10-Q

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to

Commission File Number 001-31299

MEDICAL STAFFING NETWORK HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	65-0865171
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

901 Yamato Road

Suite 110

Boca Raton, Florida 33431

(Address of principal executive offices)

(Zip Code)

(561) 322-1300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes  ý No  o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  30,230,620 shares of common stock, par value $0.01 per share, were outstanding as of November 2, 2004.

MEDICAL STAFFING NETWORK HOLDINGS, INC.

INDEX

PART I.FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets as of September 26, 2004 (Unaudited) and December 28, 2003	3
	Condensed Consolidated Statements of Operations (Unaudited) for the three months and nine months ended September 26, 2004 and September 28, 2003	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 26, 2004 and September 28, 2003	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 6.	EXHIBITS	28
SIGNATURES		29
EXHIBIT INDEX		30

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PART I - FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)	September 26, 2004			December 28, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	397		$	825
Accounts receivable, net of allowance for doubtful accounts of $1,081 and $1,920 at September 26, 2004 and December 28, 2003, respectively	60,850			68,602
Prepaid expenses	8,001			9,140
Other current assets	3,606			4,645
Total current assets	72,854			83,212
Furniture and equipment, net of accumulated depreciation of $17,265 and $13,112 at September 26, 2004 and December 28, 2003, respectively	8,966			11,377
Goodwill, net of accumulated amortization of $8,545 at September 26, 2004  and December 28, 2003	125,052			125,028
Intangible assets, net of accumulated amortization of $1,664 and $1,174 at September 26, 2004 and December 28, 2003, respectively	2,697			3,187
Other assets	5,747			6,066
Total assets	$	215,316		$	228,870
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	13,005		$	7,048
Accrued payroll and related liabilities	9,356			6,616
Current portion of long-term debt	12,000			—
Current portion of capital lease obligations	580			1,090
Total current liabilities	34,941			14,754
Long-term debt, net of current portion	20,469			54,978
Deferred income taxes	9,492			7,115
Capital lease obligations, net of current portion	91			418
Other liabilities	219			318
Total liabilities	65,212			77,583
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 75,000 authorized: 30,231 and 30,209 issued and outstanding at September 26, 2004 and December 28, 2003, respectively	302			302
Additional paid-in capital	284,411			284,346
Accumulated deficit	(134,609		)	(133,361		)
Total stockholders’ equity	150,104			151,287
Total liabilities and stockholders’ equity	$	215,316		$	228,870

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

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended				Nine Months Ended
(in thousands, except per share amounts)	Sept. 26, 2004		Sept. 28, 2003		Sept. 26, 2004			Sept. 28, 2003
Service revenues	$	106,204	$	123,686	$	318,599		$	405,154
Cost of services rendered	83,167		97,147		250,715			314,552
Gross profit	23,037		26,539		67,884			90,602
Operating expenses:
Selling, general and administrative	16,115		18,733		50,409			61,604
Corporate and administrative	3,829		3,112		11,414			8,500
Depreciation and amortization	1,615		1,757		4,912			5,082
Income from operations	1,478		2,937		1,149			15,416
Interest expense, net	780		1,147		2,751			3,549
Income (loss) from continuing operations before provision for (benefit from) income taxes	698		1,790		(1,602		)	11,867
Provision for (benefit from) income taxes	410		693		(354		)	4,723
Income (loss) from continuing operations	288		1,097		(1,248		)	7,144
Loss from discontinued operations, net of taxes	—		—		—			(506		)
Net income (loss)	$	288	$	1,097	$	(1,248	)	$	6,638
Income (loss) per share – basic:
Income (loss) from continuing operations	$	0.01	$	0.04	$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—		—		—			(0.02		)
Basic net income (loss) per share	$	0.01	$	0.04	$	(0.04	)	$	0.22
Income (loss) per share – diluted:
Income (loss) from continuing operations	$	0.01	$	0.04	$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—		—		—			(0.02		)
Diluted net income (loss) per share	$	0.01	$	0.04	$	(0.04	)	$	0.22
Weighted average number of common shares outstanding:
Basic	30,231		30,199		30,227			30,184
Diluted	30,326		30,618		30,227			30,816

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

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
(in thousands)	Sept. 26, 2004			Sept. 28, 2003
Operating activities
Net income (loss)	$	(1,248	)	$	6,638
Loss from discontinued operations, net of taxes	—			506
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	4,912			5,082
Amortization of debt issuance cost	507			811
Deferred income taxes	2,603			3,716
Provision for doubtful accounts	703			2,714
Other	55			77
Changes in operating assets and liabilities:
Accounts receivable	7,049			12,599
Prepaid expenses and other current assets	1,912			(2,396		)
Other assets	(185		)	(413		)
Accounts payable and accrued expenses	5,957			(2,054		)
Accrued payroll and related liabilities	2,740			(1,003		)
Other liabilities	(99		)	(29		)
Cash provided by continuing operations	24,906			26,248
Cash used in discontinued operations	—			(500		)
Cash provided by operating activities	24,906			25,748
Investing activities
Purchases of furniture and equipment	(1,082		)	(3,126		)
Capitalized internal software costs	(930		)	(895		)
Cash paid for acquisitions, net of cash acquired	(24		)	(10,803		)
Cash used in investing activities	(2,036		)	(14,824		)
Financing activities
Net repayments under revolving credit facility	(17,509		)	(13,000		)
Payments on term note	(5,000		)	(5,197		)
Proceeds from borrowings on term note	—			12,000
Principal payments under capital lease obligations	(837		)	(824		)
Proceeds from exercise of stock options	48			353
Cash used in financing activities	(23,298		)	(6,668		)
Net increase (decrease) in cash and cash equivalents	(428		)	4,256
Cash and cash equivalents at beginning of period	825			4,595
Cash and cash equivalents at end of period	$	397		$	8,851
Supplemental disclosure of noncash investing and financing activities
Purchase of equipment through capital leases	$	—		$	185
Supplemental disclosures of cash flow information
Interest paid	$	1,514		$	2,884
Income taxes paid (refunded), net	$	(4,444	)	$	3,244

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

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MEDICAL STAFFING NETWORK HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the year ending December 26, 2004.

The condensed consolidated balance sheet as of December 28, 2003 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

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For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 28, 2003 (File No. 001-31299).

2. STOCK-BASED COMPENSATION PLANS

The Company grants stock options for a fixed number of common shares to employees and directors from time to time. The Company accounts for employee stock options using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock option grants when the exercise price of the options equals, or is greater than, the market value of the underlying stock on the date of grant. Accordingly, the Company did not recognize any compensation cost during the three and nine months ended September 26, 2004 and September 28, 2003 for stock-based employee compensation awards.

Application of the fair value method prescribed by Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to the Company’s options would require the Company to record the following pro forma net income (loss) and net income (loss) per share amounts (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	Sept. 26, 2004			Sept. 28, 2003			Sept. 26, 2004			Sept. 28, 2003
Net income (loss) as reported	$	288		$	1,097		$	(1,248	)	$	6,638
Fair value method of stock based compensation, net of taxes	(339		)	(335		)	(884		)	(897		)
Pro forma net income (loss)	$	(51	)	$	762		$	(2,132	)	$	5,741
Per share amounts:
As reported basic income (loss) from continuing operations	$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—			—			—			(0.02		)
As reported basic income (loss)	$	0.01		$	0.04		$	(0.04	)	$	0.22
As reported diluted income (loss) from continuing operations	$	0.01		$	0.04		$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—			—			—			(0.02		)
As reported diluted income (loss)	$	0.01		$	0.04		$	(0.04	)	$	0.22
Pro forma basic income (loss) from continuing operations	$	—		$	0.03		$	(0.07	)	$	0.21
Discontinued operations, net of taxes	—			—			—			(0.02		)
Pro forma basic income (loss)	$	—		$	0.03		$	(0.07	)	$	0.19
Pro forma diluted income (loss) from continuing operations	$	—		$	0.03		$	(0.07	)	$	0.21
Discontinued operations, net of taxes	—			—			—			(0.02		)
Pro forma diluted income (loss)	$	—		$	0.03		$	(0.07	)	$	0.19

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

	Three Months Ended		Nine Months Ended
	Sept. 26, 2004	Sept. 28, 2003	Sept. 26, 2004	Sept. 28, 2003
Expected life in years	3 – 8	3 – 8	3 – 8	3 – 8
Risk-free interest rate	3.25% – 4.40%	2.02% – 3.68%	3.25% – 4.40%	2.02% – 3.68%
Volatility	65%	77%	65%	77%
Dividend yield	0%	0%	0%	0%

3. DISCONTINUED OPERATIONS

The Company discontinued its physician staffing services in the second quarter of 2003. Pursuant to the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, loss from discontinued operations, net of taxes, in the Company’s condensed consolidated statement of operations for the nine months ended September 28, 2003. There were no revenues or cost of services rendered from physician staffing services during the three and nine months ended September 26, 2004 and for the three months ended September 28, 2003. There were no net assets of the discontinued operations at September 26, 2004. Net assets of the discontinued operations were less than $0.1 million at December 28, 2003, and consisted solely of current assets.

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

	Three Months Ended Sept. 28, 2003		Nine Months Ended Sept. 28, 2003
Service revenues	$	—	$	495
Cost of service revenues	—		(1,095		)
Gross loss	$	—	$	(600	)
Loss before benefit from income taxes	$	—	$	(845	)
Benefit from income taxes	—		339
Loss from discontinued operations, net of taxes	$	—	$	(506	)

4. RESTRUCTURING CHARGE

As announced on June 16, 2003, the Company completed its plan to restructure its operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure the Company had put in place to support multiple growth initiatives and reflected the softening in demand for its services. Approximately 130 branch staff and corporate employees

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were terminated as part of the restructuring.  As a result, in the second quarter of 2003, the Company recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in the Company’s consolidated statements of operations for the nine months ended September 28, 2003. No amounts have been or are expected to be incurred or paid in subsequent quarters relating to this restructuring.  A breakdown of the restructuring charge is as follows (in thousands):

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

5. ACQUISITION

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

6. LONG-TERM DEBT

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

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

On December 22, 2003, the Company entered into a new senior credit facility (the Senior Credit Facility) which replaced the previous facility. The Senior Credit Facility provided a $65.0 million revolving credit facility (the Revolver) which expires in December 2006 and a $17.0 million term note (the Term Note) which is due in December 2005.

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On June 25, 2004, the Company amended the Senior Credit Facility to reduce the Revolver capacity from $65.0 million to $60.0 million. The amendment also favorably modified certain financial covenants while increasing the applicable margin on the Revolver by 0.5% and on the Term Note by 1.0%. In conjunction with the amendment, on July 1, 2004, the Company repaid $5.0 million of borrowings under the Term Note. The $5.0 million can not be re-borrowed under the terms of the Term Note. The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and a $7.0 million availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver.

The Revolver bears interest at either prime or LIBOR plus an applicable margin (4.4% at September 26, 2004) with interest payable monthly or as interest rate contracts expire. The Term Note bears interest at LIBOR plus an applicable margin (13.0% at September 26, 2004) with interest payable monthly. Unused capacity under the Revolver bears interest at 0.5% which is payable monthly. The Senior Credit Facility is secured by substantially all of the assets of the Company and contains certain covenants that, among other things, limit the payments of dividends, restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. As of September 26, 2004, the Company was in compliance with all covenants.

As of September 26, 2004, $12.0 million was outstanding on the Term Note and $20.5 million was outstanding under the Revolver. As of September 26, 2004, an additional $22.6 million was immediately available for borrowing under the Revolver.

Under the terms of the Senior Credit Facility, on a fiscal year basis, the Company is required to repay the Term Note based on a percentage of excess cash flow, as defined. Based on the results for the nine months ended September 26, 2004, the Company could be required to repay all or a substantial portion of the $12.0 million outstanding on the Term Note, as such, the Company has classified the $12.0 million as current in the condensed consolidated balance sheet. The Company expects to have adequate availability under the Revolver should repayment of all or a substantial portion of the Term Note be required.

7. COMPREHENSIVE INCOME (LOSS)

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

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

	Three Months Ended					Nine Months Ended
	Sept. 26, 2004		Sept. 28, 2003			Sept. 26, 2004				Sept. 28, 2003
Net income (loss)	$	288	$	1,097		$		(1,248	)	$	6,638
Other comprehensive loss:
Unrealized loss on derivative, net of taxes	—		(13		)	—				(39		)
Total comprehensive income (loss)	$	288	$	1,084		$	(1,248		)	$	6,599

8. INCOME (LOSS) PER SHARE

	Three Months Ended				Nine Months Ended
	Sept. 26, 2004		Sept. 28, 2003		Sept. 26, 2004			Sept. 28, 2003
	(in thousands, except per share amounts)
Numerator:
Numerator for basic income (loss) per share	$	288	$	1,097	$	(1,248	)	$	6,638
Denominator:
Denominator for basic income (loss) per share-weighted average shares	30,231		30,199		30,227			30,184
Effect of dilutive shares:
Employee stock options	95		419		—			632
Denominator for diluted earnings per share-adjusted weighted average shares and assumed conversions	30,326		30,618		30,227			30,816
Income (loss) per share – basic:
Income (loss) before discontinued operations	$	0.01	$	0.04	$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—		—		—			(0.02		)
Basic net income (loss) per share	$	0.01	$	0.04	$	(0.04	)	$	0.22
Income (loss) per share – diluted:
Income (loss) before discontinued operations	$	0.01	$	0.04	$	(0.04	)	$	0.24
Discontinued operations, net of taxes	—		—		—			(0.02		)
Diluted net income (loss) per share	$	0.01	$	0.04	$	(0.04	)	$	0.22

For the three months ended September 26, 2004, 0.4 million incremental options were excluded from the denominator for diluted earnings per share as the impact of conversion was anti-dilutive. For the nine months ended September 26, 2004, 1.9 million options were excluded in the calculation of diluted shares as the impact of their conversion was anti-dilutive due to the net loss. For the three and nine months ended September 28, 2003, 0.3 million incremental options were excluded from the denominator for diluted earnings per share as the impact of conversion was anti-dilutive.

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9. RELATED PARTY TRANSACTIONS

The Company provides staffing services to a healthcare system of which one of the Company’s directors, Philip A. Incarnati, is the President and Chief Executive Officer. During each of the three months ended September 26, 2004 and September 28, 2003, the Company billed approximately $0.8 million, for its services to the healthcare system.  During the nine months ended September 26, 2004 and September 28, 2003, the Company billed approximately $2.5 million and $1.4 million, respectively, for its services to the healthcare system.  The Company had a receivable balance from the healthcare system of $0.2 million and $0.3 million at September 26, 2004 and December 28, 2003, respectively.

The Company paid less than $0.1 million during the nine months ended September 26, 2004 and September 28, 2003, in donations to a Florida Atlantic University (FAU) Foundation to support a center for nursing. One of the Company’s directors, Dr. Anne Boykin, is the Dean of the College of Nursing at FAU, a university located in Boca Raton, Florida.

10. CONTINGENCIES

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

On March 29, 2004, a third class action lawsuit brought on behalf of the same class of the Company’s stockholders, making claims under the Securities Act similar to those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants removed this case to the United States District Court for the Southern District of Florida and Plaintiff moved to remand the case back to the Florida Circuit Court of the Fifteenth Judicial Circuit, which motion Defendants opposed.  On September 16, 2004 the federal district court entered an order granting Plaintiff’s motion to remand. Defendants filed their Notice of Appeal to the Eleventh Circuit on October 13, 2004, by which they appealed the remand order. Also on October 13, 2004, Defendants moved to stay the state court proceedings. The Zia complaint seeks rescission or damages as well as certain equitable relief and costs and attorney fees.

On March 2, 2004, another class action complaint was filed against the Company and certain of its directors and executive officers in the United States District Court for the Southern District of Florida by Jerome Gould, individually and on behalf of a class of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003. The complaint alleges that certain of the Company’s public disclosures during the class period

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were materially false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder. The complaint seeks compensatory damages, costs and attorney fees.

On July 2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated, Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed Lead Counsel for Plaintiffs. On September 1, 2004, Lead Plaintiff filed his consolidated amended class action complaint (the “Complaint”). The Complaint makes allegations on behalf of a class consisting of purchasers of the Company’s common stock pursuant to or traceable to the Company’s initial public offering in April 2002, for purposes of the Securities Act claims, and on behalf of the Company’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003, for purposes of the Exchange Act claims. The Complaint alleges that certain of the Company’s public disclosures during the class period were materially false and misleading in violation of Section 11 of the Securities Act and Section 10(b) of the Exchange Act. The Complaint seeks compensatory damages as well as costs and attorney fees. On November 1, 2004, Defendants filed their motion to dismiss the Complaint.

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

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

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

Introduction

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

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

•Results of operations.  This section provides an analysis of our results of operations for the three and nine months ended September 26, 2004 relative to the three and nine months ended September 28, 2003 presented in the accompanying condensed consolidated statements of operations.

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

•Critical accounting policies.  This section discusses those accounting policies that are both considered important to our financial condition and results of operations, and require significant judgment and estimates on the part of management in their application.

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

Overview

Business Description

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

Our per diem nurse staffing division currently operates in an integrated network of branches that are organized into several geographic regions. These branches serve as our direct contact with our healthcare professionals and clients. The cost structure of a typical branch is fixed, consisting of limited personnel, office space rent, information systems infrastructure and

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office supplies. We have been able to develop a highly efficient branch management model that is easily scalable. During 2004, we expanded our services to provide temporary general staffing. Our per diem general staffing assignments place individuals in a variety of areas including clerical, janitorial and food services. We believe that general staffing compliments our temporary healthcare staffing and makes us a full service provider to our existing clients.

Industry Trends

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

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

Acquisition

In the first nine months of 2004, we made no acquisitions. In March 2003, we purchased certain assets of one healthcare staffing company for an aggregate purchase price of $10.8 million. The acquisition was accounted for as a purchase and, accordingly, the results of the acquired business were included in our condensed consolidated financial statements from the date we assumed substantial control.

Service Revenues

Our temporary staffing services represent 100% of our consolidated revenue for the three and nine months ended September 26, 2004 and September 28, 2003. Approximately 75% of our revenues for the three and nine months ended September 26, 2004 were derived from per diem nurse staffing. Allied healthcare professional staffing, which includes various non-nursing specialties such as, radiology and diagnostic imaging specialists and clinical laboratory technicians, represented approximately 16% of our revenues for the three and nine months ended

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September 26, 2004. Travel nurse staffing (assignments lasting no more than thirteen weeks) represented approximately 9% of our revenues for the three months and nine months ended September 26, 2004. Per diem general staffing represented less than 1% of our revenues for both the three months and nine months ended September 26, 2004.

Discontinued Operations

We discontinued our physician staffing services in the second quarter of 2003. Pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, results of operations are to be classified as discontinued when the disposal of the “component of an entity” has occurred or it has met the “held for sale” criteria. As such, the total is shown separately in the line item, loss from discontinued operations, net of taxes, in our condensed consolidated statements of operations. For the three months ended September 28, 2003, we had no loss from discontinued operations. For the nine months ended September 28, 2003, we had a loss from discontinued operations, net of taxes, of approximately $0.5 million. There were no net assets of discontinued operations as of September 26, 2004. Net assets of discontinued operations were less than $0.1 million at December 28, 2003 and consisted solely of current assets. No reclassification of the prior year-end balance sheet presentation was made to reflect the net assets of the discontinued operations, due to immateriality.

Restructuring Charge

On June 16, 2003, we completed our plan to restructure our operations by closing 29 branches. The restructuring was necessary to adjust the infrastructure we had put in place to support multiple growth initiatives and reflected the softening in demand for our services. As a result, in the second quarter of 2003, we recorded a pre-tax charge, of approximately $0.8 million, relating to employee severance costs, branch closing costs and lease termination costs. The restructuring charge is included in selling, general and administrative expenses in our consolidated statement of operations for the nine months ended September 28, 2003. No amounts have been or are expected to be incurred or paid in subsequent quarters relating to this restructuring.

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Results of Operations

The following table sets forth, for the periods indicated, certain selected financial data expressed as a percentage of service revenues:

	Three Months Ended				Nine Months Ended
	Sept. 26, 2004		Sept. 28, 2003		Sept. 26, 2004		Sept. 28, 2003
Service revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services rendered	78.3		78.5		78.7		77.6
Gross profit	21.7		21.5		21.3		22.4
Selling, general and administrative	15.2		15.2		15.8		15.2
Corporate and administrative	3.6		2.5		3.6		2.1
Depreciation and amortization	1.5		1.4		1.5		1.3
Income from operations	1.4		2.4		0.4		3.8
Interest expense, net	0.7		1.0		0.9		0.9
Income (loss) from continuing operations before provision for (benefit from) income taxes	0.7		1.4		(0.5	)	2.9
Provision for (benefit from) income taxes	0.4		0.5		(0.1	)	1.1
Income (loss) from continuing operations	0.3		0.9		(0.4	)	1.8
Loss from discontinued operations, net of taxes	—		—		—		0.2
Net income (loss)	0.3		0.9		(0.4	)	1.6

Comparison of Three Months Ended September 26, 2004 to Three Months Ended September 28, 2003

Service Revenues.  Service revenues decreased $17.5 million, or 14.1%, to $106.2 million for the three months ended September 26, 2004, as compared to $123.7 million for the comparable prior year quarter.  The decrease was due to a lower number of hours worked by professionals due to the current weak demand for temporary healthcare staffing. Average hourly billing rates remained relatively consistent with those in the comparable prior year quarter.

Per diem nurse staffing revenues decreased $10.1 million, or 11.3%, to $79.2 million for the three months ended September 26, 2004, as compared to $89.3 million for the comparable prior year quarter. The decrease was the result of a lower number of hours worked by professionals.

Revenues from divisions other than per diem nurse staffing collectively decreased $7.4 million, or 21.4%, to $27.0 million for three months ended September 26, 2004, as compared to $34.4 million for the comparable prior year quarter. The decrease was the result of a lower number of hours worked by professionals.

Cost of Services Rendered.  Cost of services rendered decreased $14.0 million, or 14.4%, to $83.2 million for the three months ended September 26, 2004 as compared to $97.2 million for the comparable prior year quarter. The decrease was primarily attributable to the decrease in the number of hours worked by professionals.

Gross Profit.  Gross profit decreased $3.5 million, or 13.2%, to $23.0 million for the three months ended September 26, 2004, as compared to $26.5 million for the comparable prior

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year quarter.  The decrease was primarily due to the reduction in service revenues. Gross margin for the three months ended September 26, 2004 was 21.7% as compared with 21.5% for the comparable prior year quarter.

Selling, General and Administrative.  Selling, general and administrative expenses decreased to $16.1 million, or 15.2% of revenues for the three months ended September 26, 2004, as compared to $18.7 million, or 15.2% of revenues for the comparable prior year quarter. The decrease was primarily due to a reduction in bad debt expense and other cost saving measures.

Corporate and Administrative.  Corporate and administrative expenses increased to $3.8 million, or 3.6% of revenues for the three months ended September 26, 2004, as compared to $3.1 million, or 2.5% of revenues for the comparable prior year quarter. The increase was primarily due to higher professional fees including those associated with Sarbanes-Oxley implementation.

Depreciation and Amortization.  Depreciation and amortization for the three months ended September 26, 2004 was $1.6 million, as compared to $1.8 million for the comparable prior year quarter.

Interest Expense, Net.  Interest expense, net, decreased to $0.8 million for the three months ended September 26, 2004, as compared to $1.1 million for the comparable prior year quarter.  The decrease was primarily due to lower average outstanding borrowings.

Provision for (Benefit from) Income Taxes.  The Company’s effective income tax rate for the three months ended September 26, 2004 was 58.7% as compared to 38.7% in the comparable prior year quarter. The effective income tax rate this quarter reflects the impact of revising our expected annual effective income tax benefit rate to approximately 22%. The expected annual effective income tax rate is significantly different than statutory rates due to nondeductible expenses having a greater percentage impact on the rate than on the actual tax dollar amount.

Net Income (Loss).  As a result of the above, net income decreased to $0.3 million for the three months ended September 26, 2004 as compared to net income of $1.1 million for the comparable prior year quarter.

Comparison of Nine Months Ended September 26, 2004 to Nine Months Ended September 28, 2003

Service Revenues.  Service revenues decreased $86.6 million, or 21.4%, to $318.6 million for the nine months ended September 26, 2004 as compared to $405.2 million for the comparable prior year period. The decrease was due to a lower number of hours worked by professionals due to the current weak demand for temporary healthcare staffing, partially offset by revenues from the acquisition we made in the first quarter of 2003. Average hourly billing rates remained relatively consistent with those in the comparable prior year period.

Per diem nurse staffing revenues decreased $51.6 million, or 17.8%, to $238.0 million for the nine months ended September 26, 2004 as compared to $289.6 million for the comparable

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prior year period. The decrease was due to a decrease of $54.6 million associated with a lower number of hours worked by professionals, partially offset by incremental revenue of $3.0 million from the acquisition that we made in the first quarter of 2003.

Revenues from divisions other than per diem nurse staffing collectively decreased $35.0 million, or 30.2%, to $80.6 million for the nine months ended September 26, 2004 as compared to $115.6 million for the comparable prior year period. The decrease was the result of a lower number of hours worked by professionals.

Cost of Services Rendered.  Cost of services rendered decreased $63.9 million, or 20.3%, to $250.7 million for the nine months ended September 26, 2004 as compared to $314.6 million for the comparable prior year period. The decrease was due to a lower number of hours worked by professionals, partially offset by higher compensation, benefits and insurance costs associated with our healthcare professionals.

Gross Profit.  Gross profit decreased $22.7 million, or 25.1%, to $67.9 million for the nine months ended September 26, 2004 as compared to $90.6 million for the comparable prior year period. The decrease was primarily due to the reduction in service revenues. Gross margin for the nine months ended September 26, 2004 was 21.3% as compared with 22.4% for the comparable prior year period. The decrease was primarily due to higher compensation, benefits and insurance costs associated with our healthcare professionals and other direct costs.

Selling, General and Administrative.  Selling, general and administrative expenses decreased to $50.4 million, or 15.8% of revenues for the nine months ended September 26, 2004, as compared to $61.6 million, or 15.2% of revenues for the comparable prior year period. The decrease was primarily due to the elimination of expenses associated with locations closed in the second quarter of 2003 and other cost reduction programs implemented as part of a restructuring initiative that was implemented in the second quarter of 2003.  Additionally, the second quarter of 2003 included a $0.8 million restructuring charge associated with the restructuring initiative.

Corporate and Administrative.  Corporate and administrative expenses increased to $11.4 million, or 3.6% of revenues for the nine months ended September 26, 2004, as compared to $8.5 million, or 2.1% of revenues for the comparable prior year period.  The increase was primarily due to increased professional fees including those associated with Sarbanes-Oxley implementation and a charge recorded in the second quarter of 2004 associated with executive severance and search costs.

Depreciation and Amortization.  Depreciation and amortization for the nine months ended September 26, 2004 was $4.9 million, as compared to $5.1 million for the comparable prior year period.

Interest Expense, Net.  Interest expense, net, decreased to $2.8 million for the nine months ended September 26, 2004 as compared to $3.5 million for the comparable prior year period. The decrease was primarily due to lower average outstanding borrowings.

Provision for (Benefit from) Income Taxes.  The Company’s effective income tax benefit rate for the nine months ended September 26, 2004 was 22.1% as compared to 39.8% in the

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comparable prior year period. The decrease in the effective tax benefit rate is due to nondeductible items having a greater percentage impact on the rate than on the actual tax dollar amount.

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

Net Income (Loss).  As a result of the above, the Company incurred a net loss of $1.2 million for the nine months ended September 26, 2004 as compared to net income of $6.6 million for the comparable prior year period.

Seasonality

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

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

Liquidity and Capital Resources

Discussion on Liquidity and Capital Resources

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

Cash flow from operations was $24.9 million for the nine months ended September 26, 2004 as compared to $25.7 million for the nine months ended September 28, 2003. Cash flows were positively impacted in 2004 by improved accounts receivable collections and the closure during the second quarter of 2003 of 29 branches that were utilizing cash.  During the nine months ended September 26, 2004, we used cash generated from operations to repay $23.3 million of borrowings under our senior credit facility and capital lease obligations.

As of September 26, 2004, we had net working capital of $37.9 million as compared to $68.5 million as of December 28, 2003, our last fiscal year end.  The decrease was primarily due

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to a significant reduction in accounts receivable. The improvement is primarily due to improved collection efforts. The cash generated from the reduction in accounts receivable was used to repay long-term debt. Additionally, $12.0 million of borrowings under the Term Note are now classified as current.

Available borrowings under our credit facilities are an important component of our liquidity.  On October 26, 2001, we entered into a $120.0 million senior credit facility.  The facility consisted of a $40.0 million term note due in October 2006, a $60.0 million term note due in October 2007 and a $20.0 million revolving credit facility due to expire in October 2006.  In connection with our initial public offering completed on April 23, 2002, we repaid $93.4 million of borrowings that were outstanding under the facility and repaid $62.9 million that was outstanding under our previously existing senior unsecured notes.

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

On December 22, 2003, we entered into a new senior credit facility (the Senior Credit Facility) which replaced the previous facility. The Senior Credit Facility provided a $65.0 million revolving credit facility (the Revolver) which expires in December 2006 and a $17.0 million term note (the Term Note) which is due in December 2005.

On June 25, 2004, we amended the Senior Credit Facility to reduce the Revolver capacity from $65.0 million to $60.0 million. The amendment also favorably modified certain financial covenants while increasing the applicable margin on the Revolver by 0.5% and on the Term Note by 1.0%. In conjunction with the amendment, on July 1, 2004, we repaid $5.0 million of borrowings under the Term Note. The $5.0 million can not be re-borrowed under the terms of the Term Note. The impact of repaying the higher average interest rate borrowings under the Term Note, offset partially by the marginally higher interest rates, will reduce the overall cost of capital under the Senior Credit Facility going forward.

The amount that can be borrowed at any given time under the Revolver is based on a formula that takes into account, among other things, eligible accounts receivable and a $7.0 million availability reserve, which can result in borrowing availability of less than the full capacity of the Revolver. The Revolver bears interest at either prime rate or LIBOR plus an applicable margin (4.4% at September 26, 2004) with interest payable monthly or as interest rate contracts expire. The Term Note bears interest at LIBOR plus an applicable margin (13.0% at September 26, 2004) with interest payable monthly. Unused capacity under the Revolver bears interest at 0.5% and is payable monthly. The Senior Credit Facility is secured by substantially all of our assets and contains certain covenants that, among other things, limit the payments of dividends, restrict additional indebtedness and obligations, and require maintenance of certain financial ratios. As of September 26, 2004, we were in compliance with all covenants.

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

For the nine months ended September 26, 2004, the weighted average interest rate for the loans under the Senior Credit Facility was 6.2%. As of September 26, 2004, the blended rate for loans outstanding under the Senior Credit Facility was 7.6%.

As of September 26, 2004, $12.0 million was outstanding on the Term Note and $20.5 million was outstanding under the Revolver. As of September 26, 2004, an additional $22.6 million was immediately available for borrowing under the Revolver and we had cash and cash equivalents of $0.4 million.

Under the terms of the Senior Credit Facility, on a fiscal year basis, we are required to repay the Term Note based on a percentage of our excess cash flow, as defined therein. Based on the results for the nine months ended September 26, 2004, we could be required to repay all or a substantial portion of the $12.0 million outstanding on the Term Note. We expect to have adequate availability under the Revolver should repayment of all or a substantial portion of the Term Note be required.

Capital expenditures were $2.0 million for the nine months ended September 26, 2004 and were $4.0 million for the comparable prior year period. The expenditures primarily relate to the upgrade or replacement of various computer systems including hardware, and purchased and internally developed software. We expect a similar rate and type of capital expenditures on a going forward basis.

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

We believe that our current cash balances, together with the Senior Credit Facility, other available sources of liquidity and expected cash flows from our operating activities, will be sufficient for us to meet our current and future financial obligations, as well as to provide us with funds for working capital, anticipated capital expenditures and other needs for at least the next twelve months. No assurance can be given, however, that this will be the case. In the longer term, we may require additional equity and debt financing to meet our working capital needs, or to fund our acquisition activities, if any. There can be no assurance that additional financing will be available when required or, if available, will be available on satisfactory terms.

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Off-Balance Sheet Arrangements

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

Contractual Obligations

The following table reflects our significant contractual obligations and other commitments as of December 28, 2003 (in thousands):

	Payments due by period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-term debt obligations	$	54,978	$	—	$	54,978	$	—	$	—
Operating leases	19,582		4,923		6,160		3,040		5,459
Capital lease obligations	1,508		1,090		414		4		—
Total	$	76,068	$	6,013	$	61,552	$	3,044	$	5,459

Long-term debt obligations have decreased to $32.5 million as of September 26, 2004 since we repaid $22.5 million during the first nine months of 2004. Based on the results for the nine months ended September 26, 2004, we could be required to repay all or a substantial portion of the $12.0 million outstanding on the Term Note within one year. No material changes have occurred with regards to operating leases and capital lease obligations since December 28, 2003.

Critical Accounting Policies

In response to the Security and Exchange Commission (SEC) Release Number 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and SEC Release Number 33-8056, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we will evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits, allowance for doubtful accounts, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. For a summary of all our significant accounting policies, including the critical accounting policies discussed below, see Note 1 to the consolidated financial statements included in the Form 10-K for the year ended December 28, 2003.

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

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

•We have recorded goodwill and other intangibles resulting from our acquisitions through December 28, 2003. Through December 30, 2001, goodwill and other intangibles were amortized on a straight-line basis over their lives of 6 to 20 years. Pursuant to the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, which we adopted in 2002, goodwill and intangible assets deemed to have an indefinite life are no longer amortized. We evaluate the recovery of the carrying amount of costs in excess of net tangible assets acquired by determining if an impairment has occurred. This evaluation is done annually or more frequently if indicators of an impairment arise. Indicators of an impairment include duplication of resources resulting from acquisitions, instances in which the estimated undiscounted cash flows of the entity are less than the remaining unamortized balance of the underlying intangible assets and other factors. At such time that impairment is determined, the intangible assets are written off during that period. If we are required to record an impairment charge in the future, it would have an adverse impact on results of operations.

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

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

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probability of an adverse outcome and provide accruals for such contingencies as necessary.

Caution Concerning Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, operating income and cash flow. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include the following:

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

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

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

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

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

•The functioning of our information systems;

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

•Our clients’ ability to pay for services;

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

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

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

•Our ability to carry out our business strategy.

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

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk arises principally from the variable rates associated with our senior credit facility. On September 26, 2004, we had borrowings of $32.5 million under our credit facility that were subject to variable rates, with a blended rate of 7.6%. As of September 26, 2004, an adverse change of 1.0% in the interest rate of all such borrowings outstanding would have caused us to incur an increase in interest expense of approximately $0.3 million on an annualized basis.

Foreign Currency Risk

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

Inflation

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

ITEM 4.  CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board of Directors and Chief Executive Officer, Robert J. Adamson, and Chief Financial Officer, Larry McPherson, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report on Form 10-Q, were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting or in other factors that occurred during the last fiscal quarter that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

On March 29, 2004, a third class action lawsuit brought on behalf of the same class of our stockholders, making claims under the Securities Act similar to those in the lawsuits filed by Plaintiffs Joseph and Patricia Marrari and Tommie Williams, was commenced by Plaintiff Haddon Zia in the Florida Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida. Defendants removed this case to the United States District Court for the Southern District of Florida and Plaintiff moved to remand the case back to the Florida Circuit Court of the Fifteenth Judicial Circuit, which motion Defendants opposed. On September 16, 2004 the federal district court entered an order granting Plaintiff’s motion to remand. Defendants filed their Notice of Appeal to the Eleventh Circuit on October 13, 2004, by which they appealed the remand order.  Also on October 13, 2004, Defendants moved to stay the state court proceedings. The Zia complaint seeks rescission or damages as well as certain equitable relief and costs and attorney fees.

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

On July 2, 2004, the Marrari, Gould, Williams and Zia actions were consolidated, Plaintiff Thomas Greene was appointed Lead Plaintiff of the consolidated action and the law firm of Cauley Geller Bowman & Rudman LLP was appointed Lead Counsel for Plaintiffs. On September 1, 2004, Lead Plaintiff filed his consolidated amended class action complaint (the “Complaint”). The Complaint makes allegations on behalf of a class consisting of purchasers of our common stock pursuant to or traceable to our initial public offering in April 2002, for purposes of the Securities Act claims, and on behalf of Medical Staffing Network’s stockholders who purchased stock during the period from April 18, 2002 through June 16, 2003, for purposes of the Exchange Act claims. The Complaint alleges that certain of our public disclosures during the class period were materially false and misleading in violation of Section 11 of the Securities

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Act and Section 10(b) of the Exchange Act.  The Complaint seeks compensatory damages as well as costs and attorney fees.  On November 1, 2004, Defendants filed their motion to dismiss the Complaint.

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

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

ITEM 6.  EXHIBITS

The following exhibits are included herewith:

10.1         Employment Agreement, among Medical Staffing Network, Inc., Medical Staffing Network Holdings, Inc. and N. Larry McPherson, dated August 2, 2004.

31.1         Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification of Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1         Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certification of Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MEDICAL STAFFING NETWORK HOLDINGS, INC.
Dated: November 4, 2004	By:	/s/ Robert J. Adamson
		Robert J. Adamson
		Chairman of the Board of Directors and
		Chief Executive Officer
Dated: November 4, 2004	By:	/s/ Larry McPherson
		Larry McPherson
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Employment Agreement, among Medical Staffing Network, Inc., Medical Staffing Network Holdings, Inc. and N. Larry McPherson, dated August 2, 2004.
31.1	Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Robert J. Adamson, Chief Executive Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Larry McPherson, Chief Financial Officer of Medical Staffing Network Holdings, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.1

Exhibit 10.1

MEDICAL STAFFING NETWORK, INC.

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the “Agreement”) is dated as of the 15^th day of July, 2004, between Medical Staffing Network, Inc. (the “Company”), Medical Staffing Network Holdings, Inc. (“Holdings”) and N. Larry McPherson (the “Executive”).

R E C I T A L:

WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, on the basis of the foregoing and in consideration of the mutual covenants and agreements contained herein, the parties hereto agree as follows:

Section 1.               Employment.  The Company hereby agrees to employ the Executive and the Executive hereby accepts such employment with the Company, on the terms and subject to the conditions hereinafter set forth.  During the Employment Term (as hereinafter defined), the Executive shall serve as Chief Financial Officer of the Company and shall have the duties, responsibilities and obligations reasonably assigned to the Executive by the Chief Executive Officer (“CEO”) and the Board of Directors of the Company (the “Board”).  The Executive shall report to the CEO of the Company.

Section 2.               Term.  Unless terminated pursuant to Section 6 hereof, the Executive’s employment hereunder shall commence on August 2, 2004 (the “Commencement Date”) and shall continue during the period ending on the third anniversary of the Commencement Date (the “Initial Employment Term”).  The Initial Employment Term shall be extended automatically without further action by either party by one additional year (added to the end of the Initial Employment Term) first on the third anniversary of the Commencement Date, and on each succeeding anniversary thereafter, unless, not later than ninety (90) days prior to the end of the Initial Employment Term (or extension thereof), either the Company or the Executive shall have notified the other in writing of its intention not to renew this Agreement.  The Initial Employment Term, together with any extension thereof pursuant to this Section 2, shall be referred to as the “Employment Term.”

Section 3.               Compensation.  During the Employment Term, the Executive shall be entitled to the following compensation and benefits:

(a)           Salary.  As compensation for the performance of the Executive’s services hereunder, the Company shall pay to the Executive a salary of $225,000 per annum with increases, if any, as may be approved in writing by the Board (the “Salary”).  The Salary shall be payable in accordance with the payroll practices of the Company as the same shall exist from time to time.

(b)           Bonus Pool.  During the Employment Term, the Executive shall be entitled to participate in the Company’s bonus incentive pool, on such terms as the Board shall approve from time to time.

(c)           Other Compensation Plans.  The Executive shall be entitled to participate in any stock option plans, or other compensation plans offered by the Company to its officers and directors, subject to the terms and conditions contained therein.

(d)           Benefits.  The Executive shall be entitled to participate in health, insurance, pension and other benefits provided to other similarly situated employees of the Company; provided, that the Executive shall be entitled to Company paid health insurance coverage for the Executive and his dependents.  The Executive shall also be entitled to three (3) weeks of vacation per annum and shall be entitled to the same number of holidays, sick days and other benefits as are generally allowed to other similarly situated employees of the Company in accordance with the Company policy in effect from time to time.

(e)           Relocation Expenses.  The Company shall reimburse the Executive a maximum of $7,000 for relocation expenses.

Section 4.               Exclusivity.  During the Employment Term, the Executive shall devote his full working time to the business of the Company, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and reasonable directions and instructions given to him in accordance with the terms of this Agreement, shall use his best efforts to promote and serve the interests of the Company, and shall not engage in any other business activity, whether or not such activity shall be engaged in for pecuniary profit, except that the Executive may (i) participate in the activities of professional trade organizations related to the business of the Company, (ii) engage in personal investing activities and/or charitable activities consistent with the Company’s policy regarding investments (which may change from time to time) or (iii) with the consent of the Board, serve as a member of the board of directors or advisory boards (or their equivalents in the case of a non-corporate entity) of non-competing businesses and charitable organizations, provided that activities set forth in these clauses (i), (ii), and (iii) either singly or in the aggregate, do not interfere in any material respect with the services to be provided by the Executive hereunder.

Section 5.               Reimbursement for Expenses.  The Executive is authorized to incur reasonable expenses in the discharge of the services to be performed hereunder, including expenses for travel, entertainment, lodging and similar items in accordance with the Company’s expense reimbursement policy, as the same may be modified by the Board from time to time.  The Company shall reimburse the Executive for all such proper expenses upon presentation by the Executive of itemized accounts of such expenditures in accordance with the financial policy of the Company, as in effect from time to time.

Section 6.               Termination and Default.

(a)           Early Termination of the Employment Term.  Notwithstanding Section 2 hereof, the Employment Term shall end upon the earliest to occur of (i) a termination of Executive’s employment due to the Executive’s death, (ii) a termination by reason of a Disability, where “Disability” shall mean any physical or mental disability or infirmity that prevents the performance of Executive’s duties hereunder for a period of 90 consecutive days or 120 days during any 12-month period, (iii) a termination by the Company with or without Cause

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(as defined below), and (iv) a termination by Executive with or without Good Reason (as defined below).  In the event of termination of the Executive’s employment for any reason, at the Company’s request, the Executive shall resign from the Board and the board of directors of any Company subsidiaries.

(b)           Termination due to Death or Disability.  The Executive’s employment shall terminate upon his death, or in the event of a Disability, upon delivery of written notice to the Executive of such termination by reason of the Executive’s Disability.  Upon such event, the Executive, or Executive’s estate, as applicable, shall be entitled to receive the amounts specified in Section 6(f) below.  The Board’s reasoned and good faith judgment of Disability shall be final, binding and conclusive and shall be based on such competent medical evidence as shall be presented to it by Executive and/or by any physician or group of physicians or other competent medical expert employed by Executive or the Company to advise the Board.

(c)           Termination by the Company with or without Cause.  The Company may terminate the Executive’s employment at any time, with or without Cause.  Termination of the Executive’s employment hereunder shall be effective upon delivery of written notice of such termination.  For purposes of this Agreement, “Cause” shall mean: (i) the Executive’s failure, neglect or refusal (except where due to a Disability) to perform his duties hereunder which failure, neglect or refusal shall not have been corrected by the Executive within 10 business days of receipt by the Executive of written notice from the Company of such failure, neglect or refusal, which notice shall with reasonable specificity set forth the nature of said failure, neglect or refusal; (ii) any willful or intentional act of the Executive that has the effect of injuring the reputation or business of the Company or its affiliates in any material respect; (iii) the Executive’s use of illegal drugs or repeated drunkenness by the Executive on Company property; (iv) conviction of, or plea of guilty or nolo contendere to, the commission of a felony by the Executive; (v) the commission by the Executive of an act of fraud or embezzlement against the Company; or (vi) the Executive’s breach of any of the covenants provided in Section 7 hereof.

(d)           Termination by the Executive for Good Reason.  The Executive may terminate his employment with the Company for Good Reason upon thirty (30) days written notice, which notice shall specifically set forth the nature of such Good Reason.  The term “Good Reason” shall mean (i) the substantial and material diminution in the Executive’s status, duties, or responsibilities then in effect; (ii) without the Executive’s consent, the relocation of the Executive’s principal office location more than fifty (50) miles from its current location in Boca Raton, Florida; (iii) any material breach of this Agreement; or (iv) the failure of any successor to assume this Agreement as required under  Section 11(a) hereof.  Notwithstanding the occurrence of any such event or circumstance above, such occurrence shall not be deemed to constitute Good Reason hereunder if, within the thirty-day notice period, the event or circumstance giving rise to Good Reason has been fully corrected by the Company.

(e)           Resignation by the Executive.  The Executive shall have the right to terminate his employment at any time by giving thirty (30) days written notice of his resignation.

(f)            Payments upon Termination.  (i) In the event that the Executive’s employment terminates for any reason, the Company shall pay to the Executive all amounts

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accrued but unpaid hereunder through the date of termination in respect of Salary and other compensation provided hereunder, accrued but unused vacation and any unreimbursed expenses.  Amounts owed by the Company in respect of the payments under Section 6(f)(i) hereof or reimbursement for expenses under the provisions of Section 5 hereof shall be paid within five (5) business days of any termination.

(ii)           In the event the Executive’s employment is terminated by the Company without Cause (other than upon expiration of the Employment Term pursuant to Section 2 hereof or a termination under Section 6(b) above), or by the Executive with Good Reason, in addition to the amounts specified in subsection (i) above, (A) the Executive shall continue to receive the Salary and other compensation provided hereunder (less any applicable withholding or similar taxes) at the rate in effect hereunder on the date of such termination for a period of twelve (12) months (the “Severance Term”) and (B) to the extent permissible under the Company’s health plans, during the Severance Term, the Executive shall continue to receive any health benefits provided to him as of the date of such termination.

(iii)          Payment of any amounts pursuant to this Section 6(f) shall be expressly conditioned upon the Executive’s execution of a general waiver and release of claims against the Company and its officers, directors, agents, and affiliates.

(g)           Change in Control.  In the event that within twelve (12) months following a Change in Control, the Executive’s employment is terminated by the Company without Cause (other than upon expiration of the Employment Term pursuant to Section 2 hereof or a termination under Section 6(b) above), or by the Executive with Good Reason (each, a “Change in Control Termination”), in addition to amounts provided in Section 6(f) hereof, the Executive shall be entitled to a lump-sum payment equal to two (2) times the sum of the Executive’s Salary and other compensation provided hereunder as then in effect not later than 30 days after the effective date of the Executive’s termination of employment.  In addition, upon a Change in Control Termination, if the Executive holds any stock options or warrants (“Stock Rights”) of Holdings, the Company shall pay to the Executive the difference between the fair market value of a share of Holdings’ stock at the time of termination or resignation and the exercise price per share of any Stock Rights held by the Executive (whether or not such Stock Rights are presently exercisable or vested) multiplied by the number of Stock Rights held by the Executive.

For purposes of this Agreement, the term “Change in Control” shall mean:

(i)            The acquisition by any individual, entity or group (other than the Company, Holdings, any employee benefit plan of the Company or Holdings, or Warburg, Pincus Private Equity VIII, L.P. or any affiliate thereof) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of securities representing more than 50% of the voting securities of the Company or of Holdings entitled to vote generally in the election of directors, determined on a fully-diluted basis (“Voting Securities”); provided, however, that such acquisition shall not constitute a Change in Control hereunder if a majority of the holders of the Voting Securities immediately prior to such acquisition retain directly or through ownership of one or more holding companies, immediately

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following such acquisition, a majority of the voting securities entitled to vote generally in the election of directors of the successor entity;

(ii)           The date upon which individuals who as of the date hereof constitute a majority of the Board (the “Incumbent Board”) cease to constitute at least a majority of the Board, provided, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s or Holdings’ shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or

(iii)          Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or of Holdings (a “Business Combination”), in each case, unless, following such Business Combination, all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or Holdings or all or substantially all of the Company’s or Holdings’ assets either directly or through one or more subsidiaries).

(h)           Payment In Lieu.  In the event of termination of the Executive’s employment due to the voluntary resignation by the Executive, the Company may, in its sole and absolute discretion, at any time after notice of termination has been given by the Executive, terminate this Agreement, provided that the Company shall pay to the Executive his then current Salary and continue benefits provided pursuant to Section 3(d) for the duration of the unexpired notice period.

(i)            Parachute Payments.  In the event that (i) any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive (collectively, the “Covered Payments”), are or become subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended, or any similar tax that may hereafter be imposed (the “Excise Tax”), and (ii) it would be economically advantageous to the Executive to reduce such Covered Payments to avoid imposition of the Excise Tax, the Covered Payments shall be reduced to an amount which maximizes the aggregate present value (as determined in accordance with Section 280G(d)(4) of the Code or any successor provision of the Code) of the Covered Payments without causing the Covered Payments to be subject to the Excise Tax.  The reduction described in this Section 6(i) shall only be made if the net after-tax amount to be received by the Executive after giving effect to the reduction will be greater than the net after-tax amount that would be received by the Executive without the reduction.  The Executive shall in his sole discretion determine which and how much of the Covered Payments shall be eliminated or reduced consistent with the requirements of this Section 6(i).

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(j)            Survival of Operative Sections.  Upon any termination of the Executive’s employment, the provisions of Section 6(f) through Section 6(i), and Section 7 through Section 17 of this Agreement shall survive to the extent necessary to give effect to the provisions thereof.

Section 7.               Restrictive Covenants.  The Executive acknowledges and agrees that the agreements and covenants contained in this Section 7 are (i) reasonable and valid in geographical and temporal scope and in all other respects, and (ii) essential to protect the value of the Company’s business and assets and by his employment with the Company, and that the Executive will obtain knowledge, contacts, know-how, training and experience and there is a substantial probability that such knowledge, know-how, contacts, training and experience could be used to the substantial advantage of a competitor of the Company and to the Company’s substantial detriment.  For purposes of this Section 7, references to the Company shall be deemed to include Holdings.

(a)           Confidential Information.  At any time during and after the end of the Employment Term, without the prior written consent of the Board, except to the extent required by an order of a court having jurisdiction or under subpoena from an appropriate government agency, in which event, the Executive shall use his best efforts to consult with the Board prior to responding to any such order or subpoena, and except as required in the performance of his duties hereunder, the Executive shall not disclose any confidential or proprietary trade secrets, customer lists, drawings, designs, information regarding product development, marketing plans, sales plans, manufacturing plans, management organization information, operating policies or manuals, business plans, financial records, packaging design or other financial, commercial, business or technical information (i) relating to the Company, or (ii) that the Company or any of its affiliates may receive belonging to suppliers, customers or others who do business with the Company (“Confidential Information”).  Executive’s obligation under this Section 7(a) shall not apply to any information which (i) is known publicly; (ii) is in the public domain or hereafter enters the public domain without the breach of the Executive of this Section 7(a); (iii) is known to the Executive prior to the Executive’s receipt of such information from the Company or any of its subsidiaries, as evidenced by written records of the Executive; or (iv) is disclosed after termination of the Executive’s employment to the Executive by a third party not under an obligation of confidence to the Company.

(b)           Non-Competition.  The Executive covenants and agrees that during the Employment Term and for a period extending to the first anniversary of the Executive’s termination of employment for any reason, or in the case of a termination under Section 6(g) hereof a period extending to the third anniversary of such termination (the “Restricted Period”), with respect to any jurisdiction in which the Company is engaged in business at the time of such termination, the Executive shall not, directly or indirectly, individually or jointly, own any interest in, operate, join, control or participate as a partner, director, principal, officer, or agent of, enter into the employment of, act as a consultant to, or perform any services for any entity which competes to a material extent with the business activities in which the Company is engaged at the time of such termination or in which business activities the Company has documented plans to become engaged in and as to which Executive has knowledge at the time of Executive’s termination of employment, or any entity in which any such relationship with the Executive would result in the inevitable use or disclosure of Confidential Information (a

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“Competing Business”).  Notwithstanding the foregoing, in the event of a termination of employment other than pursuant to Section 6(g) hereof, at the election of the Company, the Restricted Period may be extended to a period ending not later than the third anniversary of the Executive’s termination of employment; provided, that during such extended period, the Company continues to pay the Executive the Salary (less any applicable withholding or similar taxes) at the rate in effect hereunder on the date of such termination.  Notwithstanding anything herein to the contrary, this Section 7(b) shall not prevent the Executive from acquiring as an investment securities representing not more than three percent (3%) of the outstanding voting securities of any publicly-held corporation.

(c)           Non-Solicitation; Non-Interference.  During the Restricted Period, the Executive shall not, directly or indirectly, for his own account or for the account of any other individual or entity (i) solicit or induce, or in any manner attempt to solicit or induce, any person employed by, as agent of, or a service provider to, the Company to terminate such person’s employment, agency or service, as the case may be, with the Company; or (ii) divert, or attempt to divert, any person, concern, or entity from doing business with the Company or any of its subsidiaries, or attempt to induce any such person, concern or entity to cease being a customer or supplier of the Company.

(d)           Non-Disparagement.  The Executive agrees that, except as required by applicable law, or compelled by process of law, at any time following the date hereof, neither he, nor anyone acting on his behalf, shall hereafter (i) make any derogatory, disparaging or critical statement about the Company, or any of the Company’s current officers, directors, employees, shareholders or lenders or any persons who were officers, directors, employees, shareholders or lenders of the Company; or (ii)  without the Company’s prior written consent, communicate, directly or indirectly, with the press or other media, concerning the past or present employees or business of the Company.

(e)           Return of Documents.  In the event of the termination of Executive’s employment for any reason, the Executive shall deliver to the Company all of (i) the property of the Company and (ii) the documents and data of any nature and in whatever medium of the Company in his possession, and he shall not take with him any such property, documents or data or any reproduction thereof, or any documents containing or pertaining to any Confidential Information.

(f)            Works for Hire.  The Executive agrees that the Company shall own all right, title and interest (including patent rights, copyrights, trade secret rights, mask work rights and other rights throughout the world) in any inventions, works of authorship, mask works, ideas or information made or conceived or reduced to practice, in whole or in part, by the Executive (either alone or with others) during the Employment Term (“Developments”); provided, however, that the Company shall not own Developments for which no equipment, supplies, facility, trade secret information or Confidential Information of the Company was used and which were developed entirely on Executive’s time, and which do not relate (A) to the business of the Company or its affiliates or (B) to the Company’s or its affiliates actual or demonstrably anticipated research or development, and (ii) which do not result from any work performed by the Executive for the Company.  Subject to the foregoing, Executive will promptly and fully

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disclose to the Company, or any persons designated by it, any and all Developments made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others during the Employment Term.  The Executive hereby assigns all right, title and interest in and to any and all of these Developments to the Company.  The Executive agrees to assist the Company, at the Company’s expense, to further evidence, record and perfect such assignments, and to perfect, obtain, maintain, enforce, and defend any rights specified to be so owned or assigned.  The Executive hereby irrevocably designates and appoints the Company and its agents as attorneys-in-fact to act for and on the Executive’s behalf to execute and file any document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed by the Executive.  In addition, and not in contravention of any of the foregoing, the Executive acknowledges that all original works of authorship which are made by him (solely or jointly with others) within the scope of employment and which are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 USC § 101).  To the extent allowed by law, this Section 7(f) includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights” (“Moral Rights”).  To the extent Executive retains any such Moral Rights under applicable law, the Executive hereby waives such Moral Rights and consents to any action consistent with the terms of this Agreement with respect to such Moral Rights, in each case, to the full extent of such applicable law.  The Executive will confirm any such waivers and consents from time to time as requested by the Company.

(g)           Blue Pencil.  If any court of competent jurisdiction shall at any time deem the duration or the geographic scope of any of the provisions of this Section 7 unenforceable, the other provisions of this Section 7 shall nevertheless stand and the duration and/or geographic scope set forth herein shall be deemed to be the longest period and/or greatest size permissible by law under the circumstances, and the parties hereto agree that such court shall reduce the time period and/or geographic scope to permissible duration or size.

Section 8.               Injunctive Relief.  Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in Section 7 hereof may result in material irreparable injury to the Company or its subsidiaries or affiliates for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction, without the necessity of proving irreparable harm or injury as a result of such breach or threatened breach of Section 7 hereof, restraining the Executive from engaging in activities prohibited by Section 7 hereof or such other relief as may be required specifically to enforce any of the covenants in Section 7 hereof.  Notwithstanding any other provision to the contrary, the Restricted Period shall be tolled during any period of violation of any of the covenants in Section 7(b) or Section 7(c) hereof and during any other period required for litigation during which the Company seeks to enforce this covenant against the Executive if it is ultimately determined that such person was in breach of such covenants.

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Section 9.               Representations and Warranties of the Executive.  The Executive represents that:

(a)           the Executive is entering into this Agreement voluntarily and that his employment hereunder and compliance with the terms and conditions hereof will not conflict with or result in the breach by him of any agreement to which he is a party or by which he may be bound,

(b)           he has not, and in connection with his employment with the Company will not, violate any non-solicitation or other similar covenant or agreement by which he is or may be bound, and

(c)           in connection with his employment with the Company he will not use any confidential or proprietary information he may have obtained in connection with employment with any prior employer.

Section 10.             Taxes.  The Company may withhold from any payments made under this Agreement all applicable taxes, including but not limited to income, employment and social insurance taxes, as shall be required by law.

Section 11.             Successors and Assigns; No Third-Party Beneficiaries.

(a)           The Company. This Agreement shall inure to the benefit of and be enforceable by, and may be assigned by the Company to, any purchaser of all or substantially all of the Company’s business or assets, any successor to the Company or any assignee thereof (whether direct or indirect, by purchase, merger, consolidation or otherwise).  The Company will require any such purchaser, successor or assignee to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase, succession or assignment had taken place.

(b)           The Executive.  The Executive’s rights and obligations under this Agreement shall not be transferable by the Executive by assignment or otherwise, without the prior written consent of the Company; provided, however, that if the Executive shall die, all amounts then payable to the Executive hereunder shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee or other designee or, if there be no such designee, to the Executive’s estate.

Section 12.             Waiver and Amendments.  Any waiver, alteration, amendment or modification of any of the terms of this Agreement shall be valid only if made in writing and signed by the parties hereto; provided, however, that any such waiver, alteration, amendment or modification is consented to on the Company’s behalf by the Board.  No waiver by either of the parties hereto of their rights hereunder shall be deemed to constitute a waiver with respect to any subsequent occurrences or transactions hereunder unless such waiver specifically states that it is to be construed as a continuing waiver.

Section 13.             Severability and Governing Law.  If any covenants or such other provisions of this Agreement are found to be invalid or unenforceable by a final determination of

9

a court of competent jurisdiction (a) the remaining terms and provisions hereof shall be unimpaired and (b) the invalid or unenforceable term or provision hereof shall be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision hereof.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF) APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.

Section 14.             Notices.

(a)           Every notice or other communication relating to this Agreement shall be in writing, and shall be mailed to or delivered to the party for whom it is intended at such address as may from time to time be designated by it in a notice mailed or delivered to the other party as herein provided, provided that, unless and until some other address be so designated, all notices or communications by the Executive to the Company shall be mailed or delivered to the Company at its principal executive office, and all notices or communications by the Company to the Executive may be given to the Executive personally or may be mailed to Executive at the Executive’s last known address, as reflected in the Company’s records.

(b)           Any notice so addressed shall be deemed to be given:  (i) if delivered by hand, on the date of such delivery; (ii) if mailed by courier, on the first business day following the date of such mailing; and (iii) if mailed by registered or certified mail, on the third business day after the date of such mailing.

Section 15.             Section Headings.  The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not be deemed to constitute a part thereof, affect the meaning or interpretation of this Agreement or of any term or provision hereof.

Section 16.             Entire Agreement.  This Agreement constitutes the entire understanding and agreement of the parties hereto regarding the employment of the Executive.  This Agreement supersedes all prior negotiations, discussions, correspondence, communications, understandings and agreements between the parties relating to the subject matter of this Agreement, including, without limitation, the Original Agreement.

Section 17.             Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement.

[Signatures to appear on the following page.]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

MEDICAL STAFFING NETWORK, INC.
By:	/s/ Robert J. Adamson
	Name: Robert J. Adamson
	Title: Chairman and CEO
MEDICAL STAFFING NETWORK HOLDINGS, INC.
By:	/s/ Robert J. Adamson
	Name: Robert J. Adamson
	Title: Chairman and CEO
EXECUTIVE
/s/ N. Larry McPherson
N. Larry McPherson

11

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert J. Adamson, certify that:

I have reviewed this quarterly report on Form 10-Q of Medical Staffing Network Holdings, Inc.;

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

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

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

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

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

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

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

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

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

Date:  November 4, 2004

/s/ Robert J. Adamson

Robert J. Adamson

Chairman of the Board of Directors and

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Larry McPherson, certify that:

I have reviewed this quarterly report on Form 10-Q of Medical Staffing Network Holdings, Inc.;

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

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

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

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

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

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

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

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

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

Date:  November 4, 2004

/s/ Larry McPherson

Larry McPherson

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Medical Staffing Network Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 26, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Adamson, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert J. Adamson

Robert J. Adamson

Chairman of the Board of Directors and

Chief Executive Officer

November 4, 2004

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Medical Staffing Network Holdings, Inc. (the “Company”) on Form 10-Q for the quarter ended September 26, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry McPherson, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Larry McPherson

Larry McPherson

Chief Financial Officer

November 4, 2004