Overview

The Company provides contract and placement staffing services for business and industry, specializing in the placement of information technology, engineering and accounting professionals. As of September 30, 2008, the

Company operated 17 offices located in nine states.

The Company's business is highly dependent on national employment trends in general and on the demand for professional staff in particular. As an indicator of employment conditions, the national unemployment rate was 6.1% in September 2008 and 4.7% in September 2007. The change indicates a trend toward a lower level of employment in the United States during the last twelve months.

During the year ended September 30, 2008, the U.S. economy experienced a period of uncertainty stemming from problems in the housing and credit markets, and the rate of growth in national payroll employment turned

negative. Management believes that employers became very cautious about hiring during the period. As a result, the Company experienced sharpdeclines in both the number of placements and the number of billable

contract hours.

Consolidated net revenues for the year ended September 30, 2008 decreased 23% compared with the prior year. Placement service revenues were down 31%, and contract service revenues were down 12%. The effects of lower

consolidated net revenues resulted in a $1,843,000 loss from operations this year, compared with $613,000 of income from operations last year.

The Company's current strategy is to improve performance by enhancing staff training programs, to limit losses by closing unprofitable operations and to maintain control over operating costs.

Because long-term contracts are not a significant part of the Company's business, future results cannot be reliably predicted by considering past trends or by extrapolating past results.

Results of Operations

A summary of operating data, expressed as a percentage of consolidated net revenues, is presented below.

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                                                        Year Ended September 30
                                                         2008              2007
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Net revenues:
Contract services                                        49.1 %            42.9 %
Placement services                                       50.9              57.1

Net revenues                                            100.0             100.0
Cost of contract services                                33.1              28.7
Selling, general and administrative expenses             79.0              68.2

Income (loss) from operations                           (12.1 )%            3.1 %

Net Revenues

Consolidated net revenues for the year ended September 30, 2008 were down $4,455,000 (23%) from the prior year. Placement service revenues decreased $3,483,000 (31%), and contract service revenues decreased $972,000 (12%).

As a result of the weaker economic conditions that prevailed during the year ended September 30, 2008, the Company experienced less demand for its services. The decline in consolidated net revenues was the result of 35% fewer placements and a 9% decrease in the number of billable contract hours.

Cost of Contract Services

The cost of contract services includes wages and the related payroll taxes and employee benefits of the Company's employees while they work on contract assignments. There are no direct costs associated with placement service revenues. The cost of contract services for the year ended September 30, 2008

was down $604,000 (11%) as a result of the lower volume of contract business. The gross profit margin on contract business was 32.6%, which was about

the same as the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include the following categories:

• Commission expense, which includes commissions earned by the Company's employment consultants and branch managers on permanent and temporary placements.

• Base compensation in the operating divisions, which includes salaries, wages, unrecovered advances against commissions, payroll taxes and employee benefits associated with the management and operation of the Company's staffing offices.

• Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of its finance, legal, human resources and information technology functions.

• Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses.

• Recruitment advertising, which includes the cost of identifying job applicants.

• Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.

The Company's largest selling, general and administrative expense is for commissions. Most of the Company's employment consultants are paid on a commission basis and receive advances against future commissions. Advances are expensed when paid. When commissions are earned, prior advances are applied against them and the consultant is paid the net amount. At that time, the Company recognizes the full amount as commission expense, and advance expense is reduced by the amount recovered. Thus, the Company's advance expense represents the net amount of advances paid, less amounts applied against commissions.

Selling, general and administrative expenses for the year ended September 30, 2008 decreased $1,395,000 (10%). The largest reduction was for commission expense, which was down 37% because of the lower volume of placement business and lower average commission rates. Base compensation in the operating divisions increased 12%, primarily because of a higher amount of unrecovered advances against commissions. Administrative compensation was down 5%. Recruitment advertising was up 12%, despite a lower volume of job postings, because of higher costs per posting. All other selling, general and administrative expenses together increased 9%. Selling, general and administrative expenses represented 79.0% of consolidated net revenues, which was up 10.8 points from the prior year because of the decline in revenues.

Other

Investment income for the year ended September 30, 2008 was down $264,000 (88%), primarily due to a lower average rate of return on investments. Returns in fiscal 2008 were adversely affected by a downturn in the credit markets, and include a $126,000 unrealized holding loss on trading securities.

There was no credit for income taxes as a result of the pretax losses in the 2008 period, because there was not sufficient assurance that future tax benefits would be realized. There was no provision for income taxes in the 2007 period, because of the availability of losses carried forward from prior years.

Financial Condition

As of September 30, 2008, the Company had cash and cash equivalents of $4,165,000, which was a decrease of $2,179,000 from September 30, 2007. Net working capital at September 30, 2008 was $4,285,000, which was a decrease of $2,110,000 from September 30, 2007, and the current ratio was 3.8 to 1. Shareholders' equity as of September 30, 2008 was $5,076,000, which represented 73% of total assets.

During the fiscal year ended September 30, 2008, the net cash used by operating activities was $1,550,000. The net loss for the period, adjusted for depreciation and other non-cash charges, used $1,481,000, while working capital items used an additional $69,000.

Expenditures for the acquisition of property and equipment were $122,000 for the year ended September 30, 2008.

In November 2007, the Company's board of directors declared a $.10 per share cash dividend on its common stock, which resulted in a total payment of $517,000 in January 2008.

All of the Company's office facilities are leased. As of September 30, 2008, future minimum lease payments under noncancelable lease agreements having initial terms in excess of one year totaled $1,585,000. At that date, the Company also had contractual obligations to purchase approximately $800,000 of recruitment advertising through December 2009.

The Company has an employment agreement with the chief executive officer that provides for severance benefits if the officer's employment terminates for any reason other than "cause." The Company also has arrangements covering other officers and key employees that would become effective if their employment terminated under certain conditions following a change in control of the Company. As of September 30, 2008, the potential aggregate obligation under these arrangements, if all such officers and employees were terminated, was approximately $3,100,000.

As of September 30, 2008, there were approximately $3,700,000 of losses available to reduce federal taxable income in future years through 2028, and there were approximately $5,900,000 of losses available to reduce state taxable income in future years, expiring from 2009 through 2028. Future realization of the tax benefits of net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. Based on the weight of available evidence, the Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of September 30, 2008. See "Income Taxes" in the Notes to Consolidated Financial Statements for additional information.

The Company's primary source of liquidity is from its operating activities. The Company's philosophy regarding the maintenance of cash balances reflects management's views on potential future needs for liquidity. Despite recent losses, management believes that existing cash balances will be adequate to finance current operations for the foreseeable future.

Off-Balance Sheet Arrangements

As of September 30, 2008, and during the year then ended, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.

Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known. Significant matters requiring the use of estimates and assumptions include deferred income tax valuation allowances and accounts receivable allowances. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.

The following accounting policies are considered by management to be "critical" because of the judgments and uncertainties involved, and because different amounts would be reported under different conditions or using different assumptions.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized as a tax benefit in the future. If the Company were to change its determination about the future realization of tax benefits, the valuation allowance would be adjusted as a provision or credit to income taxes in the period in which the determination is made. Judgment is required in assessing the likelihood that tax assets will be realized. These judgments are based on estimates about future taxable income, which is inherently uncertain.

Accounts Receivable Allowances

An allowance for placement falloffs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company's guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances reflect management's estimate of potential losses inherent in the accounts receivable balances, based on historical loss statistics.

Recent Accounting Pronouncements

The Company adopted the requirements of Financial Accounting Standards Board

Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," as of October 1, 2007. The interpretation specifies how tax benefits for uncertain tax positions are to be measured, recognized and disclosed in financial statements. The adoption of it did not have a material effect on the Company's financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements". Statement 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and it expands disclosures about fair value measurements. Statement 157 is effective for the Company in the first quarter

of fiscal 2009. The Company does not expect the adoption to have a material effect on its financial statements.

Forward-Looking Statements

As a matter of policy, the Company does not provide forecasts of future financial performance. However, the Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in press announcements, reports to shareholders and filings with the Securities and Exchange Commission. All statements which address expectations about future operating performance and cash flows, future events and business developments, and future economic conditions are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's then-current expectations and assumptions. Actual outcomes could differ significantly. The Company and its representatives do not assume any obligation to provide updated information.

Some of the factors that could affect the Company's future performance include, but are not limited to, general business conditions, the demand for the Company's services, competitive market pressures, the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract assignments, the possibility of incurring liability for the Company's business activities, including the activities of its contract employees and events affecting its contract employees on client premises, and the ability to attract and retain qualified corporate and branch management.