U.UNITED S.STATES SECURITIES AND EXCHANGE COMMISSION

~~Washington~~Form ~~D.C. 20549~~10-Q

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2006
OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

ý QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-13984

DIVERSIFIED CORPORATE RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Texas		75-1565578
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
10670 North Central Expressway, Suite 600, Dallas, Texas		75231
(Address of principal executive offices)		(Zip Code)
972-458-8500
(Issuer’s telephone number, including area code)

TEXAS
(State of other jurisdiction of incorporation or organization)

75-1565578
(IRS Employer Identification No.)

~~Check whether~~10670 ~~the~~NORTH ~~issuer~~CENTRAL ~~(1) filed~~EXPRESSWAY, ~~all~~SUITE ~~reports~~600 DALLAS, ~~required~~TEXAS ~~to be filed by Section 13~~75231 ~~or 15~~(d) Address of ~~the Exchange Act during the past 12 months (or for such~~principal ~~shorter~~executive ~~period that the registrant was required to file such reports~~offices)~~, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o~~

~~Indicate by~~Registrant’s ~~check~~telephone ~~mark~~number, ~~whether~~including ~~the~~area ~~registrant~~code: is(972) 458-8500 Securities anregistered ~~accelerated~~pursuant ~~filer~~to Section 12(asb) ~~defined in Rule 12b-2~~ of the Act~~). Yes o No ý~~:

As of May 31, 2005, 5,353,693 shares of the registrant’s common stock were outstanding, plus 360,559 shares of common stock are held by the registrant as treasury stock.

Title of each class:		Name of each exchange on which registered:
Common stock, $0.10 par value per share		None

~~Table~~ Securities registered pursuant to section 12(g) of ~~Contents~~the Act: N/A

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

~~Part~~Indicate by Icheck –mark ~~Financial~~whether ~~Information Item 1. Financial Statements Condensed Consolidated Statements of Operations for~~ the ~~Three~~registrant ~~Months~~is ~~Ended~~a ~~March~~large ~~31,~~accelerated ~~2005 and 2004 (unaudited) Condensed Consolidated Balance Sheets at March 31~~filer, ~~2005~~an accelerated ~~(unaudited) and December 31~~filer, ~~2004~~or ~~Condensed~~a ~~Consolidated~~non-accelerated ~~Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Item 2~~filer. ~~Management’s~~See ~~Discussion~~definition ~~and Analysis~~ of ~~Financial~~“accelerated filer ~~Condition~~ and ~~Results~~large ofaccelerated ~~Operations~~file” ~~Item~~(as 3.defined ~~Quantitative~~in ~~and~~Rule ~~Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II – Other Information Item~~ 12b-2. ~~Changes~~of inthe ~~Securities~~Exchange ~~Item 3~~Act). (Check ~~Defaults under Senior Securities Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures~~one):

1Large Accelerated filer o Accelerated Filer o Non-Accelerated filer ý

~~Part l. Financial~~Indicate by ~~Information~~check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

~~Item 1.~~Yes ~~Financial Statements~~o No ý

~~DIVERSIFIED~~As of ~~CORPORATE~~March ~~RESOURCES~~31, ~~INC.~~2006, ~~AND~~5,272,693 ~~SUBSIDIARIES~~shares of the registrant’s common stock were outstanding, plus 501,559 shares of common stock are held by the registrant as treasury stock.

~~CONDENSED~~DIVERSIFIED ~~CONSOLIDATED~~CORPORATE ~~STATEMENTS~~RESOURCES, ~~OF OPERATIONS~~INC.

~~(Unaudited)~~1st QUARTER 2006 FORM 10-Q QUARTERLY REPORT

~~(In~~TABLE ~~thousands,~~OF ~~except per share data)~~CONTENTS

		Three months ended March 31,
Part I – Financial Information
		2005			2004
Item 1.	Financial Statements
Net service revenues:
Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2006 and 2005 (unaudited)
Direct placement services		$	1,671		$	1,981
Condensed Consolidated Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005
Temporary and contract staffing services		3,524			3,307
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2006 and 2005 (unaudited)
		5,195			5,288
Notes to Condensed Consolidated Financial Statements (unaudited)
Direct cost of temporary and contract staffing services		2,504			2,424
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross profit		2,691			2,864
Item 3.	Qualitative and Quantitative Disclosures About Market Risk
Operating expenses:
Item 4.	Controls and Procedures
Selling expenses		1,638			1,819
Part II – Other Information
General and administrative expenses		1,781			3,114
Item 1.	Legal Proceedings
Stock-based employee compensation		22			79
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds
Depreciation and amortization		68			138
Item 3.	Defaults Upon Senior Securities
		3,509			5,150
Item 5.	Other Information
Other expense (income) items:
Item 6.	Exhibits
Interest expense, net		295			165
Signatures
Gain on early extinguishment of debt		—			(222		)
		295			(57		)
Income tax provision		—			—
Loss from continuing operations		(1,113		)	(2,229		)
Income from discontinued operations, net of tax		140			324
Net loss		(973		)	(1,905		)
Accretion of discount on preferred stock		—			(448		)
Cumulative preferred stock dividends earned but not declared		(53		)	(8		)
Net loss applicable to common stockholders		$	(1,026	)	$	(2,361	)
Net loss per share from continuing operations applicable to common stockholders – basic and diluted		$	(0.22	)	$	(0.67	)
Net income per share from discontinued operations		$	0.03		$	0.08
Net loss per share applicable to common stockholders – basic and diluted		$	(0.19	)	$	(0.59	)
Weighted average common shares outstanding – basic and diluted		5,354			3,985

~~See~~PART ~~notes~~I to– ~~condensed consolidated financial~~FINANCIAL ~~statements.~~INFORMATION

2Item 1. Financial Statements

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS ~~BALANCE~~OF ~~SHEETS~~OPERATIONS

(~~In thousands, except par value~~Unaudited)

	March 31, 2005			December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4		$	4
Trade accounts receivable, less allowance for doubtful accounts of $247 and $247, respectively	3,852			3,692
Other current assets	360			147
Total current assets	4,216			3,843
Property and equipment, net	315			363
Other assets:
Intangibles, net	4,183			4,187
Receivables from affiliates	—			311
Other	163			161
Net assets held for sale	5,036			5,655
Total Assets	$	13,913		$	14,520
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses	$	7,934		$	7,876
Obligations not liquidated because of outstanding checks	527			315
Borrowings under line of credit agreement	2,409			2,213
Factoring liability	875			1,501
Current maturities of long-term debt	1,306			867
Current maturities of capital leases	46			45
Total current liabilities	13,097			12,817
Deferred lease rents	477			481
Capital lease obligations, net of current maturities	42			55
Long-term debt, net of current maturities	42			55
Net liabilities held for sale	3,020			3,011
Total liabilities	16,678			16,419
Commitments and contingencies	—			—
Stockholders’ equity (deficit)
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued	—			—
Preferred stock, $10 par value, 215 shares authorized; 212 shares issued and outstanding in 2005 and 2004	448			448
Common stock, $0.10 par value, 10,000 shares authorized; 5,714 shares issued and 5,354 shares outstanding in 2005 and 2004	571			571
Additional paid-in capital	16,000			15,893
Retained deficit	(18,662		)	(17,689		)
Common stock held in treasury (361 shares), at cost	(907		)	(907		)
Receivable related to stock issued	(215		)	(215		)
Total stockholders’ equity (deficit)	(2,765		)	(1,899		)
Total Liabilities and Stockholders’ Equity (Deficit)	$	13,913		$	14,520

(In Thousands, Except Per Share Data)

See notes to condensed consolidated financial statements.

	Three Months ended March 31,
	2006			2005

Net service revenues:
Direct placement services	$	2,011		$	1,708
Temporary and contract staffing services	5,554			7,645
	7,565			9,353

Direct cost of temporary and contract staffing services	4,500			6,084
Gross profit	3,065			3,269
Operating expenses:
Selling expenses	1,620			1,805
General and administrative expenses	1,780			1,872
Stock-based employee compensation	65			22
Depreciation and amortization expense	41			70
	3,506			3,769
Other expense (income) items:
Interest expense, net	592			473
Gain on early extinguishment of debt	(28		)	—
	564			473
Net loss	(1,005		)	(973		)
Cumulative preferred stock dividends earned but not declared	(53		)	(53		)

Net loss applicable to common stockholders	$	(1,058	)	$	(1,026	)

Net loss per share from continuing operations applicable to common shareholders – basic and diluted	$	(0.20	)	$	(0.19	)

Weighted average common shares outstanding - basic and diluted	5,273			5,354

3See notes to condensed consolidated financial statements.

~~DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES~~2

~~CONDENSED~~DIVERSIFIED ~~CONSOLIDATED~~CORPORATE ~~STATEMENTS~~RESOURCES, OFINC. ~~CASH~~AND ~~FLOWS~~SUBSIDIARIES

~~(Unaudited)~~CONDENSED CONSOLIDATED BALANCE SHEETS

(InAmounts ~~thousands~~in Thousands, Except Par Value)

	Three months ended March 31,
	March 31,			Dec. 31,
	2005			2004
	2006			2005
Cash flow from operating activities:
	(Unaudited)
Net loss from continuing operations	$	(1,113	)	$	(2,229	)
ASSETS
Net income from discontinued operations	140			324
Current assets:
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Cash and cash equivalents	$	2		$	2
Depreciation and amortization	68			138
Trade accounts receivable, less allowance for doubtful accounts of $214 and $153, respectively	3,992			3,963
Gain on extinguishment of debt	—			(222		)
Prepaid expenses and other current assets	445			406
Provision for allowances	—			(56		)
Total current assets	4,439			4,371
Deferred lease rents	(4		)	98
Property and equipment, net	137			178
Accretion of interest on debts	3			1
Other assets:
Value of warrants issued	85			76
Intangibles, net	7,631			7,631
Value of stock-based employee compensation	22			79
Other	151			156
Changes in operating assets and liabilities:
Total Assets	$	12,358		$	12,336
Accounts receivable	(173		)	(671		)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts receivable from affiliates	324			34
Current liabilities:
Prepaid and other assets	(220		)	(428		)
Trade accounts payable and accrued expenses	$	12,621		$	12,069
Trade accounts payable and accrued expenses	58			1,866
Obligations not liquidated because of outstanding checks	488			335
Net operating cash flow from discontinued operations	628			764
Borrowings under revolving credit agreement	2,304			1,252
Cash used in operating activities	(182		)	(226		)
Factoring liability	—			1,059
Cash flows from investing activities:
Current maturities of long-term debt	3,286			2,987
Capital expenditures	(11		)	(20		)
Current maturities of capital lease obligations	39			46
Business acquisition costs, net of cash acquired	—			(207		)
Total current liabilities	18,738			17,748
Cash used in investing activities	(11		)	(227		)
Deferred lease rents	473			482
Cash flows from financing activities:
Capital lease obligations, net of current maturities	10			15
Issuance of common stock	—			15
Total liabilities	19,221			18,245
Issuance of preferred stock, net of issue costs	—			1,920
Commitments and contingencies	—			—
Repayment of debt to related party	—			(50		)
Stockholders’ equity (deficit):
Net borrowings (repayments) on revolving line of credit	196			1,490
Preferred stock, $1.00 par value; 1,000 shares authorized, none issued	—			—
Net repayments under factoring arrangement	(626		)	(2,533		)
Preferred stock, $10 par value; 215 shares authorized, 212 shares issued and outstanding	448			448
Obligations not liquidated because of outstanding checks	212			(128		)
Common stock, $0.10 par value; 50,000 shares authorized, 5,774 shares issued and 5,273 shares outstanding	577			577
Principal payments under debt obligations	(102		)	(202		)
Additional paid-in capital	16,883			16,832
Borrowings under debt obligations	525			—
Retained deficit	(23,649		)	(22,644		)
Principal payments under capital lease obligations	(12		)	(36		)
Common stock held in treasury; 502 shares, at cost	(1,122		)	(1,122		)
Net financing cash flow from discontinued operations	—			(124		)
Total stockholders’ (deficit)	(6,863		)	(5,909		)
Cash flows from financing activities	193			352
Total Liabilities and Stockholders’ Equity (Deficit)	$	12,358		$	12,336
Change in cash and cash equivalents	—			(101		)
Cash and cash equivalents at beginning of year	4			164
Cash and cash equivalents at end of period	$	4		$	63

See notes to condensed consolidated ~~financial~~ financial statements.

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

~~NOTES TO~~ CONDENSED CONSOLIDATED STATEMENTS ~~FINANCIAL~~OF ~~STATEMENTS~~CASH FLOWS

~~MARCH 31, 2005~~(Unaudited)

(~~Unaudited~~$ In Thousands)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

	Three Months ended March 31,
	2006			2005
Cash flow from operating activities:
Net loss	$	(1,005	)	$	(973	)
Adjustments to reconcile net loss to cash used in operating activities:
Gain on extinguishment of debt	(28		)	—
Depreciation and amortization	41			70
Change in allowance for bad debts	61			(7		)
Deferred lease rents	(9		)	(5		)
Accretion of interest on debt	(9		)	3
Value of stock-based options and warrants issued for compensation	51			107
Changes in operating assets and liabilities:
Accounts receivable	(90		)	452
Accounts receivable from affiliates	—			324
Prepaid expenses and other assets	(34		)	(220		)
Trade accounts payable and accrued expenses	552			66
Cash used in operating activities	(470		)	(183		)
Cash flows from investing activities:
Capital expenditures	—			(11		)
Cash used in investing activities	—			(11		)
Cash flows from financing activities:
Net (repayments) borrowings on revolving line of credit	1,052			196
Net (repayments) borrowings under factoring arrangement	(1,059		)	(626		)
Obligations not liquidated because of outstanding checks	153			212
Increase in debt obligations	353			525
Principal payments under debt obligations	(17		)	(102		)
Principal payments under capital lease obligations	(12		)	(12		)
Cash provided by financing activities	470			193
Change in cash and cash equivalents	—			(1		)
Cash and cash equivalents at beginning of year	2			4
Cash and cash equivalents at end of period	$	2		$	3

Going Concern: These financial statements have been prepared on a going concern basis, which contemplates the realization of the assets of Diversified Corporate Resources, Inc. and subsidiaries (the “Company”) and the satisfaction of its liabilities and commitments in the normal course of business. However, the Company believes that it will be unable to continue as a going concern for the next twelve months without obtaining additional funds through debt or equity financing or through the sale of assets. See ~~Note~~notes ~~2 for a discussion of the Company’s ability~~ to ~~continue~~condensed ~~as a going concern and~~consolidated ~~its~~financial ~~plans for addressing those issues~~statements. ~~The inability to obtain additional funds could have a material adverse effect on the Company.~~

Description of Business: The Company is a nationwide human resources and employment services firm, providing staffing solutions in specific professional and technical skill sets to Fortune 500 corporations and other large organizations. The Company offers two kinds of staffing solutions: direct placement services and temporary and contract staffing.4

~~The Company~~DIVERSIFIED ~~currently~~CORPORATE ~~operates~~RESOURCES, INC. ~~offices~~AND ~~in the following locations:~~SUBSIDIARIES

~~Arizona~~NOTES ~~Phoenix~~TO ~~California~~CONSOLIDATED FINANCIAL ~~Palm Desert Colorado Denver Georgia Atlanta Pennsylvania Philadelphia Texas Dallas, Houston and Austin~~STATEMENTS

~~The offices~~MARCH ~~are responsible for marketing to clients~~31, recruitment of personnel, operations, local advertising, initial customer credit evaluation and customer cash collection follow-up. Our executive offices, located in Dallas, Texas, provide corporate governance and risk management, as well as certain other accounting and administrative services, for our offices.2006

Basis of Presentation: The condensed consolidated financial statements include the accounts of all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.(Unaudited)

The Company’s condensed consolidated balance sheet as of March 31, 2005, the condensed consolidated statements of operations for the three months ended March 31, 2005 and 2004, and the condensed consolidated statements of cash flows for the three months ended March 31, 2005 and 2004, are unaudited1. In ~~the~~Summary ~~opinion~~ of ~~management,~~Significant ~~these statements~~Accounting have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s financial position, results of operations and cash flows. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated balance sheet as of December 31, 2004, was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Additional information is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Securities and Exchange Commission and which should be read in conjunction with this quarterly report.Policies

~~The preparation~~Going ~~of the condensed consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management of the Company to~~Concern

5These financial statements have been prepared on a going concern basis, which contemplates the realization of the assets of Diversified Corporate Resources, Inc. and subsidiaries (the “Company”) and the satisfaction of its liabilities and commitments in the normal course of business. However, the Company believes that it will be unable to continue as a going concern for the next twelve months without obtaining additional funds through debt or equity financing or through the sale of assets. See Note 2 for a discussion of the Company’s ability to continue as a going concern and its plans for addressing those issues. The inability to obtain additional funds could have a material adverse effect on the Company.

~~make estimates~~Description ~~and assumptions that affect the reported amounts~~ of assets and liabilities, and the disclosure of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during such reporting periods. Actual results could differ from these estimates.Business

~~Significant~~The ~~estimates~~Company ~~and~~is ~~assumptions~~a ~~are~~nationwide ~~used~~human ~~for,~~resources ~~but~~and ~~not~~employment ~~limited~~services ~~to:~~firm, ~~(i) the~~providing ~~allowance~~staffing ~~for~~solutions ~~doubtful~~in ~~accounts,~~specific ~~(ii) the~~professional ~~allowance~~and ~~for~~technical ~~estimated~~skill ~~losses on~~sets ~~realization~~to ofFortune 500 ~~direct~~corporations ~~placements, (iii) the useful lives of property~~ and ~~equipment,~~other ~~(iv) asset~~large ~~impairments~~organizations. ~~including~~During ~~intangibles~~2006, ~~(v) self-insurance~~the Company ~~reserves~~offered ~~for~~two ~~health~~kinds ~~claims,~~of ~~(vi) deferred~~staffing ~~tax~~solutions: ~~asset~~direct ~~valuation~~placement ~~allowance,~~services (~~vii) contingency~~“permanent ~~and litigation reserves, (viii~~placements”) ~~fair~~ ~~value of financial instruments,~~ and ~~(ix) the fair~~temporary ~~value calculations involved in determining stock-based employee compensation~~ and ~~the~~contract ~~value of warrants issued~~staffing.

The Company iscurrently ~~subject~~operates tooffices ain ~~number of risks and uncertainties. For example, management of~~ the ~~Company believes that these~~ following ~~factors, as well as others, could have a significant negative effect on the Company’s future financial position, results of operations and/or cash flows~~locations: risks associated with raising adequate capital for continuing operations; general economic conditions that affect the Company’s target markets, including inflation, recession, interest rates and other economic factors; the availability of qualified personnel; the Company’s ability to successfully integrate acquisitions or joint ventures with its operations (including the ability to successfully integrate businesses that may be diverse as to their type, geographic area or customer base); the level of competition experienced by the Company, especially from companies with greater financial and marketing resources; the Company’s ability to implement its business strategies and to manage its growth; the level of development revenues and expenses; and other factors that may affect the Company and businesses generally.

~~Cash~~Arizona ~~and~~Phoenix ~~Cash~~Colorado ~~Equivalents: Cash~~Denver ~~and~~Georgia ~~cash~~Atlanta ~~equivalents consist~~Pennsylvania ~~principally~~Philadelphia ofTexas ~~amounts~~Dallas, ~~held~~Houston ~~in demand deposit accounts~~ and ~~amounts invested in financial instruments with initial maturities of three months or less at the time of purchase.~~Austin

~~Trade~~The ~~Accounts~~offices ~~Receivable: Trade accounts receivable~~ are ~~reported~~ inresponsible ~~the consolidated balance sheets at outstanding gross billings reduced by an allowance~~ for ~~estimated losses on the realization of direct placement~~ ~~fees~~marketing ~~(principally due~~ to ~~applicants~~clients, ~~not~~recruitment ~~commencing~~of ~~employment~~personnel, oroperations, ~~not~~local ~~remaining~~advertising, ininitial ~~employment~~customer ~~for the guaranteed period) and by an allowance for doubtful accounts for potential losses due to~~ credit ~~risk. The~~evaluation ~~Company establishes the allowance for estimated losses on direct placement fees based on historical experience~~ and ~~charges~~customer ~~the~~cash ~~allowance~~collection ~~against revenue~~follow-up. ~~The~~ ~~allowance for doubtful~~Our ~~accounts~~executive isoffices, ~~based~~located ~~upon~~in aDallas, ~~review of specific customer balances~~Texas, ~~historical losses~~provide ~~and~~corporate ~~general~~governance ~~economic conditions.~~ and ~~Accounts~~risk ~~receivable at March 31~~management, ~~2005~~as ~~and~~well ~~December 31,~~as ~~2004 include~~certain ~~approximately~~other ~~$368,000~~accounting and ~~$215~~administrative services,~~000,~~ ~~respectively,~~for ofour ~~unbilled receivables~~offices. ~~The Company generally does not charge interest on past due balances.~~

~~Property~~Basis ~~and Equipment: Property and equipment is recorded at cost. Depreciation starts once an asset is placed in service using the straight-line method and is designed to distribute the cost~~ of the asset over its estimated useful life. Amortization of leasehold improvements and assets under capital leases are included in depreciation and amortization expense. Upon retirement or sale, the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the consolidated statement of operations. Maintenance and repair costs are charged to expense as incurred. Estimated useful lives are from 3 to 4 years for computer equipment and software and from 5 to 7 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the life of the lease or 5 years. Assets under capital leases are amortized over the lesser of the life of the lease or the normal life assigned to that asset.Presentation

~~Intangible~~The ~~assets: Intangible assets consist~~condensed ~~primarily~~consolidated offinancial ~~non-compete~~statements ~~agreements~~include ~~and goodwill (excess of~~ the ~~purchase~~accounts ~~price over the fair value~~ of ~~net~~all ~~assets acquired) arising from business combinations. The non~~wholly-~~compete agreements~~owned ~~are amortized over their estimated useful lives~~subsidiaries. ~~Goodwill~~ isAll ~~subject~~significant tointercompany anaccounts ~~annual~~and ~~impairment test,~~transactions ~~which the Company typically completes during the fourth quarter of its fiscal year. There~~ have been ~~no events~~ oreliminated ~~changes~~ in ~~circumstances since~~ the ~~last~~condensed ~~impairment~~consolidated ~~test~~financial ~~for December 2004 that would indicate that goodwill might be impaired since that time~~statements.

6The Company’s condensed consolidated balance sheet as of March 31, 2006, the condensed consolidated statements of operations for the three months ended March 31, 2006 and 2005, and the condensed consolidated statements of cash flows for the three months ended March 31, 2006 and 2005, are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s financial position, results of operations and cash flows. Such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2006, are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated balance sheet as of December 31, 2005, was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Additional information is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission and which should be read in conjunction with this quarterly report.

Capitalized Software: The Company purchases, and in certain cases develops, and implements new computer software to enhance the performance of its accounting and operating systems. For computer software that is developed in-house, the Company capitalizes direct internal and external costs subsequent to the preliminary stage of the software project. Software development costs are reported as a component of computer equipment and software within property and equipment and are amortized over the estimated useful life of the software (typically three years) using the straight-line method.5

~~Impairment of Long-Lived Assets:~~ The ~~Company~~preparation ~~reviews~~of ~~long-lived~~the ~~assets~~condensed ~~and~~consolidated ~~identifiable~~financial ~~intangibles~~statements, ~~for~~in ~~impairment~~conformity ~~whenever~~with ~~events~~accounting orprinciples ~~circumstances~~generally ~~indicate~~accepted ~~that~~in the ~~carrying~~United ~~value~~States of ~~an asset~~America, ~~may~~requires ~~not~~management ~~be recoverable. Recoverability~~ of ~~assets~~the Company to bemake ~~held~~estimates and ~~used~~assumptions isthat affect ~~measured~~the byreported aamounts ~~comparison~~ of ~~the~~assets ~~carrying~~and ~~value of~~liabilities, anand ~~asset to~~ the ~~undiscounted~~disclosure ~~expected~~of ~~future cash flows to be generated by~~contingent ~~that~~assets ~~asset. If~~and ~~the~~liabilities, ~~carrying~~at ~~value exceeds~~ the ~~expected~~dates ~~future cash flows~~ of the ~~asset,~~financial anstatements ~~impairment exists~~ and isthe ~~measured~~reported byamounts ~~the~~of ~~amount~~revenues ~~the~~and ~~carrying~~expenses ~~value~~during ~~exceeds~~such ~~the~~reporting ~~estimated fair value of the asset~~periods. ~~Management~~ ~~believes no~~Actual ~~impairment~~results ofcould ~~its~~differ ~~long-term~~from ~~assets~~these ~~existed at March 31, 2005 based on their carrying value~~estimates.

~~Obligations~~Significant estimates ~~not~~and ~~liquidated~~assumptions ~~because~~are ofused ~~outstanding~~for, ~~checks~~but not limited to: ~~Under~~ (i) the ~~terms~~allowance for ~~and~~doubtful ~~conditions~~accounts, of(ii) the ~~factoring~~allowance ~~arrangement~~for ~~and~~estimated ~~the~~losses ~~line~~on realization of ~~credit (see~~direct ~~Note~~placements, 6(iii), ~~all~~the ~~cash~~useful ~~receipts~~lives ~~deposited~~of inproperty ~~our~~and ~~lockboxes~~equipment, ~~are~~(iv) asset ~~swept~~impairments ~~daily~~including ~~by our~~intangibles, ~~lenders. This~~(v) ~~procedure,~~self-insurance ~~combined with~~reserves ~~our~~for ~~policy~~health claims, of(vi) ~~maintaining~~deferred ~~zero~~tax ~~balances~~asset invaluation ~~the~~allowance, ~~Company’s~~(vii) ~~operating~~contingency and ~~accounts~~litigation reserves, ~~results~~(viii) infair value of financial instruments, and (ix) the fair ~~Company~~value ~~reporting~~calculations ainvolved ~~balance~~in ofdetermining ~~obligations~~stock-based ~~not~~employee ~~liquidated~~compensation ~~because~~and the value of ~~outstanding~~warrants ~~checks~~issued.

~~Income~~The Company ~~Taxes: Deferred~~is ~~tax~~subject ~~assets~~to a number of risks and ~~liabilities~~uncertainties. ~~are~~For example, ~~established~~management ~~for~~of ~~temporary~~the ~~differences~~Company ~~between~~believes ~~financial~~that ~~statement~~these ~~carrying~~following ~~amounts~~factors, as well as ~~and~~others, could have a significant negative effect on the ~~taxable~~Company’s ~~basis~~future financial position, results of ~~assets~~operations and/or ~~liabilities~~cash ~~using~~flows: risks associated with raising adequate capital for continuing operations; general economic conditions that affect the Company’s target markets, including inflation, recession, interest rates ~~currently~~and other ineconomic ~~effect. A~~factors; ~~valuation~~the ~~allowance~~availability isof ~~established~~qualified ~~for~~personnel; ~~any~~the Company’s ~~portion~~ability to successfully integrate acquisitions or joint ventures with its operations (including the ability to successfully integrate businesses that may be diverse as to their type, geographic area or customer base); the level of competition experienced by the ~~deferred~~Company, ~~tax~~especially ~~asset~~from ~~for~~companies ~~which~~with ~~realization~~greater financial isand ~~not~~marketing ~~likely. The~~resources; ~~valuation~~the ~~allowance~~Company’s isability ~~reviewed~~to implement its business ~~periodically~~strategies and to ~~determine~~manage its growth; the ~~amount~~level of ~~deferred~~development ~~tax~~revenues ~~asset~~and ~~considered~~expenses; and ~~realizable~~other factors that may affect the Company and businesses generally.

~~Fair~~Cash ~~value of Financial Instruments: The estimated fair value of the Company’s financial instruments was determined by the Company based on available market information~~ and ~~appropriate~~Cash valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop fair value estimates. Accordingly, estimates are not necessarily indicative of the amounts the Company may realize in a current market transaction. The use of different market assumptions or estimates may have a material effect on the estimated fair value.Equivalents

~~The recorded~~ Cash ~~values of cash~~ and cash equivalents, ~~trade~~consist ~~accounts receivable,~~principally ~~accounts~~of ~~payable~~amounts ~~and~~held ~~other~~in ~~accrued~~demand ~~liabilities~~deposit ~~approximate~~accounts ~~fair~~and ~~value~~amounts ~~due~~invested ~~to the~~in ~~short~~financial ~~term nature of these~~ instruments. ~~The~~with ~~recorded~~initial ~~amount~~maturities of ~~notes~~three ~~receivable~~months ~~from~~or ~~affiliates~~less ~~approximates fair~~at ~~value due to~~ the ~~value~~time of ~~the collateral for those receivables~~purchase. The recorded value of the factoring liability, the line of credit and other current and long-term debt approximate fair value due to the Company’s ability to obtain replacement borrowings at comparable interest rates.

~~Revenue~~Trade ~~Recognition~~Accounts and Cost of Services: The Company derives its revenues from two sources: direct placement and temporary and contract staffing. The Company records revenues for staffing services at the gross amount billed the customer in accordance with EITF 99-19, Reporting Revenues Gross as a Principal Versus Net as an Agent. The Company believes this approach is appropriate because the Company itself identifies and hires qualified employees, selects the employees for the staffing assignment, and bears the risk that the services provided by these employees will not be fully paid by customers.Receivable

~~Fees for~~ Trade ~~direct~~accounts ~~placement~~receivable ofare ~~personnel~~reported ~~are~~in ~~recognized~~the consolidated asbalance ~~income~~sheets at ~~the~~outstanding ~~time~~gross ~~the applicant~~billings ~~accepts employment. Revenue is~~ reduced by an allowance for estimated losses inon the realization of ~~such~~direct placement fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period)~~. Fees~~ ~~charged~~and toby an allowance for doubtful accounts for potential ~~clients~~losses ~~are~~due ~~generally~~to ~~calculated~~credit asrisk. aThe ~~percentage~~Company ofestablishes the ~~new~~allowance ~~employee’s~~for ~~annual~~estimated ~~compensation. There~~losses ~~are~~on no direct ~~costs~~placement fees based on historical experience and charges the allowance against revenue. The allowance for ~~direct~~doubtful ~~placements~~accounts is based upon a review of specific customer balances, historical losses and general economic conditions. ~~Commissions~~ ~~paid~~Accounts receivable at March 31, 2006 and December 31, 2005 include byapproximately ~~the~~$602,000 and $348,000, respectively, of unbilled receivables. The Company ~~related~~generally todoes ~~direct~~not ~~placements~~charge ~~are~~interest ~~included~~on inpast ~~selling~~due ~~expenses~~balances.

7Property and Equipment

~~Revenues~~Property and equipment is recorded ~~from~~at ~~temporary~~cost. Depreciation starts once an asset is placed in service using the straight-line method and ~~contract~~is ~~staffing~~designed to distribute the cost of the asset over its estimated useful life. Amortization of leasehold improvements and assets under capital leases are ~~recognized~~included ~~upon~~in ~~performance~~depreciation and amortization expense. Upon retirement or sale, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in the consolidated statement of ~~services~~operations. ~~The~~ ~~direct~~Maintenance and repair costs are charged to expense as incurred. Estimated useful lives are from 3 to 4 years for computer equipment and software and from 5 to 7 years for furniture and equipment. Leasehold improvements are amortized over the lesser of ~~these~~the ~~staffing~~life of ~~services~~the lease or 5 years. Assets under capital leases are amortized over the ~~consist~~lesser ~~principally~~of the life of ~~wages~~the ~~and~~lease ~~related~~or ~~payroll~~the ~~taxes~~normal life assigned to that asset.

~~Segment~~Intangible Reporting: In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosure about Segments of an Enterprise and Related Information, the Company operates in only one segment, that of an employment services firm. While the Company’s chief operating decision maker receives information by type of revenue, either direct placements or temporary and contract staffing services, the Company does not maintain its books of record so that all operating expenses and assets can be allocated to the types of revenue reported. Therefore, it is impracticable for the Company to provide segment profit or loss by type of revenue other than on a consolidated basis. The Company has no operations outside the United States.Assets

~~Advertising~~ Intangible ~~Costs: Advertising~~assets ~~costs~~consist ~~are~~of ~~expensed~~goodwill (excess asof ~~incurred. For~~the purchase price over the ~~three~~fair ~~months~~value ~~ended~~of ~~March 31,~~net assets acquired) arising from ~~2005~~business ~~and~~combinations. ~~2004,~~Goodwill ~~advertising~~is ~~expenses~~subject ~~were~~to ~~approximately~~an ~~$56,000~~annual ~~and~~impairment ~~$87~~test,~~000,~~ which ~~respectively~~the Company typically completes during the fourth quarter of its fiscal year completed for the year. The Company determined that no

Stock-Based Compensation: In the fourth quarter of 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, using the modified prospective method as permitted under SFAS No. 148, effective as of January 1, 2003.6

~~Under this~~adjustment ~~fair~~to ~~value method of recognizing stock-based employee compensation, compensation cost is measured at~~ the ~~grant~~carrying ~~date based on the estimated fair~~ value of ~~the~~goodwill was ~~award~~required ~~and~~for isDecember ~~expensed~~2005 ~~over~~and ~~the~~no ~~vesting~~events ~~period. The~~or ~~Company~~changes ~~begins~~in ~~recognizing~~circumstances ~~such~~have occurred ~~compensation~~since ~~cost~~that ~~as if all grants will entirely vest~~time.

~~For options~~Capitalized issued during the three months ended March 31, 2005 and 2004, the fair value of each option grant was estimated on the date of grant by using the Black-Scholes option-pricing model. The fair value of options issued during the three months ended March 31, 2005 was approximately $0.16 per share and during the three months ended March 31, 2004 was approximately $1.68 per share. The following weighted average assumptions were used in valuing the options granted during these periods:Software

	2005		2004
Expected dividend yield	0.00	%	0.00	%
Expected volatility	213.67	%	105.49	%
Risk-free interest rate	3.46	%	2.64	%
Expected option lives	4.0 years		3.6 years

The Company purchases, and in certain cases develops, and implements new computer software to enhance the performance of its accounting and operating systems. For computer software that is developed in-house, the Company capitalizes direct internal and external costs subsequent to the preliminary stage of the software project. Software development costs are reported as a component of computer equipment and software within property and equipment and are amortized over the estimated useful life of the software (typically three years) using the straight-line method.

~~The Company~~Impairment ~~recognized~~of ~~stock~~Long-~~based~~Lived ~~employee compensation expense of approximately $22,000 for the three months ended March 31, 2005, and $79,000 for the three months ended March 31, 2004.~~Assets

~~Loss~~Effective January ~~per~~1, ~~share: The~~2002, ~~net~~the ~~loss~~Company ~~applicable~~adopted toSFAS ~~common~~No. 144, Accounting ~~stockholders~~for ~~was~~the ~~used~~Impairment inor Disposal of Long-Lived Assets. Under SFAS No. 144, the ~~calculation~~Company ofreviews ~~both~~long-lived ~~basic~~assets and ~~diluted~~identifiable ~~loss~~intangibles ~~per~~for ~~share. The~~impairment ~~weighted~~whenever ~~average~~events ~~number~~or circumstances indicate that the carrying value of ~~common~~an ~~shares~~asset ~~outstanding~~may ~~was~~not ~~also~~be ~~the~~recoverable. ~~same~~Recoverability ~~for~~of ~~calculating~~assets ~~both~~to ~~basic~~be held and used ~~diluted~~is ~~loss~~measured ~~per~~by ~~share. Options~~a ~~to purchase~~comparison ~~1,480,333~~of ~~shares~~the ofcarrying ~~common~~value ~~stock~~of ~~and~~an ~~warrants~~asset to ~~purchase~~the ~~2,233,495~~undiscounted ~~shares~~expected offuture ~~common~~cash ~~stock~~flows into ~~2005,~~be ~~and~~generated ~~options~~by tothat ~~purchase~~asset. ~~1,560,401~~If ~~shares~~the ofcarrying value ~~common~~exceeds ~~stock~~the ~~and~~expected ~~warrants~~future tocash ~~purchase~~flows ~~2,650,404~~of ~~shares~~the ofasset, ~~common~~an ~~stock~~impairment inexists ~~2004,~~and ~~were~~is ~~not~~measured ~~included~~by in the ~~computation~~amount ofthe ~~diluted~~carrying ~~loss~~value ~~per~~exceeds ~~share as~~ the ~~effect~~estimated offair value ~~including~~of the ~~options~~asset. ~~and~~The ~~warrants~~adoption inof ~~the~~SFAS ~~calculation~~No. ~~would~~144 bedid ~~anti-dilutive. The~~not ~~conversion~~have ~~feature~~a ofmaterial impact on the Company’s financial statements since it retained the fundamental provisions ~~preferred~~of ~~stock~~SFAS ~~into~~No. 2121,~~118,750~~ ~~shares~~Accounting for the Impairment or Disposal of Long-Lived ~~common~~Assets ~~stock~~and ~~was~~for ~~also~~Long-Lived ~~not~~Assets ~~included~~to inBe Disposed Of, related to the ~~calculation~~recognition ofand ~~diluted~~measurement ~~loss~~of ~~per~~the ~~share~~impairment asof itlong-lived ~~would~~assets to ~~also~~be ~~have~~held ~~been anti-dilutive~~and used.

~~Comprehensive~~Obligations ~~Loss: For~~not ~~all periods presented, comprehensive loss~~liquidated isbecause ~~equal~~of tooutstanding ~~net loss.~~checks

~~Recently Issued~~Under ~~Accounting Standards: In November 2004,~~ the ~~Financial~~terms ~~Accounting~~and ~~Standards~~conditions ~~Board issued~~of ~~statement~~our offactoring ~~Financial~~liability ~~Accounting~~(see ~~Standard~~Note ~~No. 151~~6), ~~“Inventory~~all ~~Costs”. The~~cash ~~new~~receipts ~~statement~~deposited ~~amends~~in ~~Accounting Research~~our ~~Bulletin~~lockboxes ~~No. 43,~~are ~~Chapter~~swept 4,daily ~~“Inventory~~by ~~Pricing,~~our “lender. toThis ~~clarify~~procedure, ~~the accounting~~combined ~~for~~with ~~abnormal~~our policy ~~amounts~~ of ~~idle~~maintaining ~~facility~~zero ~~expense,~~balances ~~freight,~~in ~~handling costs,~~the ~~and~~Company’s ~~wasted~~operating ~~material. This~~accounts, ~~statement~~results ~~requires~~in ~~that~~the ~~those~~Company ~~items~~reporting bea ~~recognized~~balance asof ~~current-period~~obligations ~~charges~~not ~~and~~liquidated ~~requires~~because ~~that allocation~~ of ~~fixed~~outstanding ~~production~~checks.

8Income Taxes

~~overheads~~Deferred tax toassets ~~the~~and ~~cost~~liabilities ofare ~~conversion~~established befor ~~based~~temporary ondifferences ~~the~~between ~~normal~~financial ~~capacity~~statement ofcarrying amounts and the ~~production~~taxable ~~facilities.~~ basis of assets and ~~This~~liabilities ~~statement~~using isrates ~~effective~~currently ~~for~~in ~~fiscal~~effect. ~~years~~A ~~beginning~~valuation ~~after~~allowance ~~June 15,~~is ~~2005. We~~established dofor ~~not~~any ~~expect~~portion ~~adoption~~ of ~~this statement~~the todeferred ~~have~~tax aasset ~~material~~for ~~impact~~which onrealization ~~our~~is not ~~financial~~likely. ~~condition~~The orvaluation ~~results~~allowance ofis reviewed periodically to determine the ~~operations~~amount of deferred tax asset considered realizable.

InFair ~~December 2004,~~Value ~~the Financial Accounting Statndards Board issued statement~~ of Financial ~~Accounting Standards No. 123~~ (revised 2004), Share-Based Payment. This statement replaces FASB Statement No. 123 and supercedes APB Opinion No. 25. Statement No. 123 (R) will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. This statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We do not believe that the adoption of FASB Statement 123 (R) will have a material effect on our results of operations since the Company currently follows FASB Statement No. 123.Instruments

~~In December 2004,~~The ~~the~~estimated ~~FASB~~fair ~~issued~~value ~~SFAS No. 153, Exchanges~~ of the ~~Nonmonetary~~Company’s ~~Assets,~~financial aninstruments ~~amendment~~at ofMarch ~~APB Opinion No. 29. The guidance in APB Opinion No. 29~~31, ~~Accounting~~2006 ~~for~~and ~~Nonmonetary~~December ~~Transactions~~31, is2005 ~~based~~were determined onby the ~~principle~~ ~~that~~Corporation ~~exchanges of nonmonetary assets should be measure~~ based on ~~fair value~~available ofmarket ~~the~~information ~~assets exchanged. The~~and ~~guidance~~appropriate ~~included~~valuation ~~certain exceptions to that principle~~methodologies. ~~This~~ ~~statement~~However, ~~amends~~considerable ~~Opinion~~judgment ~~No. 29 to~~is ~~eliminate~~necessarily ~~the~~required ~~exception~~in ~~for~~interpreting ~~nonmonetary~~market ~~exchanges~~data ofto ~~similar~~develop ~~productive~~fair ~~assets~~value ~~and~~estimates. ~~replaces~~Accordingly, itestimates ~~with~~are ~~a general exception for exchanges of nonmonetary assets that do~~ not ~~have~~necessarily ~~commercial~~indicative ~~substance. A nonmonetary exchange has commercial substance if the future cash flows~~ of the ~~entity~~amounts ~~are expected to change significantly as a result of~~ the ~~exchange. This~~Company ~~statement~~may ~~shall~~realize ~~be effective for nonmonetary exchanges occurring~~ in ~~fiscal~~a ~~periods~~current ~~beginning~~market ~~after June 15, 2005~~transaction. The ~~Company~~use ~~does~~of ~~not believe that~~different ~~the~~market ~~adoption~~assumptions ofor ~~this~~estimates ~~statement~~may ~~will~~ have a material effect on ~~its~~the ~~financial~~estimated ~~statements~~fair value.

~~NOTE~~The 2recorded values of cash and cash equivalents, trade accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short-term ~~GOING~~nature ~~CONCERN~~of ~~AND~~these ~~MANAGEMENT~~instruments. The ~~PLANS~~recorded amount of notes receivable from related parties approximates fair value due to the value of the collateral for those receivables. The recorded value of the factoring liability and current and long-term debt approximate fair value due to the Company’s ability to obtain replacement borrowings at comparable interest rates.

~~As a~~Revenue ~~result~~Recognition ~~of the recession that started in 2000~~ and ~~the impact it has had on the~~Cost ~~direct placement and temporary staffing industry, our revenues have declined approximately 67% from levels achieved in 2000. We reported net losses for the last four fiscal years as a result~~ of ~~the decline in our business, and expect to report a loss for the 2005 fiscal year. In addition, the Company’s current liabilities of $13.1 million exceed its current assets of $4.2 million.~~Services

The Company ~~currently~~derives ~~finances itself through factoring of, or lines of credit based on,~~ its ~~accounts receivable. The~~revenues ~~amount~~from oftwo ~~funds~~sources: ~~available~~direct ~~under~~placement ~~these~~and ~~agreements~~temporary ~~depends~~and oncontract ~~the amount of accounts receivable accepted by the lenders~~staffing. ~~We operate~~ ~~with minimal cash balances as all cash receipts are deposited into our~~The ~~lockboxes,~~Company ~~which~~records ~~are~~revenues ~~swept~~for ~~daily~~staffing byservices ~~our~~at ~~lenders. While we have generally sought to borrow~~ the ~~maximum~~ ~~amounts~~gross ~~available~~amount ~~from~~billed ~~these facilities during 2005,~~ the ~~facilities~~ ~~have~~customer ~~been inadequate~~ in ~~providing~~accordance ~~enough~~with ~~funds~~EITF to99-19, ~~maintain~~Reporting ~~operations,~~Revenues ~~which~~Gross ~~has~~as ~~resulted~~a inPrincipal ~~our~~Versus ~~having~~Net toas ~~use~~an ~~other~~Agent. ~~measures~~The toCompany ~~continue~~believes tothis approach ~~fund~~is ~~operations.~~

During 2004, we reduced staff and closed agencies to reduce funds outflow. We had also not paid all employer and employee payroll taxes when due. As a result of these past due payroll tax liabilities, we are in default under one of our lending agreements. In addition, we are funding operations by not paying all vendors for products and services under normal credit terms, including payments on capital leases and other debt. The consequences of some of these actions have or may result in penalties and/or fines for late payments or may involve legal actions against us. However, our management believed that these steps were necessary at the time to maintain the Company while it sought to correct its cash flow issues.7

~~The Company~~appropriate ~~incurred~~because ~~payroll~~the ~~tax liabilities of approximately $3,558,000 in 2004~~Company ~~that~~itself ~~have~~identifies ~~not been paid (excluding any penalty~~ and ~~interest~~hires ~~payments~~qualified ~~due~~employees, onselects the ~~underpayment). The~~ ~~Company~~employees ~~first~~for ~~disclosed~~the ~~that~~staffing itassignment, ~~had~~and ~~not~~bears ~~paid~~the ~~all~~risk ~~payroll~~that ~~taxes~~the ~~when~~services ~~due~~provided inby ~~June 2004. Taxes~~these employees onwill ~~payrolls~~not ~~after~~be ~~November 3, 2004,~~fully ~~have been~~ paid ~~when~~by ~~due as part of an agreement with the Internal Revenue Service (the “IRS”), as discussed below~~customers.

InFees for direct placement of ~~October 2004,~~personnel ~~the~~are ~~Internal~~recognized ~~Revenue~~as ~~Service~~income (at the ~~“IRS”)~~time ~~placed~~the aapplicant ~~lien~~accepts onemployment. ~~the~~Revenue ~~assets~~is ofreduced ~~two~~by an allowance for estimated losses in realization of ~~our~~such fees ~~subsidiaries.~~ (principally due to applicants not commencing employment or not remaining ~~The~~in ~~Company~~employment ~~and~~for the ~~IRS~~guaranteed ~~reached~~period). anFees ~~agreement~~charged ~~that~~to ~~subordinates~~clients are generally calculated as a percentage of the new employee’s annual compensation. There are ~~claims~~no direct costs for permanent placements. Commissions paid by the ~~IRS~~Company related to permanent placements are included in selling expenses.

9Revenues from temporary and contract staffing are recognized upon performance of services. The direct costs of these staffing services consist principally of direct wages and related payroll taxes paid for non-permanent personnel.

~~those of~~Segment our senior lenders so that they can continue to fund our operations. The IRS has extended the subordination agreement with one subsidiary until June 30, 2005. Our lenders are continuing to fund us. The Company has entered into a second amendment with one lender that acknowledges the extended subordination agreement with the IRS. We do not have a formal agreement with our other senior lender, but this lender has continued to fund. Currently, both lenders may demand repayment at any time. If we fail to pay all future federal payroll tax liabilities arising after the subordination agreement on a timely basis, the subordination agreement will expire and our senior lenders will stop funding our operations. This would have a material adverse effect on our ability to continue as a going concern.Reporting

In ~~the~~ ~~first~~accordance ~~quarter~~with ofSFAS ~~2004~~No. 131, ~~the~~Disclosure ~~Company~~about ~~completed~~Segments ~~the sale~~ of aan ~~new~~Enterprise ~~issue~~and ofRelated ~~the~~Information, the Company’s ~~preferred~~operates ~~stock~~in ~~(see~~only ~~Note~~one ~~5). Each~~segment, ~~share~~that of ~~preferred~~an ~~stock~~employment isservices ~~convertible~~firm. ~~into ten shares of the~~While the Company’s ~~common~~chief ~~stock. The~~operating ~~sale~~decision ~~was~~maker receives information by type of ~~closed~~revenue, ineither ~~March 2004~~direct ~~and~~placements ~~generated~~or ~~net~~temporary ~~proceeds~~and tocontract staffing services, the Company ofdoes ~~approximately $1.9~~not ~~million. This~~maintain ~~capital~~its ~~was~~books ~~used~~of ~~for general~~record ~~working~~so ~~capital~~that ~~purposes~~all operating expenses and toassets ~~acquire~~can ~~certain~~be ~~assets~~allocated ofto ~~Medical Resource~~the ~~Network,~~types ~~Inc~~of ~~(see~~revenue ~~Note 4)~~reported. Therefore, ~~While~~it ~~this~~is ~~financing~~impracticable ~~provided~~for ~~much~~the ~~needed~~Company ~~capital~~ to ~~help~~provide ~~offset~~segment ~~the~~profit or loss by type ~~Company’s~~of ~~negative~~revenue ~~cash~~other ~~flow,~~than iton ~~did~~a ~~not~~consolidated ~~provide~~basis. ~~enough~~The ~~funds~~Company tohas ~~overcome~~no ~~this~~operations outside the United States.

~~The Company~~Advertising is in negotiations to sell one of its subsidiaries, Datatek Group Corporation (“Datatek”), headquartered in Phoenix, Arizona. The proceeds received from this sale should be adequate to repay most, if not all, of the past due payroll tax liabilities. Because negotiations are in the early stages, the Company cannot be assured that a sale will occur. The unit to be sold represented approximately 54% and 60% of our temporary and contract staffing revenue for the three months ended March 31, 2005, and for the year ended December 31, 2004, respectively.Costs

~~The~~Advertising ~~Company~~costs isare ~~continuing~~expensed toas evaluate various other financing and restructuring strategies, including merger candidates and investments through private placements, to maximize shareholder value and to provide assistance to the Company in meeting its capital requirements and pursuing its business strategyincurred. ~~One~~ ofFor ~~these strategies is to seek acquisitions to replace~~ the ~~revenues~~three ~~that~~months ~~could~~ended beMarch ~~lost in the sale of Datatek by acquiring small companies~~31, ~~where~~2006 ~~their back office operations can be~~and ~~absorbed into the Company’s own. There can be no assurance that the Company will be successful in implementing the changes necessary to accomplish these objectives~~2005, oradvertising ifexpenses itwere isapproximately ~~successful~~$55,000 ~~that the changes will improve its cash flow~~ and ~~liquidity~~$52,000, respectively.

~~If a~~Earnings ~~sale~~(Loss) ofPer Datatek takes place, management believes that the Company will be able to secure other financing that will allow it to pursue its acquisition strategy, which when combined with improving market conditions and the restructuring of its present businesses, should eventually produce enough new revenues and gross profit to cover the operating funds shortfall the Company is currently experiencing. However, the Company cannot guarantee that funds will be available, that any acquisitions will, if made, be accretive to our cash flow, or that the Company’s creditors will give it the time needed to implement its plan. The inability to obtain additional financing will have a material adverse effect on the Company’s financial condition. It may cause the Company to delay or curtail its business plans or to seek protection under bankruptcy laws.Share

~~The~~Both ~~accompanying~~basic ~~financial~~and ~~statements~~diluted ~~have~~loss ~~been~~per ~~prepared~~share onwas adetermined ~~going~~by ~~concern~~dividing ~~basis, which~~the ~~contemplates~~net loss by the weighted ~~realization~~average number of ~~assets~~shares ~~and~~of ~~the~~common ~~satisfaction~~stock ~~of liabilities~~outstanding. inThe ~~the~~weighted average ~~normal~~number ~~course~~of shares of ~~business. These~~common ~~financial~~stock ~~statements~~outstanding dofor ~~not~~calculating ~~include~~both ~~any~~basic and ~~adjustments~~diluted toloss per share was also the ~~recoverability~~ same. Options and ~~classification~~warrants ofto ~~recorded~~purchase ~~asset~~7,843,000 shares ~~amounts~~of orcommon ~~the~~stock ~~amount~~in 2006 and 3,714,000 shares in 2005 were not included ~~classification~~in ofthe ~~liabilities~~computation ~~that~~of ~~might~~diluted beearnings ~~necessary~~per ~~should~~share as the ~~Company~~effect beof including ~~unable~~those tooptions ~~continue~~and aswarrants ain ~~going~~the ~~concern~~calculation would have been anti-dilutive. The conversion feature of the Company’s ~~continuation~~preferred asstock ainto ~~going~~2,118,750 ~~concern~~shares isof common ~~dependent~~stock ~~upon~~was ~~its ability~~also tonot ~~obtain~~included ~~additional~~in ~~financing~~the ~~and,~~calculation ~~ultimately,~~of todiluted ~~attain~~loss ~~and~~per ~~maintain~~share ~~profitable~~as ~~operations~~it would also have been anti-dilutive.

~~NOTE~~Comprehensive ~~3 - DISCONTINUED OPERATIONS~~Loss

OnFor ~~February 1, 2005, the Company and Axtive Corporation, Inc. (“Axtive”) entered into an asset purchase agreement in which the Company will sell substantially~~ all ofperiods ~~the assets of Datatek Group Corporation (“Datatek”)~~presented, ~~headquartered~~ incomprehensive ~~Phoenix,~~loss ~~Arizona,~~is toequal ~~a subsidiary of Axtive. The purchase price was~~ to ~~consist~~net ~~of up to $5 million in cash and 15,333,333 shares of Axtive stock~~ loss. ~~As a result of this agreement, Datatek has been presented as a discontinued operation in accordance with SFAS No. 144 – Accounting for~~

10Self-Insurance Reserves

~~the~~The Company was self-insured for ~~Disposal~~its oremployee ~~Impairment~~medical ofcoverage. ~~Long~~Provisions for claims under the self-~~lived~~insured coverage ~~Assets.~~ are based on the Company’s actual claims experience using actuarial ~~Under~~assumptions ~~this~~followed ~~statement,~~in the ~~operating~~insurance ~~results~~industry, ofafter ~~Datatek~~consideration ~~are~~of ~~presented~~excess ~~separately~~loss ~~from~~insurance ~~continuing~~coverage ~~operations~~limits. inManagement ~~the~~believes ~~accompanying~~that ~~financial~~the ~~statements~~amounts accrued ~~for~~are adequate to cover all ~~periods~~known ~~presented~~and incurred but unreported claims.

~~On June 15,~~Stock-Based 2005, the Company received notification from Axtive that they will be unable to satisfy the conditions to closing set forth in the asset purchase agreement. As of the date of this filing, however. we are negotiating with other interested parties regarding the sale of Datatek.Compensation

~~The~~ In the fourth quarter of 2003, the Company ~~cannot~~adopted the ~~provide~~fair ~~any~~value ~~assurance~~recognition ~~that~~provisions ~~these~~of ~~negotiations~~SFAS ~~will~~No. 123, ~~ultimately~~using the modified ~~lead~~prospective tomethod as permitted under SFAS No. 148, effective as of January 1, 2003. Effective January 1, 2006, the ~~sale~~Company has now adopted the fair value recognition provisions of SFAS No. 123 (R) using the ~~subsidiary~~modified prospective method.

~~Summarized~~Under ~~information~~this ~~for~~fair ~~Datatek~~value method of recognizing stock-based employee compensation, compensation cost is measured at the grant date based on the estimated fair value of the award and is expensed over the vesting period. The Company begins recognizing such compensation cost as ~~follows:~~if all grants will entirely vest.

	Quarter Ended March 31, (in thousands)
	2005		2004
	(Unaudited)		(Unaudited)
Revenue	$	4,158	$	6,079
Gross Profit	$	578	$	934
Income (loss) before income taxes	$	140	$	324

	Balance at, (in thousands)
	3/31/05		12/31/04
	(Unaudited)
Current Assets
Trade Accounts Receivable, net	$	1,586	$	2,203
Long-Term Assets
Intangibles, net	3,448		3,450
Other Assets	2		2
Total Long-Term Assets	3,450		3,452
Total Assets	$	5,036	$	5,655
Current Liabilities
Accounts Payable & Accrued Liabilities	$	3,014	$	3,005
Long-Term Liabilities
Other	6		6
Total Liabilities	$	3,020	$	3,011

For options issued to employees and directors during the three months ended March 31, 2006 and 2005, the fair value of each option grant was estimated on the date of grant by using the Black-Scholes option-pricing model. Expected volatility is based on historical volatility of the Company’s stock because the Company believes this is a reasonable representation of future volatility. Additionally, the option-pricing model uses historical data and management judgment to estimate option lives and employee turnover rates. The Company has selected a risk-free rate of a period that corresponds to the expected life of the option. The weighted average fair value of options issued during the three months ended March 31, 2006 was $0.08 per share and during the three months ended March 31, 2005 was $0.16 per share. The following weighted average assumptions were used in valuing the options granted during these periods:

NOTE 4 - MEDICAL RESOURCE NETWORK, INC. (“MRN”):

	2006	2005
Expected option lives – in years	4.0	4.0
Expected volatility - %	229.4	213.7
Expected dividend rate - %	0.0	0.0
Risk-free interest rate - %	4.5	3.5

~~During the~~The ~~third quarter of 2003, and consistent with the~~ Company~~’s commitment to~~ ~~enter~~recognized ~~into the healthcare arena, the Company identified and established a relationship with MRN. MRN was a Southern California~~stock-based ~~company~~employee ~~specializing~~compensation inexpense ~~the placement~~ of ~~traveling nurses. MRN~~approximately ~~maintained~~$65,000, ~~contract~~or ~~relationships with hundreds of hospitals throughout the country but lacked the financial resources to compete and grow~~$. As01 aper ~~result~~share, ~~the~~for ~~Company structured a transaction in which~~ the ~~employees and~~three ~~nurses~~months ~~became~~ended ~~employees~~March of31, ~~the Company~~2006, and ~~the Company began taking over many back office functions of MRN. The Company maintained this relationship into 2004~~$22,000 ~~allowing~~for ~~it to become~~the ~~thoroughly~~three ~~familiar~~months ~~with~~ended ~~the~~March ~~operations~~31, ~~the business, and the traveling nurse industry~~2005.

~~The~~As of March 31, 2006, the Company had four stock-based equity compensation plans (or “stock option plans”): the Company’s ~~closed~~1996 ~~its~~and ~~acquisition~~1998 Amended and Restated Nonqualified Stock Option Plans, the 1998 Non-Employee Director Stock Option Plan, and the 2005 Non-Qualified Stock Option Plan. Under the Company’s 1996 and 1998 Amended and Restated Nonqualified Stock Option Plans, options to purchase an aggregate of 1,300,000 shares of our common stock may be granted to key personnel of the ~~assets~~Company. Options may be granted for a term of ~~MRN~~up into ~~February 2004~~ten years to purchase common stock at a price or prices established by the Compensation Committee of the Board of Directors of the Company or its appointee. The ~~following~~options ~~table~~granted ~~summarizes~~vest over periods generally ranging from two to three years and have a term of ten years. There were approximately 160,000 shares available for additional grants at March 31, 2006 under the ~~estimated~~Plans. Under the ~~fair~~1998 ~~value~~Non-Employee Director Stock Option Plan, options to purchase an aggregate 300,000 shares of ~~assets~~the ~~acquired~~Company’s common stock may be granted. The grant vests quarterly over one year, ~~liabilities~~and ~~assumed~~the options have a term of ten years. The Director Plan expires in 2008. There are 60,000 ~~amounts~~shares ~~paid~~still available for grant under the ~~net~~Director Plan at March 31, 2006. Under the 2005 Non-Qualified Stock Option ~~assets~~Plan, ~~acquired~~the ~~and~~number of shares authorized for issuance under the ~~resulting~~plan ~~intangible~~is ~~asset~~up ~~based~~to on1.5 million. This plan was approved at the Company’s 2005 Annual Shareholders ~~assessment~~Meeting. Options may be granted for a term of ~~fair~~up ~~values~~to ~~(amounts~~ten inyears ~~thousands):~~to purchase common stock at a price or prices established by the Compensation Committee of the Board of Directors of the Company or its appointee. The options granted vest over periods generally ranging from two to three years and have a term of ten years while director grants vest quarterly over one year. There were approximately 291,000 shares available for additional grants at March 31, 2006.

11The following table summarizes the stock option activity of the Company as of March 31, 2006 and changes during the three months ended March 31, 2006:

Assets received – accounts receivable	$	421
Liabilities assumed – Notes payable	(139		)
Net assets received	282
Cash paid in 2003:
Advances to fund operations of MRN up to December 31, 2003	499
Cash paid in 2004:
To owners of MRN	11
To creditor of MRN to release accounts receivable	329
Cash provided by operations from January 1, 2004 to purchase date	(133		)
Other purchase costs:
Value of warrants issued	174
Total cash paid plus other purchase costs	880
Total amount assignable to intangible assets	598
Amount assigned to non-compete agreements and contracts	(25		)
Amount of goodwill	$	573

(shares in thousands)

The liabilities assumed of approximately $139,000 represented notes to certain shareholders of MRN. The value of the notes represents the discounted value payable, based primarily on an interest rate of 16%, which represented an estimate of an unsecured borrowing rate the Company believed it could have received had it sought outside funds to repay these liabilities. The gross amount due under the notes was approximately $161,000. One note for approximately $3,000 was repaid by May 2004. The other note for approximately $158,000 is being repaid at $5,000 per month and will be fully amortized by December 2006. The balance of this note as of March 31, 2005, was approximately $91,000.


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of Quarter	2,519		$	0.59
Granted	50		$	0.08
Exercised	—		$	—
Forfeited	(90	)	$	0.47
Outstanding, end of quarter	2,479		$	0.58	9.1	$	73,000

Exercisable	1,194		$	0.75	8.0	$	52,000

The stockholders of MRN were issued warrants to purchase 50,000 shares of the Company’s common stock as part of the purchase. The warrants have a term of 5 years, an exercise price of $0.65, and were immediately vested. The fair value of the warrants was estimated on the date of grant to be approximately $174,000 using the Black-Scholes option-pricing model.Reclassifications

~~The~~Certain ~~amount~~previously ofreported ~~the~~amounts ~~intangibles~~have ~~assigned~~been reclassified to ~~the~~conform ~~non-compete~~to ~~agreement~~current ~~and contracts purchased was amortized over a one~~ year ~~period, which represented the life of~~ ~~non-compete agreement~~presentations. ~~The remainder of the intangibles representing goodwill will be valued along with the Company’s other goodwill yearly.~~

In addition to the amounts received at the closing, one of the owners of MRN is entitled to a bonus after certain targets are hit which is equal to the sum of 20% of the gross margin plus 15% of the operating margin, as defined in the agreement. The first $250,000 of bonus payments earned would not be paid, except for certain minimum amounts due per the agreement. These bonus payments, when earned and payable, will be expensed by the Company once advances are recouped.9

~~The following~~Recently ~~table~~Issued ~~presents~~Accounting ~~the unaudited pro forma results of operations for the three months ended March 31, 2004, assuming that the purchase of MRN’s assets occurred on January 1 of that year:~~Standards

	Three months ended March 31,
($ in thousands, except per share amounts)	As reported (Unaudited) 2004			Pro forma (Unaudited) 2004
Revenues	$	5,288		$	5,715
Net loss	$	(1,905	)	$	(1,831	)
Net loss applicable to common stockholders	$	(2,361	)	$	(2,287	)
Net loss per share – basic and diluted	$	(0.59	)	$	(0.57	)

In November 2004, the Financial Accounting Standards Board issued statement of Financial Accounting Standard No. 151, “Inventory Costs”. The new statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect adoption of this statement to have a material impact on our financial condition or results of operations.

12In December 2004, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. This statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. Statement No. 123 (R) will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. This statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We do not believe that the adoption of FASB Statement 123 (R) will have a material effect on our results of operations since the Company followed FASB Statement No. 123 from January 1, 2003 through December 31, 2005.

The Company2. estimatedGoing theConcern revenue and netManagement income of MRN from January 1, 2004 to the acquisition date would be $427,000 and $74,000, respectively. These amounts are based on records provided by MRN to the Company, which have not been audited or tested for accuracy, adjusted for amortization of certain acquired intangibles.Plans

~~NOTE~~As 5a –result ~~CONVERTIBLE~~of ~~PREFERRED~~the ~~STOCK~~recession that started in 2000 and the impact it has had on the direct placement and temporary staffing industry, the Company’s revenues have declined approximately 55% from levels achieved in 2000. The Company has also reported net losses for the last four years as a result of the decline in its business, and the Company’s current liabilities of $18.7 million exceed its current assets of $4.4 million as of March 31, 2006.

~~In February~~ ~~2004,~~The ~~the~~Company ~~Board~~currently ~~authorized~~finances ~~the~~itself ~~issuance~~through factoring of, upor tolines ~~215,000 shares~~ of acredit ~~Series A~~based ~~convertible preferred stock (the “Preferred Stock”), par value $10. The offering was oversubscribed and closed~~ on ~~March 19~~, ~~2004. The Company~~its ~~issued~~accounts ~~209,875 shares of Preferred Stock and received gross proceeds of $2,098,750~~receivable. ~~Another~~ ~~2,000~~The ~~shares were~~amount ~~issued as a fee related to the offering for a total~~ of ~~211,875~~funds ~~shares outstanding. Dividends~~available ~~shall~~under bethese ~~paid~~agreements depends on the ~~Preferred~~amount ~~Stock at an annual rate~~ of ~~10%, payable quarterly on the 15th~~accounts ~~day~~receivable ~~following~~accepted ~~the~~by ~~end of~~ the ~~quarter~~lenders. The ~~Preferred~~Company ~~Stock~~operates ~~has voting rights~~ with ~~each~~minimal ~~share of Preferred Stock~~cash ~~having~~balances ~~ten~~as ~~votes on~~ all ~~matters~~cash ~~submitted~~receipts ~~to shareholders of the Company. If the dividends due on the Preferred Stock~~ are indeposited ~~arrears,~~into the Company’s ~~cannot pay dividends on~~lockboxes, ~~make other distributions~~which ~~to,~~are ~~redeem~~swept ordaily ~~purchase~~by its ~~common stock~~lenders. ~~Because~~ ofWhile the Company’s ~~current~~has ~~cash~~generally ~~position,~~sought to borrow the ~~Board~~maximum ofamounts ~~Directors has~~available ~~not~~from ~~declared~~these ~~any~~facilities, ~~dividends on~~ the ~~Preferred~~facilities ~~Stock~~have been ~~since~~inadequate ~~its~~in ~~issuance. The~~providing ~~cumulative~~enough ~~amount~~funds ofto ~~dividends~~maintain ~~earned~~operations, ~~but~~which has ~~not~~resulted ~~declared~~in atthe ~~March 31,~~Company ~~2005~~having ~~was~~to ~~approximately~~use ~~$219,442~~other ormeasures ~~$1.036~~to ~~per share~~continue ofto ~~Preferred~~fund ~~Stock outstanding~~operations.

~~Each~~During 2005, the Company reduced ~~share~~staff ofand ~~Preferred~~closed ~~Stock~~offices isto ~~convertible~~reduce atits ~~the~~funds ~~option~~outflow. ofIn 2004, the ~~holder~~Company ~~into ten~~had ~~shares~~not ofpaid ~~common~~all ~~stock. Each~~employer ~~share~~and ~~of Preferred~~employee ~~Stock~~payroll istaxes ~~convertible~~when atdue. ~~the~~The ~~option~~amount of ~~the~~unpaid payroll ~~Company~~taxes at ~~any~~March ~~time~~31, ~~after the~~2006, ~~occurrence~~was ofapproximately a$3,200,000 ~~trade~~plus ofpenalties and ainterest. ~~share~~In ofaddition, ~~its~~the ~~common~~Company ~~stock~~is onfunding aoperations ~~national securities~~by ~~exchange~~not paying all vendors for aproducts ~~price~~and ~~exceeding~~services ~~$2.00~~under ~~per~~normal ~~share;~~credit ~~however~~terms, ~~only~~including ~~after~~payments aton ~~least~~capital ~~eight~~leases ~~dividend~~and ~~payments~~other ~~have been made~~debt. ~~Each~~ ~~share~~The consequences of ~~Preferred~~some ~~Stock~~of ~~automatically~~these tactics ~~converts~~have ~~after~~or atmay ~~least~~result ~~825,000~~in ~~shares~~penalties ofand/or ~~the~~fines ~~Company’s~~for ~~common~~late ~~stock~~payments ~~have traded~~or onmay ainvolve legal ~~national~~actions ~~securities~~against ~~exchange~~the ~~for a price exceeding $3~~Company.00 ~~per share~~However, ~~subject~~ tomanagement ~~the payment~~ of ~~at least eight dividend payments and~~ the ~~common~~Company ~~stock~~believed ~~into~~that ~~which~~these ~~they~~steps ~~are~~were ~~convertible~~necessary ~~having~~at ~~been~~the ~~registered. The~~time ~~Company~~to ~~has~~maintain ~~reserved~~the ~~2,118,750~~Company ~~shares~~while ofit ~~its~~sought ~~common~~to ~~stock~~correct ~~for~~its ~~the~~cash ~~conversion~~flow ~~of the Preferred Stock~~issues.

~~The Company~~In ~~paid~~October ~~$189~~2004,~~375~~ ~~out~~the Internal Revenue Service (the “IRS”) placed liens on the assets of two of the ~~proceeds~~Company’s subsidiaries. ~~for~~The ~~fees~~Company and the IRS reached an agreement that subordinates the claims by the IRS to ~~agents~~the ~~involved~~Company’s insenior lenders so that the Company could ~~offering. In~~continue ~~addition~~to factor, ~~$20~~and borrow against,~~000~~ ~~of additional~~its ~~Preferred~~outstanding ~~Stock~~receivables ~~was~~and ~~issued~~fund its ~~(as~~operations. ~~discussed~~In ~~above)~~November ~~for~~and aDecember ~~fee~~2005, tothe anIRS placed additional liens ~~agent~~on inthe assets of the ~~offering~~two subsidiaries. ~~Legal~~ After the Company and ~~other~~the IRS entered ~~fees~~into ~~paid~~negotiations, ~~were~~and ~~approximately~~with the payment of $14277,000 of the Company’s past due tax liability, ~~resulting~~the inCompany ~~net~~and ~~cash~~the ~~proceeds~~IRS entered into both installment agreements and subordination agreements whereby the IRS subordinated its liens to the Company’s ofsenior ~~approximately~~lender $1so that the Company could continue to factor,~~895~~ and borrow against,~~000~~ its outstanding receivables. The Company believes these arrangements bring greater clarity to the Company’s agreements with the IRS.

~~Warrants were issued to certain agents in connection with the offering.~~ The Company ~~issued~~agreed, ~~warrants~~as ~~for~~part ~~169,428 shares~~ of the subordination ~~Company’s~~agreement, ~~common~~that ~~stock~~it atwould ~~$0.80~~pay ~~per~~all ~~share,~~future ~~235,713~~payroll ~~shares~~tax atliabilities ~~$2.00~~after ~~per~~the ~~share~~date ~~and~~of ~~66,964~~the ~~shares~~subordination atagreement ~~$3.50~~when ~~per share~~due. ~~These~~ ~~warrants~~The ~~have~~Company ~~a term of three years~~also ~~from their issue date~~agreed, ~~which~~as ~~was~~part ~~the~~of ~~date~~ the ~~parties~~installment ~~executed~~agreement, ~~their warrants. The~~that ~~warrant~~it ~~exercise~~would ~~price~~pay ~~on the~~ $~~2.00~~40,000 ~~per~~a ~~share~~month on ~~and~~past $3obligations.50 ~~per~~The ~~share~~IRS ~~warrants~~reserves isthe ~~subject~~right to ~~reduction depending~~change onor ~~the~~cancel ~~net income before taxes reported by~~ the ~~Company for the fiscal~~ ~~year~~agreement ~~ending~~at ~~December 31,~~any ~~2004~~time. ~~Since~~ If the Company ~~reported~~fails ato ~~net~~pay ~~loss~~any ~~before~~future ~~taxes~~tax ~~for~~liability ~~the~~on a ~~year~~timely ~~ended December 31~~basis, ~~2004,~~ the ~~exercise~~subordination ~~price~~agreement ~~for~~will ~~these~~expire ~~warrants~~and ~~has~~the ~~been~~senior ~~reduced to $0.00. These warrants were valued at their market~~lender ~~value~~will atstop ~~March 19,~~funding ~~2004 assuming that~~ the ~~exercise~~Company’s ~~price was $0~~operations.~~00,~~ ~~which resulted~~Our inlender anis ~~intrinsic~~continuing ~~value~~to ~~for~~fund ~~these warrants of approximately $989,754~~us. The ~~fair~~Company ~~value~~has ofentered ~~warrants with~~into anamendments ~~exercise~~with ~~price~~our oflender ~~$0.80~~that ~~was~~acknowledges ~~calculated using~~ the ~~Black-Scholes option~~ ~~pricing~~extended ~~model~~subordination agreement with the ~~following~~IRS. ~~average~~Currently, ~~assumptions:~~our anlender ~~expected~~may ~~term of 2~~demand ~~years,~~repayment anat ~~expected~~any ~~dividend yield of 0~~time.~~0%,~~ anThere ~~expected~~can ~~stock~~be ~~price~~no ~~volatility of~~assurance ~~107.16%~~that ~~and~~the aIRS ~~risk-free~~will ~~interest~~not ~~rate of 1.72%. The total fair value of these warrants was $457,340.~~

The embedded conversion feature in the Preferred Stock was also valued at the date of issuance. The portion of the proceeds allocated to the conversion feature was to be based on the intrinsic value calculated by subtracting the conversion price based on the discounted recorded value of the Preferred Stock from the market price of the common stock. Based on this calculation, the intrinsic value of the embedded conversion feature exceeded the value of the Preferred Stock on that date; therefore, the value of the conversion feature was limited to the actual carrying value of the Preferred Stock.10

13remove their subordination agreement, which would lead the senior lender to remove their financing. This would have a material adverse affect on the Company’s financial condition and on our ability to continue as a going concern.

The ~~following~~ ~~table~~Company ~~reflects~~has ~~the~~completed, ~~computation~~or ofis ~~the~~seeking ~~carrying~~to complete, ~~value~~certain oftransactions which will partially address the ~~Preferred~~going concern ~~Stock~~issues ~~since~~it ~~its issuance:~~faces.

Cash received – for 211,875 shares of preferred stock issued, including warrants	$	2,098,750
Less: expenses related to preferred stock issuance	(203,295		)
value of warrants issued	(1,447,094		)
Carrying value of preferred stock before value of embedded conversion feature	448,361
Less: value of embedded conversion feature	(448,361		)
Net carrying value of preferred at date of issue	—
Amortization of discount on preferred stock since issuance	448,361
Carrying value of preferred stock at March 31, 2004	$	448,361

During 2004 and 2005, the Company has entered into several debt agreements. In the 4^th quarter of 2004, the Company received a short-term loan from the James R. Colpitt Trust (the “Colpitt Trust”) that was structured as a $550,000 participation loan in the Greenfield Line of Credit. In the 1^st and 2^nd quarters of 2005, the Company has received additional loans from the Colpitt Trust in the form of a $175,000 promissory note and a $1 million line of credit. The balance of the promissory note was approximately $30,000 as of December 31, 2005, and the advances on the line of credit totaled $975,000 for the twelve months ending December 31, 2005. The Company is currently in default of the terms of these two agreements. In the 3^rd quarter of 2005, the Company received additional loans of $560,000 from the Colpitt Trust of which $75,000 was repaid. The Company has also received short-term loans of $75,000 in the 3^rd quarter of 2005 from 3 separate individuals and has received a $10,000 short-term loan from J. Michael Moore, CEO of the Company. In the 4^th quarter of 2005, we received additional loans of $367,000 from the Colpitt Trust and a short-term loan of $175,000 from a private lender. In the 1^st quarter of 2006, the Company has received short-term loans of $353,000 including $38,000 from J. Michael Moore, CEO of the Company. These short-term loans have helped to offset our cash flow issues which have been caused primarily by the decline in revenues experienced.

The ~~discount~~Company ~~related~~has tobeen ~~the~~focused ~~embedded~~on ~~conversion~~reducing ~~feature~~expenses. ~~was~~Based ~~amortized~~on ~~immediately as~~these ~~the~~efforts, ~~holders~~we reduced ofoperating ~~the~~expenses ~~Preferred~~by ~~Stock~~approximately ~~are~~$5.1 ~~able~~million tofor ~~convert~~the ~~their~~twelve ~~Preferred Stock~~months ~~into~~ending ~~common~~December ~~stock~~31, at2005 ~~their~~as ~~option~~compared atto ~~any~~the ~~time. The~~same ~~remainder~~period ofin the ~~discount~~prior isyear. ~~not being amortized as the preferred~~In ~~stock~~2006 ~~is not required to be redeemed~~thusfar, ~~except~~operating inexpensing ahave ~~liquidation~~declined orby ~~dissolution~~approximately ~~of the Company~~$263,000 ~~or upon~~ for the ~~automatic~~three ~~conversion~~months ofending ~~the~~March ~~preferred~~31, ~~which~~2006 ~~payments or~~as ~~conversions~~compared ~~are~~to ~~not~~the ~~probable~~same atperiod ~~this~~in ~~time~~the prior year.

~~NOTE~~Thusfar in 62006, -management ~~LINE~~has ~~OF CREDIT AND FACTORING FACILITIES~~also:

~~On December 1,~~• Negotiated ~~2003, Wells Fargo Business Credit (“Wells Fargo”)~~ and ~~the Company~~obtained ~~entered into a secured senior credit agreement (the “Wells Fargo~~installment ~~Facility”). The~~agreements ~~Wells Fargo Facility is a two-year term factoring facility pursuant to which Wells Fargo advances funds to the Company~~ on ~~accounts~~amounts receivable invoices it deems eligible. Under the original agreement, the gross face amount of each invoice on which Wells Fargo advances funds is reduced by from 10% for temporary placement invoices to 40% for direct placement invoices. In addition, the Company pays Wells Fargo for those invoices a discount of 1.1% of the gross face amount of each account for the first thirty days and .035% per day thereafter until paid in full. The minimum fee due Wells Fargo is $20,000 per month. The Wells Fargo Facility may be terminated by either party on 60 days notice or by Wells Fargo at any time in case of an event of default. The average amount borrowed under the ~~Wells Fargo Facility for the three months ended March 31~~IRS, 2005 was approximately $1,257,000. The average interest rate on these borrowings for the period was 33.7%. The maximum and minimum amounts borrowed were $1,615,000 and $925,000, respectively, for the three months ended March 31, 2005. The balance at March 31, 2005 of $875,000 is net of the collected reserve of approximately $87,000.

~~The~~• Negotiated ~~maximum~~several ~~amount~~settlement ~~available~~agreements ~~under the Wells Fargo~~on ~~Facility~~certain ~~is established by individual customer credit limits and as a result~~debts, there is no stated maximum. As receivables are collected, new receivables are added. Wells Fargo assumes the risk of non-payment of an accepted receivable due to a customer declaring bankruptcy or being put in receivership within 75 days after the date of the invoice. The Company assumes all other non-payment risk. All of the assets of the Company and its subsidiaries were pledged to secure this facility, and most of these subsidiaries have guaranteed the repayment of the Company’s obligation.

~~Wells Fargo,~~• Entered oninto ~~June 14, 2004, declared that~~ a ~~default~~buyout ~~currently~~of ~~existed under~~ the Wells Fargo ~~Facility as a result of our not remitting all payroll taxes~~ ~~when~~Factoring ~~due~~Agreement ~~(see Note 2), although they continued~~ to ~~advance~~consolidate ~~funds~~all onlending ~~accounts receivable~~under ~~from the Company. However, Wells Fargo lowered the advance rate to 85% as compared to 90% and raised the discount fee by 1%, still subject to the $20,000~~ a ~~month minimum~~$4. ~~Wells~~5 ~~Fargo~~million ~~also~~line ~~continued to advance funds~~of oncredit ~~the~~through ~~Company’s~~Greenfield ~~accounts~~Commercial ~~receivable~~Credit ~~after~~at ~~the~~materially ~~IRS~~lower ~~subordinated their lien for~~financing ~~unpaid~~costs, ~~payroll taxes to the Company’s senior lenders in November 2004.~~and

~~Under the~~• Initiated ~~factoring~~a ~~facilities~~private from Wells Fargo, the Company believed it retained primary responsibility for losses on the accounts receivable on which Wells Fargo advanced funds because of the guarantees and additional collateral held by the lender. Therefore, the Company does not show the assets as having been sold, and it accounts for the funds received as current debt ~~on the balance sheet in the caption “Factoring liability”~~offering.

14All of these items have helped sustain the Company in the short-run; however, significant new capital is needed to sustain the Company over the next twelve months and then implement its growth strategies

~~Due~~We toare ~~certain~~continuing ~~restrictions~~to ~~applied~~evaluate byvarious ~~Wells~~other ~~Fargo~~financing onand ~~their accounts receivable~~restructuring ~~facility~~strategies, ~~the~~including ~~Company~~merger ~~entered~~candidates ~~into~~and ainvestments ~~new~~through ~~$5.0 million secured~~private placements, ~~senior~~to ~~line~~maximize ~~of credit~~shareholder ~~facility~~value ~~with~~and ~~Greenfield~~to ~~Commercial~~provide ~~Credit~~assistance ~~(“Greenfield”)~~in ~~on March 12,~~pursuing ~~2004,~~alternative ~~while~~financing ~~still~~options ~~maintaining~~in ~~the~~connection ~~credit facility~~ with ~~Wells~~its ~~Fargo. Wells~~capital ~~Fargo~~requirements and ~~Greenfield entered into an~~ ~~Intercreditor~~business ~~Agreement to clarify their interests in the Company’s receivables and other security interests~~strategy. ~~The~~ ~~term of~~One ~~the Greenfield line~~ of ~~credit~~these ~~facility~~strategies ~~(the~~is ~~“Greenfield~~to ~~Facility”)~~seek isacquisitions ~~due~~by onacquiring ~~demand,~~small ~~but~~companies ifwhere ~~demand~~we iscan ~~not~~absorb ~~made,~~their noback ~~later~~office ~~than~~operations ~~the~~into ~~maturity~~our ~~date, which was March 12, 2005~~own. On ~~March 12, 2005, the~~There ~~Company~~can ~~has~~be ~~entered~~no ~~into~~assurance ~~an amendment with Greenfield~~ that ~~extends~~ the ~~maturity date to March 12, 2006. The~~ Company ~~does~~ ~~not~~will ~~have to~~ be successful in ~~default~~implementing ~~under~~ the ~~Greenfield Facility for demand to be~~ ~~made. All~~changes ofnecessary ~~the assets of the Company and its subsidiaries were also pledged~~ to ~~secure~~accomplish ~~this~~these ~~facility~~objectives, asor ~~well~~if asit ~~the~~is ~~Wells Fargo Facility~~successful, ~~and most of these~~that ~~subsidiaries~~the ~~have~~changes ~~also~~will ~~guaranteed~~improve ~~the~~its ~~repayment~~cash offlow ~~the~~and ~~Company’s obligation to Greenfield~~liquidity.

~~The~~Management believes ~~interest~~that ~~rate is 8.0% above~~ the ~~prime~~Company ~~rate. There~~will ~~was~~be aable ~~$200,000~~to ~~commitment~~secure ~~fee~~other ~~incurred on~~financing ~~the closing. The amount~~ that ~~may be~~will ~~borrowed~~allow ~~at any time under~~ the ~~line~~Company ofto ~~credit~~pursue isan ~~based~~acquisition onstrategy, ~~eligible~~which ~~receivables. Receivables~~when ~~for~~combined ~~temporary and contract~~with ~~services~~improving ~~will~~market beconditions ~~advanced~~and ~~at 85% of~~ the ~~receivable. Originally,~~restructuring ~~receivables for direct placement services were advanced at 60%~~ of the ~~receivable,~~Company’s ~~subject~~present ~~to the lesser of a~~businesses, ~~maximum~~should ~~advance~~eventually ofproduce ~~$1,000,000~~enough ornew ~~30%~~revenues ofand ~~the~~ gross ~~availability. All~~profit ~~proceeds~~to ~~from~~cover the ~~collection of such~~ ~~receivables~~operating ~~are~~funds ~~deposited~~shortfall ~~into~~the ~~lockboxes~~Company ~~controlled~~is bycurrently ~~Greenfield~~experiencing. ~~The average~~ ~~amount~~However, ~~borrowed under~~ the Company ~~Greenfield~~cannot ~~Facility~~guarantee ~~during~~that ~~the~~funds ~~quarter~~will ~~ended~~be ~~March 31~~available, ~~2005,~~ ~~was~~that ~~approximately~~any ~~$2,099,000. The~~acquisitions ~~maximum and minimum amounts borrowed were $2~~will,~~490,000~~ ~~and~~if $1made,~~768,000,~~ ~~respectively, for~~be ~~the~~accretive ~~same~~to ~~period. The~~our ~~average interest~~cash ~~rate~~flow, ~~including~~or ~~the~~that ~~unused line of credit fee and other fees, was 18.9%. In addition,~~ the Company’s ~~incurred~~creditors ~~fees~~will ofgive ~~approximately~~it ~~$207,000 during~~ the ~~quarter. Of~~time ~~these~~needed ~~fees, approximately $200,000 were considered debt origination costs and are being amortized~~ to ~~interest~~implement ~~expense over~~its ~~a one year period~~plan.

AsIn aSeptember ~~result of our non-payment of payroll taxes~~2005, the Company’s ~~entered~~common ~~into~~stock ~~a Forbearance~~commenced ~~Agreement~~trading ~~with Greenfield~~ on ~~July 27, 2004. Under~~ the ~~agreement, Greenfield agreed not to~~OTC ~~enforce~~Bulletin ~~its~~Board. ~~default~~The ~~remedies~~loss ~~for 90 days after the date~~ of the ~~agreement. The~~AMEX ~~Company~~listing ~~incurred~~has ~~approximately~~made ~~$51,000~~our ~~in fees~~ability ~~for~~to ~~the~~use ~~agreement. On October 27,~~our ~~2004,~~common ~~the~~stock ~~Company~~in ~~entered~~acquisitions ~~into~~substantially anmore ~~Amended Forbearance Agreement that granted the Company until January 27, 2005 to resolve its delinquent payroll tax issues with the IRS~~difficult. ~~Greenfield~~ ~~also~~The ~~agreed~~inability to ~~increase~~obtain ~~borrowings~~additional onfinancing ~~direct~~will ~~placement~~have ~~revenues to 40% of gross availability subject to~~ a ~~cap~~material ofadverse ~~$1,250,000. The~~effect ~~Company incurred~~on ~~$50,000 in fees for the amended agreement. The Amended Forbearance Agreement has not~~our ~~been~~financial ~~renewed, but Greenfield continues to fund the Company under its line of credit~~condition. On ~~March 12,~~It ~~2005,~~may ~~the Company~~cause ~~entered~~us ~~into the Second Amendment~~ to ~~the~~delay ~~Loan~~or ~~and~~curtail ~~Security~~our ~~Agreement with~~business ~~Greenfield~~plans ~~which acknowledges that the Company has extended the subordination~~or ~~of its lien with the IRS for the payment of the past due taxes; extends the maturity date of the loan agreement~~ to ~~March 12,~~seek ~~2006;~~protection ~~and~~under ~~amends~~bankruptcy ~~the borrowings on direct placement revenues to 35% of net availability subject to a cap of $1,250,000~~laws. ~~As noted above, the Company incurred $200,000 in fees for the amended agreement.~~

~~NOTE~~The accompanying 7financial –statements ~~SUPPLEMENTAL~~have ~~CASH~~been ~~FLOW~~prepared ~~AND~~on ~~BALANCE~~a ~~SHEET~~going ~~INFORMATION~~concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial

The following supplemental cash flow information is provided for interest and income taxes paid and for non-cash transactions related to investing and financing activities for the three months ended March 31, 2005 and 2004:11

($ in thousands)	2005		2004
Interest paid	$	285	$	572
Income taxes paid	—		—
Non-cash transactions for investing and financing activities:
Accretion of discount on preferred stock	—		448
Value of warrants issued in private placement to agents or advisors	—		1,447
Prior year deferred issue costs for preferred stock	—		25
Acquisition of the assets of MRN:
Net assets received	—		282
Value of warrants issued to stockholders of MRN	—		174

statements do not include any adjustments to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to obtain additional financing and, ultimately, to attain and maintain profitable operations.

153. Proposed Divestiture - Nursing Unit

~~The~~On ~~following~~April ~~supplemental~~3, ~~balance~~2006, ~~sheet~~the ~~information~~Company isexecuted ~~provided~~a ~~for~~letter ~~other~~of ~~current~~intent with InterStaff, Inc. to sell certain assets of the nursing unit for $477,000 ~~property~~plus certain closing adjustments. The Company would also retain the accounts receivable of the unit and ~~equipment~~all liabilities incurred from its date of acquisition, ~~other~~February ~~long-term~~17, ~~assets~~2004, to ~~accrued~~closing. ~~expenses~~On April 7, 2006, pursuant to the terms of the letter of intent, Interstaff advanced $100,000 in the form of a deposit to the Company. This letter of intent formally expired on May 12, 2006; however, sporadic, verbal negotiations have continued. Due to the fact that no written agreements are currently executed and in effect, there can be no assurances that a sale will ~~debt:~~be completed.

~~Other~~The Company acquired certain assets of MRN (“the ~~current~~nursing unit”) in February 2004. The following table summarizes the estimated fair value of assets acquired, liabilities assumed, amounts paid for the net assets acquired and the resulting intangible asset based on the Company’s assessment of fair values (amounts in thousands):

($ In Thousands)	March 31, 2005			December 31, 2004
Assets received - accounts receivable	$	421
	(Unaudited)
Liabilities assumed – notes payable	(139		)
Prepaid insurance	$	117		$	31
Net assets received	282
Prepaid software licenses	39			45
Cash paid in 2003:
Other prepaid expenses	4			11
Advances to fund operations of MRN up to December 31, 2003	499
Debt origination costs	200			60
Cash paid in 2004:
Total other current assets	$	360		$	147
To owners of MRN	11
To creditor of MRN to release accounts receivable	329
Cash provided by operations from January 1, 2004 to purchase date	(133		)
Other purchase costs:
Value of warrants issued	174
Total cash paid plus other purchase costs	880
Total amount assignable to intangible assets	598
Amount assigned to non-compete agreements and contracts	(25		)
Amount of goodwill	$	573

~~Property~~The ~~and~~liabilities ~~equipment~~assumed of approximately $139,000 represented notes to former employees of MRN. The value of the notes represented the discounted value payable, based primarily on an interest rate of 16%, which was based on an estimate of an unsecured borrowing rate the Company believed it could have received had it sought outside funds to repay these liabilities. The gross amount due under the notes was approximately $161,000. One note for approximately $3,000 was repaid by May 2004. The other note for approximately $158,000 has been repaid at $5,000 per month through November 2005.

($ In Thousands)	March 31, 2005			December 31, 2004
	(Unaudited)
Computer equipment and software	$	3,795		$	3,783
Furniture and equipment	1,092			1,092
Leasehold improvements	120			120
	5,007			4,995
Less accumulated depreciation and amortization	(4,692		)	(4,632		)
Property and equipment, net	$	315		$	363

The amount expended by the Company to fund the operations of MRN prior to the purchase of MRN’s assets was approximately $366,000. The Company incurred $499,000 of non-reimbursed costs during 2003, which was reported in “Receivables from affiliates” on the December 31, 2003 consolidated balance sheet. During 2004 prior to the purchase, the Company received $133,000 above its actual expenditures on behalf of MRN as partial reimbursement for expenses incurred in 2003.

The ~~unamortized~~stockholders ~~balance~~ of ~~assets~~MRN ~~under~~were ~~capital~~issued ~~leases~~warrants ~~was~~to ~~approximately~~purchase ~~$77~~50,000 shares of the Company’s common stock as part of the purchase. The warrants have a term of 5 years, an exercise price of $0.65, and were immediately vested. The fair value of the warrants was estimated on the date of grant to be approximately $88174,000 using atthe ~~March 31,~~Black-Scholes ~~2005~~option-pricing ~~and~~model ~~December 31,~~with ~~2004,~~the following assumptions: an ~~respectively. These~~expected ~~assets~~term ~~are~~of ~~included~~4 years; an expected dividend yield of 0.00%; an expected instock ~~computer~~price ~~equipment~~volatility of 108.42%; and a risk-free interest rate of 2.61%.

~~Intangibles~~The ~~subject~~amount of the intangibles assigned to ~~amortization~~the non-compete agreement and contracts purchased were amortized over a one year period, which represents the life of non-compete agreement. The remainder of the intangibles representing goodwill was reviewed for impairment along with the Company’s other goodwill in December 2005.

Intangibles subject to amortization consist of contracts purchased and non-compete agreements. These intangibles arose in relation to assets of businesses purchased by the Company. These intangibles are amortized over their estimated life, which is one year. The gross carrying amount and accumulated amortization are removed when fully amortized.12

($ in Thousands)	March 31, 2005			December 31, 2004
	(Unaudited)
Contracts and non-compete agreements of MRN	25			25
Accumulated amortization	(25		)	(21		)
Net carrying amount	$	—		$	4

In the fourth quarter of 2005, MRN filed suit against the company seeking additional compensation under the acquisition. We have filed an answer denying the liability.

~~Goodwill~~4. Discontinued Operations

~~There~~From the ~~was~~period noending ~~change~~December in31, ~~goodwill~~2004 ~~for~~through ~~the~~September ~~three~~31, ~~months~~2005, ~~ended~~the ~~March 31,~~Company has ~~2005~~reported the operations of its Datatek unit as a discontinued operation.

On February 1, 2005, the Company and Axtive Corporation, Inc. (“Axtive”) entered into an asset purchase agreement in which the Company will sell substantially all of the assets of Datatek Group Corporation (“Datatek”), headquartered in Phoenix, Arizona, to a subsidiary of Axtive. The purchase price was to consist of up to $5 million in cash and 15,333,333 shares of Axtive stock. As a result of this agreement, Datatek was presented as a discontinued operation in accordance with SFAS No. 144 – Accounting for the Disposal or Impairment of Long-~~term~~lived Assets. On June 15, 2005, the Company received notification from ~~assets~~Axtive that they will be unable to satisfy the conditions to closing set forth in the asset purchase agreement. During the 3rd quarter, the Company attempted to negotiate other possible transactions regarding the sale of this unit with other interested parties.

~~Other~~Ultimately, ~~assets~~the ~~consist~~Company ~~primarily~~has ofdecide ~~deposits~~to ofretain ~~$163~~this unit,~~000~~ ~~and~~refinance ~~$161,000~~its atworking ~~March 31,~~capital ~~2005~~facility ~~and~~(see ~~December 31,~~Note ~~2004~~6), ~~respectively. Receivables~~and ~~from~~review ~~affiliates~~its ~~consisted~~growth ~~primarily~~opportunities. As of ~~receivables~~December ~~from J. Michael~~31, ~~Moore (“Mr. Moore”)~~2005, ~~our~~the ~~Chief~~unit ~~Executive~~no ~~Officer,~~longer ~~and~~met athe ~~company~~provisions ~~related~~of ~~to Mr~~SFAS No. ~~Moore,~~ at144; ~~December 31~~therefore, ~~2004.~~ its ~~This~~financial ~~note~~and ~~was~~operating ~~repaid~~results are presented with continuing operations in the accompanying ~~1st~~financial ~~quarter~~statements ofand ~~2005~~notes for all periods presented.

165. Convertible Preferred Stock

~~Trade~~During ~~accounts~~December ~~payable~~2003, the Company executed a term sheet with certain accredited investors whereby it agreed to sell up to $1,650,000 in convertible preferred stock in a private placement. In February 2004, the Board authorized the issuance of up to 215,000 shares of a Series A convertible preferred stock (the “Preferred Stock”), par value $10. The offering was oversubscribed and ~~accrued~~closed on ~~expenses~~March 19, 2004. The Company issued 209,875 shares of Preferred Stock and received gross proceeds of $2,098,750. Another 2,000 shares were issued as a fee related to the offering for a total of 211,875 shares outstanding. Dividends shall be paid on the Preferred Stock at an annual rate of 10%, payable quarterly on the 15th day following the end of the quarter. The Preferred Stock has voting rights with each share of Preferred Stock having ten votes on all matters submitted to shareholders of the Company. If the dividends due on the Preferred Stock are in arrears, the Company cannot pay dividends on, make other distributions to, redeem or purchase its common stock. Because of the Company’s current cash position, the Board of Directors has not declared any dividends on the Preferred Stock since its issuance. The amount of dividends earned but not declared for the three months ending March 31, 2006 was $53,000 or $.25 per share of Preferred Stock outstanding. The total amount of dividends earned but not declared since the issuance of the preferred stock through March 31, 2006 was approximately $431,000 or $2.03 per share of Preferred Stock outstanding.

($ In Thousands)	March 31, 2005		December 31, 2004
	(Unaudited)
Trade accounts payable	$	1,629	$	1,651
Accrued expenses	2,050		2,052
Accrued compensation	1,289		1,293
Accrued payroll expense	2,966		2,880
Total accounts payable and accrued expenses	$	7,934	$	7,876

Each share of Preferred Stock is convertible at the option of the holder into ten shares of common stock. Each share of Preferred Stock is convertible at the option of the Company at any time after the occurrence of a trade of a share of its common stock on a national securities exchange for a price exceeding $2.00 per share; however, only after at least eight dividend payments have been made. Each share of Preferred Stock automatically converts after at least 825,000 shares of the Company’s common stock have traded on a national securities exchange for a price exceeding $3.00 per share, subject to the payment of at least eight dividend payments and the common stock into which they are convertible having been registered. The Company has reserved 2,118,750 shares of its common stock for the conversion of the Preferred Stock.

~~Included in accrued compensation are accrued commissions, bonuses and contractors’ payroll~~6. ~~Penalties~~ ~~and interest accrued~~Line ~~at March 31, 2005 on the past due taxes~~ of ~~approximately~~Credit ~~$800,000 are included in accrued expenses. In the future if the penalties~~ and~~/or~~ ~~interest~~Factoring ~~are abated, this accrual may decrease significantly.~~Facilities

~~Debt~~On December 1, 2003, Wells Fargo Business Credit (“Wells Fargo”) and the Company entered into a secured senior credit agreement (the “Wells Fargo Facility”). The Wells Fargo Facility is a two-year term factoring facility pursuant to which Wells Fargo advances funds to the Company on accounts receivable invoices it deems eligible. Under the original agreement, the gross face amount of each invoice on which Wells Fargo advances funds is reduced by from 10% for temporary placement invoices to 40% for direct placement invoices. In addition, the Company pays Wells Fargo a fee of 1.1% of the gross face amount of each eligible invoice for the first thirty days and .035% per day thereafter until paid in full. The minimum fee due Wells Fargo is $20,000 per month. On

($ In Thousands)	March 31, 2005			December 31, 2004
	(Unaudited)
Minimum deferred payment obligations:
Texcel acquisition	$	270		$	270
MRN acquisition	91			102
Colpitt Participation Note	550			550
Colpitt Promissory Note	87			—
Colpitt Line of Credit	350			—
	1,348			922
Less current maturities	(1,306		)	(867		)
Total long-term debt	$	42		$	55

~~Additions~~November 28, 2005, we entered into an amendment by which our agreement would continue month-to-month ~~debt~~and ~~during~~we ~~2005~~would ~~represent~~pay an accommodation fee of $1,400 a month. Under the ~~following:~~amendment we may terminate on at least 5 days notice or by Wells Fargo at any time in case of an event of default. On January 31, 2006, Wells sent the Company a notice of default after the additional liens by the IRS plus increased its fee to 2.625% of the gross face amount of each eligible invoice for the first thirty days and .0525% per day thereafter until paid in full. On March 31, 2006, we terminated the Wells Fargo Facility and consolidated our lending at Greenfield.

~~Colpitt Promissory~~The ~~Note~~average –amount ~~Short-term~~borrowed ~~note~~under ~~from~~ the ~~James~~Wells R.Fargo ~~Colpitt Trust with an~~Facility ~~original~~during ~~principal~~the ~~amount~~first ofquarter ~~$175,000, dated January 3, 2005. This note bears interest at a rate~~ of ~~12%~~2006 ~~per year. Repayments~~was ~~during~~approximately ~~the quarter amounted to~~ $88925,000. ~~and~~The average interest ~~incurred~~rate ~~during the quarter~~ on ~~this~~these ~~note~~borrowings was ~~approximately~~ ~~$4,000~~38. Mr1%. ~~Colpitt and~~ ~~his~~The ~~agent~~maximum ~~were~~and ~~granted~~minimum ~~warrants~~amounts borrowed towere ~~purchase 200~~$1,142,000 ~~shares~~and ~~of common stock of the Company at an exercise price of~~ $0~~.50~~, ~~per~~respectively, ~~share~~for asthe ~~additional consideration~~quarter ~~for~~ended ~~this~~March ~~financing~~31, 2006.

~~Colpitt~~Under ~~Line~~the offactoring ~~Credit~~facility –from ~~Short-term~~Wells ~~$1 million line of credit~~Fargo, ~~dated~~the ~~March 1,~~Company ~~2005. This~~believed ~~line~~it ofretained primary ~~credit~~responsibility ~~bears~~for ~~interest~~losses aton the ~~rate~~ ofaccounts ~~12%~~receivable ~~per~~on ~~year,~~which ~~and is secured by a personal non-recourse guaranty by J.~~Wells ~~Michael~~Fargo ~~Moore,~~advanced ~~CEO,~~funds ~~which~~because ~~guaranty is further secured by a pledge~~ of ~~certain assets owned by Mr. Moore. In accordance with~~ the ~~line~~guarantees ~~of credit agreement~~ and aadditional ~~board~~collateral ~~resolution, Mr. Colpitt and Mr. Moore~~held ~~will~~by ~~receive warrants to purchase 0.25 shares of common stock for each $1.00 borrowed, with an exercise price equal to $0.02 above~~ the ~~closing market price on the trading date of such advance~~lender. ~~For each~~ ~~draw under the line of credit that exceeds $150~~Therefore,~~000,~~ the Company ~~shall issue~~does annot ~~additional~~show ~~warrant to purchase 25,000 shares under~~ the ~~same~~assets ~~terms~~ as ~~stated~~ ~~above. Warrants~~having ~~to purchase~~been ~~281~~sold,~~250~~ ~~shares~~and ofit ~~common~~accounts ~~stock~~for ~~at exercise prices ranging from $0.12 to $0.27 have been issued to~~ the ~~Mr. Colpitt~~funds inreceived ~~2005~~as incurrent ~~connection~~debt ~~with advances~~ on ~~the~~ ~~line of credit. Mr. Moore has been granted~~ the ~~same amount of warrants with the same terms during 2005. The outstanding~~ balance ~~of this line of credit~~ issheet ~~$725,000~~in asthe ofcaption ~~May 31,~~“Factoring ~~2005~~liability”.

17Due to certain restrictions applied by Wells Fargo on their accounts receivable facility, the Company entered into a new $5.0 million secured, senior line of credit facility with Greenfield Commercial Credit (“Greenfield”) on March, 2004, while still maintaining the credit facility with Wells Fargo. Wells Fargo and Greenfield entered into an Intercreditor Agreement to clarify their interests in the Company’s receivables and other security interests. The term of the Greenfield line of credit facility (the “Greenfield Facility”) is due on demand, but if demand is not made, no later than the maturity date, which is March 12, 2005. On March 12, 2005, the Company entered into an amendment with Greenfield that extended the maturity date to March 12, 2006. We entered into a third amendment to extend the maturity date to March 27, 2006 and then entered into a fourth amendment to extend the maturity to March 27, 2007; to lower the maximum limit to $4.5 million; and to include Datatek as an eligible creditor to buyout Wells Fargo.

~~Shareholder~~The Company does not have to be in default under the Greenfield Facility for demand to be made. All of the assets of the Company and its subsidiaries were also pledged to secure this facility as well as the Wells Fargo Facility, and most of these subsidiaries have also guaranteed the repayment of the Company’s ~~Equity~~ ~~(Deficit)~~obligation to Greenfield.

WeThe interest rate on the Greenfield loan is 8.0% above ~~have~~the prime rate. There was a $~~215~~200,000 ~~note~~commitment ~~receivable~~fee ~~from~~paid aon ~~former~~the ~~officer~~original ofclosing. The amount that may be borrowed at any time under the ~~Company~~line ~~that~~of credit is based on eligible receivables. Receivables ~~secured~~for bytemporary ~~141,000~~and ~~shares~~contract ofservices ~~common~~will ~~stock~~be advanced at 85% of the ~~Company. Under~~receivable, and ~~the~~receivables ~~note~~for direct placement services were advanced at 60% of the receivable, subject to the ~~balance~~lesser ~~can~~of bea maximum advance of $1,250,000 or 35% of the gross ~~paid~~availability. byAll proceeds from the ~~surrender~~collection of ~~these~~such ~~shares~~receivables toare deposited ~~the~~into ~~Company~~lockboxes controlled by Greenfield. ~~During~~ The average amount borrowed under the Greenfield Facility for the quarter ended March 31, we2006 ~~received~~was aapproximately ~~written~~$1,215,000. The average interest rate, ~~request~~including tothe ~~execute~~unused ~~such~~line anof ~~exchange,~~credit ~~however~~fee, for the ~~Company~~quarter ~~has~~was ~~not~~25.4%. ~~received~~The ~~all~~maximum ~~paperwork~~and ~~necessary~~minimum toamounts ~~either~~borrowed ~~transfer~~were ~~the~~$2,304,000 ~~shares~~and ~~into~~$680,000. ~~treasury~~The ~~stock~~Company orincurred lending ~~cancel~~fees of approximately $206,000 plus unused line fees of $16,000. Of ~~the~~these ~~shares~~fees, ~~from~~approximately ~~its~~$180,000 ~~outstanding~~were ~~total~~considered debt origination costs incurred on March 27, 2006 which will be amortized to interest expense over a one year period.

~~NOTE~~On March 812, –2005, ~~COMMITMENTS~~the ~~AND~~Company ~~CONTINGENCIES~~entered into the Second Amendment to the Loan and Security Agreement with Greenfield which acknowledged that the Company had extended the subordination of its lien with the IRS for the payment of the past due taxes; extended the maturity date of the line of credit to March 12, 2006; and amended the borrowings on direct placement revenues to 35% of net availability subject to a cap of $1,250,000. The Company incurred $200,000 in fees for the amended agreement. We entered into a third amendment to extend the maturity date to March 27, 2006 and then entered into a fourth amendment to extend the maturity to March 27, 2007; to lower the maximum limit to $4.5 million; and to include Datatek as an eligible creditor to buyout Wells Fargo. The Company incurred $180,000 in fees on March 27, 2006, for the amended agreement.

~~The Company is involved in various legal proceedings arising in the normal course of business~~7. ~~Management~~ ~~believes~~Supplemental ~~the~~Cash ~~outcome~~Flow ~~of these~~and ~~matters~~Balance ~~will~~Sheet ~~not materially adversely affect the financial condition, results of operations or cash flows of the Company.~~Information

~~Payroll tax~~The ~~liabilities incurred of approximately $3,558,000 have not been paid~~following ~~(excluding~~supplemental ~~any~~cash ~~penalty~~flow ~~and~~information ~~interest payments due on the underpayment) through the November 3, 2004 payroll (see Note 2). Until the past due balance~~ is ~~repaid~~provided ~~and~~for ~~our negotiations with the IRS are complete, we are unsure at this time of the total amount of penalties and~~ interest wepaid ~~will pay. At March 31, 2005, the Company had approximately $800,000~~ in ~~penalties and interest accrued~~cash ~~for~~relating the past due payroll taxes. Since entering into the subordination agreement with the IRS (see Note 2), the Company has paid all federal payroll taxes due after that date on a timely basis. If the Company does not timely pay all payroll taxes, the subordination agreement will be terminated and our senior lenders will not continue to ~~fund the Company.~~investing

Certain amounts had not been remitted related to the Company’s 401(k) plan. At March 31, 2005, approximately $190,000 of contributions to the 401(k) plan had not been paid for the period from October 2004 to March 2005. There may be some liability for penalties related to the late payment of these amounts. We cannot at this time estimate the amount of those penalties, if any.14

Inand ~~addition, some~~financing ~~deferred~~activities ~~compensation payments~~ for ~~employees had not been made to~~ the ~~administrator of~~three ~~that~~months ~~plan. The~~ended ~~amount unpaid at~~ March 31, ~~2005~~ ~~was~~2006 ~~approximately~~and ~~$32,000 for contributions from May 2004 to March~~ 2005~~. There may be some liability for penalties related to the late payment of these amounts. We cannot at this time estimate the amount of those penalties, if any.~~:

NOTE 9 – SUBSEQUENT EVENT

($ in thousands)	2006		2005
Cash paid for interest	$	278	$	335

~~On June 15,~~The ~~2005, the Company received notification from Axtive that they~~following ~~will~~supplemental bebalance ~~unable~~sheet toinformation ~~satisfy~~is ~~the~~provided ~~conditions~~for toother ~~closing~~current ~~set forth in the Datatek~~assets, ~~asset~~property ~~purchase~~and ~~agreement~~equipment, ~~(see~~other ~~Note~~long-term ~~3). As of the date of this filing~~assets, ~~the~~accounts ~~Company~~payable isand ~~negotiating with other~~accrued ~~interested~~expenses, ~~parties~~debt, ~~regarding~~and ~~the~~common ~~sale of Datatek.~~stock:

18Other current assets

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

	March 31,		December 31,
($ In Thousands)	2006		2005
	(Unaudited)
Prepaid insurance	$	76	$	79
Prepaid rent, software, and other expenses	15		24
Debt origination costs	323		292
Collected Reserves at Wells Fargo	20		—
Other current assets	11		11
Total other current assets	$	445	$	406

~~DIVERSIFIED~~Property ~~CORPORATE~~and ~~RESOURCES, INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 2005~~Equipment

~~(dollars~~Property ~~rounded~~and toequipment ~~thousands, except~~consists ~~per share amounts)~~of:

Overview

	March 31,			Dec 31,
($ In Thousands)	2006			2005
	(Unaudited)

Computer equipment and software	$	3,880		$	3,880
Furniture and equipment	1,093			1,093
Leasehold improvements	60			60
	5,033			5,033
Less accumulated depreciation and amortization	(4,896		)	(4,855		)
Property and equipment, net	$	137		$	178

WeDepreciation and ~~are~~amortization aof ~~nationwide~~property ~~human~~and ~~resources~~equipment was approximately $41,000 and $70,000 ~~employment~~for ~~services~~the ~~firm~~three months ended March 31, ~~providing~~ ~~staffing~~2006 ~~solutions~~and in2005, ~~specific~~respectively. ~~professional~~Also included in depreciation and ~~technical~~amortization ~~skill~~expense ~~sets~~is amortization of assets tounder ~~Fortune~~capital ~~500~~leases ~~corporations~~in 2006 and ~~other~~2005 ~~large~~of ~~organizations. We~~approximately ~~offer~~$12,000 ~~two~~and ~~kinds~~$11,000 The unamortized balance of ~~staffing~~assets ~~solutions:~~under ~~direct~~capital ~~placement~~leases ~~services~~was approximately $37,000 and ~~temporary~~$49,000 at March 31, 2006 and ~~contract~~December 31, ~~staffing~~2005, respectively. These assets are included in computer equipment.

~~We currently operate offices in the following locations:~~Goodwill

~~Arizona~~There ~~Phoenix~~was ~~California~~no ~~Palm~~change ~~Desert~~in ~~Colorado~~goodwill ~~Denver~~for ~~Georgia~~the ~~Atlanta~~three ~~Pennsylvania~~months ended ~~Philadelphia~~March ~~Texas Dallas~~31, ~~Houston and Austin~~2006.

~~The~~Other offices are responsible for marketing to clients, recruitment of personnel, operations, local advertising, initial customer credit evaluation and customer cash collection follow-up. Our executive offices, located in Dallas, Texas, provide corporate governance and risk management, as well as certain other accounting and administrative services, for our offices.Assets

~~We believe that we will be unable to continue as a going concern for~~Other ~~the~~assets ~~next~~consist ~~twelve~~primarily ~~months without obtaining additional funds through debt or equity financing or through the sale~~ of ~~assets. See~~deposits ~~“Liquidity and Capital Resources” below for a discussion~~ of ~~our~~$151,000 ~~ability to~~at ~~continue~~March as31, a2006 ~~going concern~~ and ~~our plans for addressing those issues. The inability to obtain additional funds~~$156,000 ~~could~~at ~~have~~December a31, ~~material adverse effect on the Company~~2005.

~~Transformation of Our Business~~15

~~The~~Trade ~~changing~~Accounts ~~environment~~Payable ofand ~~the~~Accrued ~~job market over the past four years has caused staffing companies to either change with the times or perish. To adjust with the trends, we have:~~Expenses

~~• Shifted our~~Trade ~~revenue~~accounts ~~mix~~payable ~~to focus more on temporary~~ and ~~contract~~accrued ~~staffing~~expenses ~~services~~consist ~~rather than direct placements;~~of:

• Eliminated excess overhead of maintaining local offices to serve customers and realigned our geographic presence into regional offices;

	March 31,		Dec 31,
($ In Thousands)	2006		2005
	(Unaudited)
Trade accounts payable	$	3,692	$	3,264
Accrued expenses	3,341		3,037
Accrued compensation	1,815		1,648
Accrued payroll expense	3,773		4,120
	$	12,621	$	12,069

~~• Exited~~Included in accrued compensation are accrued ~~the~~commissions, ~~high~~bonuses ~~risk~~and ~~telecommunications~~contractors’ ~~industry~~payroll. ~~through~~Accrued payroll expense includes the ~~sale~~non-payment of ~~one~~payroll tax liabilities due to the IRS. Penalties and interest accrued at March 31, 2006 on the past due taxes of ~~our~~approximately $1,357,000 ~~agencies~~are included in ~~December 2002,~~accrued ~~and~~expenses. ~~emphasized~~In ~~our~~the ~~servicing~~future toif any of the ~~healthcare~~penalties and/or ~~industry;~~interest are abated, this accrual may decrease significantly.

~~• Focused our~~Long-Term ~~sales~~Debt ~~force~~and onGuarantees ~~Fortune~~of ~~500 companies; and~~Debt

• Reduced fixed expenses to better align our cost structure with lower margin temporary and contract staffing services.

	March 31,			December 31,
($ In Thousands)	2006			2005
	(Unaudited)
Minimum deferred payment obligations:
Texcel acquisition	$	225		$	270
MRN acquisition	55			55
Colpitt Participation Note	550			550
Colpitt Short-Term Promissory Note 1	29			29
Colpitt Line of Credit	975			975
Colpitt Short-Term Promissory Note 2	175			175
Colpitt Short-Term Promissory Note 3	100			100
Colpitt Short-Term Promissory Note 4	100			100
Colpitt Short-Term Promissory Note 5	110			110
Colpitt Short-Term Promissory Note 6	—			—
Various Short-Term Promissory Notes	75			75
Moore Short-Term Promissory Note	10			10
Colpitt Short-Term Promissory Note 7 & 8	257			257
Colpitt Short-Term Promissory Note 9	110			110
Carpenter Short-Term Promissory Note 10	172			171
Coe Short-Term Promissory Note 11	145			—
Coe Short-Term Promissory Note 12	35			—
Langkop Short-Term Promissory Note 13	28			—
Short-Term Promissory Notes from Private Offering	97			—
Moore Short-Term Promissory Note	38			—
	3,286			2,987
Less current maturities	(3,286		)	(2,987		)
Total long-term debt	$	—		$	—

~~As a result of the changes discussed above, we have largely transformed~~Additions ~~the~~to ~~Company~~debt ~~from~~during ~~its~~2005 ~~historical roots in direct placement services~~ and ~~dependence~~ on2006 ~~the~~represent telecommunications industry to a more balanced revenue model revolving around contract staffing in various industries. For most of our existence, we routinely generated 80% or more of our annual revenues from direct placement activities. While the ~~direct placement business is typically capable of generating net margins after commissions of approximately~~following:

19Colpitt Short-Term Promissory Note 1 – Short-term note from the James R. Colpitt Trust with an original principal amount of $175,000, dated January 3, 2005. This note bears interest at a rate of 12% per year. Repayments during the nine months ended September 30, 2005, have been approximately $146,000 and interest incurred during this same period was approximately $6,000. Mr. Colpitt and his agent were granted warrants to purchase 200,000 shares of common stock of the Company at an exercise price of $0.50 per share as additional consideration for this financing. This note is currently in a status of default.

50%, the revenues are volatile and difficult to forecast and finance. By the end of 2004, we had largely shifted the composition of our revenues, with 61% of our revenues generated through temporary and contract staffing and 39% of our revenues from direct placement activities. We continued this shift during the first quarter of 2005 with 68% of our revenue being generated through temporary and contract staffing services. We also diversified our industry base targeting high-growth areas, such as the bio-pharmaceutical industry and contract nurse staffing, to augment our more traditional information technology and engineering base.16

~~These~~Colpitt Line ~~strategic~~of ~~changes~~Credit ~~require~~– Short-term us$1 tomillion ~~evaluate~~line ~~our~~of ~~fixed~~credit ~~costs~~dated toMarch ~~be more~~1, in2005. This line ~~with~~of ~~our~~credit bears ~~new~~interest ~~revenue~~at ~~model. In~~the ~~2005,~~rate ~~gross~~of ~~margins~~12% ~~decreased~~per toyear, ~~51.8%~~and ofis ~~revenue~~secured asby ~~compared~~a topersonal ~~54.2%~~non-recourse inguaranty ~~2004~~by J. ~~Direct~~ ~~Placement~~Michael ~~revenues were~~Moore, ~~32%~~CEO, ofwhich ~~total~~guaranty ~~revenue~~is infurther secured ~~2005~~by asa ~~compared~~pledge toof ~~38%~~certain ofassets ~~total~~owned ~~revenue~~by ~~in 2004~~Mr. ~~General~~ ~~and~~Moore. ~~administrative expenses~~In ~~decreased~~accordance bywith the ~~$1.3~~line ~~million~~of ~~from~~credit ~~59%~~agreement ofand ~~revenues~~a orboard $3resolution, Mr.1 ~~million~~Colpitt inand Mr. Moore ~~2004,~~will receive warrants to ~~34%~~purchase 0.25 shares of ~~revenues~~common orstock for each $1.800 borrowed, ~~million~~with ~~during~~an ~~2005. Primary~~exercise ~~contributors~~price equal to ~~this~~$0.02 ~~decrease~~above ~~were~~the aclosing market price ~~$0.4~~on ~~million~~the ~~decrease~~trading indate ~~professional~~of ~~fees~~such ~~related~~advance. toFor ~~the~~each ~~non-recurring increased~~draw ~~audit~~under ~~and~~the ~~legal~~line ~~fees~~of ~~during~~credit that ~~2004~~exceeds $150,000, athe ~~$0.2~~Company ~~million~~shall ~~decrease~~issue inan additional warrant to ~~non-recurring~~purchase ~~penalties~~25,000 ~~accrued~~shares inunder the ~~1st~~same ~~quarter~~terms ofas ~~2004~~stated ~~due~~above. Warrants to ~~late~~purchase ~~payment~~385,417 shares of ~~taxes,~~common astock at exercise prices ranging from $0.212 ~~million~~to ~~decrease~~$0.47 inhave ~~rent~~been ~~and~~issued ato $0the Mr.1 ~~million~~Colpitt ~~decrease~~in 2005 in ~~salaries~~connection ~~due~~with toadvances on the ~~effects~~line of ~~restructuring~~credit. ~~during~~Mr. ~~2004~~Moore ashas been ~~discussed~~granted ~~below,~~the asame ~~$0.2~~amount ~~million~~of ~~decrease~~warrants inwith ~~group~~the ~~insurance~~same ~~costs~~terms ~~due~~during to2005. ~~lower~~On July ~~employee~~15, ~~claims~~2005, ~~experienced~~the inCompany ~~2005,~~entered ~~and~~into athe ~~$0.1~~2nd ~~million~~Amendment ~~decrease~~to inthe ~~investor~~Line of ~~relations~~Credit ~~expenses~~which ~~due~~increases the amount available to ~~cost~~borrow ~~cutting~~under ~~efforts~~this inline ~~2005~~from $1 million to $1. ~~Management~~5 ~~expects~~million. ~~general &~~In accordance with this line of credit agreement, ~~administrative~~additional ~~expenses~~borrowings toare ~~remain~~subject into (i) the ~~30%~~Colpitt -Trust’s ~~40%~~receipt ~~range~~of any financial information of ~~revenues~~the inCompany ~~2005~~reasonably asrequested by the Trust, and we(ii) ~~continue~~the toColpitt ~~work~~Trust’s ondetermination, ~~cost~~in ~~cutting~~its ~~measures.~~ sole but reasonable discretion, ~~These~~that ~~cost~~the ~~cutting~~Company’s ~~measures~~financial ~~will~~condition ~~probably~~has benot ~~partially~~declined ~~offset~~materially. byThus, the availability ~~expenditures~~of ~~related~~additional tofunds ~~the~~under ~~documentation~~this line of ~~our~~credit ~~internal~~cannot ~~control~~be ~~procedures~~guaranteed. This line ~~under~~of ~~Sarbanes-Oxley~~credit inis ~~the~~currently ~~2nd~~in ~~half~~a status of ~~2005~~default.

WeColpitt Short-Term ~~are~~Promissory ~~implementing~~Note ~~other~~2 ~~plans~~- On July 15, as2005, ~~discussed~~the Company received $175,000 in ~~“Liquidity~~financing from the James R. Colpitt Trust and ~~Capital~~entered into a short-term promissory note. This ~~Resources”~~note ~~below~~bears interest at the rate of 10% per year and has a maturity date of July 15, 2006. The note is secured by a personal non-recourse guaranty by J. Michael Moore, CEO, which weguaranty ~~believe~~is ~~will~~further ~~help~~secured ~~solve~~by ~~our~~a ~~current~~pledge ~~liquidity~~of certain assets ~~problems~~owned by Mr. Moore. The Colpitt Trust and ~~allow~~Mr. usMoore were each issued a warrant to ~~improve~~purchase ~~our~~68,750 ~~cash~~shares ~~flow~~of ~~from~~common ~~operations~~stock ~~over~~at ~~the~~an ~~next year~~exercise price of $0. If42 ~~these~~as additional ~~changes~~consideration ~~are~~for ~~not~~this financing and guaranty. Additionally, the ~~accomplished~~Colpitt Trust has the right to convert this note into 175,000 weshares ~~may~~of bethe Company’s ~~unable~~common stock at any time prior to ~~continue~~the asmaturity adate ~~going~~in ~~concern~~lieu of payment.

~~Proposed~~Colpitt Short-Term ~~Sale~~Promissory Note 3 - On August 10, 2005, the Company received $100,000 in financing from the James R. Colpitt Trust and entered into a short-term promissory note. This note bears interest at the rate of ~~Datatek~~12% per year and has a maturity date of August 10, 2006, with an optional extension until August 10, 2007. The note is secured by a personal non-recourse guaranty by J. Michael Moore, CEO, which guaranty is further secured by a pledge of certain assets owned by Mr. Moore. The Colpitt Trust and Mr. Moore were each issued a warrant to purchase 200,000 shares of common stock at an exercise price of $0.42 as additional consideration for this financing and guaranty. Additionally, Proliance Group was issued a warrant to purchase 50,000 shares of common stock at an exercise price of $0.42 as consideration for arranging this financing. The Colpitt Trust has the right to convert this note into 100,000 shares of the Company’s common stock at any time prior to the maturity date in lieu of payment.

WeColpitt ~~are~~Short-Term inPromissory ~~negotiations~~Note to4 ~~sell~~- ~~Datatek~~On ~~Group~~August ~~Corporation~~22, ~~(“Datatek”)~~2005, ~~a wholly-owned subsidiary of~~ the Company~~. Datatek~~ isreceived ~~primarily~~$100,000 ~~involved~~ in ~~temporary~~financing ~~and contract staffing and~~from ~~represented~~the ~~approximately~~James ~~60%~~R. ofColpitt ~~our~~Trust ~~2004 temporary~~ and ~~contract~~entered ~~staffing~~into ~~gross revenue. We~~a ~~are~~short-term ~~reporting~~promissory ~~Datatek~~note. ~~as a~~This ~~discontinued~~note ~~operation~~bears ininterest ~~accordance~~at ~~with~~the ~~FAS~~rate ~~144,~~of ~~Accounting~~12% ~~for~~per ~~the~~year ~~Impairment or~~and ~~Disposal~~has ofa ~~Long-Lived~~maturity ~~Assets. If~~date aof ~~sale~~August of22, ~~Datatek is consummated~~2006, itwith ~~should~~an ~~provide~~optional ~~needed~~extension ~~funds~~until toAugust ~~pay most~~22, ~~if not~~2007. ~~all,~~The ofColpitt Trust ~~our~~was ~~past~~issued ~~due~~a ~~payroll~~warrant ~~tax~~to ~~liabilities. The~~purchase ~~agency~~200,000 ~~derives~~shares ~~most~~ of ~~its~~common ~~revenues~~stock ~~from~~at an ~~temporary~~exercise ~~and~~price ~~contract~~of ~~information technology staffing~~$0. We42 ~~believe~~as ~~that~~additional aconsideration ~~sale~~for ~~will~~this ~~reduce~~financing. ~~our~~Additionally, ~~exposure~~Proliance toGroup ~~the~~was ~~information~~issued ~~technology~~a ~~industry~~warrant ~~and allow us~~ to ~~re-evaluate~~purchase ~~our sources of revenue. A Datatek sale will greatly improve our immediate financial condition; however~~50,000 itshares ~~will~~of ~~also~~common ~~remove~~stock aat ~~significant~~an ~~source~~exercise price of ~~revenue~~$0.42 ~~which~~as ~~will~~consideration ~~have~~for aarranging ~~negative~~this ~~impact on our immediate operating results~~financing. ~~This~~ ~~will~~The ~~mean~~Colpitt ~~that~~Trust wehas ~~will~~the ~~have~~right to ~~seek~~convert ~~additional~~this ~~revenues~~note ~~through~~into ~~further~~100,000 ~~acquisitions or~~shares ~~lower~~of ~~our~~the Company’s ~~fixed~~common ~~costs~~stock ~~dramatically~~at inany ~~order~~time prior to ~~achieve~~the ~~future~~maturity ~~profitability. Because~~date ~~negotiations are~~ in ~~the~~lieu ~~early~~of ~~stages, the Company cannot be assured that the sale will occur~~payment.

~~Restructuring~~Colpitt Short-Term Promissory Note 5 - On September 14, 2005, the Company received $110,000 in financing from the James R. Colpitt Trust and entered into a short-term promissory note. This note bears interest at the rate of 12% per year and has a maturity date of September 14, 2006, with an optional extension until September 14, 2007. The Colpitt Trust was issued a warrant to purchase 200,000 shares of common stock at an exercise price of $0.48 as additional consideration for this financing. Additionally, Proliance Group was issued a warrant to purchase 50,000 shares of common stock at an exercise price of $0.48 as consideration for arranging this financing. The Colpitt Trust has the right to convert this note into 110,000 shares of the Company’s common stock at any time prior to the maturity date in lieu of payment.

InColpitt ~~late~~Short-Term ~~June 2004,~~Promissory ~~the~~Note ~~Board~~6 ~~approved~~- aOn ~~several~~September ~~phase~~23, ~~restructuring~~2005, ~~plan submitted by upper management to reduce costs of~~ the Company onreceived a$75,000 ~~going-forward basis. Since severance pay was offered~~ in ~~association with layoffs that occurred in the 3rd quarter and~~financing ~~some~~from ~~phases of~~ the ~~restructuring~~James ~~occurred~~R. inColpitt ~~later~~Trust ~~periods,~~and ~~the~~entered ~~primary~~into ~~effects of~~a ~~the~~short-term ~~cost~~promissory ~~savings were not noticeable until this quarter~~note. ~~Total~~ ~~operating expenses have decreased~~This ~~approximately~~note ~~$1.6~~bears ~~million~~interest orat ~~32% in~~ the ~~1st~~rate ~~quarter~~ of ~~2005~~2% asof ~~compared to~~ the ~~same~~principal ~~period~~balance inor ~~2004. Every~~$1,500 ~~office~~ and has ~~agency~~a ofmaturity ~~the~~date ~~Company was evaluated resulting in: (i) the closure~~ of ~~several~~October ~~under-performing sales offices and agencies~~3, ~~(ii) the~~2005. ~~downsizing~~The ofCompany ~~staff,~~also ~~(iii) newly negotiated~~paid ~~contracts~~loan atfees ~~lower rates~~of $5,000 ~~including~~to ~~certain~~the ~~leases,~~Colpitt ~~and~~Trust ~~(iv) other cost~~for ~~saving~~this ~~measures~~financing. ~~All~~ ofOn ~~these measures~~November ~~have~~4, ~~been implemented to improve operating results~~2005, ~~lower~~the ~~losses,~~note ~~improve~~was ~~cash,~~repaid ~~demonstrate~~in ~~operating~~full.

2017

~~efficiencies~~Various Short-Term Promissory Notes - On September 19, 2005, the Company received $75,000 in financing from 3 individuals and ~~increase~~entered ~~our~~into ~~ability~~3 toseparate ~~raise~~short-term ~~future~~promissory ~~capital~~notes for $25,000. ~~However~~ These notes bear interest at the rate of 12% per year and have a maturity date of September 19, no2006, ~~assurance~~with ~~can~~an beoptional ~~given~~extension ~~that~~until ~~this~~September 19, 2007. The ~~lowered~~3 ~~operating~~individuals ~~expense~~were ~~will~~each ~~continue~~issued ina warrant to purchase 12,500 shares of common stock at an exercise price of $0.53 as additional consideration for this financing. ~~trend~~Additionally, ineach of the ~~future~~individuals has the right to convert their note into 25,000 shares of the Company’s common stock at any time prior to the maturity date in lieu of payment.

~~Our~~Moore Short-Term ~~Position~~Promissory Notes - On September 19, 2005, the Company received $10,000 in financing from J. Michael Moore, CEO of the ~~Industry~~Company. This note bears interest at the rate of 12% per year and has a maturity date of September 19, 2006, with an optional extension until September 19, 2007. Mr. Moore was issued a warrant to purchase 5,000 shares of common stock at an exercise price of $0.53 as additional consideration for this financing. Additionally, Mr. Moore has the right to convert this note into 10,000 shares of the Company’s common stock at any time prior to the maturity date in lieu of payment.

~~The~~Colpitt Short-Term ~~staffing~~Promissory ~~industry~~Notes is7 ~~highly~~& ~~fragmented~~8 ~~with~~- ~~numerous~~On ~~national, regional~~October 11 and ~~small~~14, ~~local~~2005, ~~firms~~the ~~all~~Company ~~competing.~~ received $257,000 in ~~Many~~financing offrom ~~these~~the ~~smaller~~James ~~companies~~R. ~~either~~Colpitt ~~have~~Trust ~~not~~and ~~repositioned~~entered ~~themselves~~into short-term ~~for~~promissory ~~the~~notes. ~~changing~~These ~~marketplace~~notes orbear ~~lack~~interest at the ~~financial~~rate ~~resources~~of to24% ~~continue~~per ~~after~~year and ~~four~~have ~~extremely~~a ~~difficult~~maturity ~~recession~~date ~~years. As~~of ~~noted,~~October we11 ~~face~~and ~~competition~~14, ~~from~~2006, ~~several~~respectively, ~~competitors~~with ~~who~~an ~~are larger~~optional ~~and~~extension ~~have~~until ~~greater~~October ~~financial~~11 ~~resources.~~and ~~However~~14, we2007, ~~believe~~respectively. ~~that~~The weCompany ~~have~~also ~~several~~paid ~~favorable~~loan ~~attributes~~fees ~~which~~of ~~give~~$14,500 usto anthe ~~advantage~~Colpitt ~~over~~Trust ~~smaller~~and ~~competitors:~~Proliance Group for this financing.

• Colpitt Short-Term Promissory Note 9 - On November 14, 2005, the Company received $110,000 in financing from the James R. Colpitt Trust and entered into a ~~superior~~short-term promissory note. This ~~growing~~note ~~database~~bears interest at the rate of ~~approximately~~12% ~~850~~per year and has a maturity date of November 14,~~000~~ ~~highly~~2006 ~~specialized~~with ~~individuals~~an inoptional ~~the~~extension until November 14, 2007. The Company also ~~technology~~paid loan fees of $5,500 ~~engineering~~to the Colpitt Trust and ~~healthcare~~Proliance ~~industries;~~Group for this financing.

• Carpenter Short-Term Promissory Note 10 - On December 23, 2005, the ~~ability~~Company toreceived $175,000 in financing ~~attract~~from ~~Fortune~~James ~~500~~Carpenter ~~clients;~~and entered into a short-term promissory note. This note bears interest at the rate of 10% per year and has a maturity date of December 23, 2006. The Company is also obligated to pay a loan fee of $25,000 to the James Carpenter for this financing. Carpenter was issued a warrant to purchase 68,750 shares of common stock at an exercise price of $0.08 as additional consideration for this financing. Carpenter has the right to convert this note into 175,000 shares of the Company’s common stock at any time prior to the maturity date in lieu of payment. Pursuant to the APB Opinion 14 regarding the Accounting of Debt Issued with Stock Purchase Warrants, we recorded an initial $4,000 discount on this note which as of 3/31/06 was amortized to $3,000.

~~• our~~Coe Short-Term ~~leadership~~Promissory Note 11 - On January 16, 2006, the Company received $150,000 in financing from ~~within~~Barbara Coe and entered into a short-term promissory note. This note bears interest at the ~~industry~~rate ~~organization~~of ~~National~~12% ~~Association~~per year and has a maturity date of ~~Personnel~~May ~~Services~~31, ~~(“NAPS”)~~2006. Coe was issued a warrant to purchase 60,000 shares of common stock at an exercise price of $0.13 as additional consideration for this financing. Pursuant to the APB Opinion 14 regarding the Accounting of Debt Issued with Stock Purchase Warrants, we recorded an initial $7,000 discount on this note which as of 3/31/06 was amortized to $5,000.

WeCoe Short-Term ~~believe~~Promissory ~~that~~Note ~~the~~12 ~~worst~~- ofOn March 2, 2006, the ~~economic~~Company ~~downturn~~received is$35,000 ~~behind~~in usfinancing from Barbara Coe and entered into a short-term promissory note. This note bears interest at the rate of 12% per year and has a maturity date of March 2, 2007, with an optional ~~industry~~extension isuntil ~~primed~~March 2, 2008. Coe was issued a warrant to purchase 3,500 shares of common stock at an exercise price of $0.10 as additional consideration for ~~increased~~this ~~consolidation~~financing. Pursuant to the APB Opinion 14 regarding the ~~Accordingly,~~Accounting weof ~~believe~~Debt weIssued ~~are~~with ~~making~~Stock ~~changes~~Purchase ~~that~~Warrants, ~~will~~we ~~leave~~recorded usan ~~well~~initial ~~positioned~~$500 todiscount ~~take~~on ~~advantage~~this note which as of ~~these~~3/31/06 ~~industry~~remained ~~consolidation~~roughly ~~trends~~$500.

~~Future~~Langkop Short-Term ~~Growth~~Promissory ~~through~~Note ~~Acquisitions~~13 - On March 2, 2006, the Company received $50,000 in financing from Gene Langkop and entered into a short-term promissory note. At March 31, 2006, $20,000 had been repaid and a principal balance of $30,000 remains. This note bears interest at the rate of 12% per year and has a maturity date of March 2, 2007, with an optional extension until March 2, 2008. Langkop was issued a warrant to purchase 23,000 shares of common stock at an exercise price of $0.10 as additional consideration for this financing. Pursuant to the APB Opinion 14 regarding the Accounting of Debt Issued with Stock Purchase Warrants, we recorded an initial $2,000 discount on this note which as of 3/31/06 remained roughly $2,000.

Management decided to move decisively into the healthcare industry by establishing a discreet Healthcare sector, focusing initially on allied health, nursing (credentialed and non-credentialed) and pharmaceutical specialists. We continue to believe that general demographic trends, forecasted employment trends and the fragmented nature of the healthcare staffing industry favor sustained growth and acceptable margins. As a result, during the first quarter of 2003, we formed several new operating agencies collectively called Magic Healthcare. We began recruiting professionals from the industry, as well as identifying those individuals within our Company with prior experience in this sector, to specialize in this area. We also began looking for acquisitions and/or affiliations within the healthcare sector. The acquisition of the assets of MRN in February 2004 was part of this focus. In the direct placement market, we have placed additional emphasis on the Bio/Pharm market which has shown and, we believe, will continue to show strong internal growth.18

~~Notwithstanding~~Various Short-Term aPromissory ~~Datatek~~Notes ~~sale~~- ~~which~~On isMarch ~~designed~~6 toand ~~provide~~21, ~~us with much needed liquidity~~2006, wethe ~~are~~Company ~~committed~~received to$100,000 anin ~~acquisition policy going~~financing ~~forward. With~~from ~~the~~two ~~growing~~individuals ~~industry trend towards lower-margin contract~~ and ~~temporary~~entered ~~staffing,~~into ~~size~~short-term ~~matters. Management~~promissory ~~has~~notes ~~mapped~~under ~~out~~ a ~~plan to make selective~~private ~~acquisitions,~~debt ~~assuming~~offering.. weThese ~~are~~notes ~~able~~bear tointerest ~~obtain~~at ~~financing, to re-establish~~ the ~~Company~~ asrate aof ~~nationwide~~12% ~~staffing~~per ~~firm~~year and ~~leverage its customer base into new~~have ~~geographical~~a ~~regions. More~~maturity ~~importantly, as~~date ~~the size~~ of ~~the~~March ~~company’s~~31, ~~revenues increase~~2007, ~~fixed~~with ~~costs~~an asoptional aextension ~~percentage~~until ~~of revenues~~March ~~should decrease~~31, 2008. ~~Although~~ ~~there is~~The notwo ~~guarantee~~individuals ~~that~~were ~~this~~each ~~strategy~~issued ~~will~~a ~~succeed,~~warrant weto ~~believe~~purchase ~~that~~5,000 ~~this~~shares of iscommon ~~the best~~stock ~~strategy~~at ~~for~~an ~~the~~exercise ~~future~~price of ~~the Company~~$0. To10 ~~achieve~~as ~~this growth, we will have to issue~~ additional ~~equity~~consideration ~~and/or~~for ~~obtain~~this ~~acquisition~~ financing. We ~~cannot assure~~Pursuant ~~you~~to ~~that~~the weAPB ~~will~~Opinion be14 ~~able~~regarding tothe ~~issue~~Accounting ~~additional~~of ~~equity or obtain additional~~Debt ~~financing,~~Issued ~~that we will be able to compete successfully~~ with ~~other~~Stock ~~companies~~Purchase ~~in acquisitions~~Warrants, orwe ~~that~~recorded ~~any~~an ~~acquisition~~initial we$3,000 ~~make~~discount ~~will~~on this benotes ~~accretive~~which toas ~~our~~of ~~earnings or~~3/31/06 ~~cash~~remained ~~flow~~roughly $3,000.

21Moore Short-Term Promissory Note - On March 20, 2006, the Company received $38,000 in financing from J. Michael Moore, CEO of the Company. This note bears interest at the rate of 12% per year and has a maturity date of March 20, 2007, with an optional extension until March 20, 2008.

~~RESULTS~~Texcel Acquisition OFDebt- In ~~OPERATIONS~~the first quarter, the Company entered into settlement agreements on certain Texcel acquisition debt. Under these agreements, approximately $17,000 of payments was made in the quarter plus a $28,000 gain on extinguishment of debt was recorded.

~~The~~Common ~~Three Months Ended March 31, 2005 Compared to The Three Months Ended March 31, 2004~~stock

~~Service~~At ~~Revenues~~March 31, 2006, the Company had 50,000,000 shares of $0.10 par value common stock, 1,000,000 shares of $1.00 par value preferred stock authorized, and ~~Gross~~215,000 ~~Profit~~shares of $10 par value preferred stock authorized. There were 5,272,693 shares of common stock outstanding at March 31, 2006, plus 501,559 shares of treasury stock are held by the Company. There were no shares of $1.00 par value preferred stock outstanding at March 31, 2006. There were 211,875 shares of $10 par value Series A convertible preferred stock outstanding at March 31, 2006. During the first quarter of 2006, options to purchase 50,000 shares of common stock and warrants to purchase 1,206,500 shares of common stock were issued.

($ in thousands)	2005		2004		Difference
Direct placements	$	1,671	$	1,981	$	(310	)
Temporary and contract staffing	3,524		3,307		217
Net service revenues	5,195		5,288		(93		)
Direct costs of temporary and contract staffing	2,504		2,424		80
Gross profit	$	2,691	$	2,864	$	(173	)

8. Commitments and Contingencies

~~For~~As ~~the~~of ~~three months ended~~ March 31, ~~2005~~2006, ~~net~~the ~~service~~Company ~~revenue decreased~~is ~~$173,000,~~a orparty ~~6.0%,~~ to ~~$2,691,000~~various aslitigation matters ~~compared~~involving toclaims ~~$2,864,000~~against ~~for~~ the ~~three~~ ~~months ended March 31, 2004~~Company. ~~Revenues~~ ~~from~~With ~~contract~~respect ~~and~~to ~~temporary~~those ~~staffing increased $217~~matters,~~000, or~~ ~~6.6%,~~management ~~while~~believes ~~direct~~the ~~placement~~claims ~~revenue~~against ~~decreased $310,000, or 15.6%. To offset~~ the ~~lack~~Company ofare ~~hiring~~without ofmerit ~~permanent employees, management has focused on growing our temporary~~ and ~~contract~~/or ~~staffing~~that ~~business. In~~the ~~2005,~~ultimate ~~temporary and~~resolution ~~contract staffing revenue has grown to approximately 68%~~ of ~~total~~these ~~revenue as~~matters ~~compared~~will tonot ~~63%~~have ~~in 2004. (Reporting Datatek on~~ a ~~discontinued~~material ~~operation basis eliminated approximately $4.1 million~~effect ofon ~~our~~the ~~temporary~~Company’s ~~and~~consolidated ~~contract~~financial ~~staffing~~position ~~revenue~~or inresults ~~2005 and $6.1 million~~ of ~~our temporary and contract staffing revenue in 2004~~operations.)

~~For~~The ~~the~~Company ~~three~~has ~~months~~not ~~ended~~made ~~March 31, 2005, gross profit decreased~~all byof ~~$173,000,~~its orpayments ~~6.0%,~~ to ~~$2,691,000~~its as401(k) ~~compared~~plan ~~to $2,864,000 for the three months ended March 31, 2004. Since sales expense~~ on ~~direct~~a ~~placements~~timely ~~are accounted for as an operating expense~~basis, ~~the~~ ~~gross~~which ~~margins~~could onresult ~~direct~~in ~~placements are typically 100% of sales~~penalties due. ~~Therefore,~~ ~~when~~At ~~direct~~March ~~placement revenues declined from 2004 to 2005~~31, ~~our gross profit registered a corresponding decline as well by $310~~2006,~~000~~ ~~offset~~the ~~partially~~Company byhad annot ~~increase~~forwarded ofapproximately $~~137~~316,000 ~~from temporary~~to ~~and contract staffing. Margins on temporary and contract staffing on~~ the ~~other~~administrator ~~hand generally range anywhere from 15% to 36%, depending on our level~~ of ~~overall involvement in~~ the ~~contract~~401(k). ~~Overall~~ ~~gross~~To ~~profit~~avoid asor areduce ~~percent~~any ~~service~~potential penalties, ~~revenue~~the ~~decreased~~Company ~~from~~may ~~approximately~~make ~~54%~~additional ofcontributions ~~total~~for ~~revenue~~employees infor ~~2004 to 52% of~~investment ~~total~~losses, ~~revenue~~if inany, ~~2005~~they ~~due~~may tohave ~~the~~suffered ~~increase in the percentage of temporary and contract staffing revenue~~ as a ~~total~~result ~~percentage~~ of ~~revenue and~~ the ~~lower~~late ~~gross margin associated with this business~~payments. ~~However,~~ ~~our gross margin on our temporary and contract staffing~~On ~~business~~March ~~increased~~1, ~~slightly~~2006, inthe ~~2005 to 28.9% from 26.7% in 2004. The~~ Company ~~has~~suspended ~~recently~~adding ~~focused~~new ~~its~~participants ~~efforts on~~or ~~temporary staffing business yielding 30% - 60% gross margins which has~~continuing ~~helped~~deductions ~~increase overall temporary and contract margins. (Reporting Datatek~~ on aexisting ~~discontinued operation~~401K ~~basis eliminated approximately $578,000 of gross margin in 2005 as compared to $934,000 of gross margin in 2004~~participants.)

~~Operating~~The ~~expenses~~Company has not made all of its payments to its deferred compensation plan on a timely basis, which could result in penalties due. At March 31, 2006, the Company had not forwarded approximately $51,000 of contributions due to the plan. To avoid or reduce any potential penalties, the Company may make additional contributions for employees for investment losses, if any, they may have suffered as a result of the late payments.

~~Operating~~The ~~expenses~~Company ~~amounted~~has toa ~~$3,509,000 for the three months ended March 31,~~self-funded ~~2005,~~medical ~~a decrease of $1,641,000, or 31~~plan.~~9%,~~ asEmployees ~~compared~~who toare ~~the~~eligible ~~three months ended March 31, 2004. Operating expenses~~ for ~~the~~this ~~three~~plan ~~months~~may ~~ended~~pay ~~March 31,~~an ~~2005,~~amount ~~included $1,638,000 of selling~~fixed ~~expenses,~~annually anto ~~decrease~~cover ofthe ~~$181,000,~~employee and/or 10family members.~~0%,~~ asThe ~~compared~~Company tohas ~~$1,819,000~~not ~~for the~~made ~~three~~all ~~months~~medical ~~ended~~payments ~~March 31,~~on ~~2004. The decrease was due primarily to~~ a ~~decrease~~timely inbasis, ~~managers~~which ~~and~~could ~~counselors salaries as a~~ result ofin ~~the~~penalties ~~restructurings done and commissions~~ due ~~to lower~~or ~~direct~~lost ~~placement~~discounts ~~sales~~from inmedical ~~the~~providers ~~first~~under ~~quarter~~out ofmedical ~~2005 compared to the same quarter in 2004~~plan. In ~~addition,~~At ~~general and~~March ~~administrative expenses decreased by $1~~31,~~333,000,~~ ~~or 42.8%~~2006, ~~as compared to~~ the ~~previous~~Company ~~year. Primary contributors~~had tomedical ~~this~~obligation ~~decrease~~due ~~were~~of aapproximately $~~421~~616,000. ~~decrease~~The inplan ~~professional fees~~is ~~related~~unfunded ~~to the non-recurring increased audit~~ and ~~legal~~any ~~fees~~amounts ~~during 2004, a $165,000 decrease in non-recurring penalties accrued in the 1st quarter of 2004~~ due toare ~~late~~not ~~payment~~secured ~~of taxes, a $153,000 decrease~~ in ~~rent and an $82,000 decrease in salaries due to~~ the ~~effects~~event of ~~restructuring during 2004,~~ a ~~$196,000 decrease in group insurance costs due to lower employee claims~~bankruptcy ~~experienced in 2005, and a $121,000 decrease in investor relations expenses due to cost cutting efforts in 2005~~filing. ~~Management expects general & administrative~~

22As of March 31, 2006, payroll tax liabilities incurred of approximately $3,200,000 have not been paid (excluding any penalty and interest payments due on the underpayment). The Company first disclosed that it had not paid all payroll taxes when due in June 2004. Taxes on payrolls after November 3, 2004, have been paid when due as part of an agreement with the Internal Revenue Service (the “IRS”), as discussed below. If the Company fails to pay any future tax liability on a timely basis, the subordination agreement will expire and the senior lender will stop funding the Company’s operations. There can be no assurance that the IRS will not remove their subordination agreement, which would lead the senior lender to remove their financing. This would have a material adverse affect on the Company’s financial condition and on our ability to continue as a going concern.

expenses to remain in the 30% - 40% range of revenues in 2005 as we continue to work on cost cutting measures. These cost cutting measures will probably be partially offset by expenditures related to the documentation of our internal control procedures under Sarbanes-Oxley in the 2nd half of 2005.19

We recorded a stock-based employee compensation charge of approximately $22,000 in 2005 as compared to approximately $79,000 in 2004 to reflect the expensing of options pursuant to the adoption of fair value accounting for stock-based employee compensation9. ~~Depreciation~~ ~~and~~Subsequent ~~amortization expense decreased to $68,000 as compared to $138,000 in the previous year. The decrease is primarily the result of the increase in property and equipment that is fully-depreciated.~~Events

~~We expect~~Proposed ~~that~~Sale operating expenses will decrease in 2005 for the year as compared to 2004, due to certain non-recurring expenses for audit fees that were spent in 2004 that will likely not recur in 2005. Additionally, penalties and interest for non-payment of ~~payroll~~Nursing taxes should not recur in 2005. These decreases will probably be partially offset by expenditures related to the documentation of our internal control procedures under Sarbanes-Oxley in the 2nd half of 2005. (Operating expenses for Datatek were approximately $261,000 in 2005 as compared to $409,000 in 2004.)Unit

~~Other~~On April ~~expense~~3, ~~items~~2006, the Company executed a letter of intent with InterStaff, Inc. to sell certain assets of the nursing unit for $477,000 plus certain closing adjustments. The Company would also retain the accounts receivable of the unit and all liabilities incurred from its date of acquisition, February 17, 2004, to closing. On April 7, 2006, pursuant to the terms of the letter of intent, Interstaff advanced $100,000 in the form of a deposit to the Company. This letter of intent formally expired on May 12, 2006; however, sporadic, verbal negotiations have continued. Due to the fact that no written agreements are currently executed and in effect, there can be no assurances that a sale will be completed.

For the three months ended March 31, 2005, net interest expense increased by $130,000 to $295,000, due primarily to the higher cost of our borrowings and the increase in notes payable to $1,348,000 at March 31, 2005, as compared to $696,000 at March 31, 2004. In 2004, we had a gain on the early extinguishment of a debt related to the purchase of one of our agencies. (Other expense items for Datatek consisted of interest expense and were approximately $177,000 in 2005 as compared to approximately $200,000 in 2004.)20

~~Income~~ITEM ~~Taxes~~2. MANAGEMENT’S DISCUSSION AND ANALYSIS

WeOF ~~did~~FINANCIAL ~~not~~CONDITION ~~report~~AND ~~any~~RESULTS ~~income~~OF ~~tax benefit from our losses before income taxes in the current or prior year due to our determination that we would not be able to realize the full benefit of our deferred tax assets.~~OPERATIONS

~~Income~~DIVERSIFIED ~~from~~CORPORATE ~~discontinued~~RESOURCES, ~~operations~~INC. AND SUBSIDIARIES

~~In accordance~~MANAGEMENT’S ~~with~~DISCUSSION ~~FAS~~AND ~~144,~~ANALYSIS Accounting for the Impairment or Disposal of Long-Lived Assets, we are reporting our Datatek subsidiary as discontinued operations for all periods presented. For 2005, income from discontinued operations decreased to $140,000 as compared to $324,000 in the prior year. This decrease was primarily due to a major contract staffing project that began before 2003 that was completed by the third quarter of 2004.OF

~~Accretion~~FINANCIAL ofCONDITION ~~Discount~~AND ~~and~~RESULTS ~~Dividends~~OF ~~on Preferred Stock~~OPERATIONS

WeMARCH issued preferred stock in March 2004. For 2004, we accreted discount equal to the value assigned to the embedded conversion feature in the preferred stock. Since the preferred stock is not redeemable except upon the happening of certain remote contingencies, we believe that there will be no additional amortization of discount in future periods. The dividend on the preferred stock is due quarterly and is cumulative. The Board of Directors has not declared or authorized payment of the dividends that have accrued to March 31, ~~2005. However, the results of operations have been adjusted to reflect the amount of dividends that would be due had they been declared.~~2006

~~LIQUIDITY AND~~(dollars ~~CAPITAL~~rounded ~~RESOURCES~~to thousands, except per share amounts)

Cash on hand at March 31, 2005 was $4,000. Because all cash receipts are deposited into our lockboxes and swept daily by our lender, combined with our policy of maintaining zero balances in our operating accounts, we maintain only a minimal amount of cash on hand. Cash flows from financingOverview

23We are a nationwide human resources and employment services firm, providing staffing solutions in specific professional and technical skill sets to Fortune 500 corporations and other large organizations. We offered two kinds of staffing solutions: direct placement services (“permanent placements”) and temporary and contract staffing.

~~activities during the quarter totaled $193,000, principally from an~~We ~~increase~~currently inoperate ~~borrowings~~offices ~~under debt obligations of $525,000 and revolving lines of credit of 196,000, along with an increase~~ in ~~obligations~~the ~~not~~following liquidated because of outstanding checks of $212,000. These increases were partially offset by net repayments under factoring arrangements of $626,000 and principal payments under debt obligations of $102,000. Cash used by investing activities of $11,000 represented funds used for capital expenditures. Cash used in operating activities was $182,000.locations:

AsArizona aPhoenix ~~result~~Colorado ofDenver ~~the~~Georgia ~~recession~~Atlanta ~~that~~Pennsylvania ~~started~~Philadelphia inTexas ~~2000 and the impact it has had on the direct placement and temporary staffing industry~~Dallas, ~~our~~Houston ~~revenues have declined approximately 67% from levels achieved in 2000. We reported net losses for the last four fiscal years as a result of the decline in our business,~~ and ~~expect to report a net loss for the 2005 fiscal year. In addition, our current liabilities of $13.1 million exceed our current assets of $4.2 million.~~Austin

The offices ~~Company~~are ~~currently~~responsible ~~finances itself~~for ~~through~~marketing ~~factoring~~to ofclients, orrecruitment ~~lines~~ of ~~credit based on~~personnel, ~~its accounts~~ ~~receivable. The~~operations, ~~amount~~local ofadvertising, ~~funds available~~initial ~~under~~customer ~~these~~credit ~~agreements~~evaluation ~~depends~~and ~~on the amount of accounts receivable~~customer ~~accepted~~cash bycollection ~~the lenders~~follow-up. We ~~operate~~Our ~~with minimal~~executive ~~cash~~offices, ~~balances~~located asin ~~all~~Dallas, ~~cash receipts are deposited into our lockboxes~~Texas, ~~which~~provide ~~are~~corporate ~~swept~~governance ~~daily~~and byrisk ~~our lenders. While we have generally sought to borrow the maximum amounts available from these facilities during 2005~~management, ~~the~~as ~~facilities~~well ~~have~~as ~~been~~certain ~~inadequate in~~other ~~providing~~accounting ~~enough~~and ~~funds~~administrative ~~to maintain operations~~services, ~~which~~for ~~has resulted in~~ our ~~having to use other measures to continue to fund operations~~offices.

~~During~~We believe ~~2004,~~that we ~~reduced staff~~will ~~and~~be ~~closed~~unable ~~agencies~~ to ~~reduce~~continue ~~the~~as ~~funds~~a ~~outflow. We~~going ~~had~~concern ~~also~~for ~~not~~the ~~paid all employer and~~next ~~employee~~twelve ~~payroll~~months ~~taxes~~without ~~when~~obtaining ~~due. The amount~~additional offunds ~~unpaid~~through ~~payroll~~debt ~~taxes~~or ~~is approximately $3,558,000 plus penalties and~~equity ~~interest. As~~financing aor ~~result~~through ofthe ~~these~~sale ~~past due payroll tax liabilities, we are in default under one~~ of ~~our lending agreements~~assets. In ~~addition,~~See we“Liquidity ~~are funding operations by not paying all vendors for products~~ and ~~services~~Capital ~~under normal~~Resources” ~~credit~~below ~~terms,~~for ~~including~~a ~~payments~~discussion ~~on capital leases and other debt. The consequences~~ of ~~some~~our ofability ~~these~~to ~~actions have~~continue oras ~~may~~a ~~result~~going inconcern ~~penalties~~ and~~/or~~ ~~fines~~our plans for ~~late~~addressing ~~payments~~those orissues. ~~may~~The ~~involve legal~~inability ~~actions~~to ~~against~~obtain ~~us. However,~~additional ~~our~~funds ~~management~~could ~~believed~~have ~~that~~a ~~these~~material ~~steps~~adverse ~~were~~affect ~~necessary~~on at the ~~time to maintain the~~ Company ~~while we sought to correct our cash flow issues~~.

InTransformation ~~October 2004, the Internal Revenue Service (the “IRS”) placed a lien on the assets~~ of two of our subsidiaries. The Company and the IRS reached an agreement that subordinates the claims by the IRS to those of our senior lenders so that they can continue to fund our operations. The IRS has extended the subordination agreement with one subsidiary until June 30, 2005. Our lenders are continuing to fund us. The Company has entered into a second amendment with one lender that acknowledges the extended subordination agreement with the IRS. We do not have a formal agreement with our other senior lender, but this lender has continued to fund. Currently, both lenders may demand repayment at any time. If we fail to pay all future federal payroll tax liabilities arising after the subordination agreement on a timely basis, the subordination agreement will expire and our senior lenders will stop funding our operations. This would have a material adverse effect on our ability to continue as a going concern.Business

WeThe changing ~~have~~environment ~~completed,~~of orthe ~~are~~job ~~seeking~~market toover ~~complete,~~the ~~certain~~past ~~transactions~~four years has caused ~~which~~staffing ~~will~~companies ~~partially~~to ~~address~~either change with the ~~going~~times ~~concern~~or ~~issues~~perish. To adjust with the trends, we ~~face.~~have:

~~In the~~• shifted ~~4th~~our ~~quarter~~revenue ofmix ~~2004,~~to ~~the~~focus ~~Company~~more ~~received a short-term loan from~~on ~~the~~temporary ~~James R. Colpitt Trust that was structured as a $550,000 participation loan in the Greenfield Line of Credit. In the 1st~~ and ~~2nd~~contract ~~quarters~~staffing ofservices ~~2005,~~rather ~~the~~than ~~Company~~direct ~~has received~~placements; ~~additional loans from the James R. Colpitt Trust in the form of a $175~~however,~~000 promissory~~ ~~note~~with ~~and~~recent aimproved $1market ~~million~~conditions ~~line~~we ofexpect ~~credit. The~~this ~~balance~~mix of the promissory note was approximately $87,000 as of March 31, 2005, and the advances on the line of credit totaled $350,000 in the 1st quarter of 2005. Also, in the 1st quarter of 2005, J. Michael Moore, CEO, repaid approximately $324,000 in notes receivable due to ~~the~~ ~~Company~~change.

~~As discussed~~• eliminated ~~above,~~excess ~~the~~overhead ~~Company~~of ~~has~~maintaining local ~~generally~~offices ~~sought~~ to ~~borrow~~serve ~~the~~customers ~~maximum amounts available under the factoring~~ and ~~line~~realigned ~~of credit agreements that are based on~~ our ~~accounts~~geographical ~~receivable. During~~presence ~~the~~into ~~4th~~regional ~~quarter of 2004 and the 1st quarter of 2005, the Company has amended the Greenfield line of credit agreement which has increased the borrowings available under this line of credit.~~offices;

24• exited the high risk telecommunications industry through the sale of one of our agencies in December, 2002, and began new strides into the healthcare industry;

~~The Company~~• Focused ~~has~~our ~~been~~sales ~~focused~~force on ~~reducing~~Fortune ~~expenses in 2004 and 2005. Based on these efforts, we have reduced~~500 ~~operating~~companies; ~~expenses by approximately $1.6 million for the 1st quarter of 2005 as compared to the same period in the prior year.~~and

~~If the~~• Reduced ~~sale~~fixed ofexpenses ~~Datatek is consummated, the cash received should be adequate~~ to ~~repay~~ ~~most,~~better ifalign ~~not all, of the past due payroll tax liabilities. We cannot give any assurance at this time~~our ~~that~~cost ~~this~~structure ~~sale~~with ~~will~~lower ~~occur. Datatek~~margin ~~is primarily involved in information technology~~ temporary and contract staffing ~~and~~ ~~represented approximately 60% of our 2004 temporary and contract staffing revenue~~services.

WeAs ~~are~~a ~~continuing~~result toof ~~evaluate~~the ~~various~~changes ~~other~~discussed ~~financing and restructuring strategies~~above, ~~including~~we ~~merger~~have ~~candidates~~largely ~~and~~transformed ~~investments through private~~the ~~placements,~~Company tofrom ~~maximize~~its ~~shareholder~~historical ~~value~~roots ~~and to provide assistance~~ in ~~pursuing alternative~~direct ~~financing~~placement ~~options~~services ~~in connection with our capital requirements~~ and ~~business~~ ~~strategy. We will also seek~~dependence ~~acquisitions~~on ~~to replace~~ the ~~revenues~~telecommunications ~~lost~~industry ~~from~~to a ~~Datatek~~more ~~sale~~balanced byrevenue ~~acquiring~~model revolving ~~small~~around ~~companies~~contract ~~where~~staffing wein ~~can~~various ~~absorb~~industries. ~~their~~For ~~back~~most ~~office~~of ~~operations into~~ our ~~own. There~~ ~~can~~existence, ~~be no assurance that~~ we ~~will~~routinely begenerated ~~successful~~80% inor ~~implementing~~more ~~the~~of ~~changes~~our ~~necessary~~annual torevenues ~~accomplish~~from ~~these~~direct placement ~~objectives,~~activities. orWhile ~~if we are successful, that~~ the ~~changes~~direct ~~will~~placement ~~improve~~business ~~our~~is ~~cash flow~~typically ~~and liquidity.~~

If a Datatek sale takes place, management believes that we will be able to secure other financing that will allow us to pursue our acquisition strategy, which, when combined with improving market conditions and the restructuring of our present businesses, should eventually produce enough new revenues and gross profit to cover the operating funds shortfall we are currently experiencing. However, we cannot guarantee that funds will be available, that any acquisitions will, if made, be accretive to our cash flow, or that our creditors will give us the time needed to implement our plan.21

~~Our common~~capable ~~stock~~of ~~was~~generating ~~delisted~~net onmargins ~~February 9,~~after commissions ~~2005,~~of ~~and~~approximately ~~has~~50%, ~~since~~the ~~been~~revenues ~~trading sporadically~~are onvolatile ~~the~~and ~~“pink~~difficult ~~sheets”~~to forecast ~~inter-dealer~~and ~~trading network~~finance. ~~The~~ ~~loss~~By the end of the ~~AMEX~~first ~~listing~~quarter ~~has~~2006, ~~made~~we ~~our~~had largely ~~ability~~reversed tothe ~~use~~composition of our ~~common~~revenues, ~~stock~~with in73% ~~acquisitions~~of ~~substantially~~our ~~more difficult. The~~revenues ~~inability to obtain~~generated ~~additional~~through ~~financing~~temporary ~~will~~and ~~have~~contract astaffing ~~material~~and ~~adverse~~27% ~~effect~~of on our ~~financial~~revenues from direct ~~condition~~placement activities. It ~~may~~We ~~cause~~also usdiversified toour ~~delay~~industry orbase targeting ~~curtail~~high-growth ~~our~~areas, ~~business~~such ~~plans~~as orthe bio-pharmaceutical and healthcare industry, to augment ~~seek~~our ~~protection~~more ~~under~~traditional ~~bankruptcy~~information ~~laws~~technology and engineering base.

~~Our~~These ~~continuation~~strategic aschanges arequire ~~going~~us ~~concern~~to isevaluate ~~dependent~~our ~~upon~~fixed costs to be more in line with our ~~ability~~new revenue model. In the first quarter of 2006, gross margins were 40.5% of revenues as compared to ~~obtain~~35.0% of revenues in 2005. Direct placement revenues ~~additional~~for ~~financing~~the year were 27% of total revenue as compared to 18% of total revenue in 2005. General and administrative expenses decreased by $92,000 ~~ultimately~~from 20.0% of revenues or $1.87 million in 2005, to ~~attain~~23.5% of revenues or $1.78 million during 2006. Primary contributors to this decrease were a $166,000 million decrease in professional and ~~maintain~~legal ~~profitable~~fees; a $127,000 decrease in staff salaries; plus a $56,000 decrease in office rent offset by a $234,000 increase in insurance costs and $23,000 of other miscellaneous items. Management expects general & administrative expenses to start leveling off; however, we continue to work on cost cutting measures and consolidation of operations.

~~CRITICAL~~We are ~~ACCOUNTING~~implementing ~~POLICIES~~other plans, as discussed in “Liquidity and Capital Resources” below, which we believe will help solve our current liquidity problems and allow us to regain positive cash flow from operations over the next year. If these changes are not accomplished, we may be unable to continue as a going concern.

~~Revenue~~Proposed Divestiture ~~Recognition and Cost~~ of ~~Services~~Nursing Unit

WeOn April ~~derive~~3, ~~our~~2006, ~~revenues~~the ~~from~~Company ~~two~~executed ~~sources:~~a ~~direct~~letter ~~placement~~of ~~and~~intent ~~temporary and~~with ~~contract~~InterStaff, ~~staffing~~Inc. We ~~record~~to ~~revenues~~sell ~~for~~certain ~~temporary~~assets ~~and~~of ~~contract~~the ~~staffing~~nursing ~~services~~unit atfor ~~the~~$477,000 ~~gross~~plus ~~amount~~certain closing ~~billed~~adjustments. ~~the~~The ~~customer~~Company inwould ~~accordance~~also ~~with~~retain ~~EITF~~the ~~99-19,~~accounts ~~Reporting~~receivable of the unit ~~Revenues~~and ~~Gross~~all asliabilities aincurred ~~Principal~~from ~~Versus~~its ~~Net~~date asof anacquisition, ~~Agent~~February 17, 2004, to closing. We ~~believe~~On ~~this~~April ~~approach~~7, is2006, ~~appropriate because~~pursuant weto ~~identify~~the ~~and~~terms ~~hire~~of ~~qualified~~the ~~employees~~letter of intent, Interstaff ~~select~~advanced $100,000 in the ~~employees~~form ~~for~~of a deposit to the Company. This ~~staffing~~letter ~~assignment~~of intent formally expired on May 12, ~~and~~2006; ~~bear~~however, ~~the~~sporadic, ~~risk~~verbal negotiations ~~that~~have continued. Due to the ~~services~~fact ~~provided~~that byno ~~these~~written agreements are ~~employees~~currently ~~will~~executed ~~not~~and in effect, there can be ~~fully~~no ~~paid~~assurances bythat ~~customers~~a sale will be completed.

Fees for direct placement of personnel are recognized as income at the time the applicant accepts employment. Revenue is reduced by an allowance for estimated losses in realization of such fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period). Fees charged to clients are generally calculated as a percentage of the new employee’s annual compensation. There are no direct costs for direct placements. Commissions paid by us related to direct placements are included in selling expenses.Restructuring

~~Revenues~~In late ~~from~~June ~~temporary~~2004, the Board approved a several phase restructuring plan submitted by upper management to reduce costs of the Company on a going-forward basis. Since severance pay was offered in association with layoffs that occurred in the 3rd quarter of 2004 and ~~contract~~some ~~staffing~~phases ~~are~~of ~~recognized~~the ~~upon~~restructuring occurred in later periods, ~~performance~~the primary effects of ~~services~~the cost savings were not be noticeable until 2005. Every office and agency of the Company was evaluated resulting in: ~~The~~(i) ~~direct~~the closure of several under-performing ~~costs~~sales offices and agencies, (ii) the downsizing of ~~these~~staff, ~~staffing~~(iii) ~~services~~newly ~~consist~~negotiated contracts ~~principally~~at lower rates, including certain leases, and (iv) other cost saving measures. All of ~~direct~~these ~~wages~~measures have been implemented to improve operating results, lower losses, improve cash, demonstrate operating efficiencies, and increase ~~related~~our ~~payroll~~ability ~~taxes~~to raise future capital. However, no assurance can be given that this lowered operating expense will continue in this trend in the future.

25Our Position in the Industry

~~Allowances~~The staffing onindustry ~~Accounts~~is ~~Receivable~~highly fragmented with numerous national, regional and small local firms all competing. Many of these smaller companies either have not repositioned themselves for the changing marketplace or lack the financial resources to continue after four extremely difficult recession years. As noted, we face competition from several competitors who are larger and have greater financial resources. However, we believe that we have several favorable attributes which give us an advantage over smaller competitors:

~~The~~• a ~~Company~~superior ~~accrues~~database anoperating ~~allowance~~system ~~for estimated losses on the~~that ~~realization~~includes ofover direct placement fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period) and an allowance for doubtful accounts for potential losses due to credit risk. The Company establishes the allowance for estimated losses on direct placement fees based on historical experience and charges the allowance against revenue. The allowance for doubtful accounts is based upon a review of specific customer balances850,000 ~~historical losses and general economic conditions. Actual losses may be different than the estimates used to calculate the allowances.~~individuals;

~~Stock-Based~~• the ~~Employee~~ability ~~Compensation~~to attract Fortune 500 clients; and

In• our ~~the~~leadership ~~fourth~~within ~~quarter of 2003, effective January 1, 2003,~~ the ~~Company~~ ~~adopted the fair value recognition method of accounting for stock-based~~industry ~~employee compensation. Under the modified prospective method of adoption selected by us~~organization, ~~stock-based employee compensation cost recognized since~~ the ~~adoption~~National isAssociation the same as that which would have been recognized had the fair value method been applied to all options granted, modified or settled after December 31, 1994. The actual expense charge depends on the method and factors used to calculate the fair value of ~~the~~Personnel ~~options~~Services ~~at their grant date~~(“NAPS”). ~~We begin recognizing such compensation cost as if all grants will entirely vest.~~

~~Prior~~We believe tothat ~~our~~the ~~adoption~~worst of the ~~fair~~economic ~~value~~downturn ~~method,~~is ~~the~~behind ~~Company~~us ~~elected~~and tothe industry ~~follow~~is ~~APB~~primed ~~Opinion No. 25, Accounting~~ for ~~Stock Issued~~increased ~~to Employees~~consolidation. ~~Under APB~~ 25Accordingly, nowe ~~compensation~~believe ~~expense~~we ~~was~~are ~~normally recognized for options granted~~making ~~because~~changes ~~their~~that ~~exercise~~will ~~price~~leave ~~usually~~us ~~equaled~~better ~~the~~positioned ~~market~~to ~~price~~take advantage of ~~the underlying~~these ~~stock~~industry onconsolidation ~~the date of grant~~trends.

~~Self-Insurance Reserves~~22

~~We are self-insured for our employee medical coverage. Provisions for claims under the self-insured~~Future ~~coverage~~Growth ~~are~~through ~~based~~Diversification on our actual claims experience using actuarial assumptions followed in the insurance industry, after consideration of excess loss insurance coverage limits. Management believes that the amounts accrued are adequate to cover all known and ~~incurred but unreported claims.~~Acquisitions

~~Goodwill~~Management decided to move decisively into the healthcare industry by establishing a discreet Healthcare sector, ~~Non~~focusing initially on allied health, nursing (credentialed and non-~~Compete~~credentialed) ~~Agreements~~and pharmaceutical specialists. We continue to believe that general demographic trends, forecasted employment trends and the ~~Property~~fragmented nature of the healthcare staffing industry favor sustained growth and ~~Equipment~~acceptable margins. As a result, during the first quarter of 2003, we formed several new operating agencies collectively called Magic Healthcare. We began recruiting professionals from the industry, as well as identifying those individuals within our Company with prior experience in this sector, to specialize in this area. In the direct placement market, we have placed additional emphasis on the Bio/Pharm market which has shown and, we believe, will continue to show strong internal growth.

~~These assets~~ We are ~~subject~~committed to ~~periodic~~an ~~review~~acquisition topolicy ~~determine~~going ~~our~~forward. ~~ability~~With tothe growing industry ~~recover~~trend ~~their~~towards ~~cost~~lower-margin contract and temporary staffing, size matters. We ~~must~~Management has mapped out a plan to make selective acquisitions, assuming we are able to obtain ~~estimates~~financing, ~~about~~to ~~their~~re-establish ~~recovery~~the ~~based~~Company onas ~~future~~a ~~cash~~nationwide ~~flows~~staffing firm and leverage ~~other~~its ~~subjective data~~customer base into new geographical regions. We More importantly, inas the size of the ~~future~~company’s revenues increase, ~~may~~fixed ~~determine that~~costs ~~some~~as a percentage of revenues ~~these~~should ~~costs~~decrease. ~~may~~Although ~~not~~there beis ~~recoverable~~no guarantee that this strategy will succeed, ~~which~~we ~~may~~believe ~~require~~that usthis tois ~~adjust~~the best strategy for the future of the ~~their~~Company. ~~capitalized~~To ~~value~~achieve bythis ~~writing~~growth, ~~off~~we ~~all~~will orhave ato ~~portion~~issue ofadditional ~~their~~equity ~~value~~and/or obtain acquisition financing. We ~~may~~cannot ~~also~~assure ~~determine~~you that ~~the~~we ~~lives~~will ~~being used~~be able to issue ~~amortize~~additional ~~property~~equity ~~and~~or ~~equipment~~obtain doadditional ~~not~~financing, ~~reflect~~that ~~actual~~we ~~usage~~will ofbe ~~these~~able to ~~assets~~compete ~~and~~successfully ~~may~~with ~~adjust~~other ~~their~~companies ~~value~~in ~~accordingly~~acquisitions, or that any acquisition we make will be accretive to our earnings or cash flow.

~~Income Taxes~~23

~~Deferred~~RESULTS ~~income~~OF taxes are provided for temporary differences between the basis of assets and liabilities for tax and financial reporting purposes. A valuation allowance is established for any portion of the deferred tax asset for which realization is not likely. We maintain a 100% valuation allowance against our deferred tax assets currently. The valuation allowance is subject to periodic review, and we may determine that a portion of our deferred tax asset may be realizable in the future.OPERATIONS

~~RECENT~~The ~~ACCOUNTING~~Quarter Ended ~~PRONOUNCEMENTS~~March 31, 2006 Compared to The Quarter Ended March 31, 2005

~~In November 2004, the Financial Accounting~~Service ~~Standards~~Revenues Board issued statement of Financial Accounting Standard No. 151, “Inventory Costs”. The new statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and ~~wasted~~Gross ~~material. This statement requires that those items be recognized~~Profit

($ in thousands)	2006			2005			Difference

Direct placements	$	2,011		$	1,708		$	303
Temporary and contract staffing	5,554			7,645			(2,091		)
Net service revenues	7,565			9,353			(1,788		)

Direct costs of temporary and contract staffing	(4,500		)	(6,084		)	(1,656		)
Gross profit	$	3,065		$	3,269		$	(204	)

asFor ~~current-period~~the ~~charges~~first ~~and~~quarter ~~requires~~of 2006, ~~that~~net ~~allocation of~~service ~~fixed~~revenue ~~production~~decreased ~~overheads~~$1,788,000, or 19.1%, to $7,565,000 as compared to $9,353,000 for the ~~cost~~previous ofyear. ~~conversion~~Revenues befrom ~~based~~direct onplacements ~~the~~increased $303,000, ~~normal~~or 17.7%, as customers increased hiring new staff in 2006. Our ~~capacity~~contract ofand ~~the~~temporary ~~production~~staffing ~~facilities~~revenues decreased $2,091,000, or 27. 3%. The ~~This~~decrease ~~statement~~in istemporary ~~effective~~and ~~for~~contract ~~fiscal~~staffing ~~years~~as ~~beginning~~compared ~~after~~to ~~June 15,~~the prior year was ~~2005. We~~due doprimarily ~~not~~to ~~expect~~the ~~adoption~~end of ~~this~~several temporary assignments which did not ~~statement~~continue toin ~~have~~2006 aas ~~material~~well ~~impact~~as clients hiring contractors on ~~our~~assignment ~~financial~~full-time. In ~~condition~~the orfirst ~~results~~quarter of 2006, the percentage of temporary and contract staffing ~~operations~~revenues to total revenues decreased to 73% versus 82% in 2005.

InFor the ~~December 2004~~first quarter of 2006, ~~the~~gross ~~Financial~~profit ~~Accounting Standards~~decreased ~~Board~~by ~~issued~~$204,000, ~~statement~~or of6.2%, ~~Financial~~to ~~Accounting~~$3,065,000 as ~~Standards~~compared Noto $3,269,000 in the previous year. ~~123~~ Since sales expenses on direct ~~(revised~~placements ~~2004)~~are accounted for as an operating expense, ~~Share-Based~~the ~~Payment.~~ gross margins on ~~This~~direct ~~statement~~placements ~~replaces~~are ~~FASB~~typically ~~Statement~~100% Noof sales. ~~123~~ ~~and~~The ~~supercedes~~net ~~APB~~margin for direct ~~Opinion~~placements ~~No. 25. Statement~~after ~~No. 123~~deducting commissions, which are classified as selling ~~(R)~~expense, ~~will~~is ~~require~~typically 50%. Contract margins on the ~~fair~~other ~~value~~hand can range anywhere from 15% to 36% depending on our level of ~~all~~overall ~~stock~~involvement ~~option~~in ~~awards~~the contract. ~~issued~~Therefore, towhen ~~employees~~temporary and contract revenues decreased from 2005 to be2006, ~~recorded~~our asdirect ancosts ~~expense~~registered ~~over~~a ~~the~~corresponding ~~related~~$1,656,000 ~~vesting~~decrease ~~period~~and our gross profit decreased to $3,065,000. ~~This~~ ~~statement~~Our ~~also~~gross ~~requires~~margin ~~the~~on ~~recognition~~our temporary and ofcontract ~~compensation~~staffing ~~expense~~business ~~for~~decreased ~~the~~in ~~fair~~2006 ~~value~~to of19.0% ~~any~~from ~~unvested~~20.4% ~~stock~~in ~~option~~2005 ~~awards~~due to ~~outstanding~~the atdecline ~~the~~in ~~date~~temporary ofstaffing ~~adoption. We~~revenues which has higher margins than docontract ~~not~~staffing ~~believe~~revenues. ~~that~~Overall ~~the~~gross ~~adoption~~profit, as a percentage of ~~FASB~~net service ~~Statement~~revenue, ~~123~~increased ~~(R)~~to ~~will~~40.5%, ~~have~~as acompared ~~material effect~~with on35.0% ~~our~~in ~~results~~the ofprevious ~~operations~~year, due ~~since~~primarily to the ~~Company~~increased ~~currently~~percentage ~~follows~~of ~~FASB~~revenues from direct placements ~~Statement~~which Nohave higher margins than temporary and contract staffing revenues. ~~123.~~

InOperating December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance included certain exceptions to that principle. This statement amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement shall be effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe that the adoption of this statement will have a material effect on our financial statements.expenses

~~FORWARD~~Operating expenses amounted to $3,506,000 for the first quarter of 2006, a decrease of $263,000, or 7.0%, as compared to the previous year. As part of this decrease, selling, general & administrative expenses (S,G&A) decreased by $277,000 plus depreciation and amortization decreased by $29,000 offset by an increase in stock-~~LOOKING~~based ~~STATEMENTS~~employee compensation. Selling expenses for 2006 were $1,620,000, a decrease of $185,000 from 2005. The decrease was due primarily to the decrease in commissions paid from the decrease in contract and direct placement revenues. In addition, general and administrative expenses decreased by $92,000, as compared to the previous year. The decrease was primarily due to a $166,000 million decrease in professional and legal fees; a $127,000 decrease in staff salaries; plus a $56,000 decrease in office rent offset by a $234,000 increase in insurance costs and $23,000 of other miscellaneous items. We recorded a non-cash stock-based employee compensation charge of $65,000 in the first quarter of 2006 as compared to $22,000 in 2005. Depreciation and amortization expense decreased to $41,000 in 2006 as compared to $70,000 in the previous year.

~~Certain~~Other ~~statements~~expense in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “continue,” “may,” “should,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from what management currently believes. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that these future events will transpire as expected. Such risks and uncertainties include, among other things, those described herein and in the “Risk Factors” section and elsewhere in our Form 10-K for the year ended December 31, 2003, which should be read in conjunction with this Form 10-Q. Should one or more of those risks and uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those described herein. Subsequent written and oral “forward-looking” statements attributable to the Company, or persons acting on its behalf, are expressly qualified by the Risk Factors. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.items

~~ITEM~~For the 3first quarter of 2006, net interest expense increased by $119,000 to $592,000, due primarily to increased borrowings as well as the higher cost of our borrowings. ~~QUANTITATIVE~~ Also, ~~AND~~the ~~QUALITATIVE~~Company ~~DISCLOSURES~~had a gain on early extinguishment of debt of $28,000 ~~ABOUT~~compared ~~MARKET~~to ~~RISK~~$0 in 2005.

The Company is exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on the earnings of its cash equivalent short-term investments, as well as interest expense on its line of credit borrowings. The factoring liability is not based directly on current rates; the factor takes a fee based on a set percentage of the outstanding balance of the accounts receivable accepted. The Company has no material cash equivalent investments so its interest income is not materially impacted by changes in interest rates. The line of credit and the Colpitt Participation Note are based on prime so that a 1% increase in the prime rate would have an approximately $7,000 impact on our interest expense each quarter based on the average amount borrowed at March 31, 2005.24

27Income Taxes

~~ITEM~~We did 4. not report any income tax benefit from our losses before income taxes in the ~~CONTROLS~~three ~~AND~~months ~~PROCEDURES~~ended March 31, 2006 or 2005 due to our determination that we may not be able to realize the full benefit of our deferred tax assets.

AtDividends ~~the~~on ~~end~~Preferred of the period covered by this report, an evaluation was performed under the supervision and with the participation of Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective in timely accumulating, processing, recording and communicating to them material information related to the Company and its consolidated subsidiaries that are required to be disclosed by the Company in reports that it files or submits under the Exchange Act.Stock

~~The~~We ~~Company’s~~issued ~~principal~~preferred ~~executive~~stock ~~officer~~in ~~and~~March ~~principal~~2004. ~~financial~~The ~~officer~~dividend ~~believe that~~on the ~~procedures~~preferred ~~followed~~stock ~~by the Company provide the necessary assurance~~is ~~that~~due ~~there~~quarterly ~~are~~and nois ~~material~~cumulative. ~~misstatements~~The inBoard ~~the~~of ~~Company’s~~Directors ~~audited~~has ~~consolidated financial~~not ~~statements~~declared ~~on Form 10-K~~ or ~~in the Company’s unaudited condensed~~ ~~consolidated~~authorized ~~financial~~payment ~~statements~~of ~~included~~the individends ~~this~~that ~~report~~have onaccrued ~~Form 10-Q~~from ~~for~~ the ~~quarterly~~issue ~~period~~date ~~ended~~to March 31, ~~2005~~2006. ~~Management~~ ~~believes~~However, ~~that~~the ~~there~~results ~~have~~of ~~not~~operations have been ~~any~~adjusted ~~changes~~to inreflect the ~~Company’s~~ ~~internal~~amount ~~controls~~of ~~over~~dividends ~~financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter covered by this report~~ that ~~have~~would ~~materially affected,~~be ordue ~~are~~had ~~reasonably~~they ~~likely~~been ~~to materially affect, the Company’s internal control over financial reporting~~declared.

~~PART II~~LIQUIDITY –AND ~~OTHER~~CAPITAL ~~INFORMATION~~RESOURCES

~~ITEM~~Cash on hand at March 31, 2006 was $2,000. ~~CHANGES~~ INBecause ~~SECURITIES~~all ~~AND~~cash ~~USE~~receipts OFare deposited into our lockboxes and swept ~~PROCEEDS~~daily by our lender, combined with our policy of maintaining zero balances in our operating accounts, we maintain only a minimal amount of cash on hand. Cash provided by financing activities during the quarter totaled $470,000, resulting primarily from the issuance of new debt obligations. Cash used by operating activities was $470,000.

~~Warrants~~As a result of the recession that started in 2000 and the impact it has had on the direct placement and temporary staffing industry, the Company’s revenues have declined approximately 55% from levels achieved in 2000. The Company has also reported net losses for the last four years as a result of the decline in its business, and the Company’s current liabilities of $18.7 million exceed its current assets of $4.4 million as of March 31, 2006.

~~In the~~ The ~~1st~~Company ~~quarter~~currently offinances ~~2005~~itself through factoring of, ~~the~~or ~~Company~~lines ~~received~~of acredit ~~short-term~~based ~~loan~~on, ~~from the~~its ~~James~~accounts Rreceivable. ~~Colpitt~~The ~~Trust in the~~ amount of ~~$175,000. Mr. Colpitt~~funds isavailable aunder ~~beneficial~~these ~~owner~~agreements ~~of more~~depends ~~than~~on ~~5% of~~ the ~~Company’s~~amount ~~common~~of ~~stock.~~ accounts Asreceivable ~~consideration~~accepted ~~for~~by ~~this~~the ~~financing,~~lenders. ~~the~~The Company ~~issued~~operates ~~warrants~~with ~~for~~minimal acash ~~total~~balances ofas ~~200,000~~all ~~shares~~cash ofreceipts ~~common~~are ~~stock~~deposited tointo the ~~Colpitt~~Company’s ~~Trust~~lockboxes, ~~and its~~which ~~agent. These~~are ~~warrants~~swept ~~have~~daily anby ~~exercise price~~its ~~of $0~~lenders.50 ~~and~~While athe ~~term~~Company ofhas ~~three~~generally ~~years.~~ sought to ~~The~~borrow ~~value~~the ofmaximum ~~these~~amounts ~~warrants,~~available asfrom ~~determined~~these ~~using~~facilities ~~the~~during ~~Black-Scholes pricing model~~2006, ~~was charged to expense in~~ the ~~1st quarter of~~ ~~2005. Neither~~facilities ~~the~~have ~~issuance~~been ofinadequate ~~the warrants~~in ~~nor~~providing ~~the~~enough ~~shares~~funds to bemaintain operations, ~~issued~~which ~~upon~~has ~~exercise~~resulted ofin ~~these~~the ~~warrants~~Company ~~have~~having ~~been registered~~to ~~under~~use ~~the~~other ~~Securities~~measures ~~Act. The~~to ~~issuance~~continue ~~was exempt from registration pursuant~~ to ~~Section 4(2) of~~fund ~~the Securities Act~~operations.

~~In March~~ During 2005, the Company ~~entered into a short-term $1 million line of credit with the James R.~~reduced ~~Colpitt~~staff ~~Trust. This~~and ~~line~~closed ofoffices ~~credit~~to ~~is secured~~reduce byits afunds ~~personal non-recourse guaranty by J~~outflow. ~~Michael~~In ~~Moore~~2004, ~~CEO,~~the ~~which~~Company had ~~guaranty~~not ispaid ~~further~~all ~~secured~~employer byand aemployee ~~pledge~~payroll oftaxes ~~certain~~when ~~assets owned by Mr~~due. ~~Moore. In~~ ~~accordance~~The ~~with~~amount ~~the line~~ of ~~credit~~unpaid ~~agreement~~payroll ~~and~~taxes aat ~~board~~March ~~resolution~~31, ~~Mr. Colpitt~~2006, ~~and~~was ~~Mr. Moore~~approximately ~~will receive warrants to purchase 0.25 shares of common stock for each~~ $~~1.00 borrowed~~3, ~~with~~200,000 anplus ~~exercise price equal to $0.02 above the closing market price on the~~penalties ~~trading~~and ~~date of such advance~~interest. ~~For~~ ~~each draw~~In ~~under~~addition, the ~~line~~Company ofis ~~credit~~funding ~~that~~operations ~~exceeds~~by ~~$150,000,~~not ~~the~~paying ~~Company shall issue an~~all ~~additional~~vendors ~~warrant~~for toproducts ~~purchase~~and ~~25,000~~services ~~shares~~ under ~~the~~normal ~~same~~credit terms, asincluding ~~stated~~payments ~~above. Warrants~~on tocapital ~~purchase~~leases ~~275,000 shares~~and ~~(Colpitt~~other ~~Trust-137,500 shares, Mr~~debt. ~~Moore-137,500~~ ~~shares)~~The consequences of ~~common stock~~some ~~at an exercise price~~ of ~~$0.27~~these tactics have ~~been~~or ~~issued~~may toresult ~~the~~in ~~Colpitt~~penalties ~~Trust~~ and/or ~~Mr. Moore in~~fines ~~the~~for ~~1st~~late ~~quarter~~payments ofor ~~2005~~may ininvolve legal ~~connection~~actions ~~with~~against ~~advances on~~ the ~~line of credit~~Company. ~~The~~ ~~value of these warrants~~However, as ~~determined~~management ~~using~~of the ~~Black-Scholes~~Company ~~pricing model, was charged to expense in~~believed ~~the~~that ~~1st~~these ~~quarter~~steps ofwere ~~2005. Neither~~necessary ~~the issuance~~at of the ~~warrants~~time ~~nor the shares~~ to bemaintain ~~issued upon exercise of these warrants have been registered under~~ the ~~Securities~~Company ~~Act. The~~while ~~issuance was exempt from registration~~it ~~pursuant~~sought to ~~Section 4(2) of~~correct ~~the~~its ~~Securities~~cash ~~Act~~flow issues.

In October 2004, the Internal Revenue Service (the ~~2nd~~“IRS”) ~~quarter~~placed liens on the assets of ~~2005,~~two ~~warrants~~of the Company’s subsidiaries. The Company and the IRS reached an agreement that subordinates the claims by the IRS to ~~purchase~~the ~~287~~Company’s senior lenders so that the Company could continue to factor,~~500~~ ~~shares~~and ~~(Colpitt~~borrow ~~Trust-143~~against,~~750~~ its outstanding receivables and fund ~~shares,~~its Mroperations. ~~Moore-143~~ In November and December 2005,~~750~~ ~~shares)~~the IRS placed additional liens on the assets of ~~common~~the ~~stock~~two atsubsidiaries. anAfter ~~exercise~~the ~~price~~Company ofand the IRS entered into negotiations, and with the payment of $~~0.12~~277,000 ~~have~~of ~~been~~the ~~issued~~Company’s topast due tax liability, the ~~Colpitt~~Company ~~Trust~~and the IRS entered into both installment agreements and ~~Mr. Moore~~subordination inagreements ~~connection~~whereby the IRS subordinated its liens to the ~~with~~Company’s ~~advances~~senior onlender so that the ~~line~~Company ofcould ~~credit~~continue to factor, and borrow against, its outstanding receivables. ~~Neither~~ ~~the~~The Company believes these arrangements ~~issuance~~bring ofgreater clarity to the ~~warrants~~Company’s ~~nor~~agreements with the IRS.

28The Company agreed, as part of the subordination agreement, that it would pay all future payroll tax liabilities after the date of the subordination agreement when due. The Company also agreed, as part of the installment agreement, that it would pay $40,000 a month on past obligations. The IRS reserves the right to change or cancel the agreement at any time. If the Company fails to pay any future tax liability on a timely basis, the subordination agreement will expire and the senior lender will stop funding the Company’s operations. Our lender is continuing to fund us. The Company has entered into amendments with our lender that acknowledges the extended subordination agreement with the IRS. Currently, our lender may demand repayment at any time. There can be no assurance that the IRS will not remove their subordination agreement, which would lead the senior lender to remove their financing. This would have

~~the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.~~25

~~ITEM~~a material adverse affect on the ~~3. DEFAULTS~~Company’s ~~UPON~~financial ~~SENIOR~~condition ~~SECURITIES~~and on our ability to continue as a going concern.

~~Dividends due~~The ~~on the~~ Company’s ~~Series A~~has ~~convertible preferred stock~~completed, ~~par~~or ~~value~~is ~~$10, of~~seeking ~~$53~~to complete,~~969~~ ~~have~~certain ~~not~~transactions ~~been~~which ~~declared~~will orpartially ~~paid~~address ~~for~~ the ~~quarter~~going ~~ended March 31,~~concern ~~2005. The~~issues ~~cumulative~~it ~~arrearage from the date of issuance through March 31, 2005, amounts to $219,442 or $1~~faces.~~036 per share of Preferred Stock outstanding.~~

~~ITEM~~During 2004 5and 2005, the Company has entered into several debt agreements. ~~OTHER~~ ~~INFORMATION~~In the 4th quarter of 2004, the Company received a short-term loan from the James R. Colpitt Trust (the “Colpitt Trust”) that was structured as a $550,000 participation loan in the Greenfield Line of Credit. In the 1st and 2nd quarters of 2005, the Company has received additional loans from the Colpitt Trust in the form of a $175,000 promissory note and a $1 million line of credit. The balance of the promissory note was approximately $30,000 as of December 31, 2005, and the advances on the line of credit totaled $975,000 for the twelve months ending December 31, 2005. The Company is currently in default of the terms of these two agreements. In the 3rd quarter of 2005, the Company received additional loans of $560,000 from the Colpitt Trust of which $75,000 was repaid. The Company has also received short-term loans of $75,000 in the 3rd quarter of 2005 from 3 separate individuals and has received a $10,000 short-term loan from J. Michael Moore, CEO of the Company. In the 4th quarter of 2005, we received additional loans of $367,000 from the Colpitt Trust and a short-term loan of $175,000 from a private lender. In the 1st quarter of 2006, the Company has received short-term loans of $353,000 including $38,000 from J. Michael Moore, CEO of the Company. These short-term loans have helped to offset our cash flow issues which have been caused primarily by the decline in revenues experienced.

The Company’s ~~common stock~~has ~~was~~been ~~traded~~focused on ~~the~~reducing ~~American~~expenses. ~~Stock~~Based ~~Exchange~~on ~~(“AMEX”)~~these ~~under~~efforts, ~~the~~we reduced ~~symbol~~operating ~~“HIR”. We~~expenses ~~asked~~by ~~the~~approximately ~~AMEX~~$5.1 tomillion ~~halt~~for ~~trading~~the intwelve ~~our~~months ~~common~~ending ~~stock~~December ~~on June 4~~31, ~~2004,~~2005 toas ~~prevent~~compared ~~trading~~to ~~until~~ the ~~Company~~same ~~had made~~period ~~public~~in ~~certain~~the ~~material~~prior ~~information~~year. In ~~The~~2006 ~~halt~~thusfar, inoperating ~~trading~~expensing ~~continued~~have indeclined ~~place~~by ~~until~~approximately ~~November 9~~$263,000 ~~2004, when~~for the ~~AMEX~~three ~~suspended~~months ~~trading~~ending inMarch ~~our~~31, ~~common~~2006 ~~stock~~ as ~~part~~compared ~~of a process~~ to ~~delist our~~the ~~common~~same ~~stock~~period ~~for being~~ in ~~violation of certain listing requirements. Our common stock was ultimately delisted on February 9, 2005, and has since been trading sporadically on~~ the ~~“pink-sheets” inter-dealer~~ ~~trading~~prior ~~network~~year.

~~ITEM~~Thusfar ~~6. EXHIBITS~~in ~~AND~~2006, ~~REPORTS~~management ONhas ~~FORM 8-K~~also:

~~(a) Exhibits~~• Negotiated and obtained installment agreements on amounts due the IRS,

~~The following~~• Negotiated ~~exhibits~~several ~~are~~settlement ~~provided~~agreements ~~pursuant to provisions of Item 601 of~~on ~~Regulation~~certain ~~S-K:~~debts,

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1		Certification Required by 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

• Entered into a buyout of the Wells Fargo Factoring Agreement to consolidate all lending under a $4.5 million line of credit through Greenfield Commercial Credit at materially lower financing costs, and

~~(b) Reports~~• Initiated ona ~~Form 8-K~~private debt offering.

~~During~~All of these items have helped sustain the ~~three~~Company ~~months~~in ~~ended~~the ~~March 31,~~short-run; ~~2005~~however, significant new capital is needed to sustain the Company ~~filed~~over the ~~following~~next twelve ~~Current~~months ~~Report~~and onthen ~~Form 8-K:~~implement its growth strategies

~~Current~~We are ~~Report~~continuing onto ~~Form 8-K~~evaluate various other financing and restructuring strategies, ~~dated~~including merger candidates and ~~filed~~investments ~~February 3,~~through ~~2005~~private placements, to maximize shareholder value and to provide assistance in pursuing ~~announcing~~alternative anfinancing ~~agreement~~options ~~for~~in ~~the~~connection ~~sale~~with its capital requirements and business strategy. One of ~~substantially~~these ~~all~~strategies is to seek acquisitions by acquiring small companies where we can absorb their back office operations into our own. There can be no assurance that the ~~assets~~Company ofwill ~~Datatek~~be successful in implementing the ~~Group~~changes ~~Corporation~~necessary to ~~Axtive~~accomplish ~~Corporation~~these objectives, ~~Inc~~ or if it is successful, that the changes will improve its cash flow and liquidity.

~~The~~Management ~~following~~believes ~~Current~~that ~~Reports~~the onCompany ~~Form 8-K~~will ~~were~~be ~~filed~~able ~~following~~to ~~March 31,~~secure other financing that will ~~2005~~allow upthe Company to pursue an acquisition strategy, which when combined with improving market conditions and the ~~date~~restructuring of ~~this~~the ~~filing:~~Company’s present businesses, should eventually produce enough new revenues and gross profit to cover the operating funds shortfall the Company is currently experiencing. However, the Company cannot guarantee that funds will be available, that any acquisitions will, if made, be accretive to our cash flow, or that the Company’s creditors will give it the time needed to implement its plan.

~~Current~~In September ~~Report~~2005, onthe ~~Form 8-K,~~Company’s ~~dated~~common ~~and~~stock ~~filed~~commenced ~~April 5,~~trading ~~2005, announcing~~on the ~~extension~~OTC Bulletin Board. The loss of the ~~closing~~AMEX ~~date~~listing ~~for~~has ~~the~~made ~~sale~~our ofability ~~Datatek~~to ~~Group~~use our ~~Corporation~~common stock in acquisitions substantially more difficult. The inability to obtain ~~Axtive~~additional ~~Corporation, Inc~~financing will have a material adverse effect on our financial condition. It may cause us to delay or curtail our business plans or to seek protection under bankruptcy laws.

~~Current~~Our continuation ~~Report~~as ona ~~Form 8-K,~~going ~~dated~~concern ~~and~~is ~~filed~~dependent onupon ~~June 17,~~its ~~2005, announcing~~ability ~~the~~to ~~termination~~obtain additional offinancing ~~the~~and, ~~sale~~ultimately, ofto ~~Datatek~~attain ~~Group~~and ~~Corporation~~maintain ~~to Axtive~~profitable ~~Corporation, Inc~~operations.

2926

~~SIGNATURES~~CRITICAL ACCOUNTING POLICIES

~~Pursuant~~Revenue Recognition toand ~~the~~Cost ~~requirements~~ of ~~the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~Services

		Diversified Corporate Resources, Inc.
	By	/s/ Michael C. Lee
		Michael C. Lee
June 27, 2005		Vice President, Treasurer, Secretary and Chief
		Financial Officer
		(Principal Financial and Accounting Officer)

We derive our revenues from two sources: direct placement and temporary and contract staffing. We record revenues for temporary and contract staffing services at the gross amount billed the customer in accordance with EITF 99-19, Reporting Revenues Gross as a Principal Versus Net as an Agent. We believe this approach is appropriate because we identify and hire qualified employees, select the employees for the staffing assignment, and bear the risk that the services provided by these employees will not be fully paid by customers.

30Fees for direct placement of personnel are recognized as income at the time the applicant accepts employment. Revenue is reduced by an allowance for estimated losses in realization of such fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period). Fees charged to clients are generally calculated as a percentage of the new employee’s annual compensation. There are no direct costs for direct placements. Commissions paid by us related to direct placements are included in selling expenses.

Revenues from temporary and contract staffing are recognized upon performance of services. The direct costs of these staffing services consist principally of direct wages and related payroll taxes paid to non-permanent personnel.

Allowances on Accounts Receivable

The Company accrues an allowance for estimated losses on the realization of permanent placement fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period) and an allowance for doubtful accounts for potential losses due to credit risk. The Company establishes the allowance for estimated losses on permanent placement fees based on historical experience and charges the allowance against revenue. The allowance for doubtful accounts is based upon a review of specific customer balances, historical losses and general economic conditions. Actual losses may be different than the estimates used to calculate the allowances.

Stock-Based Employee Compensation

Effective January 1, 2006, the Company adopted Statement No. 123 (R) which will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. This statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We do not believe that the adoption of FASB Statement 123 (R) will have a material effect on our results of operations since the Company had followed FASB Statement No. 123.

Effective January 1, 2003 through December 31, 2005, the Company adopted the fair value recognition method of accounting for stock-based employee compensation. Under the modified prospective method of adoption selected by us, stock-based employee compensation cost recognized in 2003 is the same as that which would have been recognized had the fair value method been applied to all options granted, modified or settled after December 31, 1994. The actual expense charge depends on the method and factors used to calculate the fair value of the options at their grant date. We begin recognizing such compensation cost as if all grants will entirely vest.

Self-Insurance Reserves

We are self-insured for our employee medical coverage. Provisions for claims under the self-insured coverage are based on our actual claims experience using actuarial assumptions followed in the insurance industry, after consideration of excess loss insurance coverage limits. Management believes that the amounts accrued are adequate to cover all known and incurred but unreported claims at March 31, 2006.

Goodwill, Non-Compete Agreements and Property and Equipment

These assets are subject to periodic review to determine our ability to recover their cost. We must make estimates about their recovery based on future cash flows and other subjective data. We, in the future, may determine that

some of these costs may not be recoverable, which may require us to adjust their capitalized value by writing off all or a portion of their value. We may also determine that the lives being used to amortize property and equipment do not reflect actual usage of these assets and may adjust their value accordingly.

Income Taxes

Deferred income taxes are provided for temporary differences between the basis of assets and liabilities for tax and financial reporting purposes. A valuation allowance is established for any portion of the deferred tax asset for which realization is not likely. We maintain a 100% valuation allowance against our deferred tax assets currently. The valuation allowance is subject to periodic review, and we may determine that a portion of our deferred tax asset may be realizable in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board issued statement of Financial Accounting Standard No. 151, “Inventory Costs”. The new statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current-period charges and requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. This statement is effective for fiscal years beginning after June 15, 2005. We do not expect adoption of this statement to have a material impact on our financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. This statement replaces FASB Statement No. 123 and supersedes APB Opinion No. 25. Statement No. 123 (R) will require the fair value of all stock option awards issued to employees to be recorded as an expense over the related vesting period. This statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We do not believe that the adoption of FASB Statement No. 123 (R) will have a material effect on our results of operations since the Company currently follows FASB Statement No. 123.

FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “continue,” “may,” “should,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from what management currently believes. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that these future events will transpire as expected. Such risks and uncertainties include, among other things, those described herein and in the “Risk Factors” section and elsewhere in our Form 10-K for the year ended December 31, 2005, which should be read in conjunction with this Form 10-Q. Should one or more of those risks and uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those described herein. Subsequent written and oral “forward-looking” statements attributable to the Company, or persons acting on its behalf, are expressly qualified by the Risk Factors. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

enter into a line of credit and a participation agreement that is based on prime. To the extent we have borrowed against that line of credit and participation agreement, any change in the prime rate will increase our borrowing cost. Based on the balance of the line of credit and participation agreement at March 31, 2006 of $2,853,900, a 1% increase in the prime rate would have an approximate $28,500 annual impact on our interest expense.

Item 4. Controls and Procedures

At the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective in timely accumulating, processing, recording and communicating to them material information related to the Company and its consolidated subsidiaries that are required to be disclosed by the Company in reports that it files or submits under the Exchange Act.

The Company’s principal executive officer and principal financial officer believe that the procedures followed by the Company provide the necessary assurance that there are no material misstatements in the Company’s audited consolidated financial statements on Form 10-K or in the Company’s unaudited condensed consolidated financial statements included in this report on Form 10-Q for the quarterly period ended March 31, 2006. Management believes that there have not been any changes in the Company’s internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the year ended December 31, 2003, two actions were filed against several employees of the Company seeking to enforce certain non-compete covenants between the Company’s employees and their former employer. One of these actions included the Company and its Chief Executive Officer alleging that they interfered with the non-compete contracts. This case, Oxford Global Resources, Inc. v. Michelle Weekley-Cessnum, et.al., was filed in the United States District Court for the Northern District of Texas, Dallas Division. The parties are currently attempting to finalize the terms of a settlement of both of these cases.

Also, as disclosed in a press release and Form 8-K filed December 29, 2005, a preferred shareholder, HIR Preferred Partners, L.P, filed an action against certain officers, employees and directors of DCRI, and certain lenders asserting various claims arising out of Plaintiff’s purchase of preferred shares of DCRI. HIR Preferred is demanding repayment of its $550,000 investment, unpaid dividends accrued since February 2004, attorney fees, interest, and other costs and damages. The Company believes this claim is without merit and intends to vigorously defend itself.

As of March 31, 2006, the Company is also a party to various other litigation matters involving claims against the Company. With respect to those matters, management believes the claims against the Company are without merit and/or that the ultimate resolution of these matters will not have a material effect on the Company’s consolidated financial position or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuance of Options

On January 1, 2006, the Company granted Stock Options to Samuel E. Hunter, a director of the company, for his anniversary grant. The company granted 25,000 shares with an exercise price of $0.07 per share.

On February 19, 2006, the Company granted Stock Options to John M. Gilreath, a director of the company, for his anniversary. The company granted 25,000 shares with an exercise price of $0.09 per share

Issuance of Warrants

On January 16, 2006, warrants to purchase 60,000 shares of common stock at an exercise price of $0.13 were issued to Barbara Coe as consideration for a $150,000 short-term borrowing. On March 16, 2006, warrants to purchase 3,500 shares of common stock at an exercise price of $0.10 were issued to Barbara Coe as consideration for a $35,000 short-term borrowing. Neither the issuance of the warrants nor the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

On February 27, 2006, warrants to purchase 1,050,000 shares of common stock at an exercise price of $0.10 were issued to twelve individuals as consideration for past and future professional services, legal services, or consulting services provided to the Company. Neither the issuance of the warrants nor the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

On March 2, 2006, warrants to purchase 23,000 shares of common stock at an exercise price of $0.10 were issued to Gene Langkop as consideration for $50,000 of short-term borrowings. Neither the issuance of the warrants nor the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

In March 2006, warrants to purchase 10,000 shares of common stock at an exercise price of $0.10 were issued to two debtors as consideration for $100,000 of short-term borrowings. Neither the issuance of the warrants nor the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

During the first quarter of 2006, two employees were issued warrants to purchase 30,000 shares of common stock, each, at exercise prices ranging from $.09 to $0.18 as consideration for a payment plan on obligations due. Neither the issuance of the warrants nor the shares to be issued upon exercise of these warrants have been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Dividends due on the Company’s Series A convertible preferred stock, par value $10, of $52,969 have not been declared or paid for the quarter ended March 31, 2006. The cumulative arrearage from the date of issuance through March 31, 2006, amounts to $431,000 or $2.03 per share of Preferred Stock outstanding.

Colpitt Short-Term Promissory Note 1 from the James R. Colpitt Trust with a remaining principal balance of approximately $29,000 as of March 31, 2006 is currently in default. Interest incurred but unpaid is roughly $8,000.

The Colpitt Line of Credit from the James R. Colpitt Trust with a remaining principal balance of approximately $975,000 as of March 31, 2006 is currently in default. Interest incurred but unpaid is roughly $113,000.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits

The following exhibits are provided pursuant to provisions of Item 601 of Regulation S-K:

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities

	Exchange Act.
32.1	Certification Required by 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

SIGNATURES

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

		Diversified Corporate Resources, Inc.


	By	/s/ Michael C. Lee
June 7, 2006		Michael C. Lee Vice President, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer)

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