, 2006, no shares of our Series B convertible preferred stock were outstanding. Pursuant to the Certificate of Designations, Preferences and Rights of Series B Preferred Stock, holders of the Series B convertible preferred stock were entitled to receive a dividend on each of September 30, 2004, December 31, 2004, March 31, 2005, June 30, 2005, September 30, 2005 and December 31, 2005 in an amount equal to 0.00833 shares of common stock for each share of outstanding Series B convertible preferred stock held by them. In the event of any liquidation or winding up of the company, the holders of the Series B convertible preferred stock will be entitled to receive in preference to the holders of common stock an amount equal to their initial purchase price plus any declared but unpaid dividends. Any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of the Series B convertible preferred stock (on an as-if-converted into common stock basis), common stock and any other series of preferred stock expressly entitled to participate in such distribution, until the holders of Series B convertible preferred stock shall have received, in the aggregate, an amount equal to five times the amount of their purchase price. Unless previously voluntarily converted prior to such time, the Series B convertible preferred stock will be automatically converted into common stock at an initial conversion ratio of one share of common stock for every three shares of Series B convertible preferred stock upon the earlier of (i) the closing of an underwritten public offering of our common stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series B convertible preferred stock.

Series A Convertible Preferred Stock

As of January 25, 2006, no shares of our Series A convertible preferred stock were outstanding. Pursuant to the Certificate of Designations, Preferences and Rights of Series A Preferred Stock, holders of Series A convertible preferred stock were entitled to receive a dividend on each of the three-month, six-month, nine-month and twelve-month anniversary of the date of the issuance in an amount equal to 0.04167 shares of common stock for each share of outstanding Series A convertible preferred stock held by them. In the event of any liquidation or winding up of the company, the holders of the Series A convertible preferred stock will be entitled to receive in preference to the holders of common stock an amount equal to their initial purchase price plus any declared but unpaid dividends and any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of Series A convertible preferred stock (treated on an as-if converted into common stock basis) and common stock until the holders of Series A convertible preferred stock shall have received, in the aggregate, an amount equal to three times the amount of their purchase price. Unless previously voluntarily converted prior to such time, the Series A convertible preferred stock will be automatically converted into common stock at an initial conversion ratio of approximately 1.67 shares of common stock for every one share of Series A convertible preferred stock of (i) the closing of an underwritten public offering of our common stock pursuant to a registration statement under the Securities Act of 1933, with aggregate net proceeds of at least $10 million, or (ii) one year from the date of the issuance of such shares.

PLAN OF DISTRIBUTION

Each selling stockholder of our common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the Trading Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling shares:

• ordinary brokerage transactions and transactions in which the broker dealer solicits purchasers;

• block trades in which the broker dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

• purchases by a broker dealer as principal and resale by the broker dealer for its account;

• an exchange distribution in accordance with the rules of the applicable exchange;

• privately negotiated transactions;

• settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

• broker dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

• a combination of any such methods of sale;

• through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or

• any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

Broker dealers engaged by the selling stockholders may arrange for other brokers dealers to participate in sales. Broker dealers may receive commissions or discounts from the selling stockholders (or, if any broker dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

In connection with the sale of the common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by

them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. Each selling stockholder has advised us that they have not entered into any written or oral agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the resale shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to the prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Our independent auditor for the fiscal year ending December 31, 2002 was Sanford H. Feibusch. Mr. Feibusch was dismissed as our independent auditor following the preparation of his report dated February 5, 2003 on our consolidated financial statements as of December 31, 2002, for the four months then ended and for the period from November 10, 1997 to December 31, 2002. Pursuant to the recommendation of our Board of Directors and audit committee, we engaged BDO Seidman, LLP on April 28, 2003, and BDO Seidman, LLP reported on our financial statements for the fiscal year ended December 31, 2003 and reviewed our quarterly reports on Form 10-QSB filed for the first three fiscal quarters of the fiscal year ended December 31, 2004. On January 13, 2005 we received a resignation letter from BDO Seidman, LLP. On January 13, 2005 our audit committee approved, and our Board of Directors ratified, the engagement of KBA Group LLP as our independent auditors. KBA Group LLP reported on our financial statements for the fiscal year ended December 31, 2004.

The report of BDO Seidman, LLP on our financial statements for the fiscal year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. In addition, there were no disagreements at any time between Mr. Feibusch or BDO Seidman, LLP, as the case may be, and us on matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of Mr. Feibusch or BDO Seidman, LLP, would have caused him or it to make reference to the subject matter of the disagreement in his or its report. In addition, during the Company’s two most recent fiscal years ended December 31, 2004 and 2003

CRDENTIA CORP.

Consolidated Balance Sheets

	December 31,
	2004			2003
Current assets:
Cash and cash equivalents	$	362,472		$	1,469,076
Accounts receivable, net of allowance for doubtful accounts of $114,957 in 2004 and $195,465 in 2003	2,908,403			3,058,086
Unbilled receivables	303,626			268,590
Other current assets	495,579			333,379
Total current assets	4,070,080			5,129,131

Property and equipment, net	293,600			363,815
Goodwill	12,974,973			8,519,821
Intangible assets, net	1,660,717			3,485,334
Other assets	837,061			98,297

Total assets	$	19,836,431		$	17,596,398

Current liabilities:
Accounts payable and accrued expenses	$	2,523,069		$	901,410
Accrued dividends on convertible preferred stock	1,027,254			—
Accrued employee compensation and benefits	554,945			684,160
Revolving lines of credit	2,521,598			2,871,890
Current portion of notes payable to lenders, net of discount	2,049,816			166,667
Note payable to stockholders	400,000			25,000
Current portion of notes payable to sellers	184,948			1,435,115
Other current liabilities	100,017			14,921
Subordinated convertible notes, net of discount	50,000			250,833
Total current liabilities	9,411,647			6,349,996

Notes payable to lender, less current portion	—			27,777
Long term bonus payable	884,962			801,000
Notes payable to sellers, less current portion	—			3,925,983
Other long-term liabilities	33,045			—

Total liabilities	10,329,654			11,104,756

Commitments and contingencies

Convertible preferred stock, 10,000,000 shares authorized:
Series A Convertible Preferred Stock $0.0001 par value, no shares issued and outstanding at 2004 and 1,750,000 shares issued and outstanding at 2003 (liquidation preference of $1,750,000 in 2003)	—			1,750,000
Series B Convertible Preferred Stock $0.0001 par value, 3,750,000 shares issued and outstanding at 2004 (liquidation preference of $750,000 in 2004)	750,000			—
Series B-1 Convertible Preferred Stock $0.0001 par value, 93,043 shares issued and outstanding at 2004 (liquidation preference of $5,582,580 in 2004)	30,123,400			—
Series C Convertible Preferred Stock $0.0001 par value, 52,501 shares issued and outstanding at 2004 (liquidation preference of $15,750,300 in 2004)	1,070,510			—
Series C preferred stock warrants	2,079,910

Stockholders’ equity (deficit):
Common stock, par value $0.0001, 50,000,000 shares authorized in 2004 and 2003, 14,202,883 shares issued and 13,126,477 shares outstanding in 2004 and 7,355,758 shares issued and 6,279,352 shares outstanding in 2003	1,420			736
Additional paid in capital	68,447,288			60,547,358
Treasury stock, 1,076,406 shares at cost	—			—
Deferred non-cash stock compensation	(648,746		)	(828,000		)
Accumulated deficit	(92,317,005		)	(54,978,452		)

Total stockholders’ equity (deficit)	(24,517,043		)	4,741,642

Total liabilities and stockholders’ equity (deficit)	$	19,836,431		$	17,596,398

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

F-3

CRDENTIA CORP.

Consolidated Statements of Operations

	Year Ended December 31,
	2004			2003
Revenue from services	$	23,018,389		$	4,711,972
Direct operating expenses	18,251,274			3,571,281
Gross profit	4,767,115			1,140,691

Operating expenses:
Selling, general, and administrative expenses	9,517,218			3,409,707
Loss on impairment of intangibles	1,800,000			—
Non-cash stock based compensation	393,857			51,638,254
Total operating expenses	11,711,075			55,047,961

Loss from operations	(6,943,960		)	(53,907,270		)

Non-cash expense for conversion of debt	(24,541,000		)	—
Interest expense, net	(2,217,894		)	(408,835		)

Loss before income taxes	(33,702,854		)	(54,316,105		)

Income tax expense	—			—

Net loss	$	(33,702,854	)	$	(54,316,105	)

Deemed dividend related to beneficial conversion feature on Series A convertible preferred stock	(1,000,000		)	(1,750,000		)
Deemed dividend related to beneficial conversion feature on Series B convertible preferred stock	(1,250,000		)	—
Deemed dividend related to beneficial conversion feature on Series B-1 convertible preferred stock	(1,328,400		)	—
Deemed dividend related to beneficial conversion feature on Series C convertible preferred stock	(1,070,510		)	—
Non-cash preferred stock dividends	(3,635,699		)	—

Net loss attributable to common stockholders	$	(41,987,463	)	$	(56,066,105	)

Basic and diluted loss per common share attributable to common stockholders	$	(5.23	)	$	(12.95	)

Weighted average number of common shares outstanding	8,033,725			4,330,704

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

F-4

CRDENTIA CORP.

Consolidated Statements of Stockholders’ Equity (Deficit)

	Common Stock			Additional			Deferred
	Par Value $.0001			Paid-In			Non-cash			Accumulated
	Shares	Amount		Capital			Compensation			Deficit			Total

Balance December 31, 2002	3,666,055	$	367	$	822,077		$	—		$	(662,347	)	$	160,097

Common stock issued in acquisition of Baker, Anderson, Christie, Inc.	160,000	16		172,784									172,800

Common Stock issued in acquisition of New Age Staffing, Inc.	2,294,872	229		2,478,232									2,478,461

Common Stock issued in acquisition of Nurses Network, Inc.	39,362	4		42,506									42,510

Common Stock issued in acquisition of PSR Nurses Recruiting, Inc. and PSR Nurses Holdings Corp.	1,139,596	114		3,247,719									3,247,833

Common Stock issued in conversion of debt	55,873	6		408,994									409,000

Common Stock repurchased from terminated employee				(1,208		)							(1,208		)

Beneficial conversion feature of subordinated convertible notes				910,000									910,000

Common Stock returned to company and related compensation expense				5,750,593									5,750,593

Compensation expense related to restricted stock and options issued to directors and employees				2,770,176			(828,000		)				1,942,176

Compensation expense related to restricted stock purchase rights issued to Chief Executive Officer				13,495,485									13,495,485

Compensation expense related to stock options issued to Chief Executive Officer				30,450,000									30,450,000

Benefit and deemed dividend of beneficial conversion price of Series A convertible				1,750,000									1,750,000
preferred stock				(1,750,000		)							(1,750,000		)

Net loss										(54,316,105		)	(54,316,105		)

Balance December 31, 2003	7,355,758	736		60,547,358			(828,000		)	(54,978,452		)	4,741,642

F-5

CRDENTIA CORP.

Consolidated Statements of Stockholders’ Equity (Deficit)

	Common Stock				Additional			Deferred
	Par Value $.0001				Paid-In			Non-cash			Accumulated
	Shares		Amount		Capital			Compensation			Deficit			Total

Stock dividends on Convertible Preferred Stock	735,778		74		2,608,371						(3,635,699		)	(1,027,254		)

Common stock issued in acquisition of Arizona Home Health Care/ Private Duty Inc.	200,000		20		689,980									690,000

Conversion of Convertible Series A into Common Stock	4,583,333		458		2,733,279									2,733,737

Conversion of Convertible Series B into Common Stock	833,333		83		492,349									492,432

Conversion of Convertible Series B-1 into Common Stock	453,900		45		268,791									268,836

Issuance of term loan warrants					810,000									810,000

Benefit and deemed dividend of beneficial conversion price of Series A convertible					1,000,000									1,000,000
preferred stock					(1,000,000		)							(1,000,000		)

Benefit and deemed dividend of beneficial conversion price of Series B convertible					1,250,000									1,250,000
preferred stock					(1,250,000		)							(1,250,000		)

Benefit and deemed dividend of beneficial conversion price of Series B-1 convertible					1,328,400									1,328,400
preferred stock					(1,328,400		)							(1,328,400		)

Benefit and deemed dividend of beneficial conversion price of Series C convertible					1,070,510									1,070,510
preferred stock					(1,070,510		)							(1,070,510		)

Conversion of seller note to Common Stock	40,822		4		126,544									126,548

Other	(41	)			170,616			179,254						349,870

Net Loss											(33,702,854		)	(33,702,854		)

Balance December 31, 2004	14,202,883		$	1,420	$	68,447,288		$	(648,746	)	$	(92,317,005	)	$	(24,517,043	)

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

F-6

CRDENTIA CORP.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2004			2003
Operating activities
Net loss	$	(33,702,854	)	$	(54,316,105	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of subordinated convertible note discounts	659,167			250,833
Amortization of lender note discounts	162,014			—
Amortization of debt issue costs	365,324			—
Amortization of long-term bonus payable	83,962			—
Depreciation and amortization	1,019,461			111,827
Bad debt expense	44,264			195,465
Non-cash stock based compensation	393,857			51,638,254
Non-cash expense for conversion of debt	24,541,000			—
Loss on impairment of intangibles	1,800,000			—
Changes in operating assets and liabilities, net of effects of purchases of subsidiaries:
Accounts receivable	167,259			313,254
Unbilled receivables	(35,036		)	(268,590		)
Other current assets and liabilities	(227,249		)	398,597
Accounts payable and accrued expenses	1,603,962			(388,773		)
Accrued employee compensation and benefits	(61,868		)	107,354
Long term bonus payable	—			801,000
Net cash used in operating activities	(3,186,737		)	(1,156,884		)

Investing activities
Purchases of property and equipment	(223,726		)	(50,435		)
Cash paid for acquisition of subsidiaries, net of cash received	(4,180,483		)	(13,700		)
Other	96,555			—
Net cash used in investing activities	(4,307,654		)	(64,135		)

Financing activities
Issuance of preferred stock	5,970,300			1,750,000
Repurchase of common stock	—			(1,208		)
Net increase/(decrease) in revolving lines of credit	(350,292		)	39,404
Proceeds from notes payable to lenders	2,697,802			275,000
Proceeds from note payable to majority stockholder	400,000			—
Repayment of notes payable to lenders	(219,444		)	(60,328		)
Proceeds from subordinated convertible notes	—			910,000
Repayment of subordinated convertible notes	(120,000		)	—
Repayment of notes to sellers	(825,465		)	(325,638		)
Debt issuance costs	(1,165,114		)	(22,598		)
Net cash provided by financing activities	6,387,787			2,564,632

Net increase (decrease) in cash	(1,106,604		)	1,343,613
Cash and cash equivalents at beginning of year	1,469,076			125,463
Cash and cash equivalents at end of year	$	362,472		$	1,469,076

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

F-7

CRDENTIA CORP.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2004

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

At the beginning of 2003, the Company was a development stage company with no commercial operations. During that year, the Company pursued its operational plan of acquiring companies in the healthcare staffing field and completed the acquisition of four operating companies. The companies acquired in 2003 — Baker Anderson Christie, Inc., New Age Nurses, Inc., Nurses Network, Inc., and PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp., which holds the limited partner and general partner interests in PSR Nurses, Ltd. — provide the foundation for future growth. During 2004, the Company completed the acquisitions of Arizona Home Health Care/Private Duty, Inc. and Care Pros Staffing, Inc.

The accompanying financial statements include the results of the wholly-owned subsidiaries discussed above from their respective dates of acquisition. All intercompany transactions have been eliminated in consolidation.

On June 28, 2004, the Company executed a one-for-three reverse stock split of the outstanding shares of Common Stock. All common share and per share information included in these financial statements have been retroactively adjusted to reflect the reverse stock split.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates relate to the allowance for doubtful accounts, the valuation and allocation of acquired intangible assets and goodwill, the stock valuation of the shares used to consummate the Company’s acquisitions, and analysis of impairment of goodwill and other intangible assets. Actual results could differ from those estimates.

Liquidity

Although the Company ended 2004 with a working capital deficit of $5.3 million, the Company was able to secure additional funding during 2004 to finance its operations as it continued to execute its business plan to acquire and grow companies involved in healthcare staffing. As discussed in Note 20, in March 2005 the Company’s majority stockholder exercised warrants to purchase 108,333 shares of Series C Convertible Preferred Stock providing $6.5 million to the Company. The infusion of $6.5 million into the Company enabled it to acquire additional companies and to retire certain liabilities and, based on the Company’s projections, will generate cash flow from operations in 2005 sufficient to service its debt and fund its operations for the foreseeable future. The Company will also be able to borrow on its existing line of credit to finance the growth in receivables.

Fair Value of Financial Instruments

The company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, revolving lines of credit, and notes payable. The Company believes the reported carrying amounts of its cash and cash equivalents, accounts receivable, and accounts payable approximates fair value, based upon the maturities and short-term nature of those instruments. The Company believes that the fair value of the revolving lines of credit and notes payable approximates the fair value based on the terms and conditions the Company feels could be attained from other institutions.

F-8

Revenue Recognition

The Company recognizes revenue generally on the date the Company’s healthcare staff provides services to healthcare facilities or individuals in their home. For certain permanent placement contracts, revenue is recognized over the life of the guarantee period provided in the contract.

Unbilled receivables represent an estimate of revenue earned during the period in excess of amounts billed.

Stock-Based Compensation

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

If the Company had elected the fair value method of accounting for employee stock-based compensation, compensation cost would be accrued at the estimated fair value of the stock award grants over the service period, regardless of later changes in stock prices and price volatility. The date of grant fair values for options granted have been estimated based on the Black-Scholes pricing model with the assumptions identified in the following table:

	December 31,
	2004	2003

Dividend Yield	0	0
Volatility	134%-162%	60%
Risk-Free Interest Rates	4.5%	4.5%
Expected Lives in Years	1-10 years	0-5 years

The table below shows net loss per share attributable to common stockholders for December 31, 2004 and 2003 as if the Company had elected the fair value method of accounting for stock options.

	December 31,
	2004			2003

Net loss attributable to common stockholders as reported	$	(41,987,463	)	$	(56,066,105	)
Add: stock-based employee compensation in reported net income, net of related tax effects	179,254			51,638,254
Deduct: total stock-based employee compensation determined under fair value method for all awards, net of related tax effects	(2,354,388		)	(51,974,747		)

Proforma net loss attributable to common Stockholders, as adjusted	$	(44,162,597	)	$	(56,402,598	)

Loss per share attributable to common stockholders:
Basic and diluted, as reported	$	(5.23	)	$	(12.95	)
Basic and diluted, as adjusted	$	(5.50	)	$	(13.02	)

F-10

Earnings Per Share

The Company adopted the standards set by the Financial Accounting Standards Board and computes earnings per share in accordance with SFAS No. 128 “Earnings per Share.” The basic per share data has been computed on the loss attributable to common stockholders for the period divided by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share include both the weighted average number of shares and any common share equivalents such as convertible securities, options or warrants in the calculation. As the Company recorded losses in 2004 and 2003, common share equivalents outstanding would be anti-dilutive, and as such, have not been included in weighted average shares outstanding.

New Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The company expects to adopt Statement 123R on January 1, 2006.

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

Note 2. Acquisitions

Arizona Home Health Care/Private Duty, Inc.

On August 31, 2004, the Company acquired Arizona Home Health Care/Private Duty, Inc. (“AHHC”) in exchange for $3,900,000 in cash, 200,000 shares of the Company’s Common Stock valued at $690,000, (determined by the average of $3.45 per share as of the two days prior to and subsequent to the acquisition date as quoted on the OTC Bulletin Board), and $77,154 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing industry. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Cash acquired	$	35,000
Tangible assets acquired	76,853
Customer related intangible assets	705,487
Goodwill	3,849,814
Total assets acquired	4,667,154
Liabilities assumed	—
Net assets acquired	$	4,667,154

The acquisition was accounted for using the purchase method of accounting. Customer related intangible assets will be amortized over their estimated useful life of five years. Allocation of the excess of merger consideration over the fair value of assets acquired between goodwill and customer relationships was determined by management’s estimate based on a consistent model for all acquisitions developed by a professional valuation group. The Company will be required to issue additional shares of its Common Stock to the former stockholders of

F-11

AHHC should its results of operations exceed performance standards established in the merger agreement. The goodwill acquired may not be amortized for federal income tax purposes.

Care Pros Staffing, Inc.

On August 13, 2004, the Company acquired Care Pros Staffing, Inc. in exchange for $275,000 in cash, $275,000 in notes payable and $39,706 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing market. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Cash acquired	$	86
Tangible assets acquired	61,842
Customer related intangible assets	51,993
Goodwill	475,785
Total assets acquired	589,706
Liabilities assumed	—
Net assets acquired	$	589,706

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

PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp.

On December 2, 2003, the Company acquired PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp., which held the general and limited partnership interests in PSR Nurses, Ltd., in exchange for 1,139,596 shares of the Company’s common stock, which was valued based upon an appraisal performed by an independent, third-party professional valuation firm. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing industry. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Cash acquired	$	262,721
Tangible assets acquired	2,995,043
Customer related intangible assets	1,260,000
International nurse contracts	1,820,000
Goodwill	4,549,239
Total assets acquired	10,887,003
Liabilities assumed	6,854,039
Net assets acquired	$	4,032,964

The acquisition was accounted for using the purchase method of accounting. Customer related and international nurse contract intangible assets will be amortized over their estimated useful life of five years. Allocation of the excess of merger consideration over the net book value of assets acquired between goodwill, customer relationships, and international nurse contracts was determined by an independent, third-party professional valuation firm. As the merger consideration was paid entirely in shares of the Company’s common stock, the goodwill acquired may not be amortized for federal income tax purposes. The Company was obligated to issue additional shares of its common stock to the sellers of the acquired business if it reached certain performance targets in future periods, but these targets were not achieved.

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Nurses Network, Inc.

On October 2, 2003, the Company acquired Nurses Network, Inc. in exchange for $114,432 in notes payable due in 2004 and 39,361 shares of its common stock, which was valued based upon an appraisal performed by an independent, third-party professional valuation firm. The primary purpose of the acquisition was to enhance the Company’s presence in the San Francisco market by combining the Nurses Network operations of per diem clinical staffing with Baker Anderson Christie, Inc. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Tangible assets acquired	$	11,081
Goodwill	113,414
Total assets acquired	124,495
Liabilities assumed	22,211
Net assets acquired	$	102,284

The acquisition was accounted for using the purchase method of accounting. Customer related intangible assets will be amortized over their estimated useful life of five years. Allocation of the excess of merger consideration over the net book value of assets acquired between goodwill and customer relationships was determined by an independent, third-party professional valuation firm. As a material portion of the merger consideration was paid in shares of the Company’s common stock, the goodwill acquired may not be amortized for federal income tax purposes. The Company was obligated to issue additional shares of its common stock to the sellers of the acquired business if it reached certain performance targets in future periods, but these targets were not achieved.

New Age Staffing, Inc.

On September 22, 2003, the Company acquired New Age Staffing, Inc. (“NAS”) in exchange for $400,000 in cash, $265,000 in notes payable maturing during 2003, $1,025,000 in notes maturing during 2004, a $360,000 note payable maturing in 2005, and 2,294,871 shares of the Company’s common stock, which was valued based upon an appraisal performed by an independent, third-party professional valuation firm. The notes due in 2004 and 2005, totaling $1,385,000, were amended in January, 2004. Beginning January 31, 2004, the revised note is to be paid in equal installments for 21 months at 4% interest. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing industry. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Cash acquired	$	61,887
Tangible assets acquired	1,410,491
Customer related intangible assets	460,000
Goodwill	3,592,287
Total assets acquired	5,524,665
Liabilities assumed	877,615
Net assets acquired	$	4,647,050

The acquisition was accounted for using the purchase method of accounting. Customer related intangible assets will be amortized over their estimated useful life of five years. Allocation of the excess of merger consideration over the net book value of assets acquired between goodwill and customer relationships was determined by an independent, third-party professional valuation firm. As a material portion of the merger consideration was paid in shares of the Company’s common stock, the goodwill acquired may not be amortized for federal income tax purposes.

F-13

Baker Anderson Christie, Inc.

On August 7, 2003, the Company acquired Baker Anderson Christie, Inc. (“BAC”) in exchange for 160,000 shares of its common stock, which was valued based upon an appraisal performed by an independent, third-party professional valuation firm. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing industry. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Cash acquired	$	77,254
Tangible assets acquired	171,398
Customer related intangible assets	5,000
Goodwill	45,444
Total assets acquired	299,096
Liabilities assumed	126,296
Net assets acquired	$	172,800

The acquisition was accounted for using the purchase method of accounting. Customer related intangible assets will be amortized over their estimated useful life of five years. Allocation of the excess of merger consideration over the net book value of assets acquired between goodwill and customer relationships was determined by management’s estimate. As the merger consideration was paid entirely in shares of the company’s common stock, the goodwill acquired may not be amortized for federal income tax purposes. The Company was obligated to issue additional shares of its common stock to the sellers of the acquired business if it reached certain performance targets in future periods, but these targets were not achieved.

Unaudited Pro Forma Summary Information

The following unaudited pro forma summary approximates the consolidated results of operations as if all acquisitions had occurred as of the beginning of each period presented, after giving effect to certain adjustments, including amortization of specifically identifiable intangibles and interest expense. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future results of operations.

	December 31,
	2004			2003

Revenue from services	$	29,248,404		$	33,920,780

Net loss from operations	(33,815,679		)	(43,911,025		)

Net loss attributable to common stockholders	(42,100,288		)	(45,661,025		)

Basic and diluted net loss per common share attributable to common stockholders	(5.15		)	(6.19		)

Weighted-average shares of common stock outstanding	8,167,058			7,380,145

Note 3. Concentration of Credit Risk

During 2004, sales to one customer group, Rhode Island Hospital and Newport Hospital, represented approximately 16.3% of the Company’s revenues. In the third quarter of 2004, the Company experienced a decline in revenue at these facilities and travel nurse assignments have not been renewed to date. The Company’s top ten customers accounted for 48% of revenues in 2004.

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During 2003, one hospital accounted for 32.8% of total revenue.

Note 4. Property and Equipment

Property and equipment consisted of the following:

	December 31,
	2004			2003

Leasehold improvements	$	87,346		$	21,688
Computers, office furniture and equipment	837,717			371,691
	925,063			393,379
Less accumulated depreciation and amortization	(631,463		)	(29,564		)
	$	293,600		$	363,815

Note 5. Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized and will be reviewed annually for impairment. Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.

SFAS No. 142 uses a two-step process to measure potential impairment. In the first step, the fair values of the Company’s reporting units are compared to the units’ carrying amounts. A reporting unit is an operating segment or one level below an operating segment (referred to as a component). Two or more components of an operating segment with similar economic and operating characteristics may be combined into a single segment level evaluation. If the fair value of a reporting unit exceeds its carrying cost, goodwill is not considered impaired. If the carrying cost exceeds fair value, a second step is used to determine the amount of impairment. The second step determines the implied fair value of goodwill for a reporting unit by applying the estimated fair value to the tangible and separately identifiable intangible assets of the reporting unit, with any remaining amount considered goodwill.

During 2004, the Company completed the first step analysis under the requirements of the standard and determined that goodwill was not impaired. Fair value of the Company’s reporting unit was determined using a capitalized cash flow technique. The Company used an outside valuation firm to assist in developing the primary assumptions, such as projected cash flows and capitalization rates and to perform the valuation to apply to the reporting unit. The Company next evaluated its tangible and identifiable intangible assets and liabilities to estimate their fair values.

Due to the decline in revenue related to the loss of certain customers, including a significant customer relationship, and due to the impact of new immigration regulations limiting access to foreign nurses, the Company has determined that certain intangibles are impaired. As a result of this analysis, $1,800,000 was recorded as an impairment loss in 2004.

F-15

Goodwill and other intangible assets at December 31, 2004 and 2003 consist of:

	December 31,
	2004			2003

Goodwill	$	12,974,973		$	8,519,821

Customer relationships	$	1,912,480		$	1,725,000
International nurse contracts	590,000			1,820,000
Other intangibles	—			22,598
	2,502,480			3,567,598
Less accumulated amortization	(841,763		)	(82,264		)
Net other intangible assets	$	1,660,717		$	3,485,334

Following is a table of estimated amortization expense of other intangible assets for the next five years:

Year	Estimated Amortization Expense

2005	$	641,966
2006	437,763
2007	277,996
2008	151,496
2009	151,496

Amortization expense of other intangible assets amounted to $759,499 in 2004 and $82,264 in 2003.

Note 6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	December 31,
	2004		2003

Accounts payable	$	1,815,778	$	655,701
Accrued expenses	707,291		245,709

	$	2,523,069	$	901,410

Note 7. Income Taxes

At December 31, 2004, the Company had net operating loss carryfowards for federal and state income tax purposes of approximately $8,000,000, which expire in varying amounts beginning in 2019 through 2024. The Company has undergone an ownership change as defined in Section 382 of the Internal Revenue Code. Therefore, utilization of its tax net operating loss carryforwards incurred prior to August 2003 will be limited.

F-16

Deferred taxes are comprised of the following:

	December 31,
	2004			2003

Net operating loss carryforwards	$	3,128,000		$	765,000
Deferred compensation stock options and rights	19,628,000			19,413,000
Accrued bonuses	327,000			296,000
Intangibles	756,000			—
Other	54,000			78,000

Total deferred tax assets	23,893,000			20,552,000
Less: Valuation allowance	(23,893,000		)	(20,552,000		)

Net deferred tax assets	$	—		$	—

A reconciliation of the difference between the provision computed at the statutory federal tax rate and the Company’s effective tax rate is as follows (in thousands):

	December 31,
	2004			2003

Provision computed at statutory federal tax rate	$	(11,459,000	)	$	(18,749,000	)
Permanent differences (primarily non-cash expense for conversion of debt in 2004)
	8,857,000
	89,000
State tax expense	(667,000		)	(1,655,000		)
Other	(72,000		)	8,000
Increase in valuation allowance	3,341,000			20,307,000

Income tax expense (benefit)	$	—		$	—

The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company’s history of losses, relatively high expense levels, the fact that the market in which the Company competes is intensely competitive and the lack of carryback capacity to realize deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets based on actual and forecasted operating results.

Note 8. Revolving Lines of Credit

On June 16, 2004, the Company entered into a Loan and Security Agreement with a company specializing in healthcare finance, pursuant to which the Company obtained a revolving credit facility up to $15,000,000 (the “Loan”). Subsequent to year-end, the revolving line of credit facility was reduced to $10,000,000 permitting the Company to lower its effective interest rate through lower unused line fees. The Loan has a term of three years and bears interest at a rate equal to the greater of three percent (3.0%) per annum over the prime rate or nine and one-half percent (9.5%) per annum (9.5% at December 31, 2004). Interest is payable monthly. Accounts receivable serves as security for the Loan and the Loan is subject to certain financial and reporting covenants. Customer payments are used to repay the advances on the credit facility after deducting charges for interest expense, unused line and account management fees. The financial covenants are for the maintenance of minimum net worth, minimum debt service coverage ratio, minimum EBITDA, maximum capital expenditure limits and maximum

F-17

operating lease obligations. At December 31, 2004, the Company was out of compliance with certain financial covenants of the Loan, for which a waiver was received from the lender. Until such time as the Company demonstrates its ability to comply with the financial covenants of the Loan, the outstanding balance has been classified as a current liability on the Balance Sheet. The outstanding balance on the Loan is $2,521,598 at December 31, 2004.

In 2003, the Company had a line of credit with a financial institution secured by the accounts receivable and fixed assets of the Company. Interest accrued at the financial institution’s Base Rate plus 1% (5% at December 31, 2003) and was payable monthly. The Company was permitted, at its option and within the covenants of the loan agreement, to repay principal at its discretion. On a quarterly basis, the Company had to comply with certain financial and operating covenants. As of December 31, 2003, the Company failed to comply with certain financial and operating covenants of the line of credit and the financial institution waived all such non-compliance. At December 31, 2003, the outstanding balance was $86,272. The entire line of credit was paid in full on March 12, 2004.

The Company had credit facilities with two commercial financing institutions for the financing of eligible accounts receivable. These accounts receivable served as security for the lines of credit. The Company paid interest monthly at 24% per annum on one obligation and approximately 10% on the other, based on the daily outstanding balance. Customer payments were used to repay the advances from the financing institutions after deducting charges for bad debts, reserves for charge backs, and interest expense. These credit facilities were paid off on June 16, 2004 with the proceeds from the Loan as described above.

The Company assumed a note in connection with the PSR acquisition from a commercial finance entity, which held a second secured position on the Company’s accounts receivable, in the amount of $689,001 with an interest rate of 20% per annum. Interest was accrued and payable monthly on the outstanding balance. The Company paid $50,000 of principal at the acquisition closing. The Company was further obligated to make a principal payment in the amount of $139,000 on December 31, 2003. The payment was made on January 1, 2004. An additional principal payment in the amount of $161,000 was due on February 29, 2004 with the balance paid over 10 months. The balance of the note was paid off on June 16, 2004 with the proceeds from the Loan as described above.

The Company had a variable rate installment note with a financial institution in the amount of $250,000. The note was subject to the same security as the related line of credit with the same financial institution. Under the terms of the loan, the Company was required to make monthly payments plus accrued interest on the unpaid principal at the institution’s Base Rate plus 2%. The note was paid off on June 16, 2004, with the proceeds from the Loan as described above.

Note 9. Notes Payable to Lender

Pursuant to a loan agreement dated August 31, 2004, the Company obtained a term loan credit facility (“Term Loan”) in the amount up to $10.0 million from a company specializing in healthcare finance. The Company may obtain loans under the agreement to fund permitted acquisitions. Any loans obtained under the Term Loan agreement are due and payable in full on August 31, 2007 and bear interest at the rate of fifteen and one-quarter percent (15.25%) per annum. Interest is payable monthly. The Term Loan is secured by all assets of the borrower. On August 31, 2004, the Company received proceeds from the Term Loan of $2,697,802 for the acquisitions of Arizona Home Health Care/Private Duty, Inc. and Care Pros Staffing, Inc.

The Term Loan provides that the Company shall issue warrants to purchase shares of Common Stock to the lender up to 12% of the Company’s overall capitalization on the date of borrowing. On August 31, 2004, the Company issued warrants to purchase 905,758 shares of Common Stock in connection with the first borrowing under the credit facility. As a result, the Term Loan has been recorded net of a discount of $810,000 which represents the estimated fair market value related to the warrants at the date of issuance. The discount will be amortized to interest expense over the life of the Term Loan.

The Term Loan financial covenants are for the maintenance of minimum net worth, minimum debt service coverage ratio, minimum EBITDA, maximum capital expenditure limits and maximum operating lease obligations. At December 31, 2004, the Company was out of compliance with certain financial covenants of the Term Loan, for which a waiver was received from the lender. Until such time as the Company demonstrates its ability to comply

F-18

with the financial covenants of the Term Loan, the outstanding balance has been classified as a current liability on the Balance Sheet.

Note 10. Notes Payable to Stockholders

On November 29, 2004, MedCap Partners L.P., the majority stockholder, loaned the Company $400,000 for working capital purposes. The Note bears interest at 5% and is payable on demand. As discussed in Note 20, this amount was repaid in March 2005 when the majority stockholder exercised 108,333 warrants to purchase Series C Convertible Preferred Stock for $6.5 million.

On June 30, 2003, the Company executed a Promissory Note in favor of one of its stockholders, Atlantic International Capital Holdings, Ltd., in the principal amount of $25,000 in exchange for cash in the same amount. This Promissory Note accrued interest at 12% per annum and matured on August 13, 2003 at which time the principal plus accrued interest would have been payable in full. On September 29, 2003, the scheduled repayment date was extended by the maker until November 30, 2003. The maker further extended the repayment until January 31, 2004. The note, plus accrued interest, was paid in full on February 2, 2004.

Note 11. Subordinated Convertible Notes

During 2003, the Company issued $910,000 in Convertible Subordinated Promissory Notes (the “Notes”) to twelve investors. Subject to the conversion provisions set forth in the Notes, the unpaid principal together with all accrued interest on the Notes is due and payable in full one year following the issuance date of each such note (from September to December, 2004). Interest accrues on the unpaid principal balance at a rate of ten percent (10%) per annum, simple interest, and is payable in quarterly payments. The notes are convertible to Common Stock at the holder’s option, prior to the due date, at an initial conversion price of $1.50 per share. The conversion price was subsequently adjusted to $1.00 per share upon the issuance of the Series A Convertible Preferred Stock. The Company recorded a beneficial conversion charge of $910,000 which represents the lesser of the proceeds or beneficial conversion feature of $2.0 million. The beneficial conversion was calculated as the difference between the conversion price and the Company’s Common Stock market price at the date the note proceeds were received. The beneficial conversion charge is amortized over the one year life of the notes, resulting in interest expense of $659,167 and $250,833 for the years ended December 31, 2004 and 2003, respectively.

On September 30, 2004, $740,000 of the principal amount of the Notes plus accrued interest was converted into 12,642 shares of Series B-1 Convertible Preferred Stock. The holders of such notes included the Company’s Chairman and Chief Executive Officer, a member of the Company’s Board of Directors and an entity whose managing member is also on the Company’s Board of Directors. On November 16, 2004, $120,000 of the principal amount of the Notes plus accrued interest were repaid. The remaining $50,000 of the Notes was due on March 7, 2005. This $50,000 note was extended in March 2005 to be repaid with principal and interest payments on June 2, 2005, September 2, 2005, December 2, 2005 and March 2, 2006.

Note 12. Notes Payable to Sellers

As partial consideration for the acquisition of New Age Staffing, Inc. on September 22, 2003, the Company issued unsecured subordinated notes to the former stockholders. A note for $265,000 was payable upon the earlier of the closing of additional financing or October 15, 2003. The Company made a payment of approximately $97,000 on October 15, 2003, and the holders of the note agreed to defer the remaining balance of $168,000 until such time as the Company secured additional financing. The $168,000 plus interest at 10% was paid on December 22, 2003. A second note to the sellers of New Age Staffing, Inc. with the principal amount of $1,385,000 was payable in equal installments of $65,952, beginning January 31, 2004, for 21 months plus interest at 4%. The note was payable to a former owner who was hired by the Company as a Vice President. Remaining amounts due on the note were converted to stock as discussed below.

There are two notes to the sellers of Nurses Network, the first in the amount of $64,000 was due in three equal installments on October 2, 2004, October 2, 2005 and October 2, 2006. Interest was accrued at a financial institution’s Base Rate plus 1%. The second note, in the amount of $50,432 plus interest accrued at a financial institution’s Base Rate plus 1% was due and payable on July 2, 2004. Remaining amounts due on the note were converted to stock as discussed below.

F-19

At December 31, 2004 and 2003, the long-term debt discussed in Notes 9, 10, 11 and 12 consists of the following:

	December 31,
	2004			2003

Term Loan, 15.25% interest, maturity date August 31, 2007	$	2,697,802		$	—
Variable Rate Installment Note, maturity date March 1, 2005	—			194,444
Stockholder Note - Promissory Note, 5% interest, due on demand	400,000			—
Stockholder Note - Promissory Note, 12% interest, maturity date January 31, 2004	—			25,000
Subordinated Convertible Notes	50,000			910,000
Seller Note - New Age Staffing, Inc.	—			1,385,000
Seller Note - Nurses Network, Inc.	—			114,432
Assumed Notes - PSR Nurses	—			2,717,659
Seller Note - PSR Nurses	—			1,144,007
Seller Note - Care Pros Staffing, Inc.	184,948			—
Total long-term debt	3,332,750			6,490,542
Less debt discount	(647,986		)	(659,167		)
Less current portion	(2,684,764		)	(1,877,615		)

Long-term debt	$	—		$	3,953,760

Amounts reconcile to the financial statements as follows:

	December 31,
	2004		2003

Current portion of notes payable to lenders	$	2,049,816	$	166,667
Notes payable to stockholders	400,000		25,000
Subordinated convertible notes, net of discount	50,000		250,833
Current portion of notes payable to sellers	184,948		1,435,115
Notes payable to lender, less current portion	—		27,777
Note payable to sellers, less current portion	—		3,925,983
Discount on subordinated debt	—		659,167
Discount on term loan	647,986		—

	$	3,332,750	$	6,490,542

All debt is classified as current at December 31, 2004. Accordingly, a debt maturity schedule has not been presented.

Note 13. Long Term Bonus Payable

On December 16, 2003, the Board of Directors granted the Chief Executive Officer two cash bonuses in the amount of $540,000 each. The bonuses are to be paid on December 31, 2006 and January 4, 2007. The present value of bonuses has been recorded at the Company’s estimated incremental cost of borrowing of 10%.

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Note 14. Convertible Preferred Stock

Convertible Preferred Stock Issued and Outstanding

The Company is authorized to issue 10,000,000 shares of preferred stock at a par value of $0.0001. At December 31, 2004 and 2003 there are shares issued and outstanding consisting of the following:

	December 31, 2004		December 31, 2003
	Shares Issued	Shares Outstanding	Shares Issued	Shares Outstanding

Series A Convertible Preferred Stock	—	—	1,750,000	1,750,000
Series B Convertible Preferred Stock	6,250,000	3,750,000	—	—
Series B-1 Convertible Preferred Stock	97,582	93,043	—	—
Series C Convertible Preferred Stock	52,501	52,501	—	—

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

All Convertible Preferred Shares issued and outstanding are convertible currently at the option of the holder. The Company has evaluated the potential effect of any beneficial conversion terms related to convertible instruments. As a result, the convertible instruments may have a carrying amount that differs significantly from its redemption amount. In such cases, the difference between the carrying amount and the redemption amount (limited to the actual proceeds received) is recorded as a beneficial conversion feature and deducted as a deemed dividend in determining net loss attributable to common stockholders. The table below summarizes the redemption requirements and beneficial conversion of the Convertible Preferred Shares outstanding:

Shares of Convertible Preferred Stock	Shares Outstanding	Carrying Amount		Common Shares Issuable Upon Conversion	Beneficial Conversion Recorded at Issuance

B	3,750,000	$	750,000	1,250,000	$	1,250,000
B-1	93,043	30,123,400		9,304,300	1,328,400
C	52,501	1,070,510		5,250,100	1,070,510

Series A Convertible Preferred Stock (Series A)

The holders of the Series A Convertible Preferred Stock (Series A) were entitled to receive, when declared by the Board of Directors, a quarterly dividend in the amount equal to .025 shares of Common Stock for each share of outstanding Series A held by them. The Series A automatically converted into Common Stock, unless previously voluntarily converted prior to such time, at a conversion ratio of one share of Common Stock for three shares of Series A, one year from the date of issuance of such shares. The holders of Series A were granted registration rights by the Company. Once the Series A converted into Common Stock, the Company is obligated to register the Common Stock on a “best efforts” basis.

On December 17, 2003, the Company issued an aggregate of 1,750,000 shares of Series A at a per share price of $1.00 to two investors, which included MedCap Partners L.P. The Company recorded a deemed dividend due to the beneficial conversion price of $1,750,000 which represents the lesser of the proceeds or the beneficial conversion feature of $5.2 million.

F-22

On February 4, 2004, the Company issued an additional 1,000,000 shares of Series A at a per share price of $1.00 to MedCap Partners L.P. The Company recorded a deemed dividend due to the beneficial conversion price of $1,000,000 which represents the lesser of the proceeds or the beneficial conversion feature of $2.5 million.

On April 8, 2004 the Board of Directors declared a dividend to the Series A stockholders equal to .025 shares of Common Stock for each holder of Series A. As a result, 22,917 shares of Common Stock were issued on May 26, 2004.

The Series A dividend amount was adjusted to .04167 shares of Common Stock as a result of (i) the issuance of shares of Series B Convertible Preferred Stock on June 16, 2004 at a price per share of $0.20, and (ii) the reverse stock split effected by the Company as of the close of business on June 28, 2004.

On September 30, 2004 the Board of Directors declared a dividend and distribution to the Series A stockholders. The dividend and distribution consisted of quarterly dividends that were payable on June 16, 2004, September 16, 2004 and December 16, 2004 in consideration for early conversion of the Series A into Common Stock. As a result, 343,750 shares of Common Stock were issued on September 30, 2004 related to the dividend and distribution.

On September 30, 2004, the holders of Series A converted into 4,583,333 shares of Common Stock.

Series B Convertible Preferred Stock (Series B)

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

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

On September 30, 2004 the Board of Directors declared a dividend and distribution to the Series B holder. The dividend and distribution consisted of quarterly dividends that were payable on September 30, 2004, December 31, 2004, March 31, 2005 and June 30, 2005 in consideration for early conversion of the Series B into Common Stock. As a result, 114,583 shares of Common Stock were issued on September 30, 2004 related to the dividend and distribution. On March 22, 2005, the Board of Directors declared a dividend to the Series B holder. The dividend consisted of quarterly dividends that were payable on December 31, 2004 which had an estimated fair value of $81,218. This amount has been recorded as accrued dividends on convertible preferred stock.

On September 30, 2004, the holder converted 2,500,000 shares of Series B into 833,333 shares of Common Stock.

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

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initial conversion ratio of one hundred shares of Common Stock for each one share of Series B-1. The Series B-1 is convertible at the option of the holder into common shares at an initial conversion ratio of one hundred shares of Common Stock for each share of Series B-1. The conversion ratio upon voluntary conversion is subject to adjustment under certain circumstances. Unless previously voluntarily converted prior to such time the Series B-1 shares will be automatically converted into Common Stock at an initial conversion ratio of one hundred shares of Common Stock for each share of Series B-1 upon the earlier of the closing of an underwritten public offering of Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series B-1.

On August 9, 2004, the Company issued 3,750 shares of Series B-1 Convertible Preferred Stock at a per share price of $60.00 to an investor for cash proceeds of $225,000. The Company recorded a deemed dividend due to the beneficial conversion price of $225,000 which represents the lesser of the proceeds or the beneficial conversion feature of $937,500.

Also on August 9, 2004, the Company issued 4,166 shares of Series B-1 Convertible Preferred Stock at a per share price of $60.00 to the Company’s Chairman and Chief Executive Officer for cash proceeds of $249,960. The Company recorded a deemed dividend due to the beneficial conversion price of $249,960 which represents the lesser of the proceeds or the beneficial conversion feature of $1.0 million.

On August 9, 2004, the Company issued 29,990 shares of Series B-1 Convertible Preferred Stock, issued 40,822 shares of Common Stock and paid approximately $225,000 in cash in exchange for the cancellation of all the outstanding principal and accrued and unpaid interest under certain promissory notes (Seller Notes) that were issued in 2003 in connection with the purchase of certain subsidiaries. Portions of the Seller Notes were held by a current employee who was a former owner of the subsidiary purchased and by a member of the Company’s Board of Directors. See discussion of the Seller Notes in Note 12. The conversion was recorded as an inducement and the Series B-1 was recorded at fair market value on the date of issuance of $9.3 million. As a result of the fair market valuation, approximately $7.5 million was recorded as a loss on the conversion of debt.

On September 30, 2004, the Company issued 12,642 shares of Series B-1 Convertible Preferred Stock in exchange for the conversion of $758,640 in outstanding principal plus accrued and unpaid interest under certain Convertible Subordinated Promissory Notes (Notes) issued in 2003. The holders of such Notes included the Company’s Chairman and Chief Executive Officer, a member of the Company’s Board of Directors and an entity whose managing member is also on the Company’s Board of Directors. The Company recorded a deemed dividend due to the beneficial conversion price of $758,640 which represents the lesser of the cancelled principal and accrued interest or the beneficial conversion feature of $3.7 million.

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

On September 30, 2004, the Board of Directors declared a dividend and distribution to the Series B-1 holders. The dividend and distribution consisted of quarterly dividends that were payable on September 30, 2004. Additionally, the Board of Directors declared a distribution equal to the dividends that would have been payable on December 31, 2004, March 31, 2005 and June 30, 2005 in consideration for certain shareholders electing early conversion of the Series B-1 into Common Stock. As a result, 157,203 shares of Common Stock were issued on September 30, 2004 related to the dividend and distribution. On March 22, 2005, the Board of Directors declared a dividend to the Series B-1 holders. The dividend consisted of quarterly dividends that were payable on December 31, 2004 which had an estimated fair value of $604,780. This amount has been recorded as accrued dividends on convertible preferred stock.

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

As discussed in Note 12, on November 10, 2004, the Company entered into an agreement to convert approximately $2.7 million of Seller Notes and accrued interest to Series B-1 Convertible Preferred Stock. As a

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result, the Company issued 45,450 shares of Series B-1 Convertible Preferred Stock. The conversion will be recorded as an inducement and the Series B-1 will be recorded at fair market value on the date of issuance of $19.8 million. As a result of the fair market valuation, approximately $17.0 million will be recorded as a loss on the conversion of debt.

On December 16, 2004, the Company issued 1,582 shares of Series B-1 Convertible Preferred Stock at a per share price of $60.00 to investors for cash proceeds of $94,920. The Company recorded a deemed dividend due to the beneficial conversion price of $94,920 which represents the lesser of the proceeds or the beneficial conversion feature of $447,962.

Series C Convertible Preferred Stock (Series C)

The holders of Series C are entitled to receive, when declared by the Board of Directors, a dividend on each quarter end beginning September 30, 2004 and ending December 31, 2005 in an amount equal to 2.5 shares of Common Stock for each share of outstanding Series C held by them. In the event of any liquidation or winding up of the Company, the holders of the Series C will be entitled to receive in preference to the holders of Common Stock an amount equal to five times their initial purchase price plus any declared but unpaid dividends and any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of the Company’s Common Stock and any other series of Preferred Stock expressly entitled to participate in such distribution. The Series C is convertible at the option of the holder into common shares at an initial conversion ratio of one hundred shares of Common Stock for each share of Series C. The conversion ratio upon voluntary conversion is subject to adjustment under certain circumstances. Unless previously voluntarily converted prior to such time, the Series C will be automatically converted into Common Stock at an initial conversion ratio of one hundred shares of Common Stock for each share of Series C upon the earlier of (i) the closing of an underwritten public offering of our Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series C. The description of the foregoing rights, preferences and privileges of the Series C is qualified in its entirety by the Certificate of Designations, Preferences and Rights of Series C filed with the Secretary of State of the State of Delaware on August 31, 2004.

On August 31, 2004, the Company issued 35,840 shares of Series C Convertible Preferred Stock (Series C) in exchange for cash proceeds of $2,150,400. The shares were issued to certain accredited investors as well as MedCap Partners L.P. and the Company’s Chairman and Chief Executive Officer. The purchasers were granted Series C Warrants to purchase an aggregate of 89,600 Series C Convertible Preferred Shares. The Series C Warrants are exercisable for a period of five years at a price per Series C share of $60.00. The Company valued the warrants at $1.3 million and has accordingly reduced the face value of the Series C by this amount. The Company recorded a deemed dividend due to the beneficial conversion price of $876,000 which represents the lesser of the value assigned to the Series C and the beneficial conversion feature of $11.7 million.

On September 30, 2004, the Board of Directors declared a dividend to the Series C holders. The dividend consisted of quarterly dividends that were payable on September 30, 2004. As a result, 97,325 shares of Common Stock were issued on September 30, 2004 related to the dividend and distribution. On March 22, 2005, the Board of Directors declared a dividend to the Series C holders. The dividend consisted of quarterly dividends that were payable on December 31, 2004 which had an estimated fair value of $341,257. This amount has been recorded as accrued dividends on convertible preferred stock.

Makewell Agreement

Pursuant with the Term Loan, in August 2004, MedCap Partners L.P. (a member of the Company’s Board of Directors is the managing member of MedCap Management & Research LLC, the general partner of MedCap Partners L.P.) entered into a Makewell Agreement with the lender to provide equity to the Company (in the form of purchases of additional shares of Series C Convertible Preferred Stock and warrants) up to $1.0 million to be issued if the Company failed to meet certain monthly financial targets which did occur and resulted in the purchase of shares and issuance of warrants. The proceeds from the shares issued under the Makewell Agreement are to be used to pay down the balance of the revolving line of credit Loan (as described in Note 8 above), which will allow the Company additional availability to draw on the Loan.

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In connection with the Makewell Agreement, the Company agreed that for every share of Series C Convertible Preferred Stock purchased by MedCap Partners L.P. under the Makewell Agreement, the Company would grant MedCap Partners L.P. a warrant to purchase 2.5 shares of Series C Convertible Preferred Stock. For every share over 4,333 shares purchased by MedCap Partners L.P. under the Makewell Agreement, the Company would grant MedCap Partners L.P. an additional warrant to purchase 10 shares of Series C Convertible Preferred Stock (for a total of 12.5 warrants to purchase Series C for every share over 4,333).

Pursuant to the Makewell Agreement, the Company issued to MedCap Partners L.P., (i) 3,090 shares of Series C Convertible Preferred Stock (Series C) on September 23, 2004, (ii) 1,250 shares of Series C on October 12, 2004, (iii) 5,000 shares of Series C on October 18, 2004, (iv) 1,417 shares of Series C on October 25, 2004 and (v) 5,910 shares of Series C on November 3, 2004. Such shares of Series C were issued at a cash price per share of $60.00. Each share of Series C is convertible into one hundred shares of the Company’s Common Stock. The proceeds were used to reduce the amount outstanding on the revolving line of credit Loan.

In connection with the Company’s issuances of the shares of Series C described above, MedCap Partners L.P., was granted (i) a warrant to purchase 7,725 shares of Series C on September 25, 2004 (ii) a warrant to purchase 65,685 shares of Series C on October 18, 2004, (iii) a warrant to purchase 17,712 shares of Series C on October 25, 2004 and (iv) a warrant to purchase 73,875 shares of Series C on November 3, 2004. Such warrants are exercisable for a period of five years at a price per share of Series C of $60.00. The Company valued the warrants at $805,000 and has accordingly reduced the face value of the Series C Preferred Shares by this amount. The Company recorded a deemed dividend due to the beneficial conversion price of $195,000 which represents the lesser of the value assigned to the Series C and the beneficial conversion of $6.3 million.

The Makewell Agreement terminated on November 3, 2004 as MedCap Partners L.P. has made an aggregate of $1.0 million in contributions under the Makewell Agreement triggered by failure of the Company to meet certain financial targets.

Warrants to Purchase Convertible Preferred Stock

As of December 31, 2004, warrants to purchase Convertible Preferred Stock had been granted as follows:

Series of Convertible Preferred Stock	Warrants	Exercise Price Per share

B-1	6,000	$	60.00
C	254,597	$	60.00

There were no warrants outstanding at December 31, 2003. As discussed in Note 20, 108,333 of the Series C warrants were exercised in March 2005. No other warrants have been exercised.

Note 15. Stockholders’ Equity

Common Stock

The Company is authorized to issue 150,000,000 shares of common stock at a par value of $0.0001. The authorized shares were increased in January 2005 from 50,000,000 shares. Currently there are 14,202,883 shares issued with 13,126,477 shares outstanding. The difference of 1,076,406 shares is held by the Company in treasury.

On August 6, 2003, a number of the Company’s stockholders agreed to return an aggregate of 1,016,000 shares of the Company’s common stock to treasury for no consideration, thus reducing the total number of the Company’s then issued and outstanding shares of common stock from 3,666,055 to 2,650,055. These stockholders determined in consultation with the Company’s management that, in connection with the Company’s acquisition program and on-going financing efforts, it would be in the Company’s best interests to reduce the overall number of shares of the Company’s issued and outstanding common stock. In accordance with the provisions of APB Statement No. 25, the effect of this return of shares to the Company’s treasury was to generate non-cash

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compensation expense of $5,750,593 due to the imputed increase in ownership percentage of the Company’s stock held by its officers and directors at the date of return.

On August 7, 2003, the Company completed the acquisition of Baker Anderson Christie, Inc. pursuant to which 160,000 shares of the Company’s common stock were issued to the stockholders of Baker Anderson Christie, Inc.

On September 22, 2003, the Company completed the acquisition of New Age Staffing, Inc. pursuant to which 2,294,871 shares of the Company’s common stock were issued to the stockholders of New Age Staffing, Inc.

On October 2, 2003, the Company completed the acquisition of Nurses Network, Inc. pursuant to which 39,361 shares of the Company’s common stock were issued to the stockholders of Nurses Network, Inc.

On December 2, 2003, the Company completed the acquisition of PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. pursuant to which 1,139,596 shares of the Company’s common stock were issued to the stockholders of PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp.

The Company granted the holder of a debt obligation of the Company, the right to convert outstanding principal debt to common stock. The conversion agreement is based on the per share price of $7.32. The debt holder elected, on December 2, 2003, to exchange $409,000 of principal note balance for 55,874 shares of common stock.

On September 2, September 29, October 16, December 3, and December 12, 2003, the Company issued convertible subordinated notes in the aggregate amount of $910,000 to twelve investors. The conversion privilege enables the holders of the note to exchange their notes for the Company’s common stock at an initial price of $4.50 per share. As a result of the issuance of the Series A Convertible Preferred Stock discussed above, the conversion price, per the terms of the note agreement, was reduced to $3.00 per share.

In connection with an agreement, 250,000 shares of Common Stock were delivered by a party to the agreement, to an escrow agent. These shares will be released from escrow as follows: (i) beginning on July 1, 2004 and continuing on the first day of each month through and including June 1, 2005, the Company, or its assignee, shall pay $31,250 to the escrow agent, and the escrow agent shall cause 10,417 shares to be transferred to the Company or its assignee; and (ii) beginning on July 1, 2005 and continuing on the first day of each month through and including June 1, 2006, the Company, or its assignee, shall pay $46,875 to the escrow agent, and the escrow agent shall cause 10,417 shares to be released to the Company or its assignee. The escrow agent shall distribute funds received from the Company, or its assignee, to the stockholders who are parties to the Stock Purchase Agreement. For July, 2004 through December, 2004, the Company assigned its right to purchase under the Stock Purchase Agreement to an existing shareholder.

On June 28, 2004, the Company executed a one-for-three reverse stock split of the outstanding shares of Common Stock. All common share and per share information included in these financial statements and footnotes have been retroactively adjusted to reflect the reverse stock split.

On August 31, 2004, the Company completed the acquisition of Arizona Home Health Care/Private Duty, Inc. pursuant to which 200,000 shares of the Company’s common stock were issued to the stockholders of Arizona Home Health Care/Private Duty, Inc. The Company may be obligated to issue additional shares of its common stock as merger consideration in subsequent fiscal years.

On September 30, 2004, the Company issued (i) 4,583,333 shares of Common Stock in connection with the voluntary conversion of 2,750,000 shares of Series A Convertible Preferred Stock (Series A); (ii) 833,333 shares of Common Stock in connection with the voluntary conversion of 2,500,000 shares of Series B Convertible Preferred Stock (Series B); and (iii) 411,200 shares of Common Stock in connection with the voluntary conversion of 4,112 shares of Series B-1 Convertible Preferred Stock (Series B-1). On October 19, 2004, a holder of 427 shares of Series B-1 converted his shares into 42,700 shares of common stock. All such conversions were effected pursuant to the provisions of the Company’s Amended and Restated Certificate of Incorporation and the Certificate of Designations, Preferences and Rights of each respective series of Preferred Stock.

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Warrants to Purchase Common Stock

Pursuant to the Term Loan (see Note 9), the Company agreed to issue Common Stock warrants to the lender, at $3.15 per share, to purchase up to 12% of the total capitalization of the Company as defined in the Term Loan. The Company made its first draw on the facility in the amount of $2,697,801 on August 31, 2004. The Company issued a warrant for 905,758 shares of Common Stock related to the Term Loan. The Company valued the warrant at $810,000 and recorded this as a discount to the debt. The debt will be recorded at face value of $2,697,802 less the discount of $810,000, which will be amortized to interest expense over the three-year life of the Term Loan.

Employee Stock Options and Restricted Stock Grants

Subject to the terms and conditions of a Common Stock Purchase Agreement dated May 15, 2002 with the Chief Executive Officer, the Company granted the right to purchase, at a purchase price of $0.0003 per share, up to a number of additional shares of common stock equal to twenty-five (25%) of the aggregate number of additional shares of common stock and other securities convertible into common stock issued or issuable in connection with any acquisitions the Company completed on or before August 7, 2004. The Company has issued an aggregate of 3,689,703 shares as consideration for the four completed acquisitions of Baker Anderson Christie, Inc., New Age Staffing, Inc., Nurses Network, Inc., PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. As a result of the completion of these acquisitions, the Chief Executive Officer has the right to purchase up to 922,426 shares of common stock at $0.0003 per share and such option is fully vested and exercisable. On December 31, 2003 the Common Stock Purchase Agreement dated May 15, 2002 was modified such that the Chief Executive Officer relinquished his rights to purchase additional shares of common stock (but not as to the 922,426 shares discussed above) that were to accrue to him in connection with acquisitions that occurred either before or after December 31, 2003. In consideration for this modification and based on extensive analysis and review of the Company’s planned acquisition program by the Board of Directors and with the assistance of a third-party compensation specialist, the Chief Executive Officer was granted an option to purchase up to 2,333,333 shares of common stock at an exercise price of $.30 per share. The options expire December 31, 2018. One hundred percent (100%) of the shares of common stock subject to the option to puchase 2,333,333 shares shall be exercisable by the Chief Executive Officer on December 31, 2008. The difference between the purchase price of the common stock and option ($0.0003 and $0.30 per share, respectively) and the closing price of common stock on the respective grant date, as quoted on the OTC Bulletin Board, has been accounted for as a non-cash compensation expense. The total amount of expense recorded by the Company in 2003 is $43,945,485.

The Company’s President had the option to purchase shares at the fair market value of common stock from the Company equal to 4.167% of the number of shares of the Company’s common stock issued or issuable in connection with certain acquisitions completed by the Company on or before August 7, 2004. The difference between the purchase price of the option ($2.88 per share) and the closing price of common stock on the grant date, has been accounted for as a non-cash compensation expense in 2003 totaling $1,848,490.

On December 16, 2003, the Company issued options to purchase shares to two directors in exchange for providing services to the Company. The options vest over a three year period. The difference between the purchase price of the option ($2.88 per share) and the closing price of the Company’s common stock on the grant date, has been accounted for as a non-cash compensation expense in 2003 of $828,000.

On May 27, 2004, the Company adopted a stock incentive plan (the “2004 Plan”). The 2004 Plan provides for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights and dividend equivalent rights (collectively referred to as “awards”) to employees, directors and consultants. A total of 800,000 shares of common stock were initially reserved for issuance plus annual increases equal to the lesser of (a) 5% of the total number of shares outstanding as of that date, (b) 1,000,000 shares or (c) a lesser number of shares determined by the Board.

The 2004 Plan is administered by the Board of Directors or one or more committees designated by the Board. The Board or committee determines whether and to what extent awards are granted, to determine the number of shares of common stock to be covered by each award, to approve award agreements for use under the 2004 Plan, and to determine the terms and conditions of any award. The term of any incentive stock option granted under the 2004 Plan may not be for more than ten years and may not be granted at an exercise price less than the fair

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market value of the common stock on the date the option is granted. In the event of a corporate transaction or change in control, the Administrator shall have the discretion to provide that outstanding awards shall automatically become fully vested and exercisable for all or a portion of the shares at the time represented by the award, immediately prior to the specified effective date of such corporate transaction or change in control. Effective upon the consummation of a corporate transaction, all outstanding awards shall terminate. However, all such awards shall not terminate to the extent the contractual obligations represented by the award are assumed by the successor entity.

Options to purchase 50,000 common shares were issued to Board members during 2004 with an exercise price of $5.10. On August 3, 2004, the Company’s CEO was granted the option to purchase 866,666 shares at $3.10 per share and the Company’s President was granted the option to purchase 433,333 shares at $3.10 per share. The grants to the CEO and President contained vesting provisions that were contingent upon the completion of three acquisitions, listing of the Company on AMEX, closing of a term loan agreement and meeting a defined stockholders’ equity goal by December 31, 2004. Two of the four provisions were met by December 31, 2004. In accordance with grant provisions, any non-vested shares at December 31, 2004 were terminated.

Stock option activity is summarized as follows:

	December 31,
	2004			2003

Outstanding, January 1	3,528,500			—
Granted	1,460,503			3,528,500
Exercised	—			—
Forfeited	(732,878		)	—

Outstanding, December 31	4,256,126			3,528,500

Exercisable	2,628,348			1,128,501

Available for grant	750,000			—

Average exercise price per share:
Outstanding, January 1	$	.42		$	—
Granted	4.13			.42
Exercised	—			—
Forfeited	3.15			—
Outstanding, December 31	1.19			.42
Exercisable, December 31	1.16			.17

Weighted average grant date fair value of options granted during the year	3.04			4.43

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The following table summarizes information about employee stock options outstanding at December 31, 2004:

Options Outstanding
Number outstanding		Weighted average exercise price	Weighted average remaining contractual life

922,426		.0003	14.0
2,333,333		.30	14.0
272,741		2.88	9.0
650,000		3.10	9.6
27,626		3.15	.8
	50,000	5.10	9.4
	4,256,126

Common Shares Reserved

The following table summarizes the number of shares of common stock reserved for future issuance as of December 31, 2004:

Employee stock options:
Options granted		4,256,126
Shares reserved for future grants		750,000
Stock purchase warrants and convertible preferred stock:
Term loan		905,758
Series B convertible preferred stock		1,250,000
Series B-1 convertible preferred stock and warrants		9,904,300
Series C convertible preferred stock and warrants		30,709,800
		47,775,984

Note 16. Commitments and Contingencies

Commitment to Issue Additional Common Stock Warrants

In accordance with the terms of the Term Loan (see Note 9), the Company agreed to issue warrants to purchase Common Shares to the lender up to 12% of the Company’s overall capitalization at a price of $3.15 per share. On August 31, 2004, the Company issued a warrant for 905,758 Common Shares in connection with the first borrowing on the credit facility. If borrowing were to continue up to the maximum of $10,000,000, the Company would have to issue an additional 2,451,605 warrants to purchase Common Shares.

Employment Agreement

On August 14, 2002, the Company entered into an Agreement for a period of two years with its Chairman and Chief Executive Officer, which provided for compensation of $200,000 per year. The agreement also provided for severance benefits upon termination other than for cause of a payment equal to two times his then current base salary and an automatic acceleration of all unvested options and stock grants. On December 16, 2003, the board of directors adjusted the compensation to $320,000 per year beginning January 1, 2004. In addition on December 31, 2003, the board of directors granted two cash bonuses of $540,000 payable on December 31, 2006 and January 4, 2007. The Company has recorded the two cash bonuses at their present value in the amount of $884,962 and $801,000 at December 31, 2004 and 2003, respectively.

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Operating Leases

In 2002, the Company entered into a sublease as successor in interest to premises in San Francisco, California. This sublease expired on July 31, 2004.

The Company assumed several operating leases in connection with the acquisition of Baker, Anderson, Christie, Inc., New Age Staffing, Inc., and PSR Nurses Holdings Corp. The Company moved the corporate headquarters to Dallas, Texas. This lease was renewed in 2004 and expires on November 30, 2005.

Minimum lease payments are as follows:

Year	Minimum Lease Payments

2005	$	259,491
2006	92,299
2007	49,271
2008	26,078
Total	$	427,139

Lease expense amounted to $343,427 in 2004 and $50,935 in 2003.

Stock issuance

A liability has been recorded at December 31, 2004 for the issuance of 82,540 shares of common stock to be distributed to certain nurses in 2005. The liability at December 31, 2004 related to this commitment was $214,604 based on the fair market value of the common stock at December 31, 2004.

Indemnification

Pursuant to its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. To date, the Company has not incurred any costs as there have been no lawsuits or claims that would invoke these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004. The Company carries appropriate levels of Directors and Officers insurance to minimize the risk of claims that could arise from litigation.

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors and customers, its sublandlord and (ii) its agreements with investors. Under these provisions the Company has agreed to generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. To date, the Company has not incurred any costs as there have been no lawsuits or claims related to these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004.

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse

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result in these or other matters may arise from time to time that may harm the business. The Company is not currently aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

Note 17. Related Party Transactions

As of December 31, 2004, $21,752 was recorded in the financial statements as a payable to the selling shareholders of AHHC. The amount is related to customer payments received on accounts receivable that were not purchased by the Company. A selling shareholder of AHHC joined the Company as an Executive Vice President.

Ameristar Group Incorporated (“Ameristar”) is a corporation that is an affiliate of a stockholder of the Company’s and is considered to be a related party. During the year ended December 31, 2003, the Company paid Ameristar financial consulting fees totaling $50,000, with an additional $10,000 accrued but unpaid at year end. On September 9, 2003, the audit committee of the Company’s Board of Directors approved a Consulting Agreement with Ameristar pursuant to which they will provide the Company with assistance relating to the Company’s filing requirements with the Securities and Exchange Commission in exchange for a fee of $5,000 per month. This Agreement expired on March 31, 2004.

On July 21, 2003, the Company executed a Promissory Note in favor of one of its stockholders, Gable International Holdings, Ltd., in the principal amount of $25,000 in exchange for cash in the same amount. This Promissory Note accrued interest at 12% per annum and matured on September 3, 2003 at which time the principal plus accrued interest would have been payable in full. On September 29, 2003, the scheduled repayment date was extended by the maker until November 30, 2003. The note, plus accrued interest, was paid in full on December 12, 2003.

On September 2, 2003, the Company issued $675,000 in principal amount of Convertible Subordinated Promissory Notes (the “Notes”) to six investors. The Company issued additional Notes in the principal amounts of $25,000 and $120,000 on September 29 and October 16, 2003, respectively. Subject to the conversion provisions set forth in the Notes, the unpaid principal together with all accrued interest on the Notes is due and payable in full one year following the issuance date of each such Note. Interest accrues on the unpaid principal balance at a rate of ten percent (10%) per annum, simple interest, and is payable in quarterly payments. Three of the investors included Joseph M. DeLuca, Robert P. Oliver and James D. Durham. Messrs. DeLuca and Oliver are current members of the Company’s board of directors and its audit committee. Each of them purchased, together with an affiliate of Mr. DeLuca’s, Notes in the aggregate principal amount of $125,000. James D. Durham, a member of the Company’s board of directors and its Chairman and Chief Executive Officer, purchased a Note in the principal amount of $50,000. At December 31, 2004, $50,000 of the Notes remain outstanding.

The Company sub-leased until December 1, 2004, 1,980 square feet of office space at Dallas, Texas to Rison Management Services for $2,393 per month. The principal of Rison Management Services is a stockholder of the Company. The monthly rental amount is based on the Company’s rental obligation to the landlord.

Note 18. Employee Benefits

The Company has maintained the established 401(k) plans of Baker, Anderson, Christie, Inc. and PSR Nurses, Ltd. The Baker, Anderson, Christie, Inc. plan is maintained only for those who were participating on the acquisition date of August 7, 2003. The plan allows for voluntary contribution of up to the maximum dollar amount allowable by the Internal Revenue Service or $13,000 in 2004. Any matching contribution is discretionary and none were made during 2004 or 2003. All other employees are eligible to participant in the PSR Nurses, Ltd. plan once they have completed one year or 1,000 hours of service. Participants may contribute from 1% to 20% of pretax annual compensation, as defined in the Plan with a maximum deferral determined annually by the Internal Revenue

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Service. The maximum dollar limit allowable in 2004 was $13,000. The Company may contribute discretionary matching contributions and none were made during 2004 or 2003.

Note 19. Supplemental Disclosure to the Cash Flow Statement

	Year ended December 31,
	2004		2003

Supplemental cash flow disclosures:
Cash paid for interest	$	1,068,476	$	153,407
Cash paid for income taxes	—		—

Non-cash investing and financing activities:
Conversion of debt into common stock	126,548		409,000
Conversion of debt into preferred stock	29,825,860		—
Conversion of preferred stock into common stock	3,495,005		—
Issuance of the following in connection with a merger:
Common stock issued	690,000		5,941,604
Notes payable issued and assumed	275,000		5,683,173
Common stock warrants	810,000		—

Note 20. Subsequent Events

Subsequent to December 31, 2004, the Company has borrowed $1,050,000 for working capital from MedCap Partners L.P. The underlying notes bear interest at 5% and are payable on demand.

On March 29, 2005, holders of the Convertible Preferred Series B and Convertible Preferred Series B-1 voted to convert their preferred shares to common shares. The Series B converted their 3,750,000 shares of preferred into 1,250,000 shares of common and the Series B-1 converted their 93,043 shares of preferred into 9,304,300 shares of common. Convertible preferred stock and stockholders’ equity reflected on a pro forma basis as if the conversion occurred on December 31, 2004 (but not including the exercise of warrants discussed below or the issuance of common shares in connection with the acquisition discussed below) is as follows:

	As reported			Pro Forma

Series B convertible preferred stock	$	750,000		$	—
Series B-1 convertible preferred stock	30,123,400			—
Series C convertible preferred stock	1,070,510			1,070,510
Series C preferred stock warrants	2,079,910			2,079,910

Stockholders’ equity (deficit):
Common stock	1,420			2,475
Additional paid in capital	68,447,288			99,319,633
Treasury stock	—			—
Deferred non-cash stock compensation	(648,746		)	(648,746		)
Accumulated deficit	(92,317,005		)	(92,317,005		)
Total stockholders’ equity	$	(24,517,043	)	$	6,356,357

In addition, on March 29, 2005, MedCap Partners L. P. exercised 108,333 warrants to purchase Convertible Series C Preferred Stock at $60 per share. This provided the Company with $6.5 million. Proceeds were used to repay the $1,050,000 borrowed in 2005 and the $400,000 borrowed in 2004 from the Company’s majority

F-33

CRDENTIA CORP.

Unaudited Condensed Consolidated Balance Sheet

	September 30, 2005
Current assets:
Cash and cash equivalents	$	302,578
Accounts receivable, net of allowance for doubtful accounts of $99,838	4,804,828
Unbilled receivables	559,713
Other current assets	805,934
Total current assets	6,473,053

Property and equipment, net	421,753
Goodwill	22,734,825
Intangible assets, net	2,308,479
Other assets	648,245

Total assets	$	32,586,355

Current liabilities:
Accounts payable and accrued expenses	$	1,347,664
Accrued employee compensation and benefits	882,433
Revolving lines of credit	5,057,451
Current portion of notes payable to sellers	1,107,578
Other current liabilities	242,739
Subordinated convertible note, net of discount	25,000
Total current liabilities	8,662,865

Note payable to lender, less current portion, net of discount	2,237,416
Long term bonus payable	953,590
Notes payable to sellers, less current portion	2,107,912
Other long-term liabilities	5,273

Total liabilities	13,967,056

Commitments and contingencies

Convertible preferred stock, 10,000,000 shares authorized:
Series B convertible preferred stock $0.0001 par value, no shares outstanding
Series B-1 convertible preferred stock $0.0001 par value, no shares outstanding
Series C convertible preferred stock $0.0001 par value, 183,028 shares outstanding (liquidation preference of $54,908,400)	10,020,048
Series C preferred stock warrants	839,555

Stockholders’ equity (deficit):
Common stock, par value $0.0001, 150,000,000 shares authorized, 31,621,040 shares issued and 31,544,634 shares outstanding	3,162
Additional paid in capital	112,081,975
Treasury stock, 1,076,406 shares at cost	—
Deferred non-cash stock compensation	(6,267,258		)
Accumulated deficit	(98,058,183		)
Total stockholders’ equity	7,759,696

Total liabilities and stockholders’ equity	$	32,586,355

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

F-35

CRDENTIA CORP.

Unaudited Condensed Consolidated Statements of Operations

	Nine Months Ended September 30,
	2005			2004
Revenue from services	$	23,882,837		$	17,234,443
Direct operating expenses	18,743,062			13,522,086
Gross profit	5,139,775			3,712,357

Operating expenses:
Selling, general, and administrative expenses	6,362,117			6,766,896
Loss on impairment of customer related intangibles	—			121,440
Non-cash stock based compensation	671,488			299,880
Total operating expenses	7,033,605			7,188,216

Loss from operations	(1,893,830		)	(3,475,859		)

Non-cash expense for conversion of debt	—			(7,497,250		)
Interest expense, net	(1,484,369		)	(1,712,376		)

Loss before income taxes	(3,378,199		)	(12,685,485		)

Income tax expense	—			—

Net loss	$	(3,378,199	)	$	(12,685,485	)

Deemed dividend related to beneficial conversion feature on Series A convertible preferred stock	—			(1,000,000		)
Deemed dividend related to beneficial conversion feature on Series B convertible preferred stock	—			(1,250,000		)
Deemed dividend related to beneficial conversion feature on Series B-1 convertible preferred stock	—			(1,233,480		)
Deemed dividend related to beneficial conversion feature on Series B-1 warrants issued	—			(360,000		)
Deemed dividend related to beneficial conversion feature on Series C convertible preferred stock	—			(677,382		)
Non-cash preferred stock dividends	(2,362,979		)	—

Net loss attributable to common stockholders	$	(5,741,178	)	$	(17,206,347	)

Basic and diluted loss per common share attributable to common stockholders	$	(0.26	)	$	(2.71	)

Weighted average number of common shares outstanding	22,445,325			6,349,072

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

F-36

CRDENTIA CORP.

Unaudited Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30,
	2005			2004
Operating activities
Net loss	$	(3,378,199	)	$	(12,685,485	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of subordinated convertible note discounts	—			654,167
Amortization of lender note discounts	187,600			40,503
Amortization of debt issue costs	250,184			283,732
Amortization of long-term bonus payable	68,628			62,202
Non-cash stock based expense related to short-term borrowings	162,500			—
Non-cash expense for conversion of debt	—			7,497,250
Depreciation and amortization	601,072			740,226
Bad debt expense	—			50,050
Non-cash stock based compensation	671,488			299,880
Loss on impairment of customer intangibles	—			121,440
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable	(851,578		)	91,155
Unbilled receivables	(256,087		)	(50,030		)
Other assets and liabilities	(180,282		)	(217,805		)
Accounts payable and accrued expenses	(1,325,405		)	1,243,162
Accrued employee compensation and benefits	(358,920		)	(109,817		)
Net cash used in operating activities	(3,691,159		)	(1,979,370		)

Investing activities
Purchases of property and equipment	(117,415		)	(166,648		)
Cash paid for acquisition of subsidiaries, net of cash received	(4,956,980		)	(4,213,933		)
Other	23,829			—
Net cash used in investing activities	(5,050,566		)	(4,380,581		)

Financing activities
Issuance of preferred stock	—			5,060,760
Exercise of warrants for Series C preferred stock, net of expenses	7,709,183			—
Net increase (decrease) in revolving lines of credit	1,594,463			(548,126		)
Repayment of subordinated convertible note	(25,000		)	—
Proceeds from notes payable to majority stockholder	1,050,000			—
Repayment of notes payable to majority stockholder	(1,450,000		)	—
Proceeds from notes payable to lender	—			2,697,802
Repayment of note payable to lender	—			(719,444		)
Repayment of notes payable to sellers	(184,948		)	(257,494		)
Debt issuance costs	(11,867		)	(1,105,703		)
Net cash provided by financing activities	8,681,831			5,127,795

Net decrease in cash and cash equivalents	(59,894		)	(1,232,156		)
Cash and cash equivalents at beginning of period	362,472			1,469,076
Cash and cash equivalents at end of period	$	302,578		$	236,920

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

F-37

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

At the beginning of 2003, the Company was a development stage company with no commercial operations. During that year, the Company pursued its operational plan of acquiring companies in the healthcare staffing field and completed the acquisition of four operating companies. The companies acquired in 2003 – Baker Anderson Christie, Inc., New Age Nurses, Inc., Nurses Network, Inc., and PSR Nurses, Ltd. (through the acquisition of PSR Nurses Holdings Corp. and PSR Nurse Recruiting, Inc., which hold the limited partner and general partner interests in PSR Nurses, Ltd.) — provide the foundation for future growth. During 2004, the Company completed the acquisitions of Arizona Home Health Care/Private Duty, Inc. and Care Pros Staffing, Inc. On March 29, 2005, the Company acquired TravMed USA, Inc. and Health Industry Professionals, LLC. On May 4, 2005, the Company acquired Prime Staff, LP and Mint Medical Staffing Odessa.

Basis of Presentation

The accompanying unaudited financial data as of and for the nine months ended September 30, 2005 and 2004 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s annual Report on Form 10-KSB for the year ended December 31, 2004.

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

Liquidity

The Company generated a net loss of $3,378,199 for the nine months ended September 30, 2005 and used cash in operations of $3,691,159 during the first nine months of 2005. Additionally, although the Company ended the first nine months of 2005 with a working capital deficit of $2.2 million, the Company was able to secure additional funding during 2004 and the first nine months of 2005 to finance its operations as it continues to execute its business plan to acquire and grow companies involved in healthcare staffing. As discussed in Note 8, in March 2005 the Company’s majority stockholder exercised warrants to purchase 108,333 shares of Series C Convertible Preferred Stock providing $6.4 million to the Company. Also, as discussed in Note 8, in May 2005 the Company’s majority stockholder exercised warrants to purchase 22,187 shares of Series C Convertible Preferred Stock providing $1.3 million to the Company. The infusion of $7.7 million into the Company enabled it to acquire additional companies and to retire certain liabilities. Also, following the three acquisitions discussed in Note 2, the Company increased its borrowings under its accounts receivable line, but at September 30, 2005, there is no additional borrowing availability under this line. In the third quarter of 2005, additional short-term funding of $600,000 in the form of an over-advance on the accounts receivable line was secured from Bridge Healthcare Finance, LLC. The Company will need to raise $1.5 million to $2.0 million before calendar year end 2005 or pursue other strategic options to fund operations.

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There is no assurance that the Company will be able to raise the amount of debt or equity capital required to meet its objectives. If additional debt or equity capital is not readily available, the Company will be forced to scale back its acquisition activities and its operations until income exceeds expenses. This would result in an overall slowdown of the Company’s development and could result in the failure of the Company’s business and the Company will not be able to continue as a going concern.

Stock-Based Compensation

If the Company had elected the fair value method of accounting for employee stock-based compensation, compensation cost would be recorded at the estimated fair value of the stock award grants over the service period, regardless of later changes in stock prices and price volatility. The date of grant fair values for options granted have been estimated based on the Black-Scholes pricing model.

The table below shows net loss per share attributable to common stockholders for the nine months ended September 30, 2005 and 2004 as if the Company had elected the fair value method of accounting for stock options.

	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004

Net loss attributable to common stockholders as reported	$	(5,741,178	)	$	(17,206,347	)
Add: stock-based employee compensation in reported net loss, net of related tax effects	671,488			299,880

Deduct: stock-based employee compensation determined under fair value method for all awards, net of related tax effects	(790,116		)	(2,352,628		)

Proforma net loss attributable to common stockholders, as adjusted	$	(5,859,806	)	$	(19,259,095	)

Loss per share attributable to common stockholders:
Basic and diluted, as reported	$	(.26	)	$	(2.71	)
Basic and diluted, as adjusted	$	(.26	)	$	(3.03	)

Earnings Per Share

Basic per share data has been computed on the loss attributable to common stockholders for each period divided by the weighted average number of shares of common stock outstanding for each period (excluding the restricted common stock issued to certain officers in May 2005 as discussed in Note 9). Diluted earnings per common share include both the weighted average number of common shares and any common share equivalents

F-39

such as convertible securities, options or warrants in the calculation. As the Company recorded net losses for the nine months ended September 30, 2005 and 2004, common share equivalents outstanding would be anti-dilutive, and as such, have not been included in diluted weighted average shares outstanding. Common share equivalents that were excluded in the September 30, 2005 calculations totaled 41,546,158.

New Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. Statement 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company expects to adopt Statement 123R on January 1, 2006.

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

Note 2. Acquisitions

TravMed USA, Inc.

On March 29, 2005, the Company acquired TravMed USA, Inc. (“TravMed”) in exchange for $3,215,490 in cash, $3,215,490 in notes payable, and $125,650 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing industry. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Tangible assets acquired	$	1,189,471
Customer related intangible assets	492,000
Goodwill	5,916,549
Total assets acquired	7,598,020
Liabilities assumed	1,041,390
Net assets acquired	$	6,556,630

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

Health Industry Professionals, LLC

On March 29, 2005, the Company acquired Health Industry Professionals, LLC (HIP) in exchange for $1,350,900 in cash, 1,283,684 shares of the Company’s Common Stock valued at $2,601,600, (determined by the average of $2.03 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date), and $30,653 of net acquisition costs. The primary purpose of the acquisition

F-40

was to enable the Company to expand its market share in the nurse staffing market. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Tangible assets acquired	$	44,000
Customer related intangible assets	342,000
Goodwill	3,647,153
Total assets acquired	4,033,153
Liabilities assumed	50,000
Net assets acquired	$	3,983,153

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

Prime Staff, LP and Mint Medical Staffing Odessa

On May 4, 2005, the Company acquired Prime Staff, LP and Mint Medical Staffing Odessa in exchange for $150,000 in cash, 165,042 shares of the Company’s Common Stock valued at $287,264 (determined by the average of $1.74 per share which approximates the trading value as quoted on the OTC Bulletin Board 3 days before and 3 days after the acquisition date), and $78,638 of net acquisition costs. The primary purpose of the acquisition was to enable the Company to expand its market share in the nurse staffing market. The following table summarizes the assets acquired and liabilities assumed as of the closing date:

Tangible assets acquired	$	33,400
Customer related intangible assets	292,000
Goodwill	190,502
Total assets acquired	515,902
Liabilities assumed	—
Net assets acquired	$	515,902

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

F-41

Unaudited Pro Forma Summary Information

The following unaudited pro forma summary approximates the consolidated results of operations as if all acquisitions (including 2004 acquisitions) had occurred as of the beginning of each period presented, after giving effect to certain adjustments, including amortization of specifically identifiable intangibles and interest expense. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transactions taken place at the beginning of the periods presented or of future results of operations.

	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004

Revenue from services	$	30,167,958		$	41,814,519

Net loss	(3,112,036		)	(11,529,551		)

Net loss attributable to common stockholders	(5,475,015		)	(16,050,413		)
Basic and diluted net loss per common share attributable to common stockholders	(.24		)	(2.01		)
Weighted-average shares of common stock outstanding (basic and diluted)	22,929,376			7,997,798

Note 3. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	September 30, 2005

Accounts payable	$	752,632
Accrued expenses	595,032

	$	1,347,664

Note 4. Revolving Line of Credit

On June 16, 2004, the Company entered into a Loan and Security Agreement with Bridge Healthcare Finance, LLC, pursuant to which the Company obtained a revolving credit facility up to $15,000,000 (the “Loan”). During the first quarter of 2005, the revolving line of credit facility was reduced to $10,000,000 permitting the Company to lower its effective interest rate through lower unused line fees. The Loan had an original term of three years and bears interest at a rate equal to the greater of three percent (3.0%) per annum over the prime rate or nine and one-half percent (9.5%) per annum (9.75% at September 30, 2005). Interest is payable monthly. Accounts receivable serves as security for the Loan and the Loan is subject to certain financial and reporting covenants. Customer payments are used to repay the advances on the credit facility after deducting charges for interest expense, unused line and account management fees. Except in certain limited circumstances, the Loan cannot be prepaid in full without the Company incurring a significant prepayment penalty. The financial covenants are for the maintenance of minimum tangible net worth, minimum debt service coverage ratios, minimum EBITDA, maximum capital expenditure limits and maximum operating lease obligations. In May 2005, the covenants were restructured;

F-42

however, at September 30, 2005, the Company was not in compliance with the restructured covenants. Bridge Healthcare Finance, LLC waived compliance with the covenants for the three months ended September 30, 2005. The Loan includes events of default (with grace periods as applicable) and provides that, upon the occurrence of certain events of default, payment of all amounts payable under the Loan, including the principal amount of, and accrued interest on, the Loan may be accelerated. There are also cross default provisions between the Loan and the Term Loan discussed in Note 5. The outstanding balance on the Loan is $4,457,451 at September 30, 2005 (excluding the over-advance of $600,000 described below), which represents the total availability under the line relative to the amount of receivables outstanding at that date.

During the third quarter of 2005, Bridge Healthcare Finance, LLC made a $600,000 credit line available to the Company in the form of an over-advance on the Company’s Loan. The line of credit will be used as necessary to pay certain remaining amounts due on acquisitions completed in March, 2005 and for working capital purposes. The line accrues interest at the revolving line of credit rate discussed above. The $600,000 has been completely drawn down at September 30, 2005, and must be repaid by December 31, 2005. As additional consideration for the line, the Company is required to pay a monthly fee of $15,000 through December 31, 2005. The maturity date of the related revolving credit Loan discussed above is being extended for an additional year through June 2008. The prepayment penalty discussed above is applicable for the one-year extension period except the amount is reduced in the event of a change in control of the Company.

Note 5. Notes Payable to Lender

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

The Term Loan provides that the Company shall issue warrants to purchase shares of Common Stock to the lender up to 12% of the Company’s overall capitalization on the date of borrowing. On August 31, 2004, the Company issued warrants to purchase 905,758 shares of Common Stock at a price of $3.15 per share in connection with the first borrowing under the credit facility. As a result, the Term Loan has been recorded net of a discount of $810,000 which represents the estimated fair market value related to the warrants at the date of issuance. The discount is being amortized to interest expense over the life of the Term Loan.

Except in certain limited circumstances, the Term Loan cannot be prepaid in full without the Company incurring a significant prepayment penalty. The Term Loan also contains certain financial covenants, including the maintenance of minimum tangible net worth, minimum debt service coverage ratios, minimum EBITDA, maximum capital expenditure limits and maximum operating lease obligations. At March 31, 2005, the Company was out of compliance with certain financial covenants of the Term Loan, for which a waiver was received from the lender. In May 2005, the covenants were restructured; however, at September 30, 2005, the Company was not in compliance with the restructured covenants. Bridge Healthcare Finance, LLC waived compliance with the covenants for the three months ended September 30, 2005. The Term Loan includes events of default (with grace periods as applicable) and provides that, upon the occurrence of certain events of default, payment of all amounts payable under the Term Loan, including the principal amount of, and accrued interest on, the Term Loan may be accelerated. There are also cross default provisions between the Term Loan and the Loan.

Note 6. Notes Payable to Stockholders

On November 29, 2004, MedCap Partners L.P., the Company’s majority stockholder, loaned the Company $400,000 for working capital purposes. During the first quarter of 2005, the Company borrowed an additional $1,050,000 from the majority stockholder for working capital purposes. The notes required interest at 5% and were payable on demand. These notes plus accrued interest were repaid on March 29, 2005. As an incentive to the majority stockholder to provide the working capital until acquisitions were consummated in the first quarter of 2005,

F-43

the Company issued 77,751 shares of common stock to the majority stockholder at an average market value of $2.09 per share. The related expense of $162,500 was recorded as interest expense in the accompanying statement of operations during the first quarter of 2005.

Note 7. Notes Payable to Sellers

As partial consideration for the acquisition of TravMed USA, Inc. on March 29, 2005, the Company issued unsecured subordinated notes to the former TravMed stockholders in the total amount of $3,215,490. The notes are three-year convertible notes bearing interest at 7.75%. Monthly interest payments are required for the first six months followed by principal and interest payments the next thirty months to fully repay the debt. See additional discussion in Note 11.

Note 8. Convertible Preferred Stock

Convertible Preferred Stock Issued and Outstanding

The Company is authorized to issue 10,000,000 shares of preferred stock at a par value of $0.0001. At September 30, 2005 and December 31, 2004 there are shares issued and outstanding consisting of the following:

	September 30, 2005
	Shares Issued	Shares Outstanding

Series B Convertible Preferred Stock	—	—
Series B-1 Convertible Preferred Stock	—	—
Series C Convertible Preferred Stock	183,028	183,028

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

Series of Convertible Preferred Stock	Shares Outstanding	Carrying Amount		Common Shares Issuable Upon Conversion	Beneficial Conversion Recorded at Issuance

C	183,028	$	10,020,048	18,302,800	$	1,070,510

Series B Convertible Preferred Stock (Series B)

F-44

is convertible at the option of the holder into common shares at an initial conversion ratio of one share of Common Stock for three shares of Series B. The conversion ratio upon voluntary conversion is subject to adjustment under certain circumstances. Unless previously voluntarily converted prior to such time the Series B shares will be automatically converted into Common Stock at a conversion ratio of one share of Common Stock for three shares of Series B upon the earlier of the closing of an underwritten public offering of Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series B.

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

On September 30, 2004, the holder voluntarily converted 2,500,000 shares of Series B into 833,333 shares of Common Stock. On March 29, 2005, the holder voluntarily converted 3,750,000 shares of Series B into 1,250,000 shares of Common Stock.

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

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

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

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

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outstanding principal and accrued and unpaid interest under certain promissory notes (Seller Notes) that were issued in 2003 in connection with the purchase of certain subsidiaries.

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

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

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

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

Series C Convertible Preferred Stock (Series C)

The holders of Series C are entitled to receive, when declared by the Board of Directors, a dividend on each quarter end beginning September 30, 2004 and ending December 31, 2005 in an amount equal to 2.5 shares of Common Stock for each share of outstanding Series C held by them. In the event of any liquidation or winding up of the Company, the holders of the Series C will be entitled to receive in preference to the holders of Common Stock an amount equal to five times their initial purchase price plus any declared but unpaid dividends and any remaining liquidation proceeds will thereafter be distributed on a pro rata basis to the holders of the Company’s Common Stock and any other series of Preferred Stock expressly entitled to participate in such distribution. Assuming exercise of all of the warrants to purchase shares of Series C Preferred Stock, upon a liquidation or winding up of the Company, the holders of Series C Preferred Stock would be entitled to receive approximately $92,000,000 prior to the payment of any amounts to the holders of other equity securities. The Series C is convertible at the option of the holder into common shares at an initial conversion ratio of one hundred shares of Common Stock for each share of Series C. The conversion ratio upon voluntary conversion is subject to adjustment under certain circumstances. Unless previously voluntarily converted prior to such time, the Series C will be automatically converted into Common Stock at an initial conversion ratio of one hundred shares of Common Stock for each share of Series C

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upon the earlier of (i) the closing of an underwritten public offering of our Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, with aggregate net proceeds of at least $25 million, or (ii) the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of Series C. The description of the foregoing rights, preferences and privileges of the Series C is qualified in its entirety by the Certificate of Designations, Preferences and Rights of Series C filed with the Secretary of State of the State of Delaware on August 31, 2004.

Warrants to Purchase Convertible Preferred Stock

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

Series of Convertible Preferred Stock	Warrants	Exercise Price Per share

B-1	6,000	$	60
C	124,077	$	60

On March 29, 2005, 108,333 of the Series C warrants were exercised providing proceeds, net of issue costs, of $6,435,687. On May 2, 2005, 22,187 of the Series C warrants were exercised providing net proceeds of $1,273,496. Dividends accrue on warrants but are payable only upon exercise. Accordingly, dividends declared for the quarters September 30, 2004, December 31, 2004 and March 31, 2005 became payable on the warrants exercised at March 31, 2005, with an estimated fair value of $1,411,464. These dividends were paid in March 2005 through the issuance of 705,732 shares of common stock. Dividends relative to the 22,187 warrants exercised in May 2005 amounted to $200,792 and were paid in the second quarter of 2005 through the issuance of 110,935 shares of common stock.

Note 9. Common Stock

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

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

On May 31, 2005, the Company granted 3,700,000 shares of restricted stock to four of its officers. The restricted stock has been valued at $6,290,000, which represents the trading value of the stock as quoted on the OTC Bulletin Board on May 31, 2005. All shares of restricted stock vest in five years or earlier in the event the average daily trading volume for the Company’s common stock reaches specified levels or in certain other circumstances. The $6,290,000 value has been reflected as common stock issued and outstanding with an offsetting amount included in the equity section as deferred non-cash stock compensation. The deferred non-cash stock compensation amount is being amortized monthly over the five year expected vesting period of the restricted stock grant. The President’s restricted stock grant of 900,000 shares is subject to forfeiture of 300,000 shares per quarter for the second, third and fourth quarters of 2005 if certain revenue and EBITDA targets are not achieved. The second quarter and third quarter targets were not achieved, but forfeiture has not yet been reflected since the achievement of targets is ultimately measured on a cumulative basis through December 31, 2005. The remaining grants are not

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subject to forfeiture except in the event grantee’s continuous service is terminated for any reason, other than death or disability prior to the fifth anniversary of the grant date. Non-cash stock based compensation in the accompanying statement of operations for the third quarter and nine months ended September 30, 2005 includes $314,500 and $419,333, respectively, related to these grants.

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

In August 2005, the Board of Directors approved the grant of options to key employees to purchase 95,850 shares of the Company’s common stock under the 2004 option plan at $1.60 per share (fair market value on the date of grant). The options vest 25% after one year and monthly thereafter on a straight-line basis over three years. The options expire in ten years.

Note 10. Supplemental Disclosure to the Cash Flow Statement

	September 30, 2005		September 30, 2004

Supplemental cash flow disclosures:
Cash paid for interest	$	754,830	$	713,689
Cash paid for income taxes	—		—

Non-cash investing and financing activities:
Conversion of debt into common stock	—		126,548
Conversion of debt into preferred stock	—		9,296,590
Conversion of preferred stock into common stock	30,873,400		3,496,720
Issuance of the following in connection with acquisitions:
Common stock issued	2,888,864		690,000
Revolving credit line assumed	941,390		—
Notes payable issued	3,215,490		275,000
Common stock issued as payment of preferred stock dividends	3,390,233		—
Common stock issued associated with working capital loans from majority stockholder	162,500		—
Preferred stock warrants	—		1,658,162
Common stock warrants	—		1,458,124

Note 11. Subsequent Events

The Company did not make the October 31, 2005 debt service payments of $118,246 required by terms of the $3.2 million of notes payable to sellers. Accordingly, the Company received a notice of default in early November 2005. The due date of the notes may be accelerated such that the entire balance of the notes payable to sellers is due, but such acceleration option cannot be exercised until November 21, 2005. If sellers exercise their option, the company has six months to cure the default. If cured, payment due dates revert back to the original non-accelerated terms. The default under the notes payable to sellers triggers defaults under the revolving loan and term loan discussed in Notes 4 and 5. The Company expects to cure the defaults on the notes payable to sellers, revolving loan and term loan by November 30, 2005; accordingly, the notes payable to sellers due beyond one year and the term loan continue to be classified as non-current. Also, as a result of this default, Bridge Healthcare Finance, LLC has an option to discontinue making revolving credit loans to the Company on receivables of TravMed USA, Inc., the acquisition which gave rise to the notes payable to sellers. On November 9, 2005, Bridge Healthcare Finance, LLC waived their right to exercise this option through November 30, 2005.

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Common stock offered by selling stockholders		15,110,740 (1)
Use of proceeds		We will not receive any proceeds from the sale of the common stock, but we will receive funds from the exercise of warrants by selling stockholders.
OTC Bulletin Board		CRDE.OB

	Page

PROSPECTUS SUMMARY	1

THE OFFERING	2

ADDITIONAL INFORMATION	2

RISK FACTORS	3

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	10

USE OF PROCEEDS	11

MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS	11

DIVIDEND POLICY	11

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND PLAN OF OPERATIONS	12

BUSINESS	19

LEGAL PROCEEDINGS	23

MANAGEMENT	23

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	27

EXECUTIVE COMPENSATION AND OTHER MATTERS	30

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	37

DESCRIPTION OF PROPERTY	43

SELLING STOCKHOLDERS	43

DESCRIPTION OF CAPITAL STOCK OF THE COMPANY	46

PLAN OF DISTRIBUTION	49

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	50

LEGAL MATTERS	51

EXPERTS	51

ADDITIONAL INFORMATION	51