UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-13984

DIVERSIFIED CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)

TEXAS		75-1565578
(State of other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

10670 NORTH CENTRAL EXPRESSWAY, SUITE 600

DALLAS, TEXAS 75231

(Address of principal executive offices)

Registrant’s telephone number, including area code: (972) 458-8500

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

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

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

Indicate by 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), and (2) has been subject to such filing requirements for the past 90 days. o Yes ý No

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

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

Yes o No ý

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2004, was approximately $2,227,000. The amount shown is based on the closing price of such stock on June 4, 2004 ($0.96), the date trading of the Company’s stock on the American Stock Exchange was halted. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and 10% beneficial owners are affiliates.

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.

DOCUMENTS INCORPORATED BY REFERENCE

None.

PART 1

FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K 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 in the “Risk Factors” section below and elsewhere in this Form 10-K. 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. These forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. 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 1. Business

Diversified Corporate Resources, Inc. (the “Company,” “our,” “we,” or “us,”) 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. During 2004, we offered two kinds of staffing solutions: direct placement services (“permanent placements”) and temporary and contract staffing.

The Company is a Texas corporation, which was incorporated in 1977 under the name Diversified Human Resources Group, Inc. We changed to our current name in 1994. We had historically been engaged in the permanent and temporary placement of personnel until the sale of substantially all of our assets in 1991. By 1993, we were again engaged in the permanent and temporary placement of personnel in various industries.

Direct placement is the traditional contingency search, recruiting and placement service, where we obtain a written order to fill a specific job, recruit suitable applicants and facilitate the placement. Our fees range from 15% to 35% of the first year’s annual salary of the newly placed employee. We generally offer our clients a 30-day guarantee during which we agree to replace, without additional charge to the client, any newly placed employee who leaves the job. If we are unable to replace the employee, we will generally refund the client’s fee, or a prorated portion thereof, depending upon the circumstances. Typically, direct placements are highly dependent on current economic and employment trends but carry a high profit margin. Due to its high margins, our profitability is highly dependent on revenues from direct placements.

Temporary staffing is a service where we place personnel for a relatively short period of time, ranging from several weeks to several months, with clients seeking to satisfy a temporary increase in work volume, offset a sudden loss of personnel, or, in some cases, pre-screen for a permanent placement. Temporary staffing orders are typically placed by one of our IT, engineering or nursing clients. Substantially all temporary personnel placed by us become our employees, where we pay all employment costs, including hourly wages, unemployment taxes, social security taxes and fringe benefits.

Contract staffing is a service where we place personnel to fill the needs of a client’s specific large project, or chronic staff augmentation need, ranging in duration from four weeks to more than one year. A typical placement begins with our response to a client’s request for proposal and culminates in a contract which does not specify a fixed volume of hours but does contain terms, pricing and other criteria, including a limited guarantee of an individual’s job

performance over a relatively short period of time. The contract personnel we recruit and place may become our employees, where we pay all employment costs, including hourly wages, unemployment taxes, social security taxes and fringe benefits. In some cases, due to client specifications, or when certain information technology professionals satisfy applicable requirements, contract personnel are classified as independent contractors. Contract revenues typically provide a more stable and constant revenue base but at a lower profit margin.

At the end of 2004, we operated offices in the following locations:

Arizona		Phoenix
California		Palm Desert
Colorado		Denver
Georgia		Atlanta
Pennsylvania		Philadelphia
Texas		Dallas, Houston and Austin

The 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. In the first quarter of 2004, we expanded into California with the acquisition of the assets of a nurse staffing business (see discussion below). During the third quarter of 2004, we consolidated the Raleigh office with the Atlanta office.

Historically, we have provided our two staffing solutions within four core industries: General Engineering and Technology (“General E&T”), Information Technology (“IT”), Biological Technologies and Pharmaceuticals (“Bio/Pharm”) and Telecommunications (other than IT-related) (“Telecom”). In the fourth quarter of 2002, we exited the Telecom industry through the sale of our Mountain Division (“Mountain”). Concurrently, 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. The Company added another core industry in the first quarter of 2004 with the acquisition of Medical Resources Network, Inc. which specializes in the placement of traveling nurses. 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. 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. As a result, our Bio/Pharm and Nursing revenues have grown to 37.3% of our 2004 permanent placement revenues from 2.9% in 2002. Additionally, Bio/Pharm and Nursing revenues have grown to 34.3% of our 2004 temporary/contract revenues from 0.0% in 2002. These percentages exclude the operations of our Datatek division, as discussed below. We continue to look for acquisitions and/or affiliations within the healthcare sector.

As of the date of this filing, the Company is in negotiations to sell its Datatek division. See the discussion in “Business Operations” and “Discontinued Operations-Datatek” below. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Disposal or Impairment of Long-Lived Assets, we are accounting for this division as discontinued operations in this annual report. The following is a breakdown of the relative percentage contributions to our gross revenue in 2004 between permanent placement and temporary and contract revenue in our core industries without the Datatek division:

	Permanent Placement		Temporary/Contract
	Gross Revenue		Gross Revenue
General E&T	40.9	%	26.7	%
IT	21.6	%	39.1	%
Bio/Pharm	36.7	%	12.9	%
Nursing	0.6	%	21.3	%
Other	0.2	%	0.0	%
Total	100.0	%	100.0	%

In addition, you should be aware that we may not be able to continue as a going concern over the next twelve months. See the discussion in “Business Operations” below.

Business Operations

We have experienced net losses from operations since 2001. We believe these losses were primarily the result of the effects of the recession, which began in 2000, on the employment services industry. Although we have down-sized our operation over the last four years to try to match our overhead to our revenue, we have not been able to reduce fixed costs enough to offset lower revenue and gross profit. The profitability of the Company is highly dependent on its direct placement sales, which only recently have started to show some improvement. We believe that a combination of improved market conditions, restructuring of our present businesses and key acquisitions/divestitures have led to declining losses compared to the 1^st quarter of 2004 and will eventually enable us to become profitable again. There can be no assurance that our business plans will be successful.

We believe that the next twelve months will be a critical time period for the Company as we seek to return our stock to a publicly quoted status (expected in June 2005), divest certain non-core assets, and obtain additional funds through debt or equity financing. Without obtaining additional funds through debt or equity financing or through the sale of assets, we will be unable to continue as a going concern. See the discussion concerning our ability to continue as a going concern and our plans addressing the issue in “Liquidity and Capital Resources” in Item 7 and in the audited consolidated financial statements in Item 8 contained herein. The inability to obtain additional funds could have a material adverse affect on us.

We have completed, and are seeking to complete, certain transactions which will partially address the going concern issues we face.

In December 2003, we executed a term sheet with certain accredited investors whereby we agreed to sell them up to $1,650,000 in a new issue of our preferred stock. The preferred stock would be convertible into ten shares of our common stock. The sale was closed in March 2004 and was ultimately oversubscribed. The sale generated gross proceeds to the Company in excess of $2.0 million. This capital was used for general working capital purposes and to acquire certain assets of Medical Resources Network, Inc.

In the first quarter of 2004, we acquired all of the contracts and related receivables of Medical Resource Network, Inc. (“MRN”), a Southern California-based company specializing in the placement of traveling nurses. MRN maintained contract relationships with hundreds of hospitals throughout the country but lacked the financial resources to grow. This acquisition provided us with a new core industry (Nursing) and the associated revenues from MRN represented 21.3% of total temporary and contract gross revenues for the year.

In late June 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 3^rd quarter and some phases of the restructuring occurred in later periods, the primary effects of the cost savings will not be noticeable until later periods. Every office and agency of the Company was evaluated resulting in: (i) the closure of several under-performing sales offices and agencies, (ii) the downsizing of staff, (iii) newly negotiated contracts at lower rates, including certain leases, and (iv) other cost saving measures. We believe that a notable improvement will be seen in our operating expenses for the 1^st quarter of 2005. All of these measures have been implemented to improve operating results, lower losses, improve cash, demonstrate operating efficiencies, and increase our ability to raise future capital. However, no assurance can be given that this lowered operating expense will continue in this trend in the future.

The Company is currently in negotiations to sell one of its wholly-owned subsidiaries, Datatek Group Corporation (“Datatek”). Datatek is primarily involved in temporary and contract staffing and represents approximately 60% of our 2004 temporary and contract staffing gross revenue. See discussion in “Discontinued Operations - Datatek” below.

Additionally, in the 4^th quarter of 2004, the Company entered into a short-term loan agreement with the James R. 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 James R. Colpitt Trust consisting

of a $175,000 promissory note and a $1 million line of credit secured by certain assets of J. Michael Moore, CEO of the Company.

In the second quarter of 2005, the Company will attempt to regain its publicly traded status. This change should increase the Company’s ability to raise capital.

Since 2000, we have largely transformed the Company from its historical roots in direct placement services and dependence on the telecommunications industry to a more balanced revenue model revolving around contract staffing in various industries. For the first 21 years 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 50%, the revenues are volatile and difficult to forecast and finance. For the 2004 fiscal year, approximately 63% of our revenues were derived from temporary and contract staffing and 37% of our revenues were generated from direct placement activities. 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.

Future Business Strategy

Management’s strategy going forward involves three elements: those related to our balance sheet and capitalization; those related to staffing the organization; and those related to our revenues, market presence, margins and operating metrics.

a) Balance Sheet and Capitalization

Improving our balance sheet is a priority in order to attract the additional capital needed to improve our financial viability and to allow us to implement our growth strategy (see “Revenues, Margins and Metrics” below). As part of this process, we raised more than $2.0 million in March 2004 through the sale of convertible preferred stock. In addition, in late 2003, a potential contingent liability, as a result of the Ditto litigation was eliminated (see Item 3 - “Legal Proceedings” below). We believe that a sale of Datatek, as described in “Discontinued Operations – Datatek” below, will significantly improve our balance sheet by making cash available to bring a majority of our past due liabilities current and reduce our debts to third parties. We also believe a sale will reduce our intangible assets, increase our tangible assets and reduce our total liabilities. As a result of our improved financial condition if a sale is finalized, we should be able to enter into new credit agreements with lenders on better terms than are currently available to us.

b) Staffing and New Business Development

We are constantly seeking ways to upgrade our organization through aggressive recruitment of talented professional recruiters. We look for individuals with strong “corporate books” of business. We have the systems in place to track various performance metrics at the individual recruiter level. We also monitor productivity at the agency level, the regional level and the industry level. We endeavor for every manager to understand the interrelationship between “team building” and productivity. Managers are instructed to assess teams and individual personalities in order to find the right combination of personalities and skill sets that will meet the client’s needs. Corporate management tracks the organization’s macro efficiency through several key “efficiency metrics” which include: gross margin, net margin and operating income at the agency level. Management also reviews actual and projected revenues for direct placements versus temporary and contract staffing in each of our core industries in order to determine potential gross profits and where management needs to focus its attention for future profitability. Management believes that these metrics allow it to gauge our ability to generate cash from our core operations. Selling and administrative expenses and other overhead costs, financing costs and other corporate activities are assessed separately and distinctly for their financial impacts.

c) Revenues, Margins and Metrics

Management believes that the worst of the recession is over. We expect acquisitions and other business combinations to represent the bulk of our growth going forward. During 2004, we experienced some year-over-year growth in total revenue of our existing direct placement business. Through growth (both in the form of acquisitions and internal) we plan to seek direct placement revenues of approximately 25% of total net revenues and at least $10 million. We also seek to grow our temporary and contract revenues to at least $30 million of total net revenues.

Management believes that profitability will depend on maintaining sufficient contract revenues to cover all fixed costs and on achieving a proper balance with direct placement revenues. A sale of Datatek will impact our ability to cover our fixed costs but is necessary in order to allow us to improve our financial condition and to expand our business in areas where management feels margins will be better. Therefore, we are actively seeking merger and/or acquisition candidates in our target industries that meet our goals for margins and customer quality.

Even though margins in the temporary and contract staffing business are lower than in the direct placement business, the revenue is recurring and more predictable and generates margins that help cover fixed costs. We also have seen that as economic conditions decline, a higher mix of temporary and contract staffing revenue is essential to survival in the staffing industry; however, as the market improves, a shift to a higher mix of direct placement revenue should be implemented. Management will, therefore, focus concurrently on its stated acquisition strategy, improving core productivity of its existing businesses, as well as our revenue mix.

To obtain greater visibility with our customers, we have also been actively seeking to be designated as an “approved vendor” with some of our larger current and prospective clients, offering to undergo the rigorous review of our processes and capabilities that such designation generally entails. Overall, we serve our customers by maintaining and growing our database of approximately 850,000 highly specialized individuals in the technology, engineering and healthcare industries. These individuals have skill sets to place primarily in the $50,000 - $200,000 salary range for full-time positions or approximately $50 - $175 per hour on temporary assignments.

Trademark and Marketing

Our MAGIC trademark, which is registered with the United States Patent and Trademark Office, is and will be the brand name of our business.

Historically, our marketing efforts have been implemented at the local agency level and relied primarily on telephone solicitation, referrals from other Company offices and, to a lesser extent, yellow pages, newspaper advertising, and direct mail. Currently, we operate under several subsidiary names, including Datatek, Texcel, ISCC, and Management Alliance plus several agency names. We have begun a review to determine the most effective way to capitalize on the strong local brands of our existing business units, with a view towards creating an organization with a small family of established brands and one national identity: MAGIC.

Discontinued Operations – Datatek

Datatek Group Corporation (“Datatek”), a Texas corporation and wholly-owned subsidiary of the Company, derives a majority of its income from information technology contract staffing. Datatek is based in Phoenix, Arizona and was acquired by the Company in 2000. The Company entered into a definitive agreement with Axtive Corporation, Inc. (“Axtive”), on February 1, 2005, to purchase substantially all of the assets of Datatek for consideration consisting of up to $5,000,000 in cash, and 15,333,330 shares of Axtive common stock. As a result, Datatek has been presented as a discontinued operation in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Disposal or Impairment of Long-Lived Assets. Under this statement, the operating results of Datatek are presented separately from continuing operations in the accompanying financial statements for all periods presented.

On June 15, 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.

The Company cannot provide any assurances that these negotiations will ultimately lead to a sale of the subsidiary.

Datatek represented approximately 60% of our temporary and contract staffing gross revenue in 2004. A sale of Datatek will at least temporarily reduce our exposure to the information technology business and allow us to expand our temporary and contract staffing revenue sources in areas where management feels margins will be better. This will also improve our immediate financial condition; however, it will also remove a significant source of revenue which will have a negative impact on our immediate operating results. This will mean that we will have to seek additional revenues through further acquisitions or lower our fixed costs dramatically in order to achieve future profitability.

Competition

The employment services industry is very competitive and fragmented. There are limited barriers to entry and new competitors frequently enter the market. A significant number of our competitors possess substantially greater resources than the Company. Additionally, we face substantial competition for potential clients and for technical and professional personnel from providers of outsourcing services, systems integrators, computer systems consultants, other providers of staffing services, temporary personnel agencies and search firms, which range from large national companies to local employment staffing entities. Large national companies that offer employment staffing services include the appropriate technical services, information technology and direct placement business units of Adecco SA, CDI Corp, MPS Inc., Kforce Inc., and Manpower Inc. as well as several other privately held firms. Other companies we compete with include Butler International, Inc., General Employment Enterprises, Inc., RCM Technologies, Inc., Robert Half International Inc., Professional Staff, PLC, Comforce Corp., Kelly Services, Inc., National Technical Systems, Inc., and TechTeam Global, Inc. Local employment staffing entities are typically operator-owned, and each market generally has one or more significant competitors. In addition, we compete with national clerical and light industrial staffing firms, such as Spherion Corporation and Administaff Inc., which also offer contract staffing services. National and regional consulting firms also offer certain employment staffing services. In addition, we are always exposed to the risk that certain of our current and prospective clients will decide to hire full-time employees who will provide the relevant services internally. There can be no assurance that we will be able to continue to compete effectively with existing or potential competitors.

Regulation

Most states require direct placement firms to be licensed in order to conduct business or bid on certain government contracts. Such licenses may be revoked upon material noncompliance with state regulations. Any such revocations would have a materially adverse effect on our business within that market. We believe that we are in substantial compliance with all such regulations and possess all licenses necessary to engage in the direct placement of personnel in the jurisdictions in which we do business. Various government agencies have advocated proposals from time to time to license or regulate the placement of temporary personnel. We do not believe that such proposals, if enacted, would have a material adverse effect on our business.

Employees

We had 147 full-time employees as of December 31, 2004. Of these employees, 103 were personnel consultants and office managers and 44 were administrative employees located in eight offices nationwide. We consider our relations with our employees to be good.

Additionally, we have non-permanent and contract personnel employed from time to time by our Company for placement with clients. As of December 31, 2004, we had 131 temporary and contract personnel on assignment providing staffing services to our clients.

Risk Factors

We will require additional financing to conduct our operations and fund acquisitions.

We do not currently have sufficient financial resources to fund our operations for the next twelve months without obtaining additional debt or equity funding or selling a portion of our assets. While our lenders continue to supply our capital needs, we received a notice of default from one of our lenders and have entered into a forbearance agreement with another lender during 2004. Our factoring and borrowing arrangements have not supplied adequate funds for our operations. We have had to use other means to provide liquidity.

We have not paid certain vendors when due and have withheld from the IRS our employer and employee payroll taxes. The amount of unpaid payroll taxes as of December 31, 2004 was approximately $3,558,000 plus penalties and interest. The IRS placed a lien on the assets of two of our subsidiaries in October 2004, although that lien is currently subordinated to our senior lenders. As part of the agreement with the IRS, we have made timely payments on all payroll taxes that arose after the date of the subordination agreement. If we fail to maintain timely payments of all federal tax liabilities, the IRS will cancel its subordination agreement, which will cause our senior lenders to cut off our funding. To repay the IRS, provide operating funds and continue our acquisition strategy, we need to find additional financing. A sale of Datatek, discussed above, may provide the needed capital to bring certain obligations current. However, due to the reduction in revenues and gross profit that Datatek has been generating, our future cash flows will be inadequate without further acquisitions or lowering our fixed costs dramatically.

Management believes that we will be able to secure other financing once a sale of Datatek takes place. Such financing will allow us to pursue an acquisition strategy, which, when combined with improved market conditions and the restructuring of our present businesses, would 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. The inability to obtain additional financing will have a material adverse effect on our financial condition. It may cause us to delay or curtail our business plans. It could also force us to seek protection under bankruptcy laws.

Competition for acquisition opportunities may restrict the Company’s future growth by limiting our ability to make acquisitions at reasonable valuations.

Our business strategy includes increasing market share and presence in the staffing industry through strategic acquisitions of companies that complement or enhance our business. We have historically faced competition for acquisitions. In the future, competition could limit our ability to grow through acquisitions or could raise the price of acquisitions to a level where they are less accretive or possibly non-accretive to us. In addition, we may be limited by our ability to obtain financing to consummate desirable acquisitions.

The recent economic downturn, particularly in the information technology (“IT”) sector, has adversely affected the demand for the Company’s services.

Historically, the general level of economic activity has significantly affected the demand for employment services. As economic activity slows, the use of temporary and contract personnel tend to be curtailed before permanent employees are laid off. The current economic downturn has adversely affected the demand for temporary and contract personnel, which in turn has had an adverse effect on our operating results and financial condition. We expect that future economic downturns will continue to have similar effects. In addition, the slowdown in economic activity reduces our direct placement services as well as companies do not hire new employees. Overall, the recent economic downturn resulted in lowered demand for our services. There can be no assurance that demand will increase with improving economic conditions.

We have experienced the economic slowdown in the IT industry that reflected the continued rationalization of excess capacity in this industry and a general reduction in demand for personnel with expertise in leading hardware, software or networking technologies. This has reduced the demand for our services, and there can be no assurance that demand will increase with improving economic conditions. We believe that a sale of Datatek, if consummated, will significantly reduce our exposure to the IT industry and allow us to re-evaluate our revenue sources.

The Company’s current market share may decrease as a result of limited barriers to entry for new competitors and a discontinuation of clients’ outsourcing of their staffing needs.

We face significant competition in the markets we serve and there are few barriers to entry for new competitors. The competition among staffing services companies is intense. We compete for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search companies and other providers of staffing services. A number of our competitors possess substantially greater resources than we do. We may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fill our clients’ needs. We also face the risk that certain of our current and prospective clients will decide to fill their needs internally. Further, many staffing customers are now seeking an “offshore” solution, which we do not offer, to support their technology and business process functions. Minimal barriers to entry for new competitors and client demands for lower pricing will continue to exert pressure on our business.

The Company faces significant employment liability risk.

We employ and place people in the workplaces of other businesses. An inherent risk of such activity includes possible claims of errors and omissions, misuse of client proprietary information, misappropriation of funds, discrimination and harassment, employment of illegal aliens, theft of client property, other criminal activity, torts or other claims. We have policies and guidelines in place to reduce our exposure to such risks. However, failure of any employee or personnel to follow these policies and guidelines may result in: negative publicity; injunctive relief; the payment by us of monetary damages or fines; or other material adverse effects upon our business. Moreover, we could be held responsible for the actions at a workplace of persons not under our immediate control. To reduce our exposure, we maintain insurance covering general liability, workers compensation claims, errors and omissions, and employee theft. Due to the nature of our assignments, in particular, access to client information systems and confidential information, and the potential liability with respect thereto, we may not be able to obtain insurance coverage in amounts adequate to cover any such liability on acceptable terms. Our move into healthcare staffing services also exposes us to increasing litigation in this area. In addition, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility.

The Company may be adversely affected by government regulation of the staffing business and the workplace.

Our business is subject to regulation and licensing in many states. While we have had no material difficulty complying with regulations in the past, there can be no assurance that we will be able to continue to obtain all necessary licenses and approvals or that the cost of compliance will not prove to be material. If we fail to comply, such failure could have a material adverse affect on our financial results. We could also be impacted by changes in reimbursement regulations by states or the federal government which make it difficult for our healthcare customers to pay us or require us to lower our rates. In general, increased government regulation of the workplace, or of the employer-employee relationship, could have a material adverse affect on our business.

The Company may not be able to recruit and retain qualified personnel.

We depend upon the abilities of our staff to attract and retain personnel, particularly technical and professional personnel, who possess the skills and experience necessary to meet the staffing requirements of our clients. We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing client needs and emerging technologies. We expect continued competition for individuals with proven technical or professional skills for the foreseeable future. If qualified personnel are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material adverse affect on our business.

The Company relies on short-term contracts with most of our clients.

Because long-term contracts are not a significant part of our business, future results cannot be reliably predicted by considering past trends or extrapolating past results. Further, our reliance on short-term contracts exerts continued pressure on us when we try to renew contracts with existing clients who may seek better terms at each renewal.

The Company has a high concentration of revenues with a limited number of clients so that customer retention is key.

The top six customers of the Company are all customers of our Datatek division and they accounted for approximately 42% of our total 2004 revenue including Datatek. As such, a loss of one or more of these customers could have a material adverse impact on our business. Our high customer concentration, combined with the inherent difficulty of adding new customers in a tough external environment, means retention of existing customers is critical. A sale of Datatek, if consummated, will eliminate all of these top six customers. This will mean that we must replace a significant amount of our revenue.

The Company may face difficulties integrating acquisitions into existing operations and face unforeseen problems that can accompany acquiring another company.

We continually evaluate opportunities to acquire staffing companies that complement or enhance our business. These acquisitions involve numerous risks, including:

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

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

• diversion of management attention from existing operations; and

• assumption of liabilities and exposure to unforeseen liabilities of acquired companies.

Although not expected, the potential operational, cultural and financial strains of any acquisition may ultimately have a negative impact on our business and financial condition.

The Company depends on the proper functioning of its information systems.

We are dependent on the proper functioning of information systems in operating our business. Critical information systems are used in every aspect of our daily operations, including the identification and matching of staffing resources to client assignments, customer billing and consultant payment functions. Our information systems are protected through physical and software safeguards, including the use of a third party data storage service. However, we and our systems are still vulnerable to natural disasters, fire, terrorist acts, power loss, telecommunications failures, physical or software break-ins, computer viruses and similar events. If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily impact our ability to identify placement opportunities, to maintain billing records, and to bill for services. In addition, we depend on third party vendors for certain functions whose future performance and reliability we cannot warranty.

The Company’s success depends upon retaining the services of its management team.

We are highly dependent on our management team and expect that continued success will depend largely upon their efforts and abilities. The loss of the services of certain key executives for any reason could have a material adverse effect upon us. Our success also depends upon our ability to identify, develop, and retain qualified operating employees, particularly management, client servicing, and candidate recruiting employees. We expend significant resources in the recruiting and training of our employees, as the pool of available applicants for these positions is limited. The loss of some of our key operating employees could have an adverse effect on our operations, including our ability to establish and maintain client and candidate professional and technical relationships.

Significant control over the Company is exercised by a limited number of persons.

A majority of our issued and outstanding voting shares are held by a limited number of shareholders. By acting in concert, these shareholders have the ability to control the outcome of matters submitted to a vote of shareholders.

The Company may be adversely affected by material liabilities under its self-insured programs.

We provide medical coverage to our employees through a partially self-insured preferred provider organization. If we become subject to substantial medical coverage liabilities, our financial results may be adversely affected.

However, we have excess loss insurance coverage which currently limits our liability for one individual in any one year to $55,000. There is an aggregate limit on the excess loss coverage of approximately $1,250,000.

The Company has not made contributions to its 401(k) plan and deferred compensation plan on a timely basis.

We have not made some of our 401(k) plan contribution payments on a timely basis, which could result in penalties from the US Department of Labor. To avoid or reduce any potential penalties, we may have to make additional contributions for employees for investment losses, if any, they may have suffered as a result of the late payments. At December 31, 2004, we had not remitted approximately $132,000 of employee contributions and company matching contributions to the 401(k) plan for the period from August to December 2004. We have also not made certain deferred compensation plan contributions on a timely basis. At December 31, 2004, we had not remitted approximately $24,000 of employee contributions and company matching contributions.

Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities.

We are subject to periodic federal, state and local income tax audits for various tax years. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could have a material adverse affect on us.

The Company’s stock has limited liquidity.

Our common stock was traded on The American Stock Exchange (“AMEX”) under the symbol “HIR”. We asked the AMEX to halt trading in our common stock on June 4, 2004, to prevent trading until the Company had made public certain material information. The halt in trading continued in place until November 9, 2004, when the AMEX suspending trading in our common stock as part of a process to delist our common stock 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 network. As a result, until the stock begins trading on the Over The Counter Bulletin Board (“OTCBB”) electronic inter-dealer trading network, our shareholders will experience significant illiquidity. In addition, loss of the AMEX listing has made our ability to use our common stock in acquisitions substantially more difficult.

If the Company obtains new debt or equity financing, that financing may dilute current shareholders or may limit the Company’s right to pay future dividends.

Any future issuances of equity securities may result in a dilution of our current shareholders. In addition, the issuance of new equity or debt securities may also limit the dividends that we may pay, prevent us from redeeming or purchasing our own stock or result in a change in control of the Company.

We issued convertible preferred stock in March 2004. Each share of preferred stock has 10 votes on any matter that is subject to stockholder approval, thus diluting the voting rights of the current shareholders. In addition, the dividends on our preferred stock issued in 2004 are in arrears; therefore, we cannot pay dividends on, make other distributions to, redeem or purchase our common stock.

We have also signed a new debt agreement with a senior lender that prevents us from paying dividends on our common stock or purchasing our own stock.

Potential increase in costs related to being a public company.

The Company may incur substantial additional costs related to compliance with the provisions of the Sarbanes-Oxley Act. These additional costs relate to higher audit fees and legal fees we will incur as well as for the cost involved in complying with the audit of our internal controls that will be required for the 2006 fiscal year. In addition, the audit of our 2003 and 2004 financial statements was more expensive than anticipated and included additional personnel costs and professional service fees required to complete the preparation of these financial statements and to prepare the 2004 quarterly financial statements.

Significant increases in payroll-related costs could adversely affect the Company’s business.

We are required to pay a number of federal, state, and local payroll and related costs, including unemployment taxes, workers compensation insurance, FICA, and Medicare, among others, for our employees and personnel. Significant increases in the effective rates of any payroll-related cost likely would have a material adverse effect upon us. Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel. Recent federal and state legislative proposals have included provisions extending health insurance benefits to personnel who currently do not receive such benefits. We may not be able to increase the fees charged to our clients in a timely manner and in a sufficient amount to cover increased costs, if any such proposals are adopted.

Item 2. Properties

As of December 31, 2004, we leased approximately 34,000 square feet in Dallas, Texas at our corporate headquarters; the remaining term of this lease is seven years. We also leased approximately 11,800 square feet in Houston, Texas; 3,100 square feet in Austin, Texas; 2,900 square feet in Atlanta, Georgia; 11,575 square feet in Philadelphia, Pennsylvania; 3,400 square feet in Denver, Colorado; 2,400 square feet in Phoenix, Arizona; 1,200 square feet in Palm Desert, CA; and 7,700 square feet of warehouse space in Addison, Texas. Such leases generally range from three to five years. The cost of all of our office leases is approximately $1.1 million per annum. We believe that all of our present facilities are adequate for our current needs and that additional space is available for future expansion upon acceptable terms.

Item 3. Legal Proceedings

In 1996, as previously disclosed in our Form 10-Q for the quarterly period ended September 30, 2003, a lawsuit was filed by Ditto Properties Company (“DPC”) against DCRI LP No. 2 (the “Ditto Litigation”). Later, J. Michael Moore, our Chief Executive Officer, and the Company were added to the lawsuit, and we filed a counterclaim. The lawsuit styled Ditto Properties Co. v. DCRI L.P. No. 2, Inc., et al., Adversary Proceeding No. 03-3161 included the claims asserted by DPC against the Company as well as counterclaims asserted by the Company against DPC. In November 2003, we resolved the DPC litigation. In a week-long trial beginning November 17, 2003, in the Bankruptcy Court for the Northern District of Texas, Dallas Division, we received a directed verdict in our favor on all counts. A similar verdict was rendered in favor of our co-defendants including Mr. Moore. We were not, however, granted relief on our counterclaim against DPC. Effective January 21, 2004, DPC relinquished its appeal rights in a written statement to the Court.

In the past, we had incurred legal fees on our own behalf and had funded certain of the legal fees and expenses of Mr. Moore and/or DCRI L.P. No. 2 (“L.P. No. 2”) in connection with the Ditto Litigation. As the result of our being named as a defendant in such case, in 2001 we, Mr. Moore and L.P. No. 2 decided that we should have separate counsel from Mr. Moore and L.P. No. 2. Our Board of Directors (a) approved the payment to Mr. Moore of up to $250,000 to fund legal fees and expenses anticipated to be incurred by Mr. Moore and L.P. No. 2 in the Ditto Litigation, (b) authorized us to enter into an Indemnification Agreement with each of our officers and directors, pursuant to which these individuals will be indemnified in connection with matters related to the Ditto Litigation; and (c) approved an amendment to the Bylaws of the Company to require us to indemnify our present and former officers and directors to the fullest extent permitted by the laws of the state of Texas, in connection with any litigation in which such persons became a party subsequent to March 29, 2001 and in which such persons are involved in connection with performing their duties as an officer or director of the Company.

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. In one of these actions, the Company and its Chief Executive Officer were also named as defendants. This case, Oxford Global Resources, Inc. v. Michelle Weekley-Cessnum, et.al. Civil Action No 3:04-CV-0330-N, was filed in the United States District Court for the Northern District of Texas, Dallas Division. The case is in its early

stages, and the Company cannot determine what loss, if any, may result from the final settlement of this case. The Company has agreed to pay the legal fees of its employees in connection with this action.

In the first quarter of 2005, a group of former employees has brought suit against the Company seeking a declaratory judgement construing their employment agreements. The Company has brought a counterclaim against the plaintiffs, as well as a third-party petition against their current employer alleging breach of contracts and seeking to enforce various covenants of their employment agreements. The case is in its early stages and the Company cannot determine what loss, if any, may result from the final settlement of this case.

As of December 31, 2004, we were also involved in certain other litigation and disputes. With respect to these matters, management believes the claims against us are without merit and believes that the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

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

Not applicable.

PART II

Item 5. Market Price of Registrant’s Common Stock and Related Stockholder Matters

Our common stock had been traded on the American Stock Exchange (“AMEX”) under the symbol “HIR” since September 30, 1997. Prior to that it was traded in the over-the-counter market and listed in pink sheets under the symbol “HIRE”. The following table sets forth the range of high and low sales prices for the common stock as reported on the AMEX for the year ended December 31, 2003, and through June 4, 2004, of fiscal year 2004. We asked the AMEX to halt trading in our common stock on June 4, 2004, to prevent trading in our stock until we had made public certain material information. The trading halt continued in place until November 9, 2004, when the AMEX suspended trading in our common stock as part of a process to delist our common stock for being in violation of certain listing requirements. As a result of the trading suspension, there has been sporadic trading in our common stock on the “pink sheets” inter-dealer trading network. The quotations for the fourth quarter 2004, as reported on MarketWatch.com, reflect inter-dealer prices, without mark-up, mark-down or commissions and may not represent actual transactions. Our common stock was ultimately delisted on February 9, 2005, and continues to trade on the “pink sheets” inter-dealer trading network.

	2004				2003
Quarter Ended:	High		Low		High		Low
March 31	$	4.50	$	1.37	$	0.50	$	0.13
June 30	$	2.80	$	0.95	$	1.40	$	0.39
September 30	N/A		N/A		$	1.10	$	0.55
December 31	$	0.50	$	0.01	$	1.85	$	0.51

As of April 30, 2005, we had approximately 330 holders of record of our common stock.

We have not paid any cash dividends on our common stock since our inception. We expect that we will retain all available earnings generated by our operations for the development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future on the common stock. Any future determination as to dividend policy will be made at the discretion of the Board of Directors and will depend on a number of factors, including the future earnings, capital requirements, financial condition and future prospects of the Company and such other factors as the Board of Directors may deem relevant. In addition, one of our credit facilities also prevents us from paying dividends on our common stock and, if dividends are in arrears on our preferred stock that was issued in 2004, then we are also prevented from paying dividends on our common stock.

Following is a summary of securities authorized for issuance under equity compensation plans (in thousands except per share data):

	Number of securities to be issued upon exercise of outstanding options	Weighted average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans

Equity compensation plans approved by security holders	1,323	$	0.94	239

Equity compensation plans not approved by security holders	—	—		—

During 2003, the Company issued stock options to various directors, managers and employees of the Company to purchase approximately 1,324,000 shares of common stock, at an average exercise price of $0.32 per share. These shares were granted under the previously approved Amended and Restated 1996 Non-Qualified Stock Option Plan, the 1998 Non-Qualified Employee Stock Option Plan and the 1998 Non-Employee Director Stock Option Plan. Included in the options granted were options issued in an exchange plan approved by the Board of Directors for current employees, and for non-employee directors (subject to shareholder approval). Those employees and directors holding options under either the 1996 or 1998 plans with exercise prices above $2.50 per share were offered the opportunity to exchange those options on a 1 for 5 ratio (meaning that for every 100 shares exchanged the holder would receive 20 shares) at an exercise price of $0.24 per share. Options for approximately 405,000 shares were exchanged and cancelled for new options for approximately 81,000 shares of our common stock.

During 2004, the Company issued stock options to various directors, officers, managers and employees of the Company to purchase approximately 133,000 shares of common stock, at an average exercise price of $1.15 per share. These shares were granted under the previously approved 1998 Non-Qualified Employee Stock Option Plan and the 1998 Non-Employee Director Stock Option Plan.

In January 2004 in connection with the acquisition of MRN, the Company issued warrants for 50,000 shares of common stock to the owners of MRN with an exercise price of $0.65 per share and a term of five years. Neither the issuance of these warrants, nor the shares to be issued upon exercise of these warrants, has been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

In March 2004, The Company completed the sale of 211,875 shares of Series A Convertible Preferred Stock (the “Preferred Stock”). The Preferred Stock has voting rights with each share of Preferred Stock having 10 votes on all matters submitted to our shareholders. In connection with the offering, the Company issued warrants for 472,105 shares of common stock to these preferred stockholders and certain agents with exercise prices ranging from $0.80 to $3.50 per share. These warrants have a term of three years. Neither the issuance of the Preferred Stock nor of the warrants, or the shares to be issued upon exercise of these warrants, have been registered under the Securities Act. These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act.

During the 2^nd quarter of 2004, J. Michael Moore, Chief Executive Officer of the Company, exercised warrants to purchase 900,000 shares of our common stock at an exercise price of $0.16 per share, and exercised warrants to purchase 425,000 shares of our common stock at an exercise price of $0.19 per share. Total proceeds to the Company of $144,000 and $80,750, respectively, were offset against an outstanding loan due to Mr. Moore. The exercise of these warrants was exempt from registration pursuant to Section 4(2) of the Securities Act.

During 2004, the Company entered into consulting contracts with various parties. As part of their compensation, they were issued warrants for a total of 137,500 shares of our common stock with exercise prices ranging

from $1.38 to $1.50. Neither the issuance of these warrants, nor the shares to be issued upon exercise of these warrants, has been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

During 2004, the Company received a short-term loan in the aggregate principal amount of $550,000 from the James R. Colpitt Trust. In connection with these borrowings, the Company issued warrants for a total of 350,000 shares of our common stock with an exercise price of $0.96. Neither the issuance of these warrants, nor the shares to be issued upon exercise of these warrants, has been registered under the Securities Act. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act.

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with the audited Consolidated Financial Statements in Item 8 and Management’s Discussion and Analysis of Financial Conditions and Results of Operations in Item 7 contained herein.

Selected Financial Operating Results for the five years ended December 31, 2004:

Years Ended December 31,	2004			2003			2002			2001			2000
(Amounts in thousands, except per share amounts)

Operating results:
Net staffing service revenue	$	23,264		$	18,098		$	28,745		$	56,264		$	70,653
Gross profit	12,663			11,219			15,047			26,642			40,494
Income (loss) from continuing operations before income taxes	(7,718		)	(5,749		)	(6,549		)	(5,141		)	2,412
Income tax (benefit) expense	—			—			(30		)	(894		)	1,190
Income (loss) from continuing operations	(7,718		)	(5,749		)	(6,519		)	(4,247		)	1,222
Income from discontinued operations, net of income tax benefit	1,256			1,867			548			269			490
Net (loss) income	(6,462		)	(3,882		)	(5,971		)	(3,978		)	1,712
Accretion of discount on preferred stock	(448		)	—			—			—			—
Cumulative preferred stock dividends earned but not declared	(166		)	—			—			—			—
Net (loss) income applicable to common shareholders	$	(7,076	)	$	(3,882	)	$	(5,971	)	$	(3,978	)	$	1,712

Earnings per common share:
Income (loss) from continuing operations:
Basic	$	(1.70	)	$	(1.88	)	$	(2.32	)	$	(1.51	)	$	0.44
Diluted	$	(1.70	)	$	(1.88	)	$	(2.32	)	$	(1.51	)	$	0.44
Income from discontinued operations:
Basic	$	0.26		$	0.61		$	0.20		$	0.10		$	0.17
Diluted	$	0.26		$	0.61		$	0.20		$	0.10		$	0.17
Net income (loss) applicable to common shareholders:
Basic	$	(1.44	)	$	(1.27	)	$	(2.12	)	$	(1.41	)	$	0.61
Diluted	$	(1.44	)	$	(1.27	)	$	(2.12	)	$	(1.41	)	$	0.61
Weighted average common shares:
Basic	4,909			3,062			2,810			2,813			2,791
Diluted	4,909			3,062			2,810			2,813			2,796

Financial Position:
Working capital (deficit)	$	(8,663	)	$	(6,840	)	$	(3,116	)	$	(2,143	)	$	660
Total assets	14,520			14,825			15,230			22,951			31,811
Short-term debt and current maturities	4,670			4,995			4,638			6,010			1,278
Long-term debt	110			69			—			120			7,265
Stockholders’ equity (deficit)	(1,899		)	1,774			5,147			10,981			14,829

Notes to Selected Financial Operating Results Data:

1. 2004 reflects the segregation of the Datatek division as discontinued operations in accordance with FAS 144 – Accounting for the Disposal or Impairment of Long-lived Assets. All prior year results have been restated to conform to the current year disclosure.

2. 2003 reflects a charge of $229,000 related to stock-based employee compensation expense from the adoption of fair value accounting using the modified prospective method. 2004 reflects a charge of $184,000 for stock-based

employee compensation expense.

3. 2002 reflects a loss of $1,997,000 on the sale of an agency on December 20, 2002. Also, in 2002, there was no amortization of goodwill due to the adoption of Statement of Financial Accounting Standards No. 142.

4. 2000 results include the results from March 7, 2000 for an acquisition of an agency acquired on that date.

5. Short-term debt and current maturities consists of the Greenfield and Wells Fargo loan balances along with the current portions of notes payable and capital leases.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with Selected Financial Data in Item 6 and the audited Consolidated Financial Statements in Item 8 contained herein.

Overview

We 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. During 2004, we offered two kinds of staffing solutions: direct placement services (“permanent placements”) and temporary and contract staffing.

We currently operate offices in the following locations:

Arizona		Phoenix
California		Palm Desert
Colorado		Denver
Georgia		Atlanta
Pennsylvania		Philadelphia
Texas		Dallas, Houston and Austin

We believe that we 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 “Liquidity and Capital Resources” below for a discussion of our ability to continue as a going concern and our plans for addressing those issues. The inability to obtain additional funds could have a material adverse affect on the Company.

Transformation of Our Business

The changing environment of the job market over the past three years has caused staffing companies to either change with the times or perish. To adjust with the trends, we have:

• shifted our revenue mix to focus more on temporary and contract staffing services rather than direct placements;

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

• 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;

• focused our sales force on Fortune 500 companies; and

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

As a result of the changes discussed above, we have largely transformed the Company from its historical roots in direct placement services and dependence on the 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 50%, the revenues are volatile and difficult to forecast and finance. By the end of 2004, we had largely reversed the composition of our revenues, with 63% of our revenues generated through temporary and contract staffing and 37% of our revenues from direct placement activities. 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.

These strategic changes require us to evaluate our fixed costs to be more in line with our new revenue model. In 2004, gross margins decreased to 54% of revenues as compared to 62% of revenues in 2003. Direct placement revenues for the year were 37% of total revenue as compared to 47% of total revenue in 2003. General and administrative expenses increased by $3.2 million from 43% of revenues or $7.8 million in 2003, to 47% of revenues or $11.0 million during 2004. Primary contributors to this increase were a $1.1 million increase in professional fees related to the increased audit and legal fees during 2004, with a significant amount of this expense believed to be a one-time charge; a $0.7 million increase in penalties accrued due to the late payment of taxes, also an expense believed to be a one-time charge; and a $0.6 million increase in group insurance costs due primarily to increased claims experienced in 2004 as well as the addition of new participants to the group covered by the plan related to the acquisition of MRN. Management expects general & administrative expenses to level off to approximately 34% of revenues in the 1^st quarter of 2005 as we continue to work on cost cutting measures and consolidation of operations.

We are implementing 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.

Acquisition of MRN

During the third quarter 2003, we identified and entered into an agreement to purchase all of the contracts and related receivables of Medical Resource Network, Inc. (“MRN”), a Southern California-based company specializing in the placement of traveling nurses. MRN maintained contract relationships with hundreds of hospitals throughout the country but lacked the financial resources to grow. As a result, we structured a transaction in which its nurses transitioned to our employ and we began taking over many back office functions of MRN. We maintained this relationship through February 2004, allowing us to thoroughly familiarize ourselves with the operations, the business, and the traveling nurse industry. We ultimately closed the acquisition in February 2004.

Proposed Sale of Datatek

We are in negotiations to sell Datatek Group Corporation (“Datatek”), a wholly-owned subsidiary of the Company. Datatek is primarily involved in temporary and contract staffing and represents approximately 60% of our 2004 temporary and contract staffing gross revenue. We are reporting Datatek as a discontinued operation in accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. If a sale of Datatek is consummated, it should provide needed funds to pay most, if not all, of our past due payroll tax liabilities. The agency derives most of its revenues from temporary and contract information technology staffing. We believe that a sale will reduce our exposure to the information technology industry and allow us to re-evaluate our sources of revenue. A sale of Datatek will greatly improve our immediate financial condition; however, it will also remove a significant source of revenue which will have a negative impact on our immediate operating results. This will mean that we will have to seek additional revenues through further acquisitions or lower our fixed costs dramatically in order to achieve future profitability. Because negotiations are in the early stages, there is no assurance that a sale will ultimately occur.

Restructuring

In late June 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 3^rd quarter and some phases of the restructuring occurred in later periods, the primary effects of the cost savings will not be noticeable until later filings. Every office and agency of the Company was evaluated resulting in: (i) the closure of several under-performing sales offices and agencies, (ii) the downsizing of staff, (iii) newly negotiated contracts at lower rates, including certain leases, and (iv) other cost saving measures. We believe that a notable improvement will be seen in our operating expenses for the 1^st quarter of 2005. All of these measures have been implemented to improve operating results, lower losses, improve cash, demonstrate operating efficiencies, and increase our ability to raise future capital. However, no assurance can be given that this lowered operating expense will continue in this trend in the future.

Our Position in the Industry

The staffing industry is 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:

• a superior database operating system that includes over 850,000 individuals;

• the ability to attract Fortune 500 clients; and

• our leadership within the industry organization, the National Association of Personnel Services (“NAPS”).

We believe that the worst of the economic downturn is behind us and the industry is primed for increased consolidation. Accordingly, we believe we are making changes that will leave us better positioned to take advantage of these industry consolidation trends.

Future Growth through Acquisitions

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.

Notwithstanding a Datatek sale which is designed to provide us with much needed liquidity, we are committed to an acquisition policy going forward. With the growing industry trend towards lower-margin contract and temporary staffing, size matters. Management has mapped out a plan to make selective acquisitions, assuming we are able to obtain financing, to re-establish the Company as a nationwide staffing firm and leverage its customer base into new geographical regions. More importantly, as the size of the company’s revenues increase, fixed costs as a percentage of revenues should decrease. Although there is no guarantee that this strategy will succeed, we believe that this is the best strategy for the future of the Company. To achieve this growth, we will have to issue additional equity and/or obtain acquisition financing. We cannot assure you that we will be able to issue additional equity or obtain additional financing, that we will be able to compete successfully with other companies in acquisitions, or that any acquisition we make will be accretive to our earnings or cash flow.

Sale of Preferred Stock

During December 2003, we executed a term sheet with certain accredited investors whereby we agreed to sell up to $1,650,000 in convertible preferred stock in a private placement. The offering was oversubscribed and closed in March 2004. We issued 209,875 shares of the Series A convertible preferred stock (the “Preferred Stock”), par value $10, and received gross proceeds of $2,098,750. Another 2,000 shares were issued as commission 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 10 votes on all matters submitted to our shareholders. If the dividends due on the Preferred Stock are in arrears, we cannot pay dividends on, make other distributions to, redeem or purchase our common stock. Because of our current cash position, the Board of Directors has not declared any dividends on the Preferred Stock since its issuance.

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 our option at any time after the occurrence of a trade of a share of our common stock on a national securities exchange for a price exceeding $2.00 per share; however, only after eight dividend payments have been made. Each share of Preferred Stock automatically converts after at least 825,000 shares of our 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.

We paid $189,375 out of the proceeds for commissions to agents involved in the offering. In addition, $20,000 of additional Preferred Stock was issued (as discussed above) for commissions to an agent in the offering. Legal and other fees paid were approximately $14,000, resulting in net cash proceeds to the Company of approximately $1,895,000.

Warrants were issued to certain agents in connection with the offering. We issued warrants for 169,428 shares of our common stock at $0.80 per share, 235,713 shares at $2.00 per share and 66,964 shares at $3.50 per share. These warrants have a term of three years. In accordance with the warrant agreements, the warrant exercise price on the $2.00 per share and $3.50 per share warrants was reduced to $0.00 based on the Company reporting a net loss before taxes for the fiscal year ending December 31, 2004. The effect of this change was charged to expense during 2004.

RESULTS OF OPERATIONS

The Year Ended December 31, 2004 Compared to The Year Ended December 31, 2003

Service Revenues and Gross Profit

($ in thousands)	2004			2003			Difference

Direct placements	$	8,642		$	8,480		$	162
Temporary and contract staffing	14,622			9,618			5,004
Net service revenues	23,264			18,098			5,166

Direct costs of temporary and contract staffing	(10,601		)	(6,879		)	(3,722		)
Gross profit from continuing operations	$	12,663		$	11,219		$	1,444

For the year 2004, net service revenue increased $5,166,000, or 28.5%, to $23,264,000 as compared to $18,098,000 for the previous year. To offset the lack of hiring of permanent employees during this recovery, management focused on growing our temporary and contract staffing business. Although revenues from direct placements increased $162,000, or 1.9%, our contract and temporary staffing revenues increased $5,004,000, or 52.0%. The significant increase in temporary and contract staffing as compared to the prior year was due primarily to the MRN acquisition. In 2004, the percentage of temporary and contract staffing revenues to total revenues increased to 63% versus 53% in 2003. (Reporting Datatek on a discontinued operation basis eliminated approximately $21.0 million of our net service revenue in 2004 and $32.4 million of our net service revenue in 2003.)

For the year 2004, gross profit increased by $1,444,000, or 12.9%, to $12,663,000 as compared to $11,219,000 in the previous year. Since sales expenses on direct placements are accounted for as an operating expense, the gross margins on direct placements are typically 100% of sales. The net margin for direct placements after deducting commissions, which are classified as selling expense, is typically 50%. Contract margins on the other hand can range anywhere from 15% to 36% depending on our level of overall involvement in the contract. Therefore, when temporary and contract revenues increased from 2003 to 2004, our direct costs registered a corresponding $3,722,000 increase and our gross profit increased to $12,663,000. Our gross margin on our temporary and contract staffing business decreased slightly in 2004 to 27.5% from 28.5% in 2003 due to the MRN acquisition. Overall gross profit, as a percentage of net service revenue, decreased to 54.4%, as compared with 62.0% in the previous year, due primarily to the increased percentage of revenues from temporary and contract staffing which has lower margins than direct placement revenues. (Reporting Datatek on a discontinued operation basis eliminated approximately $3.0 million of gross profit in 2004 as compared to $4.4 million of gross profit in 2003.)

Operating expenses

Operating expenses amounted to $19,388,000 for 2004, an increase of $2,867,000, or 17.4%, as compared to the previous year. As part of this increase, selling, general & administrative expenses (S,G&A) increased by $3.75 million offset by decreases in both stock-based employee compensation plus depreciation and amortization. Selling expenses for 2004 were $7,813,000. an increase of $550,000 from 2003. The increase was due primarily to the increase in commissions paid from the increase in contract and direct placement revenues. In addition, general and administrative expenses increased by $3,204,000, as compared to the previous year. The increase was primarily due to a $1.1 million increase in professional fees related to the increase in audit and legal fees during 2004, a $0.7 million increase in accrued penalties & interest related to the late payment of taxes, and a $0.6 million increase in group insurance costs. We recorded a non-cash stock-based employee compensation charge of $184,000 in 2004 as compared to $229,000 in 2003. We adopted the fair value accounting for stock-based employee compensation in 2003. Depreciation and amortization expense decreased to $424,000 in 2004 as compared to $1,266,000 in the previous year. During 2003, we adjusted the lives of computer equipment from five to four years and of furniture from five to seven years. We also determined that certain other computer equipment did not provide any future benefit to us in 2003. The total charge in 2003 for these adjustments to depreciation expense was $368,000.

We expect that operating expenses will decrease in 2005, due to certain non-recurring expenses for professional fees that were spent in 2004 that will likely not recur in 2005. Additionally, penalties and interest for non-payment of payroll 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 2^nd half of 2005. (Operating expenses for Datatek were approximately $1,198,000 in 2004 as compared to $$1,810,000 in 2003.)

Other expense items

For the year 2004, net interest expense increased by $733,000 to $1,213,000, due primarily to the higher cost of our borrowings. In 2004, the Company had a gain on early extinguishment of debt of $222,000. Net loss on the sale of assets was $2,000 in 2004 as compared to $25,000 in 2003. Other income decreased by $58,000 in 2004. (Other expense items for Datatek consisted of interest expense and were approximately $526,000 in 2004 as compared to $690,000 in 2003.)

Income Taxes

We did not report any income tax benefit from our losses before income taxes in 2004 or 2003 due to our determination that we may not be able to realize the full benefit of our deferred tax assets.

Income from discontinued operations

In accordance with FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we are reporting our Datatek subsidiary as discontinued operations for all periods presented. For the year 2004, income from discontinued operations decreased to $1,256,000 as compared to $1,867,000 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.

Accretion of Discount and Dividends on Preferred Stock

We issued preferred stock in March 2004. For the year 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 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 from the issue date to December 31, 2004. However, the results of operations have been adjusted to reflect the amount of dividends that would be due had they been declared.

The Year Ended December 31, 2003 Compared to The Year Ended December 31, 2002

Service Revenues and Gross Profit

($ in thousands)	2003			2002			Difference

Direct placements	$	8,480		$	10,673		$	(2,193	)
Temporary and contract staffing	9,618			18,072			(8,454		)
Net service revenues	18,098			28,745			(10,647		)

Direct costs of temporary and contract staffing	(6,879		)	(13,698		)	6,819
Gross profit	$	11,219		$	15,047		$	(3,828	)

For the year 2003, net service revenue decreased $10,647,000, or 37.0%, to $18,098,000 as compared to $28,745,000 for the previous year. Reflecting the severe decline in the IT market during this period, direct placement

revenue decreased $2,193,000, or 20.5%. Revenues from contract and temporary staffing decreased $8,454,000, or 46.8%, due to the sale of one of our divisions. This sale resulted in a decrease in direct placement revenues of $32,000 and temporary and contract staffing revenues of $8,130,000 in 2003 as compared to 2002. In 2003, the percentage of temporary and contract staffing revenues to total revenues declined to 53% versus 63% in 2002. (Reporting Datatek on a discontinued operation basis eliminated approximately $32.4 million in net service revenue in 2003 and approximately $23.0 million in net service revenue in 2002.)

For the year 2003, gross profit decreased by $3,828,000, or 25.4%, to $11,219,000 as compared to $15,047,000 in the previous year. Since sales expenses on direct placements are accounted for as an operating expense, the gross margins on direct placements are typically 100% of sales. The net margin for direct placements after deducting commissions, which are classified as selling expense, is typically 50%. Contract margins on the other hand can range anywhere from 15% to 36% depending on our level of overall involvement in the contract. Therefore, when direct placement revenues declined from 2002 to 2003, our gross profit registered a corresponding $2,193,000 decline as well. The sale of one our divisions in 2002 resulted in a decrease in our gross profit on temporary and contract staffing of $1,351,000 in 2003 as compared to 2002. Our gross margin on our temporary and contract staffing business increased in 2003 to 28.5% from 24.2% in 2002. Overall gross profit, as a percentage of net service revenue, increased to 62.0%, as compared with 52.3% in the previous year, due primarily to the increased percentage of total revenues from direct placements with its 100% margins. (Reporting Datatek on a discontinued operation basis eliminated approximately $4.4 million of gross profit in 2003 as compared to approximately $2.6 million of gross profit in 2002.)

Operating expenses

Operating expenses amounted to $16,521,000 for 2003, a decrease of $2,164,000, or 11.6%, as compared to the previous year. Included in operating expenses for 2003 were $7,263,000 of selling expenses, a decline of $941,000 from 2002. The decline was due primarily to the decrease in commissions paid from the decrease in direct placement revenues. In addition, general and administrative expenses declined by $1,202,000, or 13.4%, as compared to the previous year. Part of the decrease was due to the sale of one of our agencies in 2002 which had $968,000 of expenses during 2002. The remaining decrease was due to cost cutting initiatives at our other agencies. Also, in 2003, the Company recorded no charges for restructuring and severance expense compared to $392,000 in the previous year. We recorded a non-cash stock-based employee compensation charge of $229,000 in 2003 to reflect the expensing of options pursuant to the adoption of fair value accounting for stock-based employee compensation. There was no similar expense in the prior year. Depreciation and amortization expense increased to $1,266,000 as compared to $1,124,000 in the previous year. During 2003, we adjusted the lives of computer equipment from five to four years and of furniture from five to seven years. We also determined that certain other computer equipment did not provide any future benefit to us. The total charge in 2003 for these adjustments to depreciation expense was $368,000. (Operating expenses for Datatek were approximately $1,810,000 in 2003 as compared to approximately $1,448,000 in 2002.)

Other expense items

For the year 2003, net interest expense decreased by $443,000 to $480,000, due primarily to lower interest expense under our line of credit with Greenfield Commercial Credit as compared to our GE Facility in 2002. In 2002, the Company had a loss on the sale of assets of $1,996,000, which was principally the loss of $1,997,000 on the sale of one of our agencies, as compared to a loss on the sale of fixed assets of $25,000 in 2003. Other income increased by $50,000 between 2003 and 2002. (Other expense items for Datatek consisted of interest expense and were approximately $690,000 in 2003 as compared to $627,000 in 2002.)

Income Taxes

We reported an income tax benefit of $30,000 in 2002. We did not report any income tax benefit from our losses before income taxes in 2003. The decreased benefit was the result of the increase in our deferred tax asset valuation allowance due to our determination that we may not be able to realize the full benefit of our deferred tax assets.

Income from discontinued operations

Income from discontinued operations increased $1,319,000 to $1,867,000 as compared to $548,000 in the prior year. The increase was primarily due to a major contract staffing project that began in the 3rd quarter of 2002 and continued throughout 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash on hand at December 31, 2004 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 provided by financing activities during the year totaled $1,468,000, resulting primarily from the issuance of preferred stock in March 2004. Cash used by investing activities of $244,000 represented MRN acquisition costs of $207,000 (net of cash acquired), and capital expenditures of $37,000. Cash used by operating activities was $1,384,000.

As a result of the recession that started in 2000 and the impact it has had on the direct placement and temporary staffing industry, our revenues have declined approximately 67% from levels achieved in 2000. We have also reported net losses for the last three years as a result of the decline in our business, and our current liabilities of $12.8 million exceed our current assets of $3.8 million.

The Company currently finances itself through factoring of, or lines of credit based on, its accounts receivable. The amount of funds available under these agreements depends on the amount of accounts receivable accepted by the lenders. We operate with minimal cash balances as all cash receipts are deposited into our lockboxes, which are swept daily by our lenders. While we have generally sought to borrow the maximum amounts available from these facilities during 2004, the facilities have been inadequate in providing enough funds to maintain operations, which has resulted in our having to use other measures to continue to fund operations.

During 2003 and 2004, we reduced staff and closed offices to reduce the funds outflow. We have also not paid all employer and employee payroll taxes when due. The amount of unpaid payroll taxes at December 31, 2004, was approximately $3,558,000 plus penalties and interest. 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 we sought to correct our cash flow issues.

In 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.

We have completed, or are seeking to complete, certain transactions which will partially address the going concern issues we face.

In March 2004, we completed the sale of Preferred Stock, as described above. The sale generated net proceeds to us of approximately $1.9 million. This capital was used for general working capital purposes and to purchase certain assets of MRN.

In the 4^th quarter of 2004, the Company received a short-term loan from the James R. 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 James R. Colpitt Trust. Also, in the 1^st quarter of 2005, J. Michael Moore, CEO, repaid all notes receivable due to the Company. (See Note 21-Subsequent Events in the attached financial statements for related disclosures regarding these transactions.)

If a sale of Datatek is consummated, the cash received should be adequate to repay most, if not all, of the past due payroll tax liabilities. We cannot give any assurance at this time that this sale will occur. Datatek is primarily involved in information technology temporary and contract staffing and represented approximately 60% of our 2004 temporary and contract staffing revenue.

We are continuing to evaluate various other financing and restructuring strategies, including merger candidates and investments through private placements, to maximize shareholder value and to provide assistance in pursuing alternative financing options in connection with our capital requirements and business strategy. We will also seek acquisitions to replace the revenues lost from the Datatek sale by acquiring small companies where we can absorb their back office operations into our own. There can be no assurance that we will be successful in implementing the changes necessary to accomplish these objectives, or if we are successful, that the changes will improve our cash flow 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.

Our common stock was delisted on February 9, 2005, and has since been trading sporadically on the “pink sheets” inter-dealer trading network. The loss of the AMEX listing has made our ability to use our common stock in acquisitions substantially more difficult. The inability to obtain additional 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.

Our continuation as a going concern is dependent upon our ability to obtain additional financing and, ultimately, to attain and maintain profitable operations.

Contractual Obligations and Commercial Commitments

Summarized below are the Company’s obligations and commitments to make future payments under lease agreements and debt obligations as of December 31, 2004:

($ in Thousands)	Total		Less than one year		2-3 Years		4-5 years		More than 5 years
Operating leases	$	5,493	$	948	$	1,676	$	1,450	$	1,419
Capital leases	111		53		58		—		—
Notes Payable	922		867		55		—		—

Total	$	6,526	$	1,867	$	1,789	$	1,450	$	1,419

Critical Accounting Policies

Revenue Recognition and Cost of Services

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.

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, 2003, 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.

Prior to January 1, 2003, the Company elected to follow APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, no compensation expense was normally recognized for options granted because their exercise price usually equaled the market price of the underlying stock on the date of grant.

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 December 31, 2004.

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

“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 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 No. 123 (R) will have a material effect on our results of operations since the Company currently follows FASB Statement No. 123.

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

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 our line of credit borrowings. Our factoring liability is not based directly on current rates; the factor takes a fee based on a set percentage of the outstanding balance of accounts receivable that are accepted. During 2004, we did 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 December 31, 2004 of $2,763,000, a 1% increase in the prime rate would have an approximate $28,000 annual impact on our interest expense.

Item 8. Financial Statements and Supplemental Data

The audited financial statements and related footnotes as well as supplemental data can be found beginning with the Index to Financial Statements and Financial Statement Schedule following Part IV of this Annual Report on page F-1.

Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

The information required by this item has been previously disclosed by the registrant in a Form 8-K filed September 24, 2004.

Item 9A. Controls and Procedures

Within ninety days of the filing date of this Report, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934). The Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management to allow

timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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 included in this report on Form 10-K. There have been no other changes in the Company’s disclosure controls and procedures since December 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Company’s disclosure controls and procedures.

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors

The table and text below set forth the name, age, current position and term of office of the Company’s current directors.

Name	Age	Position
J. Michael Moore	58	Chairman of the Board and Chief Executive Officer
John M. Gilreath	52	Chairman of the Audit Committee
Mark E. Cline	52	Director
Samuel E. Hunter	70	Chairman of the Compensation Committee

MARK E. CLINE, 52, has been a director of the Company since July 9, 2002. Since 1985, Mr. Cline has served as President of Memphis, Inc., a Dallas-based entity engaged in owning and operating food and beverage establishments. Since April, 1999, he has also served as President of Nimrod, Inc., a Dallas-based real estate development concern, and since October 2004, as a Vice President and licensed securities broker of Reef Securities Inc., a Richardson, Texas based securities firm. Mr. Cline serves on the Audit and Compensation Committees.

JOHN M. GILREATH, 52, has been a director of the Company since February 19, 2003. Since December 2002, Mr. Gilreath has served as Director of Finance and Chief Operating Officer of Entera Entertainment, Inc., a Washington, D.C.-based film distribution company. From April 2001 to December 2002, he served as Vice President of Allegiance Capital Corporation, a Dallas-based middle market investment bank, and from April 1996 to April 2001, he served as Managing Director of DSJ Consulting, L.L.C., a Tulsa-based corporate finance consulting company. Mr. Gilreath serves as Chairman of the Audit Committee and on the Compensation Committee.

SAMUEL E. HUNTER, 70, has been a director of the Company since February 1997. Since July 2000, Mr. Hunter has served as Senior Vice President and Manager of the Sales Trading Desk for the New York office of the Charlotte-based Interstate Group. From October 1997 to June 2000, Mr. Hunter served as Senior Vice President of Sales for OptiMark Technologies, Inc., a New York-based electronic trading network. Mr. Hunter serves as chairman of the Compensation Committee and on the Audit Committee.

J. MICHAEL MOORE, 58, Certified Personnel Consultant (CPC), was elected to the board of directors of the Company on May 1, 1991. On March 26, 1993, Mr. Moore was appointed as CEO and Chairman of the board. He currently serves as a director of the National Association of Personnel Services (NAPS) and as a director for the Texas Association of Personnel Consultants (TAPC), while acting as a liaison between the two associations. Before joining the Company, Mr. Moore was President and Chief Executive Officer of United States Funding Group, Inc. a Texas corporation (“USFG”). USFG has been involved in acquiring the following from the Resolution Trust Corporation, FSLIC, FDIC and private organizations: real estate, notes secured primarily by real estate, oil & gas properties, and turn-around companies located within the United States.

Executive Officers

The table and text below set for the name, age, current position and term of office of the Company’s current executive officers.

Name	Age	Position
J. Michael Moore	58	Chairman of the Board and Chief Executive Officer
Michael C. Lee	36	Chief Financial Officer, Treasurer, Vice President and Secretary

Mr. Moore has served as Chief Executive Officer of the Company since May 1993. Mr. Moore has entered into an Employment Agreement with the Company providing for employment through December 31, 2006, at a base salary of $250,000, and a severance payment equal to twelve months salary if terminated other than for cause.

Mr. Lee has served as Chief Financial Officer of the Company since June 30, 2004. Previously, Mr. Lee served as interim Chief Financial Officer of the Company (January 2004 – June 2004), performed the duties of Director of Finance and Accounting of the Company (September 2003 - January 2004) and worked as Director of Finance for Avatex Corporation (November 1997-May 2003). Mr. Lee has entered into an employment agreement with the Company providing for employment through December 31, 2006, at a base salary of $125,000, and a severance payment equal to twelve months salary if terminated other than for cause.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s officers and directors and persons who beneficially own more than 10% of common stock (the “Reporting Persons”) to file reports of ownership and changes of ownership with the Securities and Exchange Commission (“SEC”) and to furnish the Company with copies of Section 16(a) forms so filed. Based solely on a review of copies of such forms received, the Company believes that, except as set forth below, all of the Reporting Persons timely met their filing obligations for the fiscal year ended December 31, 2004. The exceptions arise as follows: (a) J. Michael Moore did not file Form 4 in connection with the exercise of warrants and purchase by him of 900,000 shares of common stock on April 29, 2004, until May 4, 2004, and filed his Form 5 for 2004 on June 9, 2005, (b) Samuel E. Hunter, a director, did not file Form 4 in connection with the purchase by him of 9,000 shares of common stock on January 5, 2004, until January 8, 2004, did not file Form 4 in connection with the exercise of options and purchase by him of 6,250 shares of common stock on February 4, 2004, until February 19, 2004, did not file Form 4 in connection with the sale by him of 4,500 shares of common stock on March 4, 2004, until January 10, 2005, did not file Form 4 in connection with the sale by him of 4,000 shares of common stock on May 3, 2004, 1,000 shares of common stock on May 4, 2004, and 3,000 shares of common stock on May 5, 2004, respectively, until June 13, 2005, did not file Form 4 for the grant of common stock options received on January 1, 2004 until June 13, 2005, and filed his Form 5 for 2004 on June 13, 2005, (c) Mark E. Cline, a director, filed his Form 4 for the grant of common stock options received on July 9, 2004 and his Form 5 for 2004 on June 9, 2005, (d) John M. Gilreath, a director, filed his Form 4 for the grant of common stock options received on February 19, 2004 and his Form 5 for 2004 on June 8, 2005, and (e) Michael C. Lee, CFO, filed his Form 3 for the promotion to Chief Financial Officer on June 30, 2004 and his Form 5 for 2004 on June 10, 2005.

Audit Committee and Audit Committee Financial Expert

The Audit Committee currently consists of John M. Gilreath (Chairman), Samuel E. Hunter and Mark E. Cline. Mr. Gilreath was elected as a member and Chairman of the Audit Committee on February 19, 2003, the date that he was appointed to the Board. The Board of Directors has determined that Mr. Gilreath qualifies to be the “audit committee financial expert” as such term is defined in the regulations promulgated by the SEC.

Code of Ethics

The Company adopted a code of ethics on December 7, 2004 that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Company’s Ethics Policy was filed as an exhibit to our 2003 Form 10-K. A copy of the policy will be supplied to any person without charge by application to Investor Relations, DCRI, 10670 North Central Expressway, Suite 600, Dallas, Texas 75231.

Item 11. Executive Compensation

					Long-term compensation
					Awards		Payouts
		Annual compensation				Securities
Name and Principal Position	Year	Salary	Bonus	Other annual compensation	Restricted stock award(s)	underlying options/ SARs	LTIP payouts	All other compensation
(a)	(b)	($) (c)	($) (d)	($) (1) (e)	($) (f)	(#) (2) (g)	($) (h)	($) (3) (i)
J. Michael Moore Chairman of the Board and Chief Executive Officer	2004 2003 2002	250,000 250,000 225,000	-0- -0- -0-	48,000 48,000 57,000	-0- -0- -0-	-0- 185,000 -0-	-0- -0- -0-	-0- 9,000 110,000
W. Brown Glenn, Jr. President (4)	2004 2003	34,000 150,000	-0- -0-	-0- -0-	-0- -0-	-0- 175,000	-0- -0-	-0- -0-
Michael C. Lee Chief Financial Officer (5)	2004	118,000	-0-	18,500	-0-	50,000	-0-	25,000

(1) Includes perquisites and other personal benefits if the aggregate value is greater than the lesser of $50,000 or 10% of reported salary and bonus. For Mr. Moore, includes deferred compensation of $36,000 and an automobile allowance of $12,000 in 2004; deferred compensation of $36,000 and an automobile allowance of $12,000 in 2003; and deferred compensation of $45,000 and an automobile allowance of $12,000 in 2002. For Mr. Lee, includes deferred compensation of $12,500 and an automobile allowance of $6,000 in 2004. The deferred compensation is currently unfunded but, has been accrued as a liability to the Company.

(2) Option grants for 2003 for Mr. Moore do not include the options for 48,000 shares of common stock that were issued during 2003 in a repricing of options for 240,000 shares of common stock issued in prior years (see “Ten Year Options/SAR Repricings” below). No options were granted in 2002.

(3) In October 2002, a warrant to purchase 2.7 million shares of the Company’s stock was issued to Mr. Moore. The estimated value of the warrant was $110,000. The warrant was not issued as compensation in exchange for his services as an officer of or director of the Company but was granted in connection with his guarantee of the Company’s senior credit facility with GE Capital Corp. In 2003, the terms of the warrant were changed. The $9,000 charge for 2003 was the difference in the estimated fair value of the warrant before and after the change was made. As of November 15, 2004, Mr. Moore had acquired 2,225,000 shares of common stock from the exercise of this warrant. For Mr. Lee, the amount represents other compensation for restructuring contributions. Mr. Lee has deferred receipt of this compensation until 2005.

(4) In June 2004, Mr. Glenn, who had served as President of the Company from March 2003 and had served as a director from August 2002, resigned his positions.

(5) In June 2004, Mr. Lee was promoted to Chief Financial Officer of the Company.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Individual grants

Potential realizable value at
assumed annual rates of stock
price appreciation for option
term

Name

Number of
securities
underlying
option/SARs
granted

Percent of total
options/SARs
granted to employees
in fiscal year

Exercise or
base price

Expiration
date

Alternative to
(f) And (g):
grant date value

Grant date present
value

5% ($)

10% ($)

(a)

(#)
(b)

(c)

($/Sh)
(d)

(e)

$
(f)

$
(g)

$
(h)

Michael C. Lee

50,000

52.3

0.96

6/30/2014

35,500

Grant date value was calculated using the Black-Scholes option pricing model with the same assumptions as those used to calculate the value of these options in the audited consolidated financial statements, included in Item 8 herein, under Statement of Financing Accounting Standards No. 123, “Accounting for Stock-Based Compensation” . The average expected volatility used in this calculation was 108.3%, the average term was 4.0 years, the average risk free interest rate was 3.5% and the expected dividend yield was 0.0%.

Stock Option Exercises and Year-end Values

The following table sets forth information with respect to the named executive officers concerning the exercise of options during 2004 and unexercised options held as of December 31, 2004:

Name	Shares Acquired on Exercise(#)	Value Realized ($)	Number of Shares Underlying Unexercised Options at Fiscal Year End(#)(1) Exercisable/ Unexercisable	Value of Unexercised In-The-Money Options / SARs at Fiscal Year End ($)(1) Exercisable/ Unexercisable
J. Michael Moore	-0-	-0-	351,333/106,667	$ 0/$ 0
W. Brown Glenn, Jr.	-0-	-0-	0/0	$ 0/$ 0
Michael C. Lee	-0-	-0-	13,334/76,666	$ 0/$ 0

(1)

The amounts under the headings entitled “Exercisable” reflect vested options as of December 31, 2004 and the amounts under the headings entitled “Unexercisable” reflect options that have not vested as of December 31, 2004. The value of the options was based on the closing price of the common stock of the Company on December 31, 2004 of $0.15.

TEN-YEAR OPTION/SAR REPRICINGS

Name	Date	Number of Securities underlying option/SARs repriced or amended	Market price of stock at time of repricing or amendment		Exercise price at time of repricing or amendment		New exercise price		Length of original option term remaining at date of repricing or amendment
Moore, J. Michael	04/01/2003	62,500	$	0.43	$	12.75	$	0.24	5yr-2mo
Moore, J. Michael	04/01/2003	31,000	$	0.43	$	5.13	$	0.24	3yr-10mo
Moore, J. Michael	04/01/2003	46,500	$	0.43	$	4.00	$	0.24	3yr-10mo
Moore, J. Michael	04/01/2003	100,000	$	0.43	$	12.75	$	0.24	5yr-2 mo

In order to retain our employees, the Board agreed to reprice certain options previously granted. In March 2003, the Board voted to offer all employees the opportunity to exchange previously granted options, with an exercise price in excess of $2.50 per share, for a new option grant on a 1 for 5 basis effective April 1, 2003. The exercise price for the new option was based upon the market price on January 31, 2003 of $0.24. Options for a total of 404,824 shares, including 240,000 shares for Mr. Moore, were converted into options for 80,964 shares, including 48,000 shares for Mr. Moore.

Compensation of Directors

In 2004, our three non-employee directors each received a monthly retainer of $2,666.67. Additionally, the directors each received an option to purchase 25,000 shares of our common stock, vesting at the rate of 6,250 shares for each calendar quarter thereafter. The options granted to the directors in excess of 12,500 shares each are subject to approval and ratification by the shareholders.

The additional compensation paid in 2004 to Mr. Gilreath, the current Chairman of the Audit Committee, was $1,500 per month.

Members of the Board of Directors who are employees of the Company do not receive additional compensation for serving as a director of the Company or for attending meetings of the Board of Directors.

Employment Contracts

The Company has employment contracts with J. Michael Moore and Michael C. Lee effective as of January 1, 2005. These contracts expire on December 31, 2006.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee is responsible for establishing the level of compensation of the listed executive officers of the Company and administering the 1996 Nonqualified Stock Option Plan (the “1996 Plan”) and the 1998 Nonqualified Stock Option Plan (the “1998 Plan”). The compensation review and evaluation is conducted by reviewing the overall performance of each individual and comparing the overall performance of the Company with others in its industry, as well as considering general economic and competitive conditions. The financial performance of the Company on a yearly basis and as compared with the Company’s Peer Group (see “Comparative Total Returns” below) and the industry as a whole, the Company’s stock price and market share, and the individual performance of each of the executive officers are among the factors reviewed. No particular weight is assigned to one factor over another.

General Compensation Philosophy

Our fundamental philosophy is to offer the Company’s executive officers competitive compensation opportunities based upon their personal performance, the financial performance of the Company and their contribution to that performance. It is our objective to make a substantial portion of each officer’s compensation contingent upon the Company’s performance as well as upon his or her own level of performance. Accordingly, each executive officer’s compensation package is comprised of three elements: (a) base salary, which reflects individual performance and is designed primarily to be competitive with salary levels of similarly sized companies, (b) annual variable performance awards payable in cash and tied to the Company’s achievement of performance goals, and (c) long-term stock based incentive awards which strengthen the mutuality of interests between the executive officers and the Company’s shareholders. Generally, as an officer’s level of responsibility increases, a greater portion of his or her total compensation will be dependent upon Company performance and stock price appreciation rather than base salary.

2004 Compensation

With respect to Mr. Moore, we continue to believe that he has provided outstanding leadership for the Company in some of the most difficult market conditions our industry has ever seen. However, in light of the financial and market conditions faced by the Company, we did not believe it appropriate to give him a raise or bonus in 2004.

Mr. Lee was promoted to Chief Financial officer in June 2004. Based on the recommendation of the CEO and review of current market conditions, an employment contract was executed between Mr. Lee and the Company with total compensation set at the approximate current market rate based on his level of experience and responsibilities.

2004 Option Grants

The Board determined that it was in the best interests of the Company to allow many of our key employees to have an increased equity participation in the Company. Thus, options to purchase approximately 96,000 shares at exercise prices of from $0.24 to $1.38 per share, principally vesting over three years, were granted to 6 employees. With the exception of options to purchase 50,000 shares to Michael C. Lee, (in connection with his promotion to Chief Financial Officer), none of these options were granted to executive officers of the Company. The timing of future grants of options from the overall option pools established under the 1996 Plan and the 1998 Plan, and their allocations, will be determined by the Compensation Committee based upon market conditions, accounting impact and corporate and individual performance. Emphasis is placed on the long-term performance of the Company and is subjective with no particular emphasis being placed on any one factor.

Compliance with Section 162(m)

With certain exceptions, Section 162(m) of the Internal Revenue Code of 1986, as amended, prevents publicly held corporations, including the Company, from taking a tax deduction for compensation in excess of $1 million paid to the Chief Executive Officer and the other persons named in the Summary Compensation Table in this Proxy Statement (“Covered Persons”). For nonqualified stock options the deduction is normally taken in the year the option is exercised. However, Section 162(m) will not apply to limit the deductibility of performance-based compensation exceeding $1 million if (i) paid solely upon attainment of one or more performance goals, (ii) paid pursuant to a performance-based compensation plan adopted by the Compensation Committee, and (iii) the terms of the plan are approved by the shareholders before payment of the compensation.

The Compensation Committee has previously reviewed the Company’s compensation plans with regard to the deduction limitation contained in Section 162(m) and believes that option grants under the 1996 Plan (the “1996 Options”) do not meet the requirements of Section 162(m) to be considered performance-based compensation. Therefore, Section 162(m) could limit the Company’s deduction in any tax year in which a Covered Person who received 1996 Options exercises some or all of his 1996 Options and his total compensation, including the value of the exercised options, exceeds $1 million in that taxable year.

The Compensation Committee decided not to alter the Company’s compensation plans with respect to existing 1996 Options, but does believe that options granted and repriced to Covered Persons under the 1998 Plan will meet the deductibility requirements of Section 162(m).

Samuel E. Hunter, Chairman
Mark E. Cline
John M. Gilreath

Compensation Committee Interlocks and Insider Participation

All of the members of the Compensation Committee are independent non-employee directors. No executive officer of the Company served as a member of a compensation committee or as a director of another corporation, one of whose executive officers served on the Compensation Committee or as a director of the Company except that Mr. Hunter is a director and minority shareholder in Pursuant Technologies, Inc., and Mr. Moore is a minority shareholder in Pursuant Technologies, Inc.

COMPARATIVE TOTAL RETURNS

Performance Graph

The following graph compares the cumulative total shareholders’ return on our common stock to that of the Russell 2000 Index and the Peer Group (as defined below). The graph assumes that an investment of $1,000 was made in our common stock and each of the other indexes on January 1^st of the earliest year shown, and that dividends, if any, were reinvested. The stock price performance shown in the graph is not necessarily indicative of future price performance.

	1999	2000	2001	2002	2003	2004
Peer Group	1,000	390	330	360	510	710
Russell 2000	1,000	1,180	1,210	960	1410	1,670
DCRI	1,000	580	170	50	350	40

The Company’s Peer Group, as selected by the Company’s Compensation Committee, consists of the following companies whose business taken as a whole resembles our activities: Butler International, Inc., General Employment Enterprises, Inc., RCM Technologies, Inc., Professional Staffing, Comforce Corp., National Technical Systems, Inc. and TechTeam Global, Inc. In previous years, the Company’s Peer Group included Lamalie Associates, which was party to a merger in 1999 and no longer exists. The returns for the Peer Group index for each period were computed based on the weighted average of the market capitalization of the companies in the Peer Group at the beginning of such period.

Item 12. Security Ownership of Certain Beneficial Owners and Management

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of the common stock as of May 31, 2005, by (a) each person known by us to own beneficially five percent or more of the outstanding common stock; (b) each of our directors; (c) each of the current executive officers and those officers named in the Executive Compensation table above; and (d) all directors and executive officers as a group. The address of each person listed below is 10670 N. Central Expressway, Suite 600, Dallas, Texas 75231, unless otherwise indicated.

Name and Address of Beneficial Owner	Number of Shares Beneficially Owned (1)		Percent of Total Voting Shares (2)
DCRI L.P. No. 2, Inc.	451,700	(3)	6.04	%
J. Michael Moore	4,148,617	(3)(4)	48.05	%
Samuel E. Hunter	74,500	(5)	1.00	%
Mark E. Cline	78,200	(6)	1.04	%
John M. Gilreath	56,250	(7)		*
Michael C. Lee	30,001	(8)		*
Jack Pogue	638,900	(9)	8.55	%
Scott W. Pollock	812,500	(10)	10.87	%
Carl V. Karnes	812,500	(11)	10.87	%
HIR Preferred Partners, LP.	685,046	(12)	9.00	%
Robert A. Shuey, III	391,718	(13)	5.05	%
James R. Colpitt	751,250	(14)	9.16	%
All directors and executive officers as a group (6 persons)(3),(4), (5), (6), (7), (8), and (9)	4,387,568		49.67	%

* Represents less than 1% of outstanding common stock.

(1) Information relating to beneficial ownership of common stock is based upon “beneficial ownership” concepts set forth in rules of the SEC under Section 13(d) of the Securities Exchange Act of 1934, as amended. Under such rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any security of which that person has the right to acquire beneficial ownership within 60 days. Under the rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he has no beneficial interest. For instance, beneficial ownership includes spouses, minor children and other relatives residing in the same household, and trusts, partnerships, corporations or deferred compensation plans which are affiliated with the principal.

(2) The percentages are based on 7,472,443 shares, which represents the total voting power of the shares of common stock and preferred stock entitled to vote, voting as a single class, of which 2,118,750 votes are represented by Series A Convertible Voting Preferred Stock and 5,353,693 votes by common stock outstanding, plus shares of common stock which may be acquired by the particular beneficial owner, or group of beneficial owners, within 60 days of May 31, 2005, by exercise of options and/or warrants. The percentage total differs from the sums of the individual percentages due to the differing denominators with respect to each calculation.

(3) In February 2003, DCRI LP No. 2, Inc. (“No. 2”) filed for bankruptcy protection. As a result, No. 2 holds sole voting and investment power with respect to these shares, but subject to (a) the claims of all of the creditors of No. 2 (in connection with the bankruptcy filing), as well as (b) the rights retained by Sipur LLC, a company in which Mr. Moore has a financial interest, with respect to 168,500 of these shares in connection with two loans to No. 2, the principal balance of which is approximately $269,000.

(4) Includes the 451,700 shares of common stock which are beneficially owned by No. 2 (as Moore owns substantially all of the capital stock of No. 2), 94,500 shares of common stock owned by another affiliate of Moore and 404,667 shares of common stock issuable upon the exercise of options that vest within 60 days of May 31, 2005. Also includes 756,250 shares of common stock underlying warrants granted to Moore. The address of Mr. Moore is 5919 Club Hill Place, Dallas, Texas 75248.

(5) Includes 25,000 shares remaining from 37,500 shares of common stock issued upon the exercise of options, the grant of 24,500 of which is subject to approval and ratification by the shareholders. Also includes 49,500 shares of common stock issuable upon the exercise of options that vest within 60 days of May 31, 2005, 18,750 of which are subject to approval and ratification by the shareholders. The address of Mr. Hunter is 19 Fulton Street, Suite 407, New York, New York 10138.

(6) Includes 65,000 shares of common stock issuable upon the exercise of options that vest within 60 days of May 31, 2005, the grant of 25,000 of which is subject to approval and ratification by the shareholders. The address of Mr. Cline is 3828 Banner Drive, Frisco, Texas 75034.

(7) Includes 56,250 shares of common stock issuable upon the exercise of options that vest within 60 days of May 31, 2005, the grant of 25,625 of which is subject to approval and ratification by the shareholders. The address of Mr. Gilreath is 1900 White Oak Road, McKinney, Texas 75070.

(8) Includes 30,001 shares of common stock issuable upon the exercise of options that vest within 60 days of May 31, 2005. The address of Mr. Lee is 2117 Brook Tree Drive, Garland, Texas 75040.

(9) Includes 21,400 shares held by the Jack Pogue IRA Account, 12,500 Shares held by the Criswell Trust of which Mr. Pogue is the sole beneficiary, and 150,000 shares issuable upon conversion of 15,000 shares of Series A Convertible Voting Preferred Stock. The address of Mr. Pogue is 500 North Akard, #3240, Dallas, Texas 75201.

(10) Includes 587,500 shares issuable upon conversion of 58,750 shares of Series A Convertible Voting Preferred Stock owned by Jupiter Orbit Fund, LP, a Texas limited partnership. Mr. Pollock is a manager of Jupiter Management, LLC, the managing general partner of Jupiter Orbit Fund, LP, and exercises shared power (with Carl V. Karnes) to vote such shares. Also includes 225,000 shares issuable upon conversion of 22,500 shares of Series A Convertible Voting Preferred Stock owned by Mercury Orbit Fund, Ltd., a Texas limited partnership. Mr. Pollock is a manager of B4 Mercury Fund, LLC, the managing general partner of Orbit Fund, Ltd., and exercises shared power (with Carl V. Karnes) to vote such shares.

(11) Includes 587,500 shares issuable upon conversion of 58,750 shares of Series A Convertible Voting Preferred Stock owned by Jupiter Orbit Fund, LP, a Texas limited partnership. Mr. Karnes is a manager of Jupiter Management, LLC, the managing general partner of Jupiter Orbit Fund, LP, and exercises shared power (with Scott W. Pollock) to vote such shares. Also includes 225,000 shares issuable upon conversion of 22,500 shares of Series A Convertible Voting Preferred Stock owned by Mercury Orbit Fund, Ltd., a Texas limited partnership. Mr. Karnes is a manager of B4 Mercury Fund, LLC, the managing general partner of Orbit Fund, Ltd., and exercises shared power (with Scott W. Pollock) to vote such shares.

(12) Includes 550,000 shares issuable upon conversion of 55,000 shares of Series A Convertible Voting Preferred Stock and 135,046 shares issuable upon conversion of warrants. The address of HIR Preferred Partners, LP, is 43-46 Norre Gade, Suite 232, St. Thomas, U.S. Virgin Islands 00802.

(13) Includes 100,250 shares issuable upon conversion of 10,025 shares of Series A Convertible Voting Preferred Stock and 291,468 shares issuable upon the exercise of warrants. The address of Mr. Shuey is 15851 Dallas Parkway, Suite 180, Addison, Texas 75001.

(14) Includes 731,250 shares issuable upon the exercise of warrants. Also includes 20,000 shares issuable upon conversion of 2,000 shares of Series A Convertible Voting Preferred Stock. The address for Mr. Colpitt is PO Box 462, Collinsville, Oklahoma 74021.

Item 13. Certain Relationships and Related Transactions

On April 21, 2002, we entered into an agreement with J. Michael Moore and with DCRI L.P. No. 2 pursuant to which
Mr. Moore and DCRI L.P. No. 2 both executed promissory notes to the Company in the amount of $105,000 and $289,000, respectively. These notes had a balance of $324,000 at December 31, 2004. These notes are related to legal fees associated with a lawsuit with Ditto Properties Company (See Item 3 above). These notes were paid off in the first quarter of 2005. Mr. Moore owns substantially all of the common stock of DCRI L.P. No. 2.

On October 29, 2003, Mr. Moore loaned the Company $302,000 pursuant to a promissory note, payable on demand, bearing 10% interest. The note was repaid in 2004 to fund the exercise of warrants.

We incurred expenses to Pursuant Technologies Inc., previously More-O Corporation (“Pursuant”), of which Mr. Moore is a minority shareholder and Samuel E. Hunter, a director of our Company, is a minority shareholder and a director, for approximately $142,000, $97,000 and $95,000, respectively, in 2004, 2003 and 2002, for web site development and for front office software license fees.

We incurred expenses to Imology, previously Diaws, for approximately $112,000, $118,000 and $122,000 in 2004, 2003 and 2002, respectively, to develop and maintain websites and further develop marketing programs using web technology. Mr. Pogue is a significant shareholder of both the Company and Imology.

The above amounts and transactions are not necessarily indicative of the amounts or transactions that would have been incurred had comparable transactions been entered into with independent parties.

Interest income from related parties amounted to approximately $15,000, $16,000, and $20,000 in 2004, 2003 and 2002, respectively. Interest expense to related parties was approximately $25,000 in 2004 and $5,200 in 2003.

On February 4, 2004, Mr. Hunter exercised options to purchase 6,250 shares of our common stock, at an exercise price of $0.24 per share. Total proceeds to the Company were $1,500.

On April 29, 2004, Mr. Moore exercised warrants to purchase 900,000 shares of our common stock, at an exercise price of $0.16 per share. Total proceeds to the company were $144,000.

On May 4, 2004, Mr. Moore exercised warrants to purchase 425,000 shares of our common stock, at an exercise price of $0.19 per share. Total proceeds to the company were $80,750.

In November 2004, the James R. Colpitt Trust loaned the Company $550,000 in the form of a participation agreement in the Greenfield Line of Credit. Mr. Colpitt is a beneficial owner of more than 5% of the Company’s voting stock. This loan bears interest at the rate of prime plus 8%. Warrants to purchase 350,000 shares of the Company’s common stock at an exercise price of $0.96 per share were issued in connection with this loan. In the first quarter of 2005, the Colpitt Trust loaned the Company additional funds under two distinct agreements. The first promissory note for $175,000 was dated January 3, 2005. This note bears interest at the rate of 12% per year. In consideration for this note, warrants to purchase 200,000 shares of the Company’s common stock were issued to the Colpitt Trust and its agent at an exercise price of $0.50 per share. The second agreement was a $1 million line of credit and was dated March 1, 2005. This line of credit bears interest at the rate of 12% per year, and is secured by a personal non-recourse guaranty by Mr. Moore, which guaranty is further secured by a pledge of certain assets owned by Mr. Moore. A $2,000 origination fee was paid upon establishing this line of credit. For each draw on this line of credit, the Company is obligated to issue a warrant 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. For each draw under the line of credit that exceeds $150,000, the Company shall issue an additional warrant to purchase 25,000 shares under the same terms as stated above. In accordance with the line of credit agreement, warrants to purchase 281,250 shares of common stock at exercise prices ranging from $0.12 to $0.27 have been issued to the Colpitt Trust in 2005 in connection with advances on the line of credit. The outstanding balance of this line of credit was $725,000 as of May 31, 2005.

In 2005, Mr. Moore has received warrants to purchase 281,250 shares of common stock at exercise prices ranging from $0.12 to $0.27 in accordance with the terms of the $1 million line of credit from the James R. Colpitt Trust for providing the guaranty described above.

Mr. Moore and Mr. Colpitt are each 50% owners of Sipur Company LLC (“Sipur”). In 2004, Sipur purchased two notes and the associated indebtedness of DCRI LP No. 2, Inc., which were formerly held by Compass Bank. These notes had an aggregate principal balance of approximately $269,000, were collateralized by 168,500 of the 451,700 shares of the Company’s common stock that were held by DCRI LP No. 2. These notes were also guaranteed by the Company. Sipur has released the Company from its guaranty of the notes.

Item 14. Principal Accounting Fees and Services.

The fees billed or expected to be billed by Pender Newkirk & Company, CPAs for professional services rendered to the Company for the 2004 audit are set forth below. All other fees are for amounts actually paid. The Audit Committee has concluded that the provision of non-audit services by the independent auditors to the Company did not and does not impair or compromise the auditors’ independence.

	Pender Newkirk & Company, CPAs				BDO Seidman, LLP
	2004		2003		2003
Audit Fees	$	210,000	$	188,000	$	429,145
Audit-Related Fees	—		—		—
Tax Fees	—		—		—
All Other Fees	—		—		—
Total	$	210,000	$	188,000	$	429,145

Audit Fees

These amounts represent fees billed or expected to be billed by each of the accounting firms for professional services rendered for the audits of the Company’s annual financial statements for the fiscal years ended December 31, 2004 and 2003, the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q and services related to statutory and regulatory filings or engagements for such fiscal years.

Audit-Related Fees

These amounts represent fees billed or expected to be billed by each of the accounting firms for professional services rendered that were reasonably related to the performance of the audits or the reviews of the Company’s financial statements (but which are not included under “Audit Fees” above).

Audit Committee Pre-Approval Policy

The Audit Committee has adopted a policy for the pre-approval of all audit and permitted non-audit services that may be performed by the Company’s independent auditors. Under this policy, each year, at the time it engages the independent auditors, the Audit Committee pre-approves the audit engagement terms and fees and may also pre-approve detailed types of audit-related and permitted tax services to be performed during the year. All other non-audit services are required to be pre-approved by the Audit Committee on an engagement-by-engagement basis. The Audit Committee may delegate its authority to pre-approve services to one or more of its members, whose activities shall be reported to the Audit Committee at each regularly scheduled meeting.

PART IV

Item 15. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit Number		Description

2.1		Asset Purchase Agreement, dated as of October 7, 1998, between Registrant, DCRI Acquisition Corporation, Texcel, Inc., Texcel Technical Services, Inc., Thomas W. Rinaldi, Gary E. Kane, Paul J. Cornely and Deborah A. Jan Francisco (schedules have been omitted pursuant to Regulation S-K 601(b)(2)). (Incorporated by reference to Exhibit 2.1 of our Form 8-K filed on October 21, 1998)
2.2		Purchase Agreement, by and between Registrant and the shareholders of Mountain, LTD. (schedules have been omitted pursuant to Regulation S-K 601(b) (2). (Incorporated by reference from Exhibit 10.3 to our Form 10-Q filed on August 16, 1999)
2.3		Purchase Agreement, dated as of March 6, 2000, by and among Registrant, Datatek Consulting Group Corporation, Datatek Corporation, Julia L. Wesley and Michael P. Connolly. (schedules have been omitted pursuant to Regulation S-K 601 (b)(2). (Incorporated by reference from Exhibit 2.1 to our Form 8-K filed on March 7, 2000)
2.4		Agreement dated as of December 20, 2002, by and among Registrant, MAGIC Northeast, Inc., Joseph H. Hosmer and Sandra Hosmer (schedules have been omitted pursuant to Regulation S-K 601(b) (2) (Incorporated by reference to Exhibit 2.1 of our Form 8-K dated December 24, 2002)
3.1		Articles of Incorporation of Registrant as amended (Incorporated by reference from Exhibit 3(a) to our Registration Statement on Form S-18 (Reg. No. 33-760 FW)
3.2		Bylaws of our Company (Incorporated by reference from Exhibit 3(b) to our Registration Statement on Form S-18 (Reg. No. 33-760 FW))
3.3		Amendment No. 1 to Bylaws of Registrant (Incorporated by reference to Exhibit 3.4 of our Form 10-Q filed on May 15, 1998)
3.4		Amendment No. 2 to Bylaws of Registrant (Incorporated by reference to Exhibit 3.1 of our Form 10-Q filed on November 16, 1998)
3.5		Amendment No. 3 to Bylaws of Registrant (Incorporated by reference to Exhibit 3.4 of our Form 10-K filed on March 30, 1999)
3.6		Amendment No. 4 to Bylaws of Registrant (Incorporated by reference to Exhibit 3.6 of our Form 10-K filed on March 30, 2001)
4.1		Form of Certificate of Designation for Designating Series A Junior Participating Preferred Stock, $0.10 par value (Incorporated by reference to Exhibit A of Exhibit 4.1 of our Form 8-K filed on May 8, 1998)
4.2		Rights Agreement, dated as of May 1, 1998, between Registrant and Harris Trust and Savings Bank which includes the form of Certificate of Designation for Designating Series A Junior Participating Preferred Stock, $0.10 par value, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Series A Junior Participating Preferred Stock as Exhibit C. (Incorporated by reference to Exhibit 4.1 of our Form 8-K filed on May 8, 1998)
4.3		Form of Common Stock Warrant (Incorporated by reference from Exhibit 1.2 to our Amendment No. 1 to our Registration Statement on Form S-1 (Reg. No. 333-31825))
4.4		Amended and Restated 1996 Nonqualified Stock Option Plan of Registrant, effective as of December 28, 1996 (Incorporated by reference from Exhibit 10(z)(21) to our Form 10-K for the year ended December 31, 1996)
4.5		Amendment No. 1 to the Amended and Restated 1996 Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.5 of our Form 10-Q filed on May 15, 1998)+
4.6		1998 Nonqualified Stock Option Plan, effective as of January 1, 1998 (Incorporated by reference to Exhibit 10.14 of our Form 10-Q filed on May 15, 1998)+
4.7		1998 Non-employee Director Stock Option Plan, effective as of December 9, 1998 (Incorporated by reference to Exhibit 4.7 of our Form 10-K filed on March 30, 1999)+
4.8		First Amendment to Rights Agreement (Incorporated by reference from Exhibit 10.5 to our Form 10-Q filed on August 16, 1999)

4.9		Common Stock Warrant Agreement (as amended) dated effective December 31, 2001, between Registrant and Thomas W. Rinaldi, Gary E. Kane and Paul J. Cornely (Incorporated by reference to Exhibit 4.9 of our Form 10-K for 2002)
4.10		Common Stock Warrant Agreement, dated effective October 30, 2002, between Registrant and J. Michael Moore (Incorporated by reference to Exhibit 4.10 of our Form 10-K for 2002)
4.11		Form of Certificate of Designation for designating Series A Convertible Preferred Stock, $10 par value, dated as of February 5, 2004 (Incorporated by reference to Exhibit 4.11 of our Form 10-K for 2003)
4.12		Second Amendment to Rights Agreement, dated effective December 31, 2003 (Incorporated by reference to Exhibit 4.12 of our Form 10-K for 2003)
4.13		Voting Agreement between Registrant and Microcapital Strategies, Inc., dated as of February 16, 2004 (Incorporated by reference to Exhibit 4.13 of our Form 10-K for 2003)
4.14		Common Stock Warrant between Registrant and Microcapital Strategies, Inc., dated March 19, 2004 (Incorporated by reference to Exhibit 4.14 of our Form 10-K for 2003)
4.15		Common Stock Warrant between Registrant and Microcapital Strategies, Inc., dated March 19, 2004 (Incorporated by reference to Exhibit 4.15 of our Form 10-K for 2003)
4.16		Common Stock Warrant between Registrant and Microcapital Strategies, Inc., dated February 19, 2004 (Incorporated by reference to Exhibit 4.16 of our Form 10-K for 2003)
4.17		Form of Common Stock Purchase Warrant between Registrant and the James R. Colpitt Trust and J. Michael Moore, respectively, issued in connection with the $1 million line of credit agreement *
10.1		Stock Option Agreement between Registrant and J. Michael Moore, executed May 15, 1997 (Incorporated by reference from Exhibit 4.10 to our Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.2		First Amendment to Amended and Restated Stock Option Agreement between Registrant and J. Michael Moore effective September 30, 1998 (Incorporated by reference to Exhibit 10.4 of our Form 10-K filed on March 30, 1999)+
10.3		Stock Option Agreement between Registrant and J. Michael Moore effective as of April 29, 1998 (Incorporated by reference to Exhibit 10.6 of our Form 10-K filed on March 30, 1999)+
10.4		Amendment to Stock Option Agreement (Pricing Amendment) for J. Michael Moore effective as of October 23, 1998 (Incorporated by reference to Exhibit 10.9 of our Form 10-K filed on March 30, 1999)+
10.5		Stock Option Agreement between Registrant and Samuel E. Hunter, executed May 15, 1997 (Incorporated by reference from Exhibit 4.10 to our Form S-8 (Reg. No. 333-27867) filed on May 27, 1997)+
10.6		First Amendment to Stock Option Agreement between Registrant and Samuel E. Hunter, effective March 20, 1998 (Incorporated by reference to Exhibit 10.13 to our Form 10-Q filed on May 15, 1998)+
10.7		Stock Option Agreement (1998) between Registrant and Samuel E. Hunter effective as of April 29, 1998 (Incorporated by reference to Exhibit 10.16 of our Form 10-K filed on March 30, 1999)+
10.8		Partial Option Termination Agreement between Registrant and Samuel E. Hunter effective December 9, 1998 (Incorporated by reference to Exhibit 10.19 of our Form 10-K filed on March 30, 1999)+
10.9		Directors Option Agreement between Registrant and Samuel E. Hunter effective as of December 9, 1998 (Incorporated by reference to Exhibit 10.22 of our Form 10-K filed on March 30, 1999)+
10.10		Form of Stock Option granted to certain employees of Registrant, effective November 13, 1997 (Incorporated by reference to Exhibit 10.10 of our Form 10-Q filed on May 15, 1998)+
10.11		Form of Stock Option Agreements, dated as of October 8, 1998, between Registrant and certain non-shareholder employees of DCRI Acquisition Corporation (Incorporated by reference to Exhibit 10.2 of our Form 8-K filed on October 21, 1998)+
10.12		Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.2 of our Form 10-Q filed on May 15, 2001)
10.13		Amended and Restated Employment Agreement dated as of November 1, 2001 between Registrant and J. Michael Moore (Incorporated by reference to Exhibit 10.1 of our Form 10-Q filed on November 14, 2001)+
10.14		Stock Option Agreement between Registrant and J. Michael Moore, dated April 26, 2001 (Incorporated by reference to Exhibit 10.27 of our Form 10-K for 2001)+
10.15		Stock Option Agreement between Registrant and J. Michael Moore, dated December 31, 2001 (Incorporated by reference to Exhibit 10.29 of our Form 10-K for 2001)+
10.16		Note Receivable dated June 22, 1998, between Registrant and J. Michael Moore (Incorporated by reference to Exhibit 10.2 of our Form 10-Q filed on August 13, 1998)
10.17		Note Purchase Agreement dated as of January 12, 1999 among Registrant, Compass Bank and DCRI LP No. 2 Inc. (Incorporated by reference to Exhibit 10.1 of our Form 8-K filed on January 28, 1999)

10.18		Pledge Agreement dated as of January 12, 1999 between Compass Bank and DCRI LP No. 2, Inc. (Incorporated by reference to Exhibit 10.2 of our Form 8-K filed on January 28, 1999)
10.19		Bank Transaction Agreement dated as of January 12, 1999 among Registrant, DCRI LP No. 2, Inc. and J. Michael Moore (Incorporated by reference to Exhibit 10.3 of our Form 8-K filed on January 28, 1999)
10.20		Loan and Security Agreement, by and between Management Alliance Corporation, Information Systems Consulting Corporation, Datatek Consulting Group Corporation, Texcel Services Inc. and Mountain Ltd. and General Electric Capital Corporation (Incorporated by reference from Exhibit 10.1 to our Form 10-Q filed on August 10, 2000)
10.21		Security Agreement effective September 18, 2000, between Registrant and J. Michael Moore (Incorporated by reference to Exhibit 10.43 of our Form 10-K filed on March 30, 2001)
10.22		Amendment No. 1 to Security Agreement effective March 30, 2001, between Registrant, J. Michael Moore and DCRI L.P. No. 2, Inc. (Incorporated by reference to Exhibit 10.44 of our Form 10-K filed on March 30, 2001)
10.23		Agreement effective March 30, 2001 between Registrant, J. Michael Moore and DCRI L.P. No. 2, Inc. (Incorporated by reference to Exhibit 10.45 of our Form 10-K filed on March 30, 2001)
10.24		Stock Option Agreement between Registrant and James E. Filarski, dated August 9, 2001 (Incorporated by reference to Exhibit 10.46 of our Form 10-K for 2001)+
10.25		Amendment to Stock Option Agreement for Samuel E. Hunter dated August 9, 2001 (Incorporated by reference to exhibit 10.47 of our Form 10-K for 2001)+
10.26		Amendment to Stock Option Agreement for J. Michael Moore dated August 9, 2001 (Incorporated by reference to Exhibit 10.48 to our Form 10-K for 2001)+
10.27		Directors Option Agreement (2000) between Registrant and Samuel E. Hunter effective as of January 1, 2000 (Incorporated by reference to Exhibit 10.53 of our Form 10-K for 2001)+
10.28		Directors Option Agreement (2001) between Registrant and Samuel E. Hunter effective as of January 1, 2001 (Incorporated by reference to Exhibit 10.54 of our Form 10-K for 2001)+
10.29		Office Lease Agreement dated October 21, 2001 between Registrant and PFP Search Plaza, Inc. (Incorporated by reference to Exhibit 10.55 of our Form 10-K for 2001)
10.30		Agreement between Registrant , DCRI L.P. No. 2, Inc. and J. Michael Moore effective as of April 21, 2002 (Incorporated by reference to Exhibit 10.56 of our Form 10-K for 2001)
10.31		Directors Option Agreement (2002) between Registrant and Samuel F. Hunter effective as of January 1, 2002 (Incorporated by reference to Exhibit 10.49 of our Form 10-K for 2002)+
10.32		Directors Option Agreement (2002) between Registrant and Mark E. Cline effective as of July 9, 2002 (Incorporated by reference to Exhibit 10.50 of our Form 10-K for 2002)+
10.33		Directors Option Agreement (2002) between Registrant and W. Brown Glenn, Jr., effective as of August 28, 2002(Incorporated by reference to Exhibit 10.51 of our Form 10-K for 2002)+
10.34		Loan Agreement between Registrant and Greenfield Commercial Credit, L.L.C. (Incorporated by reference to Exhibit10.1 of our Form 8-K dated December 24, 2002)
10.35		Validity Guaranty, dated as of December 22, 2002, by and between J. Michael Moore and Greenfield Commercial Credit, L.L.C. (Incorporated by reference to Exhibit 10.2 of Form 8-K dated December 24, 2002)
10.36		Subordination Agreement, dated as of December 23, 2002, between Julia A. Wesley, Michael P. Connolly, Datatek Corporation, and Greenfield Commercial Credit, L.L.C. (Incorporated by reference to Exhibit 10.3 of Form 8-K dated December 24, 2002)
10.37		Second Amendment to Agreements, effective January 1, 2003, between Registrant, Julia A. Wesley, Michael P. Connolly, and Datatek Corporation (Incorporated by reference to Exhibit 10.55 of our Form 10-K for 2002)
10.38		Amended and Restated Forbearance and Amendment Agreement, effective January1, 2003, between Registrant and Thomas W. Rinaldi (Incorporated by reference to Exhibit 10.56 of our Form 10-K for 2002)
10.39		Amended and Restated Forbearance and Amendment Agreement, effective January 1, 2003, between Registrant and Paul J. Cornely (Incorporated by reference to Exhibit 10.57 of our Form 10-K for 2002)
10.40		Amended and Restated Forbearance and Amendment Agreement, effective January 1, 2003, between Registrant and Gary E. Kane (Incorporated by reference to Exhibit 10.58 of our Form 10-K for 2002)
10.41		Subordination Agreement, dated as of February 21, 2003, between Registrant, Texcel Services, Inc., Gary E. Kane and Greenfield Commercial Credit, L.L.C. (Incorporated by reference to Exhibit 10.59 of our Form 10-K for 2002)

10.42		Promissory Note, dated as of January 1, 2003, made by Registrant to the order of Gary E. Kane (Incorporated by reference to Exhibit 10.60 of our Form 10-K for 2002)
10.43		Securities Purchase Agreement between Registrant and Microcapital Strategies, Inc., dated effective November 21, 2003 (Incorporated by reference to Exhibit 10.43 of our Form 10-K for 2003)
10.44		Assignment and Assumption between Microcapital Strategies, Inc. and Mercury Orbit Fund, Ltd., dated February 6, 2004 (Incorporated by reference to Exhibit 10.44 of our Form 10-K for 2003)
10.45		Assignment and Assumption between Microcapital Strategies, Inc. and HIR Preferred Partners, LP, dated February 6, 2004 (Incorporated by reference to Exhibit 10.45 of our Form 10-K for 2003)
10.46		Account Purchase Agreement between Management Alliance Corporation and Wells Fargo Business Credit, Inc., dated as of December 1, 2003 (Incorporated by reference to Exhibit 10.46 of our Form 10-K for 2003)
10.47		Cross-Collateral Agreement among Information Systems Consulting Corporation, Management Alliance Corporation, Texcel Services, Inc. and Datatek Group Corporation and Wells Fargo Business Credit, Inc., dated as of December 1, 2003 (Incorporated by reference to Exhibit 10.47 of our Form 10-K for 2003)
10.48		Guaranty by Corporation made by Registrant for the benefit of Wells Fargo Business Credit, Inc., dated as of December 7, 2003 (Incorporated by reference to Exhibit 10.48 of our Form 10-K for 2003)
10.49		Validity Guaranty made by J. Michael Moore for the benefit of Wells Fargo Business Credit, Inc., dated as of December 1, 2003 (Incorporated by reference to Exhibit 10.49 of our Form 10-K for 2003)
10.50		Second Amendment to Loan and Security Agreement between Registrant and Greenfield Commercial Credit LLC, dated effective as of March 15, 2005 *
10.51		Amended and Restated Employment Agreement dated as of January 1, 2005, between Registrant and J. Michael Moore + *
10.52		Amended and Restated Employment Agreement dated as of January 1, 2005, between Registrant and Michael C. Lee + *
10.53		Participation Agreement, effective November 3, 2004, between the James R. Colpitt Trust and Greenfield Commercial Credit LLC *
10.54		Promissory Note, dated as of January 3, 2005, made by Registrant to the order of the James R. Colpitt Trust *
10.55		Line of Credit Promissory Note, dated as of March 1, 2005, made by Registrant to the order of the James R. Colpitt Trust *
10.56		First Amendment to Line of Credit Promissory Note, dated as of March 10, 2005, between Registrant and the James R. Colpitt Trust *
14.1		Diversified Corporate Resources, Inc. Code of Business Conduct and Ethics (Incorporated by reference to Exhibit 14.1 of our Form 10-K for 2003)
21.0		List of Subsidiaries*
23.1		Consent of Weaver and Tidwell, LLP*
23.2		Consent of Pender Newkirk & Company, CPAs*
31.1		Certification of Chief Executive Officer*
31.2		Certification of Chief Financial Officer*
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC Section 1350*

(* Filed herewith)

(+ Compensation plan, benefit plan or employment contract or arrangement)

(b) Reports on Form 8-K

The following Current Reports on Form 8-K were filed during the three months ended December 31, 2004:

Current Report on Form 8-K dated November 4, 2004, filed November 12, 2004, announcing that the American Stock Exchange intends to continue with delisting the common stock of the registrant, that the registrant is in negotiations regarding the potential sale of a significant subsidiary of the registrant, and that the Internal Revenue Service had imposed liens on the assets of two of the registrant’s subsidiaries in October 2004, which the Internal Revenue Service has agreed to subordinate to the debt owed the registrant’s senior lenders.

Current Report on Form 8-K dated December 9, 2004, filed December 16, 2004, announcing the filing of the registrant’s Form 10-K for the year ended December 31, 2003. It also announced that trading of our common stock was suspended on November 9, 2004 by the American Stock Exchange. The Listing Qualifications Panel of the American Stock Exchange recommended that our common stock be delisted. We are appealing that ruling. Since the suspension of trading on the American Stock Exchange, there has been sporadic trading of our common stock on the “Pink Sheets”.

Current Report on Form 8-K dated December 22, 2004, filed January 7, 2005, announcing that AMEX’s Committee on Securities affirmed the decision to delist the Company’s common stock.

The following Current Reports on Form 8-K were filed after December 31, 2004 and before April 29, 2005, the date this Form 10-K for the year ended December 31, 2004 was filed:

Current Report on Form 8-K, dated and filed February 3, 2005,announcing an agreement for the sale of substantially all the assets of Datatek Group Corporation to Axtive Corporation, Inc.

Current Report on Form 8-K, dated and filed April 5, 2005, announcing the extension of the closing date for the sale of Datatek Group Corporation to Axtive Corporation, Inc.

Current Report on Form 8-K, dated and filed on June 17, 2005, announcing the termination of the sale of Datatek Group Corporation to Axtive Corporation, Inc.

SIGNATURES

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

		Diversified Corporate Resources, Inc. Registrant

Date: June 27, 2005	By:	/s/ J. Michael Moore
		J. Michael Moore Chief Executive Officer (Principal Executive Officer)

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

Date: June 27, 2005	By:	/s/ J. Michael Moore
		J. Michael Moore Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: June 27, 2005	By:	/s/ Michael C. Lee
		Michael C. Lee Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

Date: June 27, 2005	By:	/s/ Mark E. Cline
		Mark E. Cline Director

Date: June 27, 2005	By:	/s/ John M. Gilreath
		John M. Gilreath Director

Date: June 27, 2005	By:	/s/ Samuel E. Hunter
		Samuel E. Hunter Director

Financial Statements and Supplemental Data

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS AND

FINANCIAL STATEMENT SCHEDULE

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at December 31, 2004 and 2003

Consolidated Statements of Operations for each of the three years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for each of the three years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm on the Financial Statement Schedule

Report of Independent Registered Public Accounting Firm on the Financial Statement Schedule

Schedule II–Valuation and Qualifying Accounts for each of the three years ended December 31, 2004, 2003 and 2002

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Diversified Corporate Resources, Inc. and Subsidiaries

10670 North Central Expressway, Suite 600

Dallas, Texas 75231

We have audited the accompanying consolidated balance sheets of Diversified Corporate Resources, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the management of Diversified Corporate Resources, Inc. and Subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required at this time, to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversified Corporate Resources, Inc. and Subsidiaries as of December 31, 2004 and 2003 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the consolidated financial statements, the Company incurred a net loss of approximately $7,076,000 during the year ended December 31, 2004, has a working capital deficiency of approximately $8,974,000 at December 31, 2004, and is in default on some of its long-term debt. As more fully described in Note 2, the Company is delinquent on its payroll taxes in the approximate amount of $3,558,000 as of December 31, 2004. These conditions and others raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Pender Newkirk & Company

Certified Public Accountants

Tampa, Florida

May 24, 2005

F-2

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

DIVERSIFIED CORPORATE RESOURCES, INC.

We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows of Diversified Corporate Resources, Inc. and subsidiaries for the year ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Diversified Corporate Resources, Inc. and subsidiaries for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company incurred a net loss of $5,971,000 during the year ended December 31, 2002, and, as of that date, had a working capital deficiency of $3,108,000. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2, “Going Concern and Management Plans”. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/ WEAVER AND TIDWELL, L.L.P.


Dallas, Texas
March 27, 2003

F-3

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts In Thousands, Except Par Value)

	December 31,
	2004			2003

ASSETS
Current assets:
Cash and cash equivalents	$	4		$	164
Trade accounts receivable, less allowance for doubtful accounts of $247 and $259, respectively	3,692			2,568
Prepaid expenses and other current assets	147			110
Total current assets	3,843			2,842
Property and equipment, net	363			687
Other assets:
Intangibles, net	4,187			3,610
Receivables from affiliates	311			857
Other	161			209
Net assets held for sale	5,655			6,620
Total Assets	$	14,520		$	14,825

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses	7,876			$	4,158
Obligations not liquidated because of outstanding checks	315			529
Borrowings under revolving credit agreement	2,213			—
Factoring liability	1,501			3,885
Current maturities of long-term debt	867			1,031
Current maturities of capital lease obligations	45			79
Total current liabilities	12,817			9,682
Deferred lease rents	481			398
Capital lease obligations, net of current maturities	55			69
Long-term debt, net of current maturities	55			—
Net liabilities held for sale	3,011			2,902
Total liabilities	16,419			13,051

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 2004	448			—
Common stock, $0.10 par value; 10,000 shares authorized, 5,714 and 4,329 shares issued, 5,354 and 3,968 shares outstanding, respectively	571			433
Additional paid-in capital	15,893			13,242
Retained deficit	(17,689		)	(10,779		)
Common stock held in treasury (361 shares), at cost	(907		)	(907		)
Receivables from related parties	(215		)	(215		)
Total stockholders’ equity (deficit)	(1,899		)	1,774
Total Liabilities and Stockholders’ Equity (Deficit)	$	14,520		$	14,825

See notes to consolidated financial statements.

F-4

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

	Years ended December 31,
	2004			2003			2002

Net service revenues:
Direct placement services	$	8,642		$	8,480		$	10,673
Temporary and contract staffing services	$	14,622		9,618			18,072
	23,264			18,098			28,745
Direct cost of temporary and contract staffing services	10,601			6,879			13,698
Gross profit	12,663			11,219			15,047
Operating expenses:
Selling expenses	7,813			7,263			8,204
General and administrative expenses	10,967			7,763			8,965
Stock-based employee compensation	184			229			—
Restructuring and severance expenses	—			—			392
Depreciation and amortization expense	424			1,266			1,124
	19,388			16,521			18,685
Other expense (income) items:
Interest expense, net	1,213			480			923
Gain on early extinguishment of debt	(222		)	—			—
Loss on sale of assets	2			25			1,996
Other expense (income), net	—			(58		)	(8		)
	993			447			2,911
Loss from continuing operations before income taxes	(7,718		)	(5,749		)	(6,549		)
Income tax benefit	—			—			30
Loss from continuing operations	(7,718		)	(5,749		)	(6,519		)
Income from discontinued operations, net of tax	1,256			1,867			548
Net loss	(6,462		)	(3,882		)	(5,971		)
Accretion of discount on preferred stock	(448		)	—			—
Cumulative preferred stock dividends earned but not declared	(166		)	—			—

Net loss applicable to common stockholders	$	(7,076	)	$	(3,882	)	$	(5,971	)

Net loss per share from continuing operations applicable to common shareholders – basic and diluted	$	(1.70	)	$	(1.88	)	$	(2.32	)

Net income per share from discontinued operations – basic and diluted	$	0.26		$	0.61		$	0.20

Net loss per share applicable to common shareholders - basic and diluted	$	(1.44	)	$	(1.27	)	$	(2.12	)

Weighted average common shares outstanding - basic and diluted	4,909			3,062			2,810

See notes to consolidated financial statements.

F-5

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

($ In Thousands)

	Preferred Stock			Common Stock		Additional paid-in Capital		Retained earnings (deficit)			Common stock held in Treasury			Receivables from related parties			Total

BALANCE, December 31, 2001	$	—		$	340	$	12,794	$	(266	)	$	(1,649	)	$	(238	)	$	10,981
Warrants issued	—			—		145		—			—			—			145
Treasury stock purchased	—			—		—		—			(8		)	—			(8		)
Net loss	—			—		—		(5,971		)	—			—			(5,971		)

BALANCE, December 31, 2002	$	—		340		12,939		(6,237		)	(1,657		)	(238		)	5,147
Stock-based employee compensation	—			—		229		—			—			—			229
Warrants issued	—			—		24		—			—			—			24
Common stock issued	—			93		50		—			—			—			143
Treasury stock issued	—			—		—		(660		)	750			—			90
Decrease in related party receivable	—			—		—		—			—			23			23
Net loss	—			—		—		(3,882		)	—			—			(3,882		)

BALANCE, December 31, 2003	$	—		$	433	$	13,242	$	(10,779	)	$	(907	)	$	(215	)	$	1,774
Stock-based employee compensation	—			—		184		—			—			—			184
Warrants issued	—			—		471		—			—			—			471
Common stock issued	—			138		101		—			—			—			239
Preferred stock issued, net of offering costs	1,895			—		448		(448		)	—			—			1,895
Warrants issued with preferred stock	(1,447		)	—		1,447		—			—			—			—
Net loss	—			—		—		(6,462		)	—			—			(6,462		)

BALANCE, December 31, 2004	$	448		$	571	$	15,893	$	(17,689	)	$	(907	)	$	(215	)	$	(1,899	)

See notes to consolidated financial statements.

F-6

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ In Thousands)

	Years Ended December 31,
	2004			2003			2002
Cash flow from operating activities:
Net loss from continuing operations	$	(7,718	)	$	(5,749	)	$	(6,519	)
Net income from discontinued operations	1,256			1,867			548
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Gain on extinguishment of debt	(222		)	—			—
Depreciation and amortization	424			1,266			1,124
Loss from disposal of assets	—			25			1,996
Provision for allowances	(12		)	(29		)	(25		)
Deferred lease rents	83			(49		)	418
Accretion of interest on long term debt	10			13			25
Value of warrants issued	297			24			145
Value of stock-based employee compensation	184			229			—
Changes in operating assets and liabilities:
Accounts receivable	(691		)	1,136			2,532
Accounts receivable from affiliates	47			43			50
Federal income taxes receivable	—			—			1,513
Prepaid expenses and other assets	(14		)	8			139
Trade accounts payable and accrued expenses	3,693			970			(726		)
Net operating cash flow from discontinued operations	1,279			(228		)	(58		)
Cash provided by (used in) operating activities	(1,384		)	(474		)	1,162
Cash flows from investing activities:
Capital expenditures	(37		)	(138		)	(268		)
Business acquisition costs, net of cash acquired	(207		)	—			(294		)
Advances to Medical Resources Network, Inc.	—			(499		)	—
Proceeds from sale of assets	—			—			557
Net investing cash flow from discontinued operations	—			(410		)	(72		)
Cash used in investing activities	(244		)	(1,047		)	(77		)
Cash flows from financing activities:
Issuance of preferred stock	1,920			—			—
Issuance of common stock	14			143			—
Borrowings from related parties	—			302			—
Net borrowings (repayments) on revolving line of credit	2,213			(3,768		)	492
Net (repayments) borrowings under factoring arrangement	(2,384		)	3,885			—
Obligations not liquidated because of outstanding checks	(214		)	529			(592		)
Issuance (purchase) of treasury stock	—			90			(8		)
Increase in debt obligations	1,053			—			295
Principal payments under debt obligations	(854		)	(31		)	(146		)
Principal payments under capital lease obligations	(75		)	(75		)	(96		)
Net financing cash flow from discontinued operations	(205		)	(124		)	(455		)
Cash provided by (used in) financing activities	1,468			951			(510		)
Change in cash and cash equivalents	(160		)	(570		)	575
Cash and cash equivalents at beginning of year	164			734			159
Cash and cash equivalents at end of year	$	4		$	164		$	734
Supplemental cash flow information and non-cash investing and financing activities:
Cash paid for interest	$	1,524		$	1,170		$	1,380
Cash paid (refunded) for taxes	$	—		$	—		$	(1,620	)
Non-cash investing and financing transactions:
Assets acquired under capital leases	$	37		$	100		$	—
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		$	—		$	—
Warrants exercised by reduction in debt due to holder of the warrant	$	225		$	—		$	—
Net assets of MRN acquired	$	282		$	—		$	—
Value of warrants issued to stockholders of MRN	$	174		$	—		$	—
Purchase of property and equipment financed by the vendor	$	—		$	93		$	—

See notes to consolidated financial statements.

F-7

DIVERSIFIED CORPORATE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004

1. Summary of Significant Accounting Policies

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 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.

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. During 2004, the Company offered two kinds of staffing solutions: direct placement services (“permanent placements”) and temporary and contract staffing.

The Company currently operates offices in the following locations:

Arizona		Phoenix
California		Palm Desert
Colorado		Denver
Georgia		Atlanta
Pennsylvania		Philadelphia
Texas		Dallas, Houston and Austin

Basis of Presentation

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the operations of all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Use of Estimates in the Preparation of Financial Statements and Significant Risks and Uncertainties

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amount 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.

Significant estimates and assumptions are used for, but not limited to: (i) the allowance for doubtful accounts, (ii) the allowance for estimated losses on realization of permanent placements, (iii) the useful lives of property and equipment, (iv) asset impairments including intangibles, (v) self-insurance reserves for health claims, (vi) deferred tax asset valuation allowances, (vii) contingency and litigation reserves, (viii) fair value of financial instruments, and (ix) the fair value calculations involved in determining stock-based employee compensation and the value of warrants issued.

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The Company is subject to a 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: 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 and Cash Equivalents

Cash and cash equivalents consist principally of amounts held in demand deposit accounts and amounts invested in financial instruments with initial maturities of three months or less at the time of purchase.

Trade Accounts Receivable

Trade accounts receivable are reported in the consolidated balance sheets at outstanding gross billings reduced by an allowance for estimated losses on the realization of direct placement fees (principally due to applicants not commencing employment or not remaining in employment for the guaranteed period) and by 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 balances, historical losses and general economic conditions. Accounts receivable at December 31, 2004 and 2003 include approximately $215,000 and $4,000, respectively, of unbilled receivables that were billed in 2005 and 2004. The Company generally does not charge interest on past due balances.

Property 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 and 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.

During 2003, the Company conducted a review of its property and equipment and related depreciation policies. As a result, the Company changed the estimated useful life of its computer equipment from five to four years and for its furniture from five to seven years. The changes were made to more accurately reflect the actual period of time the Company was benefiting from these assets. The reassessment of the lives used to depreciate these items was considered a change in estimate and resulted in an additional $186,200 charge to depreciation expense for the fourth quarter of 2003. In addition, the Company determined that certain other computer equipment and software did not provide any future benefit to the Company and took an additional depreciation charge of approximately $181,800 for the change in estimate of their useful lives in the fourth quarter of 2003.

Intangible Assets

Intangible assets consist of non-compete agreements and goodwill (excess of the purchase price over the fair value of net assets acquired) arising from business combinations. Prior to 2002, intangible assets were being amortized on a straight-line basis over periods ranging from 3 to 20 years based on their estimated useful lives or contract terms. On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and certain intangibles are no longer subject to amortization. Goodwill is subject to an annual impairment test, which the Company completed for the year ended December 31, 2004. The Company determined that no adjustment to the carrying value of goodwill was required.

F-9

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.

Impairment of Long-Lived Assets

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144, the Company reviews long-lived assets and identifiable intangibles for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to the undiscounted expected future cash flows to be generated by that asset. If the carrying value exceeds the expected future cash flows of the asset, an impairment exists and is measured by the amount the carrying value exceeds the estimated fair value of the asset. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial statements since it retained the fundamental provisions of SFAS No. 121, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, related to the recognition and measurement of the impairment of long-lived assets to be held and used.

Obligations not liquidated because of outstanding checks

Under the terms and conditions of our factoring liability (see Note 6), all cash receipts deposited in our lockboxes are swept daily by our lender. This procedure, combined with our policy of maintaining zero balances in the Company’s operating accounts, results in the Company reporting a balance of obligations not liquidated because of outstanding checks.

Income Taxes

Deferred tax assets and liabilities are established for temporary differences between financial statement carrying amounts and the taxable basis of assets and liabilities using rates currently in effect. A valuation allowance is established for any portion of the deferred tax asset for which realization is not likely. The valuation allowance is reviewed periodically to determine the amount of deferred tax asset considered realizable.

Fair Value of Financial Instruments

The estimated fair value of the Company’s financial instruments at December 31, 2004 and 2003 were determined by the Corporation based on available market information and appropriate 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. The fair value estimates are as of December 31 of the appropriate year and are not adjusted for changes in assumptions or circumstances that may arise after those dates.

The recorded values of cash and cash equivalents, trade accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short-term nature of these instruments. The 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.

Revenue Recognition 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.

F-10

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 permanent placements. Commissions paid by the Company related to permanent placements are included in selling expenses.

Segment Reporting

In accordance with 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.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31, 2004, 2003 and 2002, advertising expenses were approximately $263,000, $303,000, and $359,000, respectively.

Earnings (Loss) Per Share

Both basic and diluted loss per share were determined by dividing the net loss by the weighted average number of shares of common stock outstanding during the year. The weighted average number of shares of common stock outstanding for calculating both basic and diluted loss per share was also the same. Options and warrants to purchase 3,081,000 shares of common stock in 2004, 3,626,000 shares in 2003 and 4,496,000 shares in 2002 were not included in the computation of diluted earnings per share as the effect of including those options and warrants in the calculation would have been anti-dilutive.

Comprehensive Loss

For all periods presented, comprehensive loss is equal to net loss.

Self-Insurance Reserves

The Company was self-insured for its employee medical coverage. Provisions for claims under the self-insured coverage are based on the Company’s 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 December 31, 2004.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123 using the modified prospective method as permitted under SFAS No. 148. As a result, for the year ending December 31, 2003, the compensation cost recognized for stock-based employee compensation is the same as that which would have been recognized if the Company had used the fair value based recognition provisions of SFAS No. 123 for all employee awards granted, modified or settled after December 31, 1994. Under the modified prospective

F-11

method the Company used under SFAS No. 148, results for prior years are not restated. The Company begins recognizing such compensation cost as if all grants will entirely vest.

Prior to January 1, 2003, the Company elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees. Under APB Opinion No. 25, no compensation expense was generally recognized for options if their exercise price was at least equal to the market price of the underlying stock on the date of grant.

For options issued to employees and directors during the three years ended December 31, 2004, the fair value of each option grant was estimated on the date of grant by using the Black-Scholes option-pricing model. The weighted average fair value of options issued during the year ended December 31, 2004 was $1.15 per share, during the year ended December 31, 2003 was $0.31 per share, and during the year ended December 31, 2002 was $0.46 per share. The following weighted average assumptions were used in valuing the options granted during these periods:

	2004	2003	2002
Expected option lives – in years	3.7	4.0	4.0
Expected volatility - %	107.0	99.6	84.1
Expected dividend rate - %	0.0	0.0	0.0
Risk-free interest rate - %	3.1	3.0	3.0

The following table illustrates the effect on net loss and net loss per share for the three years ended December 31, 2004 as if compensation cost for the Company’s options issued to employees and directors had been determined using the fair value based method at the date of grant of such awards consistent with the provisions of SFAS No. 123:

($ in thousands, except per share amounts)		2004			2003			2002

Net loss as reported		$	(6,462	)	$	(3,882	)	$	(5,971	)
Add:	Stock-based employee compensation expense included in reported net income, net of related tax effects	184			229			—
Less:	Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(184		)	(229		)	(236		)
Pro forma net loss		$	(6,462	)	$	(3,882	)	$	(6,207	)

Basic and diluted loss per share		$	(1.32	)	$	(1.27	)	$	(2.21	)

Reclassifications

Certain previously reported amounts have been reclassified to conform to current year presentations.

Recently Issued Accounting Standards

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.

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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.

2. Going Concern and Management Plans

As a result of the recession that started in 2000 and the impact it had had on the direct placement and temporary staffing industry, the Company’s revenues have declined approximately 67% from levels achieved in 2000. The Company has also reported net losses for the last three years as a result of the decline in its business, and the Company’s current liabilities of $12.8 million exceed its current assets of $3.8 million as of December 31, 2004.

The Company currently finances itself through factoring of, or lines of credit based on, its accounts receivable. The amount of funds available under these agreements depends on the amount of accounts receivable accepted by the lenders. The Company operates with minimal cash balances as all cash receipts are deposited into the Company’s lockboxes, which are swept daily by its lenders (see Note 6). While the Company has generally sought to borrow the maximum amounts available from these facilities during 2004, the facilities have been inadequate in providing enough funds to maintain operations, which has resulted in the Company having to use other measures to continue to fund operations.

During 2003 and 2004, the Company reduced staff and closed offices to reduce its funds outflow. The Company has also not paid all employer and employee payroll taxes when due (see Note 18). As a result of the past due payroll tax liability, the Company is in default under one of its lending agreements (see Notes 6 and 18). In addition, the Company is 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 tactics have or may result in penalties and/or fines for late payments or may involve legal actions against the Company. However, management of the Company believed that these steps were necessary at the time to maintain the Company while it sought to correct its cash flow issues.

Payroll tax liabilities incurred of approximately $3,558,000 as of December 31, 2004, 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 as discussed below.

In October 2004, the Internal Revenue Service (the “IRS”) placed liens on the assets of two of the Company’s subsidiaries. After the Company and the IRS entered into negotiations, and with the payment of $200,000 of the Company’s past due tax liability, the Company and the IRS entered into a subordination agreement whereby the IRS subordinated its liens to the Company’s senior lenders so that the Company could continue to factor, and borrow against, its outstanding receivables. The 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. If the Company fails to pay any future tax liability on a timely basis, the subordination agreement will expire and the senior lenders will stop funding the Company’s operations. The IRS has extended the subordination agreement with one subsidiary of the Company until June 30, 2005. The Company has not entered into a formal agreement with the other senior lender, but this lender has continued to fund. Currently, both lenders may demand repayment at any time (see Note 6). There can be no assurance that the IRS will not remove their subordination agreement, which would lead the senior lenders to remove their financing. This would have a material adverse affect on the Company’s financial condition.

The Company has completed, or is seeking to complete, certain transactions which will partially address the going concern issues it faces.

In the first quarter of 2004, the Company completed the sale of a new issue of the Company’s preferred stock (see Note 5). Each share of preferred stock is convertible into ten shares of the Company’s common stock. The sale was closed in March 2004 and generated net proceeds to the Company of approximately $1.9 million. This capital was used for general working capital purposes and to acquire certain assets of Medical Resources Network, Inc. (see Note 3). While this financing provided much needed capital to help offset the Company’s negative cash flow, it did not provide enough funds to overcome this.

The Company is currently in negotiations to sell its Datatek division. If a sale of Datatek is consummated, the cash received should be adequate to repay most, if not all, of the past due payroll tax liabilities. There can be no

F-13

assurance at this time that a sale of Datatek will occur. Datatek represented approximately 60% of our temporary and contract staffing revenue in 2004. In accordance with FAS 144 – Accounting for the Impairment or Disposal of Long-lived Assets, we are accounting for Datatek as a discontinued operation (see Note 4).

The Company is continuing to evaluate various other financing and restructuring strategies, including merger candidates and investments through private placements, to maximize shareholder value and to provide assistance in pursuing alternative financing options in connection with its capital requirements and business strategy. One of these strategies is to seek acquisitions to replace the revenues lost in the Proposed Sale by acquiring small companies where we can absorb their back office operations into our own. There can be no assurance that the Company will be successful in implementing the changes necessary to accomplish these objectives, or if it is successful, that the changes will improve its cash flow and liquidity.

If a Datatek sale takes place, management believes that the Company will be able to secure other financing that will allow the Company to pursue an acquisition strategy, which when combined with improving market conditions and the restructuring of the 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.

The American Stock Exchange has delisted the Company which will make using the Company’s common stock in procuring financing more difficult. 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.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial 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.

3. Business Acquisitions / Divestitures

Medical Resource Network, Inc. (“MRN”):

During the third quarter of 2003, and consistent with the Company’s commitment to enter into the healthcare arena, the Company identified and established a relationship with MRN. MRN was a Southern California-based company specializing in the placement of traveling nurses. MRN maintained contract relationships with hundreds of hospitals throughout the country but lacked the financial resources to compete and grow. As a result, the Company structured a transaction in which the employees and nurses became employees of the Company, and the Company began taking over many back office functions of MRN. The Company maintained this relationship into 2004, allowing it to become thoroughly familiar with the operations, the business, and the traveling nurse industry.

The Company closed its acquisition of certain assets of MRN 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):

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

F-14

The liabilities 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 is being repaid at $5,000 per month and will be fully amortized by December 2006.

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 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 with the following assumptions: an expected term of 4 years; an expected dividend yield of 0.00%; an expected stock price volatility of 108.42%; and a risk-free interest rate of 2.61%.

The amount of the intangibles assigned to the non-compete agreement and contracts purchased will be 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 2004.

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.

The following table presents the unaudited pro forma condensed combined results of operations for the years ended December 31 2004 and 2003, assuming that the purchase of MRN’s assets occurred on January 1, 2003:

	Years ended December 31, 2004 and 2003
	As reported						Pro forma
	(Unaudited)						(Unaudited)
($ in thousands, except per share amounts)	2004			2003			2004			2003
Revenues	$	23,264		$	18,098		$	23,691		$	22,026
Net loss	$	(6,462	)	$	(3,882	)	$	(6,388	)	$	(4,424	)
Net loss applicable to common stockholders	$	(7,076	)	$	(3,882	)	$	(7,002	)	$	(4,424	)
Net loss per share – basic and diluted	$	(1.44	)	$	(1.27	)	$	(1.43	)	$	(1.44	)

The Company estimated the revenue and net income of MRN from January 1, 2004 to the acquisition date would be $427,000 and $74,000, respectively. The Company estimated the revenue and net loss of MRN would be $3,928,000 and $542,000, respectively, for the period from January 1, 2003 to December 31, 2003. These amounts are based on records provided to the Company by MRN, which have not been audited or tested for accuracy, adjusted for expenses paid on MRN’s behalf by the Company and for amortization of acquired intangibles. Pro forma amounts for 2002 are not presented as the Company did not have a relationship with MRN prior to 2003.

Mountain, Ltd. (“Mountain”):

Effective December 20, 2002, the Company sold the operations of Mountain back to the former owners. The terms of this sale included: (a) a payment of $572,000 to the Company, (b) a contingent future payment of

F-15

$78,000, (c) the waiver of all amounts payable by the Company to the former owners, approximately $2.1 million, and (d) the retention by the Company of all of Mountain’s cash, accounts receivable, and accounts payable. The warrants to purchase common stock of the Company issued to the former owners were also cancelled. The loss incurred on the sale was approximately $1,997,000. In 2002, Mountain’s contribution to the Company’s operating results included revenues of approximately $8.2 million, and an operating loss of $0.1 million.

4. Discontinued Operations

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 has been presented as a discontinued operation in accordance with SFAS No. 144 – Accounting for the Disposal or Impairment of Long-lived Assets. Under this statement, the operating results of Datatek are presented separately from continuing operations in the accompanying financial statements for all periods presented.

The Company cannot provide any assurance that these negotiations will ultimately lead to a sale of the subsidiary.

Summarized information for Datatek is as follows:

	Year Ended December 31,
	(in thousands)
	2004		2003		2002
Revenue	$	20,962	$	32,444	$	23,085
Gross Profit	$	2,979	$	4,368	$	2,623
Income (loss) before income taxes	$	1,256	$	1,867	$	548

	Balance at December 31,
	(in thousands)
	2004		2003
Current Assets
Cash & Cash Equivalents	$	—	$	(543	)
Trade Accounts Receivable, net	2,203		3,701
Total Current Assets	2,203		3,158
Long-Term Assets
Intangibles, net	3,450		3,460
Other Assets	2		2
Total Long-Term Assets	3,452		3,462
Total Assets	$	5,655	$	6,620

Current Liabilities
Accounts Payable & Accrued Liabilities	$	3,005	$	2,697
Long-Term Liabilities
Notes Payable	—		205
Other	6		—
Total Long-Term Liabilities	6		205
Total Liabilities	$	3,011	$	2,902

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5. Convertible Preferred Stock

During December 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 closed on 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 15^th 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 twelve months ending December 31, 2004 was $166,474 or $0.786 per share of Preferred Stock outstanding.

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.

The Company paid $189,375 out of the proceeds for fees to agents involved in the offering. In addition, $20,000 of additional Preferred Stock was issued (as discussed above) for a fee to an agent in the offering. Legal and other fees paid were approximately $14,000, resulting in net cash proceeds to the Company of approximately $1,895,000.

Warrants were issued to certain agents in connection with the offering. The Company issued warrants for 169,428 shares of the Company’s common stock at $0.80 per share, 235,713 shares at $2.00 per share and 66,964 shares at $3.50 per share. These warrants have a term of three years from their issue date, which was the date the parties executed their warrants. The warrant exercise price on the $2.00 per share and $3.50 per share warrants is subject to reduction depending on the net income before taxes reported by the Company for the fiscal year ending December 31, 2004. Since the Company reported a net loss before taxes for the year ending December 31, 2004, the exercise price for these warrants has been reduced to $0.00. These warrants were valued at their market value at March 19, 2004 assuming that the exercise price was $0.00, which resulted in an intrinsic value for these warrants of approximately $989,754. The fair value of warrants with an exercise price of $0.80 was calculated using the Black-Scholes option pricing model with the following average assumptions: an expected term of 2 years, an expected dividend yield of 0.0%, an expected stock price volatility of 107.16% and a risk-free interest 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.

The following table reflects the computation of the carrying value of the Preferred Stock since its issuance:

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

F-17

The discount related to the embedded conversion feature was amortized immediately as the holders of the Preferred Stock are able to convert their Preferred Stock into common stock at their option at any time. The remainder of the discount is not being amortized as the preferred stock is not required to be redeemed, except in a liquidation or dissolution of the Company, or upon the automatic conversion of the preferred, which payments or conversions are not probable at this time.

6. Line of Credit and Factoring Facilities

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. 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 during 2004 was approximately $2,094,000. The average interest rate on these borrowings was 24.9%. The maximum and minimum amounts borrowed were $5,541,000 and $934,000, respectively, for the year ended December 31, 2004.

The maximum amount available under the Wells Fargo Facility is established by individual customer credit limits and as a result, 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. The Company had also agreed to a permanent reserve of $700,000, which was released in March 2004 in connection with the Company obtaining a secured, senior line of credit discussed below.

Wells Fargo, on June 14, 2004, declared that a default currently existed under the Wells Fargo Facility as a result of the Company not remitting all payroll taxes when due, although they continued to advance funds on accounts receivable 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. Wells Fargo also continued to advance funds on the Company’s accounts receivable after the IRS subordinated their lien for unpaid payroll taxes to the Company’s senior lenders in November 2004.

Under the factoring facility 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”.

Due 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 12, 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 has entered into an amendment with Greenfield that extends the maturity date to March 12, 2006. 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 obligation to Greenfield.

The interest rate on the Greenfield loan is 8.0% above the prime rate. There was a $200,000 commitment fee paid on the closing. The amount that may be borrowed at any time under the line of credit is based on eligible receivables. Receivables for temporary and contract services will be advanced at 85% of the receivable. Originally, receivables for direct placement services were advanced at 60% of the receivable, subject to the lesser of a maximum advance of $1,000,000 or 30% of the gross availability. All proceeds from the collection of such receivables

F-18

are deposited into lockboxes controlled by Greenfield. The average amount borrowed under the Greenfield Facility for the year ended December 31, 2004 was approximately $2,276,000. The average interest rate, including the unused line of credit fee, for the year was 17.4%. The maximum and minimum amounts borrowed were $3,228,000 and $1,065,000. The Company incurred fees of approximately $413,000. Of these fees, approximately $242,000 were considered debt origination costs and are being amortized to interest expense over a one year period.

As a result of our non-payment of payroll taxes, the Company entered into a Forbearance Agreement with Greenfield on July 27, 2004. Under the agreement, Greenfield agreed not to enforce its default remedies for 90 days after the date of the agreement. The Company incurred approximately $51,000 in fees for the agreement. On October 27, 2004, the Company entered into an Amended Forbearance Agreement that granted the Company until January 27, 2005 to resolve its delinquent payroll tax issues with the IRS. Greenfield also agreed to increase borrowings on direct placement revenues to 40% of gross availability subject to a cap of $1,250,000. The Company incurred $50,000 in fees for the amended agreement. The Amended Forbearance Agreement has not been renewed, but Greenfield continues to fund the Company under its line of credit. On March 12, 2005, the Company entered into the Second Amendment to the Loan and Security Agreement with Greenfield which acknowledges that the Company has extended the subordination of its lien with the IRS for the payment of the past due taxes; extends the maturity date of the line of credit to March 12, 2006; and amends 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.

7. Property and Equipment

Property and equipment consists of:

	December 31,
($ In Thousands)	2004			2003

Computer equipment and software	$	3,783		$	3,731
Furniture and equipment	1,092			1,080
Leasehold improvements	120			114
	4,995			4,925
Less accumulated depreciation and amortization	(4,632		)	(4,238		)
Property and equipment, net	$	363		$	687

Depreciation and amortization of property and equipment was approximately $395,000, $1,266,000, and $1,124,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The depreciation for 2003 included approximately $368,000 in charges related to a change in the estimated lives of certain assets (see Note 1). Also included in depreciation and amortization expense is amortization of assets under capital leases in 2004, 2003 and 2002 of approximately $62,000, $50,000 and $68,000. The unamortized balance of assets under capital leases was approximately $88,000 and $114,000 at December 31, 2004 and December 31, 2003, respectively. These assets are included in computer equipment.

8. Intangibles

Intangibles Subject to Amortization

Intangibles subject to amortization consist of non-compete agreements. The non-compete agreements arose in relation to businesses purchased by the Company. The gross carrying amount is the amount assigned to the non-compete agreement in the related purchase contract. These agreements are amortized over their life, which is from one to five years. The gross carrying amount and accumulated amortization are removed when fully amortized.

F-19

	December 31,
($ in Thousands)	2004			2003
Gross carrying amount	$	25		$	0
Accumulated amortization	(21		)	—
Net carrying amount	$	4		$	0

The estimated amortization expense for the remaining life of the non-compete agreements is as follows: 2005 - $4,000.

Goodwill

Effective January 1, 2002, goodwill ceased to be amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The carrying value for goodwill is the net amortized balance as of the date of adoption of SFAS No. 142, as adjusted.

	December 31,
($ In Thousands)	2004		2003
Balance at the beginning of the year	$	3,610	$	3,200
Goodwill acquired during year	573		410
Balance at the end of the year	$	4,183	$	3,610

The addition to goodwill during 2004 relates to the acquisition of MRN. The addition to goodwill during 2003 related to contingent compensation to be paid to the owners of businesses acquired in prior years under their purchase contracts based on results of the operations during 2003.

9. Other Assets and Receivables from Affiliates

Other assets consist primarily of deposits of $161,000 in 2004 and $180,000 in 2003. Receivables from affiliates consisted primarily of receivables from J. Michael Moore (“Mr. Moore”), our Chief Executive Officer, and a company related to Mr. Moore, of $324,000 at December 31, 2004 and $358,000 at December 31, 2003 (see Notes 16 and 21). The remaining balance at December 31, 2003 of $499,000 was the amount due from MRN for services provided to them during 2003. The assets of MRN were acquired in February 2004 (see Note 3).

10. Trade Accounts Payable and Accrued Expenses

Trade accounts payable and accrued expenses consist of:

	December 31,
($ In Thousands)	2004		2003
Trade accounts payable	$	1,651	$	894
Accrued expenses	2,052		1,497
Accrued compensation	1,293		1,341
Accrued payroll expense	2,880		426
	$	7,876	$	4,158

Included in accrued compensation are accrued commissions, bonuses and contractors’ payroll. The increase in accrued payroll expense primarily represents the non-payment of payroll tax liabilities due to the IRS. Penalties and interest accrued at December 31, 2004 on the past due taxes of approximately $800,000 are included in accrued expenses. In the future if the penalties and/or interest are abated, this accrual may decrease significantly.

F-20

11. Long-Term Debt and Guarantees of Debt

Long-term debt consists of:

	December 31,
($ In Thousands)	2004			2003
Minimum deferred payment obligations:
Texcel acquisition	$	270		$	729
MRN Acquisition	102			—
J. Michael Moore promissory note	—			302
Colpitt promissory note	550			—
	922			1,031

Less current maturities	(867		)	(1,031		)
Total long-term debt	$	55		$	—

On October 8, 1998, the Company completed the acquisition of substantially all of the assets and assumed certain liabilities of Texcel, Inc. and Texcel Technical Services, Inc. (collectively, “Texcel”). As part of the purchase, the Company was obligated to make certain deferred payments to the prior owners. Effective January 1, 2003, the Company entered into the Amended and Restated Forbearance and Amendment Agreements with the three prior owners of Texcel, which restructured the prior deferred payment obligation by the Company and cured a default thereunder. Under the agreements, the Company’s obligation to repay the $746,800 in debt was deferred to June 30, 2004. However, under certain circumstances allowed under the terms of the Greenfield Facility, monthly payments of principal could be made. During 2003, $18,000 in principal payments were made. Interest was payable monthly commencing in May 2003, with all past due interest to be paid by April 2003. Under the new agreement, the interest rate was 12.5% per annum. A total of approximately $110,000 in interest was paid during 2003. In addition, the agreement amended the terms of the warrants that had been issued to these prior owners of Texcel. The previously issued warrants were canceled and new warrants were issued that increased the number of shares available to a total of 100,000 and reduced the exercise price to $0.27 (see Note 13).

During February 2004, the Company reached a settlement with one of the prior owners of Texcel. The settlement involved the retirement of the Company’s $412,000 obligation to that owner for $190,000. Funds were transferred during the second week of February and each party released the other from any future obligation. On June 30, 2004, the balance of the note to the remaining two former owners was not paid. One of the owners extended his portion of the note of $113,000 until September 3, 2004. Additional principal payments were made during the period. The payment due in September was not made, and the Company still owes that former owner approximately $81,000 including interest accrued to that date. Another of the former owners is still due approximately $194,000 including accrued interest as of June 30, 2004.

On October 29, 2003, Mr. Moore loaned the Company $302,000 pursuant to a promissory note, payable on demand, bearing interest at 10% per annum. The note was repaid during 2004 to fund the exercise of warrants.

Pursuant to a Note Purchase Agreement effective January 8, 1999, by and among the Company, Compass Bank (the “Bank”), DCRI L.P. No. 2, Inc. (L.P. No. 2), a company controlled by Mr. Moore, and Mr. Moore, the Company’s Chief Executive Officer, the Company was obligated to purchase from the Bank two promissory notes (the “Notes”) issued to the Bank by LP No. 2. The Company has been notified by Mr. Moore that an entity in which he has a financial interest purchased these Notes in 2004 and eliminated the Company’s obligation to the Bank (see Note 16).

In February 2004, the Company acquired the assets of MRN (see Note 3). Liabilities assumed in connection with this acquisition were approximately $139,000 and 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 initial 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 in monthly installments of $5,000 and will be fully amortized by December 2006. The principal balance of this note at December 31, 2004, was approximately $102,000.

In November 2004, the James R. Colpitt Trust loaned the Company $550,000 in the form of a participation agreement in the Greenfield Line of Credit (see Notes 6, 13 and 16). This agreement allows for the participation in

F-21

the accounts receivable collateral which secures the Greenfield Line of Credit. This loan bears interest at the rate of prime plus 8%.

12. Stock Options

Under provisions of the Company’s 1996 and 1998 Amended and Restated Nonqualified Stock Option Plans (the “Plans”), options to purchase an aggregate of 1,300,000 shares of our common stock may be granted to key personnel of the Company. Options may be granted for a term of up to 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 options granted in 2003, 2002, and 2001 vest over periods generally ranging from two to three years and have a term of ten years. There were approximately 104,000 shares available for additional grants at December 31, 2004 under the Plans.

The Company has also adopted the 1998 Non-Employee Director Stock Option Plan (the “Director Plan”). Options to purchase an aggregate 300,000 shares of the Company’s common stock will be automatically granted as follows: (i) each director who was serving at the time of the adoption of the Director Plan received an option for 15,000 shares of common stock, while each new director when elected or appointed receives the same award; and (ii) for those directors serving at the adoption of the Director Plan, they receive an additional option grant of 12,500 shares of common stock on January 1 of each year, while for directors elected or appointed after the adoption of the Director Plan, they receive the same award on the anniversary date that they were elected or appointed. The grant vests quarterly over one year, and the options have a term of ten years. The Director Plan expires in 2008. There are 135,000 shares still available for grant under the Director Plan at December 31, 2004.

The following table summarizes the information with respect to stock options for the years ended December 31, 2004, 2003 and 2002, respectively:

	2004				2003				2002
(shares in thousands)	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of Year	1,522		$	0.80	1,106		$	3.34	1,243		$	3.78
Granted	133		$	1.15	1,424		$	0.32	55		$	0.74
Exercised	(25	)	$	0.24	(13	)	$	0.24	—		—
Cancelled	—		—		(405	)	$	7.73	—		—
Forfeited	(307	)	$	0.40	(590	)	$	1.70	(192	)	$	5.42
Outstanding, end of year	1,323		$	0.94	1,522		$	0.80	1,106		$	3.34

Exercisable	783				428				865

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

	Options outstanding				Options exercisable
	Number of Shares Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number of Shares Outstanding	Weighted Average Exercise Price

(shares in thousands)
Exercise Prices

$ 0.20 to $ 0.50	795	8.17	$	0.24	372	$	0.24
$ 0.54 to $ 1.75	346	7.74	$	0.96	232	$	0.93
$ 2.875 to $ 12.75	182	5.65	$	3.93	179	$	3.94
	1,323	7.71	$	0.94	783	$	1.29

During 2003, all employees with options outstanding with an exercise price of greater than $2.50 per share were provided the opportunity to exchange those options for options with an exercise price of $0.24 per share. However, each employee would receive a new option for only 20% of the shares of common stock they surrendered.

F-22

Employees submitted options for 404,824 shares ranging in exercise price from $2.875 to $12.75 per share. The compensation expense incurred for the repriced options was approximately $26,000. The directors were also given this same opportunity, subject to shareholder approval. One director indicated he would exchange options for 60,000 shares for a new option of 12,000 shares.

In addition, the Director Plan has been amended, subject to shareholder approval, to change the number of shares for each option grant either on the initial date the director takes office or for the annual option award to 25,000 shares effective with the options granted in 2003. The option award for additional shares to be issued under the amended Director Plan, or the option exchange for the one director, will not be considered issued until the stockholders have approved the changes.

13. Common stock and warrants

At December 31, 2004, the Company had 10,000,000 shares of $0.10 par value common stock, 1,000,000 shares of $1.00 par value preferred stock authorized, and 215,000 shares of $10 par value preferred stock authorized. There were 5,353,693 shares of common stock outstanding at December 31, 2004, plus 360,559 shares of treasury stock are held by the Company. There were no shares of $1.00 par value preferred stock outstanding at December 31, 2004. There were 211,875 shares of $10 par value Series A convertible preferred stock outstanding at December 31, 2004.

During 2004, the Company issued 1,385,578 shares of common stock as a result of the exercise of stock options and warrants.

The Company has reserved 1,758,495 shares of common stock for issuance upon the exercise of outstanding warrants (see below). The Company has also reserved 1,323,501 shares of common stock for grant or issuance under the Company’s stock option plans (see Note 12).

The Company was prevented from paying dividends on its common stock or acquiring any treasury stock under the terms of the Greenfield Facility, until its termination in December 2003. The Company entered into a new agreement for a line of credit with Greenfield during 2004 (see Note 6), which has the same prohibition on the payment of dividends and the purchase of treasury stock.

The Company has issued warrants to employees, consultants and to former owners of acquired businesses. All the warrants issued are vested. The following table summarizes the information related to warrants for the years ended December 31, 2004, 2003 and 2002:

	2004				2003			2002
(shares in thousands)	Shares		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding, beginning of Year	2,104		$	0.77	3,274	$	0.55	378	$	3.90
Granted, including modified warrants	1,009		$	1.39	2,730	$	0.17	3,305	$	0.20
Exercised	(1,355	)	$	0.17

DIVERSIFIED CORPORATE RESOURCES INC 10-K