MPS Group, Inc. is a leading provider of business services with over 220 offices in the United States, Canada, the United Kingdom, continental Europe, Australia, and Asia. We deliver specialty staffing, consulting and business solutions to virtually all industries in the following disciplines and through the following primary brands:

 Discipline                             Brand(s)
 Information Technology (IT) Services   Modis®
 Accounting and Finance                 Badenoch & Clark®, Accounting Principals®
 Engineering                            Entegee®
 Legal                                  Special Counsel®
 IT Solutions                           Idea Integration®
 Healthcare                             Soliant Health®
 Workforce Automation                   Beeline®

We present the financial results of the above brands under our four reporting segments: North American Professional Services, International Professional Services, North American IT Services and International IT Services.

Non-GAAP Financial Measures

From time to time we may measure certain financial information on a 'constant currency' basis. Such constant currency financial data is not a U.S. generally accepted accounting principles ('GAAP') financial measure. Constant currency removes from financial data the impact of changes in exchange rates between the U.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period financial data into U.S. dollars using the same foreign currency exchange rates that were used to translate the financial data for the previous period. We believe presenting certain results on a constant currency basis is useful to investors because it allows a more meaningful comparison of the performance of our foreign operations from period to period. Additionally, certain internal reporting and compensation targets are based on constant currency financial data for our various foreign subsidiaries. However, constant currency measures should not be considered in isolation or as an alternative to financial measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with GAAP.

From time to time we may measure certain financial information excluding the effect of acquisitions. Such financial data that excludes the effect of businesses we acquire is not a GAAP financial measure. We believe presenting some results excluding the effects of businesses we acquire is helpful to investors because it permits a comparison of the performance of our core internal operations from period to period. Additionally, certain internal reporting and compensation targets are based on the performance of core internal operations. The effect of a business we acquire is generally excluded for only the first 12 months following the acquisition date. Subsequent to this, a business is considered to be integrated for reporting purposes. Again, however, such measures should be considered only in conjunction with the correlative measures that include the results from acquisitions, as calculated and presented in accordance with GAAP.

We may use EBITDA to measure results of operations. EBITDA is a non-GAAP financial measure that is defined as earnings before interest, taxes, depreciation and amortization. We believe EBITDA is a meaningful measure of operating performance as it gives management a consistent measurement tool for evaluating the operating activities of the business as a whole, as well as, the various operating units, before the effect of investing activities, interest and taxes. In addition, we believe EBITDA provides useful information to investors, analysts, lenders, and other interested parties because it excludes transactions that management considers unrelated to core business operations, thereby helping interested parties to more meaningfully evaluate, trend and analyze the operating performance of our business. We also use EBITDA for certain internal reporting purposes, and certain compensation targets may be based on EBITDA. Finally, certain covenants in our debt facility are based on EBITDA performance measures. EBITDA, as with all non-GAAP financial measures, should be considered only in conjunction with the comparable measures, as calculated and presented in accordance with GAAP, including net income.

Critical Accounting Policies

We prepare our financial statements in conformity with GAAP. We believe the following are our most critical accounting policies in that they are the most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective or complex judgments.

Revenue Recognition

We recognize substantially all revenue at the time services are provided, and on a time and materials basis. In most cases, the consultant is our employee and all costs of employing the worker are our responsibility and are included in cost of revenue. Revenues generated when we permanently place an individual with a client are recorded on the date the individual begins employment with the client.

Allowance for Doubtful Accounts

We regularly monitor and assess our risk of not collecting amounts we are owed by our customers. This evaluation is based upon a variety of factors including, an analysis of amounts current and past due along with relevant history and facts particular to the customer. Based upon the results of this analysis, we record an allowance for uncollectible accounts for this risk. Our allowance for doubtful accounts, as a percentage of gross accounts receivable was 6.8%, 5.8% and 5.0% as of December 31, 2008, 2007 and 2006 respectively. The increase from 2007 to 2008 in the allowance for doubtful accounts as a percentage of gross accounts receivable was primarily due to worsening economic conditions. The increase from 2006 to 2007 in the allowance for doubtful accounts as a percentage of gross accounts receivable was primarily due to the write-off of receivables from one customer, the vendor management service provider, Ensemble Chimes Global, which filed for bankruptcy. As of December 31, 2008, a five-percentage point deviation in our allowance for doubtful accounts would have resulted in an increase or decrease to the allowance of $1.0 million. This analysis requires us to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts.

Income Taxes

We adopted FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on recognition, classification, and disclosure of tax positions.

The provision for income taxes is based on income before taxes as reported in the Consolidated Statements of Operations. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. An assessment is made as to whether or not a valuation allowance is required to offset deferred tax assets. This assessment includes anticipating future income.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets. Management evaluates all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The establishment and amount of a valuation allowance requires significant estimates and judgment and can materially affect our results of operations. Our effective tax rate may vary from period to period based, for example, on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, completion of federal, state or foreign audits, deductibility of certain costs and expenses by jurisdiction, and as a result of acquisitions.

Our tax basis in tax-deductible goodwill is deducted in our income tax returns. Accordingly, we expect future tax deductions of $268.1 million associated with tax-deductible goodwill. While these deductions are expected to span the next fifteen years, approximately 70% are anticipated to be generated over the next five years. In addition, we have a net deferred tax asset as of December 31, 2008, and a net deferred tax liability as of December 31, 2007. The components of our net deferred tax liabilities and assets, as well as other information on income taxes can be found in Footnote 7 to the Consolidated Financial Statements.

Impairment of Tangible and Intangible Assets

For acquisitions, we allocate the excess of the cost of the acquisition over the fair market value of the net tangible assets acquired first to identifiable intangible assets, if any, and then to goodwill. In connection with Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, we are required to perform goodwill impairment reviews, at least annually, utilizing a fair-value approach. We evaluate

goodwill for impairment using the two-step process prescribed in SFAS No. 142. The first step is to identify potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds the book value, goodwill is not considered impaired. If the book value exceeds the fair value, the second step of the process is performed to measure the amount of impairment.

In accordance with SFAS No. 142, we perform valuation testing annually as of October 1 and between tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We did not incur any goodwill impairment resulting from our valuation testing performed in the fourth quarters of 2007 and 2006. During the first three quarters of 2008, we did not experience significant adverse changes in the business climate that would cause us to accelerate the timing of our valuation testing. During the fourth quarter of 2008, we experienced the acceleration of certain negative trends in our business operations and financial results which were occurring in conjunction with evidence of a significant downturn in the macroeconomic conditions of the United States and the United Kingdom, the primary countries in which we do business. During the latter half of the fourth quarter of 2008, it became apparent that the deterioration of macroeconomic conditions in the United States and the United Kingdom would continue into 2009 resulting in a significant decrease in our revenues and profits. In addition, during the fourth quarter of 2008 we experienced a material decline in our market capitalization along with the valuations of our market comparable companies. Our valuation testing performed as of October 1, 2008 considered this continued economic and market deterioration that occurred during the fourth quarter.

Based on the results of our valuation testing performed in the fourth quarter of 2008, we recorded a goodwill and intangible impairment charge of $379.3 million, or $303.4 million net of the related tax benefit. This goodwill and intangible impairment charge was comprised of $205.1 million for a reporting unit included in our North American IT Services segment, $94.3 million for reporting units included in our International Professional Services segment, $49.9 million for a reporting unit included in our North American Professional Services segment, and $29.9 million for a reporting unit included in our International IT Services segment. We used a blended value of a discounted cash flow methodology and guideline public company methodology to arrive at fair value for SFAS No. 142. The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance for a five-year period. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the terminal value and expected future revenues, gross margins, operating margins, and working capital levels, which vary among reporting units. The guideline public company methodology establishes fair value by comparing us to other publicly traded companies that are similar to us from an operational and economic standpoint. The guideline public company methodology compares us to the comparable companies on the basis of risk characteristics in order to determine our risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. The market multiples we use for each reporting unit are: a) enterprise value to revenue and b) enterprise value to EBITDA. A control premium represents the value an investor would pay above minority interest transaction prices in order to obtain a controlling interest in the respective company.

As previously mentioned, the process of evaluating goodwill for impairment involves the determination of the fair values of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusion regarding whether remaining goodwill is impaired could change and result in an additional goodwill and intangible impairment charge, which could have a material effect on our consolidated financial position or results of operations. Additional information on Goodwill can be found in Footnote 5 to the Consolidated Financial Statements.

We amortize the cost of identifiable intangible assets (either through acquisition or as part of our internally generated intellectual property) over their estimated useful lives unless such lives are deemed indefinite. We review our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In performing the review for recoverability, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment charge is recognized. Otherwise, an impairment charge is not recognized. Measurement of an impairment charge for long-lived assets and identifiable intangibles would be based on the fair value of the asset. Included in the aforementioned goodwill and intangible impairment charge was a $2.5 million impairment charge to identifiable intangible assets.

Share-Based Compensation

Under our employee and director share-based compensation plans, participants have received or may receive grants of stock options, stock appreciation rights, restricted stock, restricted stock units, and performance shares. For 2008, we have solely utilized restricted stock for our share-based awards. Historically, we have utilized both restricted stock and stock options.

Effective January 1, 2006, we adopted the provisions of SFAS 123R, Share-Based Payment, using the modified prospective transition method to all past awards outstanding and unvested as of the effective date of January 1, 2006; accordingly, prior periods have not been restated. SFAS 123R requires the recognition of expense only for awards that are expected to vest, rather than recording forfeitures when they occur as previously permitted. Our forfeiture rates are based mainly upon historical share-based compensation cancellations. However, if the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. A one-percentage point deviation in the estimated forfeiture rates would have resulted in a $100,000 increase or decrease in compensation expense related to restricted stock for the year ended December 31, 2008. Additional information on share-based compensation can be found in Footnote 9 to the Consolidated Financial Statements.

Our consolidated revenue in 2008 increased 2% compared to 2007. This contrasts to the first 9 months of 2008, where our consolidated revenue had increased 8% compared to the same period for 2007. The demand for our services is highly dependent upon the state of the economy in the markets in which we operate, particularly the United States and the United Kingdom, and upon the staffing needs of our clients. During the fourth quarter of 2008, we experienced the acceleration of certain negative trends in our business operations and financial results which were occurring in conjunction with evidence of a significant downturn in the macroeconomic conditions of the United States and the United Kingdom. This deterioration was evident in both our North American and International segments, but was more pronounced in our permanent placement business than in our staffing business. In particular, our permanent placement fees generated from our North American and International Professional Services segments together decreased 29% from the third quarter of 2008 to the fourth quarter of 2008. This is significant as more than 80% of our permanent placement fees are generated by our North American and International Professional Services segments. In the third quarter of 2008, permanent placement weakening occurred primarily in our International Professional Services segment and to a lesser extent in our North American Professional Services segment. Staffing services in both our North American and International segments were also impacted by worsening economic conditions as staffing services revenue decreased 15% from the third quarter of 2008 to the fourth quarter of 2008. Prior to the third quarter of 2008, our staffing services were not as impacted by worsening economic conditions. We believe that economic conditions will continue to erode demand for both our permanent placement and staffing services, further decreasing our revenues and profits. However, our ability to provide guidance on future results is impaired by the uncertain economic conditions.

Our revenue and to a lesser extent profits, are impacted by fluctuations in foreign currency exchange rates. The British Pound, the main functional currency for our international segments, weakened against the United States Dollar in the third quarter of 2008. This devaluation of the British Pound accelerated in the fourth quarter of 2008 and continued into the first quarter of 2009. If this trend does not reverse for the remainder of the first quarter of 2009, our revenue for the first quarter will be reduced.

We expect to realize a decrease in compensation expenses associated with decreases in revenue as many of our employees are compensated based on revenue production. As economic conditions weakened, we have taken steps to improve our cost efficiency including slowing the hiring of new staff, reducing personnel through attrition and eliminating certain staff positions. If we do not continue to undertake short-term steps to improve our cost efficiency, the revenue declines discussed above could have a greater negative impact on our operating income. However, we do not want to take actions that may impede our ability to grow revenue once the economic conditions strengthen.

In accordance with SFAS No. 142, we performed our valuation testing for goodwill impairment during the fourth quarter of 2008. Based on the results of this testing, we recorded a goodwill and intangible impairment charge of $379.3 million, or $303.4 net of the related tax benefit. Although the goodwill and intangible impairment charge impacted operating income, it was a non-cash charge. Our operating loss for both the fourth quarter and year of 2008 of $359.9 million and $263.9 million, respectively, included this charge. In discussing profits for the first quarter of 2009 above, we are comparing profits to the fourth quarter level before this charge.

The following detailed analysis of operations should be read in conjunction with the 2008 Consolidated Financial Statements and related footnotes included elsewhere in this Form 10-K.

Consolidated revenue was $2,222.3 million, $2,171.8 million, and $1,876.6 million in 2008, 2007 and 2006, respectively, increasing by 2.3% and 15.7% in 2008 and 2007, respectively.

Consolidated gross profit was $636.9 million, $622.3 million, and $517.0 million in 2008, 2007 and 2006, respectively, increasing by 2.3% and 20.4% in 2008 and 2007, respectively. The consolidated gross margin was 28.7% in 2008 and 2007, and 27.5% in 2006.

Consolidated operating expenses were $900.8 million, $488.7 million, and $402.5 million, in 2008, 2007 and 2006, respectively, increasing by 84.3% and 21.4% in 2008 and 2007, respectively. General and administrative (G&A) expenses, which are included in operating expenses, were $499.7 million, $468.5 million, and $386.6 million, in 2008, 2007 and 2006, respectively, increasing by 6.7% and 21.2% in 2008 and 2007, respectively. Operating expenses include a $379.3 million goodwill and intangible impairment charge. $49.9 million and $94.4 million of the goodwill and intangible impairment charge were recorded in our North American and International Professional Services segments, respectively, and $205.1 million and $29.9 million of the goodwill and intangible impairment charge were booked in our North American and International IT Services segments, respectively.

Unallocated corporate expenses, included in consolidated operating expenses, pertain to certain functions, such as executive management, accounting, administration, tax, and treasury that are not attributable to our operating units. Unallocated corporate expenses were $30.9 million, $30.4 million and $28.1 million, in 2008, 2007 and 2006, respectively, increasing 1.6% and 8.2% in 2008 and 2007, respectively. As a percentage of revenue, unallocated corporate expenses were 1.4% for 2008 and 2007, and 1.5% for 2006. The increase in unallocated corporate expense in 2007 was due primarily to a combination of higher compensation and benefits cost, and an increase in non-cash compensation expense from our use of restricted stock.

Consolidated operating loss was $263.9 million in 2008, and consolidated operating income was $133.6 million and $114.5 million in 2007 and 2006, respectively, decreasing by 297.5% in 2008 and increasing by 16.7% in 2007. Operating loss as a percentage of revenue was 11.9% in 2008, and operating income as a percentage of revenue was 6.2% and 6.1% in 2007 and 2006, respectively.

Consolidated other expense, net, was $5.6 million in 2008, and consolidated other income, net, was $6.9 million and $6.0 million in 2007 and 2006, respectively. Other income (expense), net, primarily includes changes in the cash surrender value of our company-owned life insurance, interest income related to our investments and cash on hand, net of interest expense related to notes issued in connection with acquisitions and fees and interest on our credit facility. The change from other income, net in 2007 to other expense, net, in 2008 was due primarily to a decrease in the cash surrender value of our company-owned life insurance, and to a lesser extent a decrease in interest income and an increase in interest expense. The cash surrender value of our company-owned life insurance decreased by $7.3 million from the twelve months ended December 31, 2007 to the twelve months ended December 31, 2008. The decrease in the cash surrender value of our company-owned life insurance was due to a decrease in the value of the equity mutual funds within our company-owned life insurance.

The consolidated income tax benefit was $33.6 million in 2008, and the consolidated income tax provision was $53.5 million and $45.3 million in 2007 and 2006, respectively. The effective tax rate was 12.5%, 38.0% and 37.6%, for 2008, 2007 and 2006, respectively. The effective tax rate in 2008 decreased because a significant portion of the goodwill and intangible impairment charge was related to non-deductible goodwill. Included in the 2007 and 2006 tax provisions were $1.6 million and $1.1 million, respectively, of tax benefits due primarily to valuation allowance reductions associated with state net operating loss and foreign tax credit carryforwards, and favorable settlements of certain state income tax audits.

Consolidated net loss was $236.0 million in 2008, and consolidated net income was $87.1 million and $75.2 million in 2007 and 2006, respectively.

Results of Operations for the Three Years Ended December 31, 2008 - By Business Segment

Professional Services division

North American Professional Services segment

Revenue in our North American Professional Services segment was $726.5 million, $690.1 million, and $617.2 million, for 2008, 2007 and 2006, respectively, increasing by 5.3% and by 11.8% in 2008 and 2007, respectively. North American Professional Acquisitions contributed $28.3 million, $26.4 million, and $33.2 million in revenue in 2008, 2007 and 2006, respectively. The increase in revenue for 2008 was due primarily to acquisitions in our Soliant Health and Special Counsel business units, and to a lesser extent to internal growth, most notably in the segment's Special Counsel and Entegee business units. The increase in revenue for 2007 was due primarily to internal growth, most notably in the segment's Entegee business unit, and to a lesser extent due to acquisitions, most notably in the segment's Special Counsel business unit.

Revenue contribution from the North American Professional Services businesses for 2008, 2007 and 2006 were as follows:

                                            2008     2007     2006
                    Entegee                 43.9 %   44.6 %   44.9 %
                    Special Counsel         25.2     23.4     22.2
                    Accounting Principals   13.3     16.2     16.9
                    Soliant Health          17.6     15.8     16.0
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