Depreciation and amortization for the fiscal years ended September 30, 2003 and 2002 were $0.3 million and $0.2 million respectively.

Interest and other income was $0.6 million and $1.1 million for the fiscal years ended September 30, 2003 and 2002, respectively, a decrease of $0.5 million. This decrease is primarily attributable to the reduction in late payment fees received by our Medical Staffing division due to a more competitive pricing environment, and referral fees received in fiscal 2002 due to the closing of the Houston Medical Staffing service office.

Interest and other expense was $0.2 million for the fiscal years ended September 30, 2003 and 2002

Income tax benefit from continuing operations for the fiscal year ended September 30, 2003 was $0.9 million versus income tax expense of $1.7 million for the fiscal ended September 30, 2002. These tax benefits in 2003 are a result of losses from operations.

Loss from continuing operations for the fiscal year ended September 30, 2003 was $1.5 million or $.10 per fully diluted share, as compared to income from continuing operations of $3.0 million or $0.18 per fully diluted share for the same period last year. This decrease is due to the decreased performance of TeamStaff's Medical Staffing division and the accrual for TeamStaff's potential obligations to its former Chief Executive Officer and Chief Financial Officer under their severance agreement and under its SERP.

Losses from discontinued operations net of tax for the fiscal year ended September 30, 2003 was $27.4 million compared to income from discontinued operations net of tax of $0.1 million for the same period last year. This decrease is predominantly due to the after-tax write down of impaired goodwill and the intangibles related to the Wachovia relationship of $25.4 million.

Net loss for the fiscal year ended September 30, 2003 was $28.9 million or $1.84 per fully diluted share, as compared to net income of $3.1 million or $0.19 per fully diluted share for the same period last year.

Liquidity and Capital Resources

Net cash used in operating activities for the fiscal year ended September 30, 2005 was $2.1 million compared to $1.2 million in the fiscal year 2004 was $1.2 million compared to $6.8 million in fiscal 2003. As part of the sale of the PEO business, TeamStaff received $9.25 million in cash.ended September 30, 2004. Use of cash during fiscal year2005 includes increased accounts receivable of $1.8 million primarily due to the operations of Nursing Innovations subsequent to its acquisition on November 14, 2004 includedand RS Staffing subsequent to its acquisition effective June 4, 2005, increased accrued payroll and other current assets related to workers' compensation payments, increased other assets related to increasesaccrued expenses of $1.3 million and losses in TeamStaff's deferred tax asset, additional cash classified ascontinuing and discontinued operations, offset by a decrease of $1.8 million in restricted cash related to ourthe release of the letter of credit requirement from Zurich for TeamStaff’s workers’ compensation policy.

Cash used in investing activities for the fiscal year ended September 30, 2005 was $4.8 million compared to $0.02 in fiscal 2004. Use of cash was primarily for the purchase of certain of the assets of Nursing Innovations for $1.9 million including acquisition expenses and the capital stock purchase of RS Staffing Services for $3.25 million plus acquisiton expenses, less acquired cash of $0.7 million.

Cash provided by SunTrustfinancing activities for the fiscal year ended September 30, 2005 was $5.1 million compared to $0.06 million in connection with our Zurich workers' compensation program, reduction in severance obligations to TeamStaff's former CEO and CFO, and losses from continuing and discontinued operations.

fiscal 2004. During the first fiscal quarter of 2005, TeamStaff entered into Securities Purchase Agreements as of November 5, 2004(subsequent to the balance sheet date) with several accredited investors for the private sale under Section 4(2) of the Securities Act of 1933 and/or Regulation D of securities for an aggregate purchase price of $4,305,600.$4.3 million. The offering consisted of the sale of 2,392,000 shares of Common Stock and 598,000 common stock warrants. The warrants have a three-year exercise term and an exercise price of $2.50 per share. The investors in the transaction received one three-year warrant to purchase an additional share of common stock at a price of $2.50 per share for every four shares of common stock purchased in the transaction.

Closing of the offering occurred on Wednesday, November 10, 2004. TeamStaff received net proceeds of approximately $4,000,000$4.0 million, after payment of commissions and related offering expenses. SunTrust Robinson Humphrey Capital Markets and Maxim Group LLC served as selling agents on TeamStaff's behalf and received combined commissions of 6.5% of the gross proceeds.

Effective June 8, 2005, TeamStaff, Inc. entered into a $7.0 million revolving credit facility provided by PNC Bank to (i) provide for the acquisition of RS Staffing; (ii) refinance an outstanding senior loan facility; and (iii) provide ongoing working capital. Revolving Credit advances bear interest at either the Prime Rate plus 25 basis points or LIBOR plus 275 basis points, whichever is higher. The net proceeds will be used principallyfacility has a three-year life and contains term and line of credit borrowing options. The facility is subject to fundcertain restrictive covenants, including minimum EBITDA and a minimum consolidated debt service coverage ratio. For the Company's internal growth initiativesperiod ended September 30, 2005, TeamStaff was not in compliance with the EBITDA covenant. PNC issued an Amendment to Revolving Credit and Security Agreement, waiving the minimum EBITDA requirement because the Company met the minimum consolidated debt service coverage ratio. The facility is subject to executeacceleration upon non-payment or various other standard default clauses. In addition, we granted PNC a lien and security interest on its strategyall of completing complementary acquisitions inour assets. As of September 30, 2005, there was $4.0 million debt outstanding under the temporary medical staffing industry.

Cash used in investing activitiesCredit Facility and $1.8 million of unused availability under the line, based on billed accounts receivable. The interest rate effective as of September 30, 2005 was virtually unchanged during fiscal year 2004 as opposed to $0.4 million used in fiscal year 2003.

Cash used in financing activities in the fiscal year 2004 was $0.1 million, primarily due to comprehensive expense recognized as a result of a change in discount rtes used in the calculation of7.0%.

projected benefit obligationsAvailability under the PNC line of credit is directly related to the SERP. This is comparedsuccessful assignment of certain accounts receivable. Certain government accounts of RS Staffing Services are required to $0.9 millionexecute ‘‘Acknowledgements of Assignment.’’ There can be no assurance that every RS Staffing government account will execute the documentation to effectuate the assignment and secure availability. The failure of government third parties to sign the required documentation could result in fiscal year 2003, primarily due toa decrease in availability under the repurchaseline of 251,214 shares of TeamStaff stock during the fiscal year.credit.

As of September 30, 2004,2005, TeamStaff had unrestricted cash and cash equivalents of $3.1$1.3 million and net accounts receivable of $3.0$9.5 million. As of September 30, 2004,2005, TeamStaff had working capital of $5.6$1.0 million. Management believes its existing cash, liquidity provided by the Company’s revolving line of credit and funds generated by operations will be sufficient to support cash needs for at least the next twelve months.

On July 22, 1999, the Board of Directors authorized the repurchase up to 3% of the outstanding shares of TeamStaff's common stock. On November 19, 2002, the Board of Directors authorized an additional repurchase of up to $1.0 million in common stock. Since inception we have repurchased 581,470 shares at an average cost of $4.18 per share for a total cost of $2.4 million. As of September 30, 2004, TeamStaff retired 574,470 shares of treasury stock.

Obligations (Amounts in Thousands)				Payments Due By Period
				Total				Less than 1 year				1-3 years				4-5 years
Long-term debt				$	136			$	112			$	24			$	0
Operating leases (1)					2,025				1,249				470				306
Pension liability (2)					1,428				556				672				200
Serverance (3)					62				62				—				—
Total Obligations				$	3,651			$	1,979			$	1,166			$	506

Obligations (Amounts in Thousands)				Payments Due By Period
				Total				Less than 1 year				1-3 years				4-5 years
Long-term debt (1)				$   9,439				$    7,719				$    1,720				$0
Operating leases (2)				2,498				644				1,396				458
Pension liability (3)				872				275				462				135
Total Obligations				$ 12,809				$    8,657				$    3,559				$   593

(1)

Represents bank line of credit, notes payable related to acquisition of RS Staffing, CNA settlement, and capital lease obligations. Bank line of credit has a 3-year life but is classified as short term because it is subject to acceleration upon non-payment or various other standard default clauses. Additionally, the CNA settlement is classified as short term because it contains an acceleration clause not to exceed amounts received from Zurich American Insurance Company.

(2)	Represents lease payments net of sublease income.

(2)(3)	Represents pension liability for the former CEO and former CFO.

(3)	Represents accrual for separation agreements with former CEO and former CFO. This amount is included within accrued payroll on TeamStaff's balance sheet.

Recently Issued Accounting Pronouncements

On November 17, 2003, Affecting the Financial Accounting Standards Board (FASB) issued the final FASB Staff Position (FSP) FAS 150-3, "Effective Date for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests under FASB Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity' ". The final FSP affects how public and nonpublic entities classify, measure, and disclose certain mandatorily redeemable non-controlling interests associated with finite-lived subsidiaries and mandatorily redeemable financial instruments and requires entities that have already adopted FAS 150 to rescind the adoption of certain provisions of FAS 150 and to permit them to present the adoption of the FSP either by restating previously issued financial statements or as a cumulative effect in the period of adoption. The Company has analyzed its financial instruments in light of FAS 150 and has determined that this statement is not applicable to its financial position and that the adoption of this statement has no impact on its consolidated statements.

In December 2003,2004, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsSFAS No. 132123 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements2004) Share-Based Payments (SFAS No. 87, 88, and 106" ("SFAS 132 (revised 2003)"), effective for fiscal years beginning after December 15, 2002, subject to certain exemptions. SFAS 132 (revised 2003) revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"123(R)), which it replaces. Itreplaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) requires additional disclosuresall share-based payments to

those employees, including grants of employee stock options, to be recognized in the originalfinancial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. The pro forma disclosures previously permitted under SFAS 132 aboutNo. 123 no longer will be an alternative to financial statement recognition. In April 2005, the assets, obligations, cash flows, and net periodic benefit costSEC issued a press release that revises the required date of defined benefit pension plans and other defined benefit postretirement plans.adoption under SFAS 123(R). The required information should be provided separately for pension plans and for other postretirement benefit plans. The Company adoptednew rule allows companies to adopt the provisions of SFAS 132 (revised 2003) as of January 1, 2004. The effect of123(R) beginning on the adoption of this statement was not material.

In March 2004, the FASB reached a consensus on Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which provides guidance to determine the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity (including individual securities and investments in mutual funds), and investments accounted for under the cost method or the equity method. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periodsfirst annual period beginning after June 15, 2004. The adoption of Issue No. 03-1 has not had any impact2005. Based on the Company's financial statements and results of operations.new required adoption date, the Company expects to adopt SFAS 123(R) effective October 1, 2005.

On March 31, 2004, the FASB issued an exposure document relatedSFAS 123(R) permits public companies to share-based payments that would amend SFAS No. 123, "Accounting for Stock-Based Compensation." The FASB has tentatively concluded that companies could adopt the new standard inits requirements using one of two ways: the methods: (1) a ‘‘modified prospective transitionprospective’’ method and the modified retrospective transition method. Using the modified prospective transition method, a company would recognize share-based employeeunder which compensation cost fromis recognized beginning with the beginningeffective date based on the requirements of the fiscal period in which the recognition provisions are first applied as if the fair-value based accounting method had been used to accountSFAS 123(R) for all employee awardsshare-based payments granted modified, or settled after the effective date and based on the requirements of SFAS 123 for all awards granted to any awards that were not fully vested as of the effective date. Using the modified retrospective method, a company would recognize employee compensation cost for periods presentedemployees prior to the adoption of the proposed Standard in accordance with the original provisionseffective date of SFAS No. 123;123(R) that is, an entity would recognize employee compensation cost inare unvested on the amounts reported ineffective date; or (2) a ‘‘modified retrospective’’ method which includes the pro-forma disclosures provided in accordance with SFAS No. 123. A company would not be permitted to make any changes to those amounts upon adoptionrequirements of the proposed Statement unless those changes represent a correction of an error (and are disclosed accordingly.). For the periods after the date of adoption of the proposed Standard, the modified prospective transition method described above would be applied. The FASB expects to issueand also has entities restate either all prior periods presented or prior interim periods of the final standard by December 31, 2004.year of adoption using the amounts previously calculated for pro forma disclosure under SFAS 123. The Company continuesintends to evaluatefollow the impactmodified prospective method upon adoption in the final standardfirst fiscal quarter of 2006.

See ‘‘Stock-Based Incentive Compensation’’ in the Notes to Consolidated Financial Statements for the pro forma net income and net income per share amounts, for the fiscal years ended September 30,

2005, 2004 and 2003, as if we had used a fair-value-based method similar to the methods required under SFAS 123(R) to measure compensation expense for employee stock incentive awards. Although we have not yet determined whether the adoption of SFAS 123(R) will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating whether the requirements under SFAS 123(R) will have a significant adverse impact on the Company's resultsour consolidated statements of operations and financial statements.

In April 2004, the EITF reached consensus on EITF Issue No. 03-6, "Participating Securities and the Two Class Method under FASB Statement No. 128" ("EITF 03-6"). EITF 03-6 addresses a number of questions regarding the computation of earningsnet income (loss) per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in the dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-6 also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and requires retroactive restatement of prior earning per share amounts. The adoption of Issue No. 03-6 has not had a material impact on the Company's financial statements and results of operations.share.

ITEM 7a7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TeamStaff does not undertake trading practices in securities or other financial instruments and therefore does not have any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from such practices. TeamStaff has no material interest rate risk, except with respect to our workers' compensation programs, and is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. TeamStaff has a material interest rate risk with respect to our prior workers’ compensation programs. In connection with TeamStaff's workers'TeamStaff’s prior workers’ compensation programs, prepayments of future claims arewere deposited into trust funds for possible future payments of these claims in accordance with the policies. The interest income resulting

from these prepayments is for the benefit of TeamStaff, and is used to offset workers'workers’ compensation expense. If interest rates in these future periodsperiods’ decrease, TeamStaff's workers'TeamStaff’s workers’ compensation expense would increase because TeamStaff would be entitled to less interest income on the deposited funds. Further, and as discussed elsewhere in this filing, TeamStaff, Inc. completed a $7.0 million revolving credit facility by PNC Bank effective on June 8, 2005. Revolving Credit advances bear interest at either the Prime Rate plus 25 basis points or LIBOR plus 275 basis points, whichever is higher. The facility has a three-year life and contains term and line of credit borrowing options. The facility is subject to certain restrictive covenants, including minimum EBITDA and a minimum consolidated debt service coverage ratio. The facility is subject to acceleration upon non-payment or various other standard default clauses. Material increases in the Prime or LIBOR rate could have a material adverse effect on our results of operations, the status of the Revolving Credit Facility as well as interest costs.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

See attached Financial Statements beginning on page F-1 attached to this report on Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 10, 2002, the Board of Directors of TeamStaff and its Audit Committee decided to change independent public accountants from Arthur Andersen LLP to PricewaterhouseCoopers, LLP for the fiscal year ending September 30, 2002.

At a meeting held on December 10, 2002, prior to concluding their audit for fiscal 2002, PricewaterhouseCoopers expressed its opinion to the Audit Committee of TeamStaff that there were material weaknesses in TeamStaff's system of internal controls, including the adequacy, competency and reliability of operational and financial information, information systems and finance personnel. PricewaterhouseCoopers further stated that information had come to its attention, that if further investigated may materially impact the fairness or reliability of the previously issued financial statements for fiscal year 2001 and/or the financial statements to be issued for fiscal year 2002. PricewaterhouseCoopers also stated that due to an accounting error in the treatment of a supplemental retirement plan, a restatement and a reaudit of fiscal 2001 would be required but it declined the engagement for the reaudit of fiscal year 2001.

In December 2002, PricewaterhouseCoopers further advised TeamStaff that it believed it would be essential to employ a new Chief Financial Officer and conditioned the continuance of its audit for fiscal 2002 on the employment of a new Chief Financial Officer. Pricewaterhouse-Coopers acknowledged that in view of the foregoing, it was likely that TeamStaff would be unable to make a timely filing of its annual report for fiscal year 2002.

In response to the foregoing advice from PricewaterhouseCoopers, the Audit Committee recommended to the Board of Directors that TeamStaff's Chief Financial Officer be relieved of his duties immediately, and a search for a new Chief Financial Officer be commenced. The Board accepted and implemented the recommendations of the Audit Committee in full. We have since retained a new Chief Financial Officer and have established, and will continue to establish, new policies and procedures designed to improve the reliability and reporting of operational and financial information.

Our consolidated financial statements for fiscal 2001 were audited by Arthur Andersen which is no longer licensed to practice before the Securities and Exchange Commission. Therefore, the restatement of fiscal 2001 required the reaudit of the fiscal 2001 financial statements. PricewaterhouseCoopers advised the Audit Committee that it would not accept an engagement for the reaudit of fiscal 2001 due to its concerns regarding the internal control issues described above. In light of the need to engage a new auditor for fiscal 2001, the Audit Committee determined that the interests of TeamStaff were best served by engaging new independent accountants willing to audit both fiscal 2001 and fiscal 2002.

On December 13, 2002, the Audit Committee dismissed PricewaterhouseCoopers and engaged Lazar Levine & Felix LLP to serve as TeamStaff's independent public accountants. In conducting the audit for fiscal year ended September 30, 2002, Lazar expanded its testing of TeamStaff's internal controls, including information technology controls, to include the fiscal year ended September 30, 2001. This procedure was followed since the Arthur Anderson work papers were not readily available for review by Lazar and to investigate the concerns regarding internal controls raised by PricewaterhouseCoopers. As a result of this expanded testing, no material weaknesses in the systems was revealed and, based on these results, Lazar concluded that only an audit of one restatement adjustment, as discussed below, was appropriate and a full reaudit of the fiscal 2001 consolidated financial statements was not necessary.

Prior to its dismissal, PricewaterhouseCoopers had advised the Audit Committee that, in PricewaterhouseCoopers' opinion, TeamStaff should not have applied pension plan accounting to its supplemental retirement plan adopted on October 1, 2000, resulting in a material error requiring the restatement of the fiscal year 2001 financial statements. This would have resulted in an additional after-tax charge to earnings of approximately $408,000 in fiscal year 2001. TeamStaff had engaged an independent firm to design the plan and had reviewed the plan's accounting treatment with Arthur Andersen prior to its certification of TeamStaff's fiscal year 2001 financial statements. Lazar advised the Audit Committee that it had undertaken its own analysis of the appropriate accounting treatment for the supplemental retirement plan. Lazar determined that the plan is indeed a pension plan and TeamStaff had accounted for it as such. Nevertheless, Lazar determined that a restatement of TeamStaff's fiscal year 2001 financial statements was appropriate due to the omission of a note in the fiscal year 2001 consolidated financial statements containing certain required disclosures for the plan. Further, an adjustment in the expense calculation of the plan resulted in a reduction in net income after-tax for fiscal year 2001 of $76,000 from $1,424,000 to $1,348,000.

In light of the foregoing, TeamStaff determined that the conclusions reached by PricewaterhouseCoopers concerning TeamStaff's internal controls and financial and operational systems and personnel were not supported by Lazar's independent analysis or TeamStaff's own assessment of its financial and operational systems and personnel.

During the period of PricewaterhouseCoopers's engagement, which commenced on April 10, 2002, there were no disagreements with PricewaterhouseCoopers on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to PricewaterhouseCoopers 's satisfaction, would have caused them to make reference to the subject matter in connection with their report on TeamStaff's consolidated financial statements. PricewaterhouseCoopers did not report on our consolidated financial statements for any fiscal year. PricewaterhouseCoopers expressed its opinion to the Audit Committee that there were material weaknesses in our system of internal controls, including the adequacy, competency and reliability of operational and financial information, information systems and finance personnel, as described above.

During the years ended September 30, 2002 and 2001 and the interim periods up to and including the date of Lazar's engagement, TeamStaff did not consult Lazar with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on its consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

The Audit Committee retained Lazar to serve as our independent accountants for the fiscal year ending September 30, 2004 and 2003. The audit services provided by Lazar consist of examining financial statements, reviewing filings with the Securities and Exchange Commission, and consulting in regard to various accounting matters as permitted under the Sarbanes-Oxley Act of 2002.None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (who serves as our principal accounting officer), conducted an evaluation of our "disclosure‘‘disclosure controls and procedures"procedures’’ (as defined in the Securities

Exchange Act of 1934 Rules 13a-14(c)) within 90 daysas of the filing dateend of the period (September 30, 2005) (‘‘Evaluation Date’’) covered by this Annual Report on Form 10-K. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer (who serves as our principal accounting officer) have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that all material information required to be filed in this Annual Report on Form 10-K has been made known to them.

Changes in Internal Controls:

There have been no significant changes, including corrective actions with regard to significant deficiencies or material weaknesses, in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date set forth above.

ITEM 9B.    OTHER INFORMATION

On September 1, 2004,2005, pursuant to our Non-Executive Director Stock Option Plan, we granted our non-executive directors options to purchase shares of our common stock at an exercise price of $2.23$1.36 per share, which represents the closing selling price per share of our common stock on the NasdaqNASDAQ National Market on September 1, 2004. Each2005. Four of the fivesix non-executive directors were each granted 5,000 options. Two non-executive directors who joined the board in fiscal year 2005 were each granted 2,500 options for their partial year service at September 30, 2005 (plus the initial grant of 5,000 options each for joining the Board). The options are governed by our standard form stock option agreement, a copy of which is filed as an exhibit to this Annual Report on Form 10-K, and the terms of our Non-Executive Director Stock Option Plan, as amended. The options vest after one year, are immediately vested, exercisable for a period of five years (subject to earlier termination under certain circumstances) and were granted on a non-discretionary basis pursuant to our Non-Executive Director Stock Option Plan. On November 17, 2004, TeamStaff granted options to purchase 100,000 shares of common stock to TeamStaff President and CEO T. Kent Smith at an exercise price of $2.08 per share. One half of the options vest on November 17, 2005, and the remainder vest on November 17, 2006. The options expire five years from the grant date.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS

The executive officers and directors of TeamStaff as of December 15, 200416, 2005 are as follows:

NAME				AGE				OFFICE
T. Stephen Johnson					55			Chairman of the Board of Directors Class 1
Karl W. Dieckmann					7677			Vice-Chairman Class 2
Ron Aldrich					62			Director Class 2
Peter Black					33			Director Class 1
Martin Delaney					6162			Director Class 3, Senior Vice President
Ben J. Dyer					5657			Director Class 1
Rocco J. Marano					76			Director Class 3
T. Kent Smith					4849			President, Chief Executive Officer, Director Class 2
Rick J. Filippelli					4849			Vice President, Finance, Chief Financial Officer
Edmund KenealyJames D. Houston					4246			Vice President, General Counsel
Timothy Nieman					4546			Senior Vice President, Sales
Peter Rosen					58			Vice President, Human Resources
Barry McDonald					47			President, TeamStaff Rx, Inc.
William L. Booth					42			President, Nursing Innovations
Roger Staggs					53			President, RS Staffing Services, Inc.

Board of Directors

Our board is classified into three classes, which are each elected in staggered three yearthree-year terms. Class 1 consists of T. Stephen Johnson, and Ben J. Dyer and Peter Black, and the term expires in 2006; Class 2 consists of Karl Dieckmann, and T. Kent Smith and Ron Aldrich, and the term expires in 2007 and Class 3 consists of Rocco Marano and Martin Delaney, and the term expires in 2008.

Ron Aldrich joined the Board of Directors in May 2005. Mr. Aldrich has more than thirty-seven years of leadership experience in health care organizations throughout the United States. He served for nineteen years as the President and CEO of three multi-hospital Catholic Systems (a 3,400 bed system based in Aston, Pennsylvania, a regional system located in Urbana, Illinois and a regional system based in Melville, Long Island, New York). He was also President and CEO of Mercy Hospital in Urbana, Illinois for five years from 1977 to 1982. Mr. Aldrich was instrumental in the formation of Catholic Health Initiatives that integrated three large Catholic Systems (including Franciscan Health System) in 1996. With 126 Health Care Organizations in 21 states, it was the largest not-for-profit health care merger to occur in the United States. Mr. Aldrich has also served on the Boards of Directors of five Catholic Health Systems. From 1992 to 1993 he served as Chairperson of the Catholic Health Association of the United States. He currently serves on the Boards of Bon Secours Health System, Franciscan Ministries Foundation and the Board of Trustees of the University of Florida Foundation.

Peter Black joined the Board of Directors in March 2005. For the past six years, Mr. Black has been an Investment Analyst and Portfolio Manager at Wynnefield Capital, Inc., where he is responsible for researching and identifying small-cap value investments. Mr. Black has initiated investments on Wynnefield's behalf that span multiple industries. Prior to joining Wynnefield, Mr. Black was an investment banker in the mergers and acquisition departments of UBS Securities and SG Cowen & Co., where he amassed significant valuation and transactional experience. Mr. Black is a graduate of Boston College and received his MBA from Fordham University. Wynnefield Capital, Inc., through certain of its investment funds, is the owner of approximately 12% of our outstanding shares of common stock.

Martin J. Delaney joined the Board of Directors in July 1998. Mr. Delaney was hired as a Senior Vice-President of TeamStaff effective January 5, 2005. Mr. Delaney is an attorney and a prominent

healthcare executive who began his hospital management career in 1971 as an Assistant Administrator at Nassau County Medical Center. He has been a director of a large regional Health Maintenance Organization on Long Island, the Hospital Association of New York State, the Greater New York Hospital Association, and chairman of the Nassau-Suffolk Hospital Council. He has been President, CEO and a directorDirector of Winthrop University Hospital, Winthrop South Nassau University Health Care Systems, and the Long Island Health Network. He has a graduate degree in health care management from The George Washington University and a law degree from St. John's University. He has been admitted to practice in New York State and federal courts.

Karl W. Dieckmann, a Director of TeamStaff since April 1990, had been Chairman of the Board from November 1991 until September 2001 and has been Vice Chairman since September 2001. From 1980 to 1988, Mr. Dieckmann was the Executive Vice President of Science Management Corporation and managed the Engineering, Technology and Management Services Groups. From 1948 to 1980, Mr. Dieckmann was employed by the Allied Signal Corporation (now Honeywell Corporation) in various capacities including President, Semet Solvay Division; Executive Vice President, Industrial Chemicals Division; Vice President TechnicalFibersTechnical – Fibers Division; Group General ManagerFabricatedManager – Fabricated Products Division; and General ManagerPlasticsManager – Plastics Division, as well as various positions with the Chemicals Division.

Ben J. Dyer joined the Board of Directors in December 2002. Mr. Dyer is currently President of investment banking firm Jackson Capital, a general partner of the early stage technology fund Cordova Intellimedia Ventures LP, and is President of Innovations Publishing, LLC, an Atlanta based company which provides a subscription-based online catalog of emerging technology ventures.private ventures across the Southeastern US. In the 1980s Mr. Dyer served as chairmanChairman and CEO of Comsell, Inc., a pioneering multimedia development firm and was presidentPresident and a directorDirector of the de novo Enterprise National Bank. Mr. Dyer founded Intellimedia Sports, Inc. in 1992 to create the ESPN-branded sports instruction category in the CD-ROM industry. He was earlier a founder of Peachtree Software, Inc. and served as its President from 1977 to September 1983. He currently serves on a number of private and nonprofit boards including The Mansell Group, FundRaisingInfo.com and Practice Bank. Mr. Dyer is also Senior Managing Director of Jackson Capital, LLC and an organizing director of Atlanta Bancorporation, Inc.and is a member of the External Advisory Council of Georgia Tech Research Institute. He concentrateshas concentrated his community activities on higher education and has been presidentPresident of the Georgia Tech Alumni Association, a directorDirector of the Georgia Tech Foundation, chairmanChairman of the AlumiAlumni Advisory Board for Tech's School of Industrial & Systems Engineering, and chairman of the Georgia

Tech Research Corporation. He is currently a Senior Fellow of the Center for Entrepreneurship and Corporate Growth at Emory University's Goizueta Business School. Mr. Dyer holds a Bachelors degree in Industrial Engineering from Georgia Tech and an MBA in finance from Georgia State University.

Rick J. Filippelli assumed his current position as Vice President and Chief Financial Officer in September 2003. Prior to joining TeamStaff, Mr. Filippelli spent approximately two years as Chief Financial Officer of Rediff.com, a publicly traded global information technology company. From 1985 through 2001 Mr. Filippelli held various financial positions including that of Chief Financial Officer with Financial Guaranty Insurance Company ("FGIC"), a subsidiary of GE Capital. Prior to joining FGIC Mr. Filippelli spent six years in public accounting including three years with the Big 4 firm of Ernst and Young. Mr. Filippelli holds a BS in Accounting from Brooklyn College and is a Certified Public Accountant as well as a member of the American Institute of Certified Public Accountants.

T. Stephen Johnson has been Chairman of the Board of TeamStaff since September 2001. He has served as Chairman of T. Stephen Johnson & Associates, Inc., a financial services consulting firm, and its related entities since inception in 1986. Mr. Johnson is a long-time banking consultant and Atlanta entrepreneur who has advised and organized dozens of community banks throughout the Southeast. He is Chairman Emeritus and a Director of Netbank, the largest and most successful Internet-only bank, as well as Chairman and principal owner of Bank Assets, Inc., a provider of benefit programs for directors and officers of financial institutions. Mr. Johnson is Chairman of the Board of Directo, Inc., a company specializing in providing financial services for unbankedun-banked individuals Viceand Chairman of Florida BankAtlanta Financial Corporation. See ‘‘Certain Relationships and an organizing director of Atlanta Bancorporation, Inc.

Edmund C. Kenealy has been Vice President, General Counsel of TeamStaff since November 2001. Mr. Kenealy joined TeamStaff as Vice President, Legal & Regulatory Affairs (PEO Division) in October 2000 upon its acquisition of HR2, Inc., where he was Vice President, General Counsel and Vice President, Operations. Prior to joining HR2, Inc. in April 1998, Mr. Kenealy was Assistant General Counsel of ManagedComp, Inc. from 1993 to 1998. He was previously associated with the Boston offices of Nutter, McClennen & Fish and Skadden, Arps, Slate, Meagher & Flom. He is a graduate of Dartmouth College and the Vanderbilt University School of Law. He is admitted to practice in Massachusetts and the District of Columbia.Related Transactions’’.

Rocco Marano served as member of the Board of Directors from July 1999 throughthru September 2001. He rejoined the Board of Directors in November 2002. Mr. Marano, a prominent telecommunications executive, is the retired chairman and President of Bellcore, Inc. a Bell Communications research and engineering entity formerly owned by the seven Bell regional communications companies. Prior to acting as President of Bellcore, Mr. Marano served as President of New Jersey Bell Telephone Company. His present additional board affiliations include Horizon Blue Cross/Blue Shield Foundation of New Jersey.Foundation. He has also served as Chairman of Horizon Blue Cross/Blue Shield of New Jersey.

Timothy Nieman was appointed President of TeamStaff Rx on December 12, 2003. Prior Mr. Marano holds a B.S. in Accounting from Fordham University and a J.D. from Fordham University Law School, and is admitted to joining TeamStaff, Mr. Nieman operated an independent consulting firm providing advisory services to the human capital and staffing industries. Mr. Nieman was employed with Spherion Corporation and its predecessor, Norrell Services Corporation, from January 1985 through September 2002, where he held a number of positions, including Senior Vice President and General Manager of Spherion's Enthusian business unit, which provided application service provider interfaces for the contingent workforce and financial services arenas. Prior to assuming his role with Enthusian, Mr. Nieman held the position of Vice President of Integration, overseeing the merger between Norrell and Interim, as well as a number of executive operational and sales leadership positions with Norrell. Mr. Nieman received his Bachelor'spractice law in Business Administration in 1984 from the University of Memphis.New York.

T. Kent Smith was appointed as our Chief Executive Officer, President and a member of our Board of Directors on June 18, 2003. From January 2000 to January 2003, Mr. Smith served as the President of HoneyBaked Ham Company and Chief Executive Officer of the Heavenly Ham Company. From 1998 to 1999, Mr. Smith was the Senior Vice President of Organization Serv. Prior to that,that; Mr. Smith served in various executive positions for Norrell Corporation from 1987 to 1998, including Senior Vice President, Service Operations, Vice President and Chief Information Officer and Vice President,

Finance & Strategic Planning. Mr. Smith received a Masters in Business Administration from the University of Virginia and is a graduate of Vanderbilt University.

Other Executive Officers

Rick J. Filippelli assumed his current position as Vice President and Chief Financial Officer of TeamStaff in September 2003. Prior to joining TeamStaff, Mr. Filippelli spent approximately two years as Chief Financial Officer of Rediff.com, a publicly traded global information technology company. From 1985 through 2001 Mr. Filippelli held various financial positions including that of Chief Financial Officer with Financial Guaranty Insurance Company (‘‘FGIC’’), a subsidiary of GE Capital. Prior to joining FGIC, Mr. Filippelli spent six years in public accounting including three years with the Big 4 firm of Ernst and Young. Mr. Filippelli holds a BS in Accounting from Brooklyn College and is a Certified Public Accountant as well as a member of the American Institute of Certified Public Accountants.

James D. Houston has been Vice President, Business and Legal Affairs, General Counsel and Corporate Secretary of TeamStaff since May, 2005. Mr. Houston has spent most of his career acting as the chief legal officer for several public and private companies. From 1999 through 2005, several companies engaged Mr. Houston through his own independent consulting firm. Mr. Houston was general counsel for SITA and division counsel for the Strategic and Global Licensing Division of SAS Institute, Inc. from 1997 through 1999. Prior to joining SAS Institute, Mr. Houston spent six years as an independent legal consultant after having worked as an associate for the national law firms Adams, Duque and Hazeltine and Keck, Mahin and Cate from 1987 through 1991. Mr. Houston holds a Juris Doctorate from Boston University School of Law and a B.A. in Political Science and Philosophy from Long Island University. He is admitted to practice law in New York and California.

Timothy Nieman is TeamStaff’s Senior Vice President, Sales. Mr. Nieman was President of TeamStaff Rx until April 2005. Prior to joining TeamStaffRx, Mr. Nieman operated an independent consulting firm providing advisory services to the human capital and staffing industries. Mr. Nieman was employed with Spherion Corporation and its predecessor, Norrell Services Corporation, from January 1985 through September 2002, where he held a number of positions, including Senior Vice President and General Manager of Spherion’s Enthusian business unit, which provided application service provider interfaces for the contingent workforce and financial service arenas. Prior to assuming his role with Enthusian, Mr. Nieman held the position of Vice President of Integration, overseeing the merger between Norrell and Interim, as well as a number of executive operational and sales leadership positions with Norrell. Mr. Nieman received his Bachelor’s in Business Administration in 1984 from the University of Memphis.

Peter F. Rosen is a Human Resources executive with over 20 years of domestic and international experience. Mr. Rosen has been in senior HR roles for established organizations like Capital One, the Coca-Cola Company and SmithKline-Beecham, as well as serving as the VP HR for Norrell Corporation, which was a publicly traded staffing and outsourcing company. Mr. Rosen has an undergraduate degree in Industrial and Labor Relations from Cornell University and a law degree from St. John’s University School of Law.

W. Lee Booth is the former founder and current President of Nursing Innovations, a leading provider of Travel and Per-diem Nurses which we acquired in June 2005. He has ten years experience in the healthcare industry, with management experience in one of TennCare’s Managed Care Organizations. He is a Registered Nurse with experience in various clinical settings including ER and Telemetry. Mr. Booth has a Bachelor’s in Business Administration from the University of Memphis and a Bachelor of Science in Nursing from the University of Memphis.

Kathleen Z. Charles joined DSI in January of 1996 as Client Services Manager. In October of 1996 she assumed responsibility for the DSI Payroll Services division. Mrs. Charles brought 20 years of experience in client support team management, operations management and system integration in the Payroll and Human Resource Services (ADP) and Commercial Insurance (Crum & Forster Insurance) industries to the DSI ‘‘family’’. She attended Seton Hall University and Kean College as an education major.

Barry McDonald joined TeamstaffRx in May 2004 as Senior Vice President of Sales and was named President of TeamStaff Rx in April 2005. Mr. McDonald has worked in the health care staffing industry since 1987 as either a Senior Executive or Business Principal. Mr. McDonald's industry experience has been in the Sales, Marketing, and Operations as well as in Merger's and Acquisitions. He attended The University of Toledo and is a Registered Respiratory Therapist with a Bachelor's of Science degree in Health Care Administration.

Roger D. Staggs, President of RS Staffing Services, Inc. joined TeamStaff with the acquisition of RS Staffing Services, Inc. in June 2005. He has thirty years experience in management and employee training/development, with fifteen years experience in the staffing industry. Mr. Staggs also has six years experience in the government-contracting arena, creating innovative staffing solutions for government and private sector clients.

Management Resources and Compensation Committee Interlocks and Insider Participation in Compensation Decisions

Karl W. Dieckmann (Chair), Martin J. Delaney Karl W. Dieckmann and T. StephenSteven Johnson, served on the Management Resources and Compensation Committee during the last fiscal year ended September 30, 2004. Mr. Delaney resigned his position on the Committee effective January 5, 2005. Mr. Rocco Marano replaced Mr. Delaney on the Committee. There are no interlocks between TeamStaff's Directors and Directors of other companies.companies and at all times members of the Management Resources and Compensation Committee satisfied the independence requirements of Section 4200(a)(15) of the NASDAQ Marketplace Rules.

Meetings of the Board of Directors and Committees

During the fiscal year ended September 30, 2004,2005, the Board of Directors met on seventeen13 occasions, twelve9 of which were by telephone conference call. Our board of directors has determined that each offrom October 1, 2004 to January 5, 2005 Messrs. Johnson, Dyer, Dieckmann, Delaney and Marano and Delaney satisfysatisfied the independence requirements within the meaning of Section 4200(a)(15) of the NasdaqNASDAQ Marketplace Rules. From and after January 5, 2005, to the end of the Company’s 2005 fiscal year, Messrs. Johnson, Dyer, Dieckmann, and Marano continued to satisfy the independence requirements within the meaning of Section 4200(a)(15) of the NASDAQ Marketplace Rules. Messrs. Aldrich and Black each joined the Board as independent directors and continuously satisfied the independence requirements within the meaning of Section 4200(a)(15) of the NASDAQ Marketplace Rules through the end of the Company’s 2005 fiscal year. As of September 30, 2005 through and including the date of this filing, Messrs. Aldrich, Black, Dyer, Dieckmann, Johnson and Marano satisfied the independence requirements within the meaning of Section 4200(a)(15) of the NASDAQ Marketplace Rules.

The Board of Directors has four committees: Audit, Management Resources and Compensation, Executive, and Nominating and Corporate Governance and Nominating Committees.

For the fiscal year ended September 30, 2004,2005, the members of the committees, and a description of the duties of the Committees were as follows:

Audit Committee. TeamStaff's Audit Committee acts to:(i) review with management the finances, financial condition and interim financial statements of TeamStaff; (ii) review with TeamStaff's independent auditors the year-end financial statements; and (iii) review implementation with the independent auditors and management any action recommended by the independent auditors and (iv) the retention and termination of TeamStaff'sTeamStaff’s independent auditors. During the fiscal year ended September 30, 2004,2005, the Audit Committee met on eleven5 occasions, seven4 of which were by telephone conference call.

The Audit Committee adopted a written charter governing its actions effective June 14, 2000. Effective May 27, 2003, the Audit Committee adopted an Amended and Restated Charter which was filed as an exhibit to our Proxy Statement prepared in connection with our Annual Meeting of Shareholders held on August 12, 2003. TheA copy of the Audit Committee's Amended and Restated Charter may be reviewed on our website at www.teamstaff.com. From October 1, 2004 through January 5, 2005, our Audit Committee members arewas comprised of Martin Delaney, Karl W. Dieckmann and Rocco J. Marano. All threeFrom January 5, 2005 to September 30, 2005, our Audit Committee was comprised of theseRocco J. Marano (Chair), Karl W. Dieckmann and Ben J. Dyer. On July 19, 2005, Mr. Black was added to the Audit Committee. At all times during the fiscal year, all of the members of TeamStaff'sour Audit Committee were "independent"‘‘independent’’ within the definition of that term as provided by Rule 4200(a)(14)(15) of the listing standardsNASDAQ Marketplace Rules. From the end of fiscal year to the present, all of the National Associationmembers of Securities Dealers.our Audit Committee are ‘‘independent’’ within the meaning of Rule 4200(a)(15) of the NASDAQ Marketplace Rules. From October 1, 2004 through January 5, 2005 Martin Delaney was electedacted as its chairman of the audit committee and Rocco J. Marano has beenwas designated as an "Audit‘‘Audit Committee financial expert"expert’’ in accordance with the Sarbanes Oxley Act of 2002 and the regulations promulgated thereunder. Beginning on January 5, 2005, Mr. Marano assumed the position of Chairman of the Audit Committee and maintained his position as financial expert.

Management Resources and Compensation Committee. The Management Resources and Compensation Committee functions include negotiation and review of all employment agreements of executive officers of TeamStaff and administration of TeamStaff's 2000 Employee Stock Option Plan and Non-Executive Director Stock Option Plan and negotiation and reviewPlan. Karl W. Dieckmann is the chairman of all employment agreements of executive officers of TeamStaff. Thethe Committee. From October 1, 2004 to January 5, 2005, the Management Resources and Compensation Committee's members arewere Karl W. Dieckmann (Chair), Martin J. Delaney Karl W. Dieckmann, and T. Stephen Johnson. From January 5, 2005 to the present, the members were and are Karl W. Dieckmann was elected as its chairman.(Chair), Rocco Marano, and T. Stephen Johnson. At all times members of the Management Resources and Compensation Committee satisfied the independence requirements within the meaning of Section 4200(a) (15) of the NASDAQ Marketplace Rules. During the fiscal year ended September 30, 2004,2005, the committee met on five occasions.5 occasions, 3 of which were by telephone conference call.

Nominating and Corporate Governance andCommittee. The Nominating Committee.    Theand Corporate Governance and Nominating Committee functions include the review of all candidates for a position on the board of directors including existing directors for renomination and reports its findings with recommendations to the Board. The Nominating and Corporate Governance and Nominating Committee solicits candidates on behalf of TeamStaff to fill any vacancy on the Board. The Nominating and Corporate Governance and Nominating Committee performs such other duties and assignments as directed by the Chairman or the Board but shall have no power to add or remove a director without the approval of the Board. Our Board of Directors has adopted a charter governing the activities of the Nominating and Corporate Governance Committee, which may be viewed online on our Web site at www.teamstaff.com. Pursuant to its charter, the

Nominating and Corporate Governance Committee's tasks include reviewing and recommending to the Board issues relating to the Board's composition and structure; establishing criteria for membership and evaluating corporate policies relating to the recruitment of Board members; implementing and monitoring policies regarding principles of corporate governance in order to ensure the Board's compliance with its fiduciary duties to the company and its shareholders; and making recommendations regarding proposals submitted by shareholders. From October 1, 2004 to July 19, 2005, the Nominating and Corporate Governance and Nominating Committee members arewere Ben J. Dyer (Chair), Karl W. Dieckmann and T. Stephen Johnson. From and after July 19, 2005, the Nominating and Corporate Governance Committee members were and are Ben J. Dyer (Chair), Karl W. Dieckmann and Ron Aldrich. At all times members of the Nominating and Corporate Governance Committee satisfied the independence requirements within the meaning of Section 4200(a) (15) of the NASDAQ Marketplace Rules. During the fiscal year ended September 30, 2004,2005, the committee met on 5 occasions.4 occasions, 1 of which was by telephone conference call.

Executive CommitteeCommittee.. The Board of Directors created an Executive Committee effective September 4, 2001. Executive committee members are Karl W. Dieckmann, T. Stephen Johnson and T. Kent Smith. T. Stephen Johnson serves as its chairman. This committee did not meet during the fiscal year ended September 30, 2004.2005.

No member of the Board of Directors or any committee failed to attend or participate in fewer than 75% of the meetings of the Board or any committee on which such member serves.

Code of Ethics

On June 20, 2003, TeamStaff distributed a company-wide Code of Ethics and Business Conduct and Code of Ethics for Chief Executive Officer, Chief Financial Officer and Controller. Additionally, both the Codes were posted on TeamStaff's internal intranet website and are available on TeamStaff's internetTeamStaff’s Internet web address, www.teamstaff.com. These Codes were adopted by TeamStaff's Board of Directors, and provide employees with a confidential method of reporting suspected Code violations.

ITEM 11.    EXECUTIVE COMPENSATION

The following provides certain summary information concerning compensation during the years ended September 30, 2005, 2004, 2003, and 20022003 paid to or earned by TeamStaff'sTeamStaff’s Chief Executive Officer and each of the executive officers and key employees of TeamStaff who received in excess of $100,000 in compensation during the last fiscal year.

												ANNUAL COMPENSATION
NAME AND PRINCIPAL POSTION				YEAR				SALARY				BONUS				OTHER				LONG TERM COMPENSATION OPTIONS/SAR'S
T. Kent Smith				2004				$	250,000			$	100,000				-0-				-0-
Chief Executive Officer				2003				$	70,192			$	35,616				-0-				400,000
				2002					-0-				-0-				-0-				-0-
Rick J. Filippelli				2004				$	224,988			$	70,000				-0-				50,000
				2003				$	8,653				-0-			$	20,000				50,000
				2002					-0-				-0-				-0-				-0-
Edmund Kenealy				2004				$	174,942			$	53,000			$	15,875				50,000
				2003				$	159,944			$	27,200			$	15,871				-0-
				2002				$	135,000			$	25,000			$	15,859				50,000
Timothy Nieman				2004				$	138,654			$	21,600				-0-				50,000
				2003					-0-				-0-				-0-				-0-
				2002					-0-				-0-				-0-				-0-

												ANNUAL COMPENSATION
NAME AND PRINCIPAL POSTION				YEAR				SALARY				BONUS				OTHER				LONG TERM COMPENSATION OPTIONS/SAR’S
T. Kent Smith					2005			$	250,000			$	170,000				-0-				100,000
Chief Executive Officer					2004			$	250,000			$	100,000				-0-				-0-
					2003			$	70,192			$	35,616				-0-				400,000
Rick J. Filippelli					2005			$	224,988			$	138,000				-0-				-0-
					2004			$	224,988			$	70,000				-0-				50,000
					2003			$	8,653				-0-			$	20,000				50,000
Martin Delaney					2005			$	103,923				-0-			$	1,248				100,000
					2004				-0-				-0-				-0-				-0-
					2003				-0-				-0-				-0-				-0-
Barry McDonald					2005			$	135,000			$	27,000				-0-				-0-
					2004			$	57,115			$	13,608				-0-				25,000
					2003				-0-				-0-				-0-				-0-
Tim Nieman					2005			$	175,000			$	28,000				-0-				-0-
					2004			$	141,346			$	21,600				-0-				50,000
					2003				-0-				-0-				-0-				-0-

TeamStaff provides normal and customary life and health insurance benefits to all of its employees including executive officers. TeamStaff has a 401(k) plan that is voluntary.

Compensation of Directors

Effective November 19, 2002, the Board established the following cash compensation terms for the members of the Board and committees. The Chairman and Vice-Chairman of the Board each received $3,000 per month. The Chairman of the Audit Committee received $2,500 per month. All other

non-employee Directors received $1,667 per month. Effective as of August 12, 2003, the Chairman of the Nominating and Corporate Governance Committee also received $2,500 per quarter. All non-employee Board members received $1,500 for each Board meeting attended and $600 for each committee meeting attended (unless the member is Chairman of the committee). The Chairman of each committee received $1,000 for each committee meeting attended. Non-employee directors also received $1,000 per meeting with executives that do not constitute Board or Committee meetings. Non-employee Board members also received reimbursement of their Board-related travel expenses. We have also established a Non-Executive Director Stock Option Plan, as described below. The Director Plan provides that directors: 1) receive 5,000 options upon joining the Board; 2) receive 5,000 option on September 1^st of each year thereafter (subject to downward adjustment as of the first award date based on when the director joined the Board); and 3) for one year after joining the Board are entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000.

The Board established the following new cash compensation terms for the non-employee members of the Board and committees effectivecommencing as of January 1, 2004. The2004, the Chairman, Vice Chairman and Chairman of the Audit Committee each receive $3,000 per month. The Chairman of the Nominating and Corporate Governance Committee receives $2,500 per month. All other non-employee directors receive $1,667 per month. All non-employee Board members receive $1,500 for each in-person Board meeting attended and $750 for each telephonic Board meeting in which they participate. All committee

members receive $600 for each in-person meeting attended and $300 for each telephonic committee meeting in which they participate. The Chairman of each committee receives $1,000 for each in-person committee meeting attended and $500 for each telephonic meeting in which he participates. Non-employee Directors also receive $1,000 for each in-person meeting with Company executives that do not constitute Board or Committee meetings. On November 18, 2004 the non-employee director cash compensation terms were amended to provide that non-committee members would be compensated in the same manner as committee members for any committee meeting they attend or telephonic meeting in which they participate at the written request of the committee Chairman. Additionally non-employee directors will receive $1,000 per day for their attendance at continuing education or other seminars they attend in connection with their service as a TeamStaff director. Non-employee Board members also receive reimbursement of their Board-related travel, cell phone and similar expenses.

Under the Company’s Non-Executive Director Stock Option Plan, directors 1) receive 5,000 options upon joining the Board; 2) receive 5,000 options on September 1^st of each year thereafter (subject to downward adjustment for less than a full year’s service); and 3) for one year after joining the Board are entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000. Our shareholders previously approved this option plan.

Employment Agreements

Effective as of June 18, 2003, TeamStaff entered into an employment agreement with T. Kent Smith pursuant to which Mr. Smith serves as TeamStaff's President and Chief Executive Officer. The agreement expiresexpired on September 30, 2005. Under the terms of the agreement, Mr. Smith iswas paid an annual base salary of $250,000 and iswas eligible to receive a bonus of up to 50% of his base salary based on the achievement of revenue, income and other objectives established by the Management Resources and Compensation Committee. Pursuant to the Agreement, Mr. Smith also was granted an option to purchase 400,000 shares of TeamStaff common stock, one-fourth of which vested on June 18, 2003, one-fourth of which will vest one year thereafter,vested on June 18, 2004 and the remainder of which will vestvested on June 18, 2005. Mr. Smith also receivesreceived four weeks annual vacation and iswas offered welfare benefit plans, 401(k) and fringe benefits generally made available to other TeamStaff employees. The agreement provides,provided, among other things, that Mr. Smith willwould be paid a severance payment of three months of his base salary if Mr. Smith and TeamStaff dodid not enter into a new employment agreement by September 30, 2005. Additionally, the agreement providesprovided for certain post-termination payments depending upon the reason for the termination of Mr. Smith's employment. The agreement also providesprovided for the payment of nine months of base salary and the provision of certain other benefits should Mr. Smith's employment terminatehave terminated in connection with a change in control, as defined in the agreement.

Effective January 1, 2003,On June 30, 2005 TeamStaff entered into a one-yearnew two-year employment agreement with Edmund C. Kenealy pursuant to which Mr. Kenealy served as ViceT. Kent Smith, its President General Counsel, at an annualand Chief Executive Officer. The term of the agreement commenced on October 1, 2005 and terminates on September 30, 2007. The material terms of Mr. Smith's employment agreement provide for a base salary of $160,000.$250,000 per annum and standard Company executive benefits as provided under his prior agreement. In addition, Mr. Kenealy wasSmith is eligible to receive a bonus equal to up to 70% of his base salary upon satisfaction of performance-based criteria. Mr. Smith will be considered for future salary increases as may be determined by the Management Resources and Compensation Committee of the Board of Directors. Mr. Smith will be eligible to participate in the Company's incentive stock ownership plan as may be determined by the Management Resources and Compensation Committee of the Board of Directors. The agreement also includes provisions for payment of all compensation otherwise payable under the agreement in the event that Mr. Smith is terminated without cause and one year of severance in all circumstances other than for termination ‘‘for cause.’’ In the event that there is a change of control of TeamStaff and Mr. Smith's employment is terminated (or his position is changed), Mr. Smith will be entitled to receiveacceleration of all incentive compensation, all compensation otherwise due under the agreement and an increase in annual compensation asadditional twelve (12) months of October 1, 2003 andhis then in-effect base salary. A ‘‘change of control’’ is defined generally to constitute a bonus to be determined based on the achievement of

certain performance criteria determined aschange of 20% of more of the commencementbeneficial ownership of each fiscal year. Mr. Kenealy received certain other benefits granted to other TeamStaff employees, including health and other insurance benefits, as well asthe Company's outstanding Common Stock, or a car allowancechange in two thirds of $500 per month and three weeks annual vacation. This agreement was not renewed by TeamStaff. However, the Board of Directors, approved TeamStaff's entrysubject to certain exceptions.

On June 30, 2005 TeamStaff entered into a severancetwenty seven month employment agreement with Mr. Kenealy effectiveRick J. Filippelli, its Vice President and Chief Financial Officer. The term of the agreement commenced on June 30, 2005 and terminates on September 30, 2007. The material terms of Mr. Filippelli's employment agreement provide for a base salary of $225,000 per annum, a potential bonus of up to 70% and standard Company executive benefits, upon substantially the same terms as provided for Mr. Smith. The Management Resources and Compensation Committee of January 1, 2004, providing him with six monthsthe Board of Directors will consider Mr. Filippelli for future compensation increases as may be determined. Mr. Filippelli will be eligible to participate in the Company's incentive stock ownership plan as may be determined by the Management Resources and Compensation Committee of the Board of Directors. The agreement also includes provisions for payment of all compensation otherwise payable under the agreement in the event that Mr. Filippelli is terminated without cause and one year of severance should his employment terminatein all circumstances other than for "cause," astermination ‘‘for cause.’’ In the event that there is a change of control of TeamStaff and Mr. Filippelli's employment is terminated (or his position is changed), Mr. Filippelli will be entitled to acceleration of all incentive compensation, all compensation otherwise due under the agreement and an additional twelve (12) months of his then in-effect base salary. A ‘‘change of control’’ is defined generally to constitute a change of 20% of more of the beneficial ownership of the Company's outstanding Common Stock, or a change in two thirds of the agreement. The Board of Directors, approved substantially identical severance agreements with Rick J. Filippelli and Timothy Nieman, our Chief Financial Officer and President of TeamStaff Rx, respectively, also effective as of January 1, 2004.subject to certain exceptions.

TeamStaffPursuant to the RS Staffing Services, Inc. acquisition, the Company entered into an employment agreement with Mr. Donald Kappauf, TeamStaff's former President and Chief Executive Officer effective April 2, 2001 and terminating on September 30, 2003. Mr. Kappauf agreedRoger Staggs to relinquish his positionbe employed as President and Chief Executive Officer of TeamStaff as of June 18, 2003. Mr. Kappauf terminated his employment effective as of September 30, 2003. Under theRS Staffing Services, Inc. The material terms of the employmentMr. Staggs’ agreement Mr. Kappauf'sare for a period of one (1) year from on or about June 4, 2005 and provide for a base compensation was initially $230,000, increasing to $300,000 commencing September 1, 2001, and subject to yearly increases thereaftersalary of $150,000 per annum, a potential bonus at the discretion of the compensation committee. ForBoard of Directors and standard Company executive benefits.

Pursuant to the fiscal year ended September 30, 2003, Mr. Kappauf received a base salary of $300,000. Mr. Kappauf also was entitled to an annual bonus based onRS Staffing Services, Inc. acquisition, the achievement of certain performance criteria as determined by the compensation committee. In addition, Mr. Kappauf received certain other benefits including insurance benefits as are provided to all other executives, a car lease allowance in the maximum amount of $1,000 per month, participation in the supplemental executive retirement plan and a split dollar life insurance arrangement. The agreement also provided for the grant of 300,000 stock options, which vested in annual increments of one third commencing on the date of the agreement. TeamStaff also entered into a severance agreement with Mr. Kappauf, as described below, which governed the termination of his employment and certain other events including a change of control of TeamStaff.

TeamStaffCompany entered into an employment agreement with Mr. Donald Kelly, TeamStaff's former Chief Financial Officer, effective April 2, 2001 and terminating on September 30, 2003. In June 2003, Mr. Kelly notified TeamStaff that he wouldBarry Durham to be terminating his employment on July 2, 2003 purportedly for "good reason,"employed as defined in his severance agreement, as described below. Under theVice-President of RS Staffing Services, Inc. The material terms of his employmentMr. Durham's agreement Mr. Kelly'sare for a period of one (1) year from on or about June 4, 2005 and provide for a base compensation was initially $170,000, increasing to $200,000 commencing September 1, 2001, and subject to yearly increases thereaftersalary of $150,000 per annum, a potential bonus at the discretion of the compensation committee. For the fiscal year ended September 30, 2003, Mr. Kelly received a base salary of $200,000. Mr. Kelly also was entitled to a bonus based on the achievement of certain performance criteria as determined by the compensation committee. In addition, Mr. Kelly received certain other benefits including insurance benefits as are provided to all other executives, a car allowance in the amount of $800 per month, participation in the supplemental executive retirement plan and a split dollar life insurance arrangement. The agreement also provided for the grant of 150,000 stock options, which vested in annual increments of one third commencing on the date of the agreement. TeamStaff also entered into a severance agreement with Mr. Kelly, as described below, which governed the termination of his employment and certain other events including a change of control of TeamStaff.

The split dollar life insurance agreements and supplemental retirement plan were approved by the Compensation Committee of the Board during the 2000 fiscal year and implemented effective October 1, 2000. Under the terms of the SERP, a participant receives a benefit sufficient to provide lump sum annual payments equal to approximately one-third of the participant's base salary on the date the participant becomes a participant. Payment of benefits commences when the participant reaches 65 years of age. The benefit under the SERP is subject to a seven-year vesting schedule (0%, 0%, 20%, 40%, 60%, 80%, 100%), based on the participant's original date of employment with TeamStaff and contingent on the participant's reaching age 55; provided, however, a participant's benefit becomes fully vested upon a change of control, as defined in the SERP, if within two years of the change of control there is a material change in the participant's job title or responsibilities or if the participant's employment is terminated by TeamStaff for any reason other than conviction for theft or embezzlement from TeamStaff. Additionally, if a participant retires by means of total disability (as

defined in the SERP), the participant's benefit becomes fully vested and benefit payments commence as of the disability retirement date. The SERP does not provide a death benefit. Mr. Kappauf and Mr. Kelly were the only SERP participants.

SERP participants also were provided with a split dollar life insurance policy, insuring the life of the participant until the participant reached age 65. Although the participant was the owner of the Policy, TeamStaff paid all Policy premiums. Each participant had collaterally assigned the Policy to TeamStaff to secure repayment of the premiums through either its cash surrender value or the Policy proceeds. The participant's right to the Policy vested in accordance with the same schedule as the SERP and with similar change of control provisions. Upon the participant's 65th birthday (and in certain other circumstances provided by the Policy agreement), TeamStaff would release the collateral assignment of the Policy provided the participant released TeamStaff from all obligations it may have with respect to the participant (including those under the SERP). However, given the uncertainty of TeamStaff's ability to continue to maintain this payment arrangement in light of certain of the provisions of the Sarbanes-Oxley Act of 2002, TeamStaff had, with the President and Chief Executive Officer's consent, deferred paying Policy premiums on behalf of the Chief Executive Officer, pending review of the SERP to comply with the Sarbanes-Oxley Act. For the fiscal quarter ended December 31, 2002, TeamStaff paid the Chief Executive Officer a bonus in the amount of the Policy premiums, grossed-up to cover allocable income taxes. Pursuant to the severance agreement with Mr. Kappauf, in the event he were terminated for cause, he would be entitled only to his accrued compensation, which means his base salary, reimbursement of business expenses, vacation pay and earned but unpaid bonuses to the date of termination. "Cause" is defined to include conviction of a felony, an intentional and continual failure to substantially perform his duties or an intentional failure to follow or perform a lawful direction of the Board of Directors. If Mr. Kappauf were terminated for disability or death, he would be entitled to his accrued compensation and certain other payments, such as the pro rata bonus amount. The pro rata bonus amount is defined as the amount equal to the greater of the most recent annual bonus amount paid or the annual bonus paid or payable for the full fiscal year ended prior to the termination, in either case pro-rated through the date of death or disability. In the event that Mr. Kappauf's employment terminated for any other reason, the agreement provided for payment of his accrued compensation, a pro rata bonus amount, a bonus amount allocated to the remainder of the term of his employment agreement, his base salary through the remainder of the term of his employment agreement, a severance payment equal to one year's base compensation, a payment equal to the cost of health and other similar benefits for a period of two years and costs associated with outplacement services.

On June 18, 2003, Donald W. Kappauf relinquished his positions of President and Chief Executive Officer of TeamStaff. In light of the circumstances regarding the relinquishment by Mr. Kappauf of his positions, Mr. Kappauf may have had reason to terminate his employment with TeamStaff for "good reason" and exercise his rights under the severance agreement. The term good reason includes "a change in the [e]xecutive's status, title, position or responsibilities . . . ." In addition, TeamStaff may have been required to contribute funds to an irrevocable trust to meet the premium obligations of the split dollar life insurance policy granted to Mr. Kappauf in connection with the SERP.

The severance agreement with Mr. Kelly had terms which are substantially similar to those described above for Mr. Kappauf. Until December 10, 2002, Mr. Kelly held the positions of Chief Financial Officer, Vice President, Finance and Secretary of TeamStaff. As a result of the previously disclosed change in his duties, the former Chief Financial Officer may have had "good reason" to terminate his employment with TeamStaff and may have had claims for the severance payments and benefits provided by the severance agreement. The term good reason includes "a change in the [e]xecutive's status, title, position or responsibilities . . . ." In June 2003, Mr. Kelly notified the Board of Directors that he would terminate his employment, effective July1, 2003, for "good reason" and exercise his rights under the severance agreement. Additionally, the change in Mr. Kelly's duties may have caused his benefits under the SERP to become fully vested.

In connection with the change in their employment status, TeamStaff engaged in negotiations with its former President and Chief Executive Officer and the former Chief Financial Officer regarding the payment of certain severance benefits and the satisfaction of TeamStaff's obligations to each of them

under the SERP and the split dollar life insurance arrangements. On December 31, 2003, TeamStaff executed an agreement with its former President and Chief Executive Officer pursuant to which TeamStaff agreed to, among other things, release the collateral assignment of the split dollar life insurance policy as of December 31, 2003 and to accelerate the payment of certain agreed upon payments under the SERP in complete satisfaction of TeamStaff's obligations under the SERP. TeamStaff entered into a similar agreement with its former Chief Financial Officer effective as of December 30, 2003. That agreement also provided for the payment of severance and other benefits over time in satisfaction of TeamStaff's obligations to its former Chief Financial Officer under his severance agreement effective May 22, 2002.standard Company executive benefits.

Management Resources and Compensation Committee Report on Executive Compensation

This report is submitted by the Management Resources and Compensation Committee of the Board of Directors of TeamStaff.TeamStaff, Inc. (‘‘TeamStaff’’). During the fiscal year ended September 30, 2004,2005, the Management Resources and Compensation Committee was responsible for reviewing TeamStaff's stock option plans and reviewing and approving compensation matters concerning the executive officers.officers and senior management of TeamStaff. Further, the Management Resources and Compensation Committee balances compensation among TeamStaff’s executive officers and senior management.

Overview and Philosophy. TeamStaff uses its compensation program to achieve the following objectives:

	•	To provide compensation, as determined by the Management Resources and Compensation Committee, that attracts, motivates and retains the talented, high caliber officers and employees necessary to achieve TeamStaff's strategic objectives;

	•	To align the interest of officers with the success of TeamStaff;

	•	To align the interest of officers with stockholders by including long-term equity incentives; and

	•	To increase the long-term profitability of TeamStaff and, accordingly, increase stockholder value.

Compensation under the executive compensation program is comprised of cash compensation in the form of base salary and bonus compensation and, in some cases, automobile allowances.compensation. Executives are also granted severance plans providing

various benefits upon termination of employment without cause and, in some cases (including the case of the CEO,Chief Executive Officer), a change of control of TeamStaff. In addition, the compensation program includes various other benefits, including medical and insurance plans and TeamStaff's 401(k) Plan, whichPlan. These plans are generally available to all employees of TeamStaff.

The principal factors whichthat the Management Resources and Compensation Committee considered with respect to each officer's compensation package for fiscal year ended September 30, 20042005 are summarized below. The Management Resources and Compensation Committee may however, in its discretion, apply different or additional factors in making decisions with respect to executive compensation in future years.years, at its discretion.

Base Salary. Compensation levels for each of TeamStaff's officers, including the Chief Executive Officer, are generally set within the range of salaries that the Management Resources and Compensation Committee believes is paid to officers with comparable qualifications, experience and responsibilities at similar companies. In setting compensation levels, the Management Resources and Compensation Committee takes into account such factors as (i) TeamStaff's past performance and future expectations, (ii) individual performance and experience and (iii) past salary levels. The Management Resources and Compensation Committee does not assign relative weights or ranking to these factors, but instead makes a determination based upon the consideration of all of these factors as well as the progress made with respect to TeamStaff's long-term goals and strategies. Base salary, while reviewed annually, is only adjusted as deemed necessary by the Management Resources and Compensation Committee in determining total compensation for each officer. Base salary levels for each of TeamStaff's officers, other than the Chief Executive Officer, are also based in part upon evaluations and recommendations made by the Chief Executive Officer.

Equity Incentives. The Management Resources and Compensation Committee believes that stock participation aligns officers' interests with those of the stockholders. In addition, the Management

Resources and Compensation Committee believes that equity ownership by officers helps to balance the short-term focus of annual incentive compensation with a longer-term view and may help to retain key executive officers. Long-term incentive compensation, generally granted in the form of stock options, allows the officers to share in any appreciation in the value of TeamStaff's common stock.

In making stock option grants, the Management Resources and Compensation Committee considers general corporate performance, individual contributions to TeamStaff's financial, operational and strategic objectives, the Chief Executive Officer's recommendations, level of seniority and experience, existing levels of stock ownership, previous grants of restricted stock or options, vesting schedules of outstanding restricted stock or options and the current stock price. During the fiscal year ended September 30, 2004,2005, the Management Resources and Compensation Committee approved the grant of 200,000280,000 options, 150,000250,000 of which were granted to executive officers.officers, as follows: 50,000 to Lee Booth, 100,000 to Martin Delaney and 100,000 to T. Kent Smith.

Other Benefits. TeamStaff also has various broad-based employee benefit plans. Executive officers participate in these plans on the same terms as eligible, non-executive employees, subject to any legal limits on the amounts that may be contributed or paid to executive officers under these plans. TeamStaff offers a 401(k) plan, which allows employees to invest in a wide array of funds on a pre-tax basis. TeamStaff also maintains insurance and other benefit plans for its employees, including the executive officers of TeamStaff.

During the fiscal year ended September 30, 2001, the Management Resources and Compensation Committee created the supplemental executive retirement plan, or SERP. The SERP became effective on October 1, 2000. At the present time, no executive officers are participants in the SERP. Donald Kappauf and Donald Kelly, former executive officers, were the only participants in the SERP.

Chief Executive Officer Compensation.

In the fiscal year ended September 30, 2004,2005, T. Kent Smith, TeamStaff'sTeamStaff’s Chief Executive Officer, received a base salary at the annual rate of $250,000, which was the same as his base salary during the prior fiscal year. TeamStaff employed Mr. Smith as its Chief Executive Officer in June 2003 and paid an aggregate amount of $70,192$250,000 to him as base salary for his services as Chief Executive Officer during the period commencing on his employment andOctober 1, 2004 through September 30, 2003.2005. Mr. Smith'sSmith’s compensation is determined pursuant to an employment agreement dated June 18, 2003, which provides for base compensation of $250,000 per annum and a bonus, in the discretion of the Management Resources and Compensation Committee, of up to 50 % of his base salary. Pursuant to his employment

agreement, Mr. Smith also was awarded options to purchase 400,000 shares of Common Stock exercisable at $3.00 per share and subject to certain vesting requirements. Mr. Smith'sSmith’s base salary is believed by the Management Resources and Compensation Committee to be consistent with the range of salary levels received by executives in a similar capacity in companies of comparable size. During the interim period between June 18, 2003October 1, 2004 and the end of fiscal 2003,September 30, 2005, Mr. Smith was awarded a bonus of $35,616$70,000 in light of the difficult circumstances under which Mr. Smith was employed and the success he achieved in stabilizing TeamStaff's operations.inclosing the favorable acquisition of RS Staffing Services, Inc. In accordance with the terms of his employment agreement, Mr. Smith was awarded a total bonus of $100,000$170,000 for the fiscal year ended September 30, 2004. After2005 (including the close of the fiscal year ended September 30, 2004,$70,000 previously mentioned). Mr. Smith was awarded an additional optionoptions to purchase 100,000 shares of Common Stock exercisable at $2.08 per share and subject to certain vesting requirements.requirements during the fiscal year ended September 30, 2005.

On June 30, 2005 TeamStaff, Inc. (‘‘TeamStaff’’) entered into new two-year employment agreement with Mr. T. Kent Smith, its President and Chief Executive Officer, as his then-current employment agreement was due to expire as of September 30, 2005. The Compensation Committee and the Board determined that the Company desired to retain Mr. Smith’s services and desired to set the terms of his new agreement in advance of the termination of the then-existing agreement. The term of the new agreement commenced on October 1, 2005. The material terms of Mr. Smith's employment agreement provide for a base salary of $250,000 per annum and standard Company executive benefits. In addition, Mr. Smith is eligible to receive a bonus equal to up to 70% of his base salary upon satisfaction of performance-based criteria. Mr. Smith will be considered for future salary increases as may be determined by the Management Resources and Compensation Committee of the Board of Directors. Mr. Smith will be eligible to participate in the Company's incentive stock ownership plan as may be determined by the Management Resources and Compensation Committee of the Board of Directors. The agreement also includes provisions for payment of all compensation otherwise payable under the agreement in the event that Mr. Smith is terminated without cause and one year of severance in all circumstances other than for termination ‘‘for cause.’’ In the event that there is a change of control of TeamStaff and Mr. Smith's employment is terminated (or his position is changed), Mr. Smith will be entitled to acceleration of all incentive compensation, all compensation otherwise due under the agreement and an additional twelve (12) months of his then in-effect base salary. A ‘‘change of control’’ is defined generally to constitute a change of 20% of more of the beneficial ownership of the Company's outstanding Common Stock, or a change in two thirds of the Board of Directors, subject to certain exceptions. The term of the agreement commences on October 1, 2005 and terminates on September 30, 2007.

Compensation of Executive Officers Other Than the CEO During Fiscal Year 20042005

For the fiscal year ended September 30, 2004,2005, executive officers other than the Chief Executive Officer received base salaries and bonuses which the Management Resources and Compensation Committee believes reflected industry standards, prevailing compensation practices in similar companies with which TeamStaff competes for executive talent, the seniority and skill level of the executive officer, TeamStaff'sTeamStaff’s performance, and each executive officer'sofficer’s contribution thereto. Base salaries and bonuses paid to our named executive officers for the fiscal year ended September 30, 20042005 are as set forth in the table provided under the heading "Executive‘‘Executive Compensation --– Summary Compensation Table."

During the fiscal year ended September 30, 2004, the Management Resources and Compensation Committee approved severance agreements for certain executive officers that provide for the payment

of six months base compensation in the event of a termination without cause. The specific executive officers covered by this severance arrangement are Rick J. Filippelli, TeamStaff's Chief Financial Officer; Edmund C. Kenealy, TeamStaff's Vice President, General Counsel, and Secretary; and Tim Nieman, the President of TeamStaff Rx.’’

The Management Resources and Compensation Committee periodically reviews the number of vested and unvested options held by executive officers and makes stock grants to these executives to provide greater incentives to continue employment with TeamStaff and to strive to increase stockholder value. Stock options typically have been granted to executive officers when the executive first joins TeamStaff, in connection with a significant change in responsibilities and, occasionally, to achieve equity within a peer group. During the fiscal year ended September 30, 2004,2005, the Management Resources and Compensation Committee made stock option grants to executive officers, as described in the section entitled "Executive‘‘Executive Compensation – Option/SAR Grants in Last Fiscal Year."’’ The primary factors upon which specific stock option grants made by the Management Resources and Compensation Committee during fiscal year 20042005 were based are the executive'sexecutive’s past performance, anticipated future contribution, consistency within the executive'sexecutive’s peer group, prior option grants to the executive officer, the percentage of outstanding equity owned by the executive, the level of vested

and unvested options, competitive market practices, and the executive'sexecutive’s responsibilities and performance. The Management Resources and Compensation Committee does not set specific target levels for options granted to named executive officers or for the CEO but seeks to be competitive with similar companies.

Tax Deductibility of Executive Compensation. Section 162(m) of the Code limits the tax deduction to TeamStaff to $1 million for compensation paid to any of the executive officers unless certain requirements are met. The Management Resources and Compensation Committee has considered these requirements and the regulations. It is the Management Resources and Compensation Committee'sCommittee’s present intention that, so long as it is consistent with its overall compensation objectives, substantially all executive compensation be deductible for United States federal income tax purposes. The Management Resources and Compensation Committee believes that any compensation deductions attributable to options granted under the employee stock option plan currently qualify for an exception to the disallowance under Section 162(m).

By the Management Resources and Compensation Committee of the Board of Directors of TeamStaff, Inc.

Karl W. Dieckmann Martin Delaney (October 1, 2004 – January 5, 2005) T. Stephen Johnson Martin DelaneyRocco Marano (January 5, 2005 – September 30, 2005)

This report of the Management Resources and Compensation Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing by us under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate this report by reference therein.

Option/SAR Grants in Last Fiscal Year

OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)

Name				No. of Securities Underlying Options Granted				Percentage of Total Options Granted in Fiscal Year				Exercise of Base Price Per Share				Expiration Date
T. Kent Smith					0				0	%			—				—
Rick J. Filippelli					50,000				22	%		$	2.30				5/21/2009
Edmund Kenealy					50,000				22	%		$	2.30				5/21/2009
Timothy Nieman					50,000				22	%		$	2.08				12/12/2008

Name				No. of Securities Underlying Options Granted				Percentage of Total Options Granted in Fiscal Year				Exercise of Base Price Per Share				Expiration Date
T. Kent Smith					100,000				36	%		$	2.08				11/17/2009
Rick J. Filippelli					0				0	%			—				—
Martin Delaney					100,000				36	%		$	1.75				1/18/2010
Barry McDonald					0				0	%			—				—
Tim Nieman					0				0	%			—				—

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

The following table sets forth information with respect to the named executive officers concerning exercise of stock options and SARs during the last fiscal year and the value of unexercised options and SARs held as of the year ended September 30, 2004.2005.

NAME				SHARES ACQUIRED ON EXERCISE				VALUE REALIZED				NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS/SARS AS OF SEPTEMBER 30, 2004 EXERCISABLE/ UNEXERCISABLE				VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF SEPTEMBER 30, 2004 EXERCISABLE/ UNEXERCISABLE(1)
T. Kent Smith					0			$	0				200,000/200,000			$	0/$0
Rick J. Filippelli					0			$	0				25,000/75,000			$	57,500/$57,500
Edmund Kenealy					0			$	0				60,000/50,000			$	0/$0
Timothy Nieman					0			$	0				0/50,000			$	0/$115,000

(1)	Based upon a closing sales price of the Common Stock at $2.30 per share on September 30, 2004.

NAME				SHARES ACQUIRED ON EXERCISE				VALUE REALIZED				NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS/SARS AS OF SEPTEMBER 30, 2005 EXERCISABLE/ UNEXERCISABLE				VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AS OF SEPTEMBER 30, 2005 EXERCISABLE/ UNEXERCISABLE(1)
T. Kent Smith					0			$	0				500,000/0			$	0/$0
Rick J. Filippelli					0			$	0				100,000/0			$	0/$0
Martin Delaney					0			$	0				120,000/0			$	0/$0
Barry McDonald					0			$	0				25,000/0			$	0/$0
Tim Nieman					0			$	0				50,000/0			$	0/$0

(1) Based upon a closing sales price of the Common Stock at $1.38 per share on September 30, 2005.

Stock Option Plans

In April 1990, the Board of Directors adopted the 1990 Employees Stock Option Plan (the "1990 Plan"‘‘1990 Plan’’), which was approved by shareholders in August 1990. The 1990 Plan provided for the grant of options to purchase up to 285,714 shares of TeamStaff's common stock. Under the terms of the 1990 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs"(‘‘ISOs’’) under Section 422A of the Code, or options which do not so qualify ("Non-ISO's"(‘‘Non-ISO's’’).

In April 1990, the Board of Directors adopted the Non-Executive Director Stock Option Plan (the "Director Plan"‘‘Director Plan’’), which was approved by shareholders in August, 1991 and amended in March 1996. The Director Plan provided for issuance of a maximum of 142,857 shares of common stock upon the exercise of stock options arising under the Director Plan.

In April 1990, the Board of Directors adopted and in August, 1990, TeamStaff's shareholders approved the Senior Management Incentive Plan (the "Management Plan"‘‘Management Plan’’) for use in connection with the issuance of stock, options and other stock purchase rights to executive officers and other key employees and consultants who render significant services to TeamStaff and its subsidiaries. A total of 1,428,571 shares of common stock were reserved for issuance under the Management Plan.

The forgoingforegoing plans have expired and options are no longer being granted under any of these plans. There are no options outstanding under any of these plans.

2000 Employee Stock Option Plan

In the fiscal year 2000, the Board of Directors and shareholders approved the adoption of the 2000 Employees Stock Option Plan (the "2000 Plan"‘‘2000 Plan’’) to provide for the grant of options to purchase up to

1,714,286 shares of TeamStaff's common stock to all employees, including senior management. The 2000 Plan replaces the 1990 Employee Plan and Senior Management Plans, both of which expired. Under the terms of the approved 2000 Plan, options granted there under may be designated as options which qualify for incentive stock option treatment ("ISOs"(‘‘ISOs’’) under Section 422A of the Code, or options which do not so qualify ("Non-ISO's"(‘‘Non-ISO's’’). As of September 30, 2004,2005, there were 1,069,0001,193,000 options outstanding under the 2000 Plan.

The 2000 Plan is administered by the Management Resources and Compensation Committee designated by the Board of Directors. The Management Resources and Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or Non-ISOs; the periods during which each option will be exercisable; and the number of shares subject to each option. The Committee has full authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto.

Under the 2000 Plan, the exercise price of an option designated, as an ISO shall not be less than the fair market value of the common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent (10%) shareholder (as defined in the 2000 Plan), such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value.

The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year shall not exceed $100,000.

The Management Resources and Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arise in connection with the exercise or cancellation of an option. The Management Resources and Compensation Committee can also permit the payment of the exercise price in the common stock of the Corporation held by the optionee for at least six months prior to exercise.

Non-Executive Director Plan

In fiscal 2000, the Board of Directors and stockholders approved the adoption of the 2000 Non-Executive Director Stock Option Plan (the "Director Plan"‘‘Director Plan’’) to provide for the grant of options to non-employee directors of TeamStaff. Under the terms of the Director Plan, each non-executive director is automatically granted an option to purchase 5,000 shares upon joining the Board and each September lst, pro rata, based on the time the director has served in such capacity during the previous year. The Directors' Plan also provides that directors, upon joining the Board, and for one (1) year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000. The Director Plan replaced the previous Director Plan that expired in April 2000.

Under the Director Plan, the exercise price for options granted under the Director Plan shall be 100% of the fair market value of the common stock on the date of grant. Until otherwise provided in the Stock Option Plan, the exercise price of options granted under the Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of common stock of TeamStaff or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the Director Plan, expires five (5) years from the date of grant. The Committee has no discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Committee will make all determinations of the interpretation of the Director Plan. Options granted under the Director Plan are not qualified for incentive stock option treatment. As of September 30, 2004,2005, there were 100,000125,000 options held by directors outstanding under the Director Plan.

Shareholder Return Performance Presentation

Set forth herein is a line graph comparing the total returns (assuming reinvestment of dividends) of TeamStaff'sTeamStaff’s common stock, the Standard and Poor Industrial Average, and an industry composite

consisting of a group of four peer issuers selected in good faith by TeamStaff. TeamStaff'sTeamStaff’s common stock is listed for trading in the NasdaqNASDAQ National Market and is traded under the symbol "TSTF"‘‘TSTF’’.

NOTES

(1)	Assumes that the value of the investment in TeamStaff'sTeamStaff’s Common Stock and each index was $100 on September 30, 19992000 and that dividends were reinvested at years ended September 30th.

(2)

Industry composite for "Old‘‘Old Peer Group"Group’’, which includes only companies related to our PEO discontinued operations,medical staffing, includes Administaff, Gevity HR, Team America Corp., Cross Country Healthcare, Medical Staffing Network Holdings, On Assignment, and Rehabcare Group. Industry composite for "New‘‘New Peer Group"Group’’, which includes only companies related to both our medical staffing division,and office administration/technical professional staffing, includes Cross Country Healthcare, Medical Staffing Network Holdings, On Assignment, Rehabcare Group, ATC Healthcare, AMN Healthcare Services and Rehabcare Group.KForce. The industry composite has been determined in good faith by management to represent entities that compete with TeamStaff in certain of its significant business segments. Management does not believe there are any publicly held entities that compete with all TeamStaff'sTeamStaff’s business segments.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of December 15, 200416, 2005 with respect to each director, each of the named executive officers as defined in Item 402(a)(3), and directors and executive officers of TeamStaff as a group, and to the persons known by TeamStaff to be the beneficial owner of more than five percent of any class of TeamStaff's voting securities. At December 15, 2004,16, 2005, TeamStaff had 15,714,22919,278,270 shares of common stock outstanding. The figures stated below are based upon Schedule 13G, Schedule 13G/A, Form 3, and Form 4’s filed with the Securities and Exchange Commission by the named persons.

Name of Shareholder				Number of Shares Currently Owned (1)				Percent of Company's Outstanding Stock
Martin J. Delaney (2) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					72,235				0.5	%
Karl W. Dieckmann (3) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					105,924				0.7	%
Ben J. Dyer (4) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					27,526				0.2	%
Rick J. Filippelli (5) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					25,000				0.2	%
T. Stephen Johnson (6) C/o T. Stephen Johnson & Associates, Inc. 3650 Mansell Road, Suite 200 Alpharetta, GA 30022					279,011				1.8	%
Edmund Kenealy (7) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					69,816				0.4	%
Rocco Marano (8) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					33,857				0.2	%
Timothy Nieman (9) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					0				0.0	%
T. Kent Smith (10) C/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873					200,000				1.3	%
Wachovia Corp (11) One First Union Center Charlotte, NC 28288					2,822,417				18.0	%

Name				Number of Shares Currently Owned (1)				Percent of Company's Outstanding Stock
Ronald Aldrich (2) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				0				*
Peter Black (3)(16)(17) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				0				*
Martin J. Delaney (4) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				172,235				*
Karl W. Dieckmann (5) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				105,924				*
Ben J. Dyer (6) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				38,126				*
Rick J. Filippelli (7) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				100,000				*
James D. Houston (8) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				0				*
T. Stephen Johnson (9) c/o T. Stephen Johnson & Associates, Inc. 3650 Mansell Road, Suite 200 Alpharetta, GA 30022				284,011				1.47%
Rocco Marano (10) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				48,857				*
Timothy Nieman (11) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				50,000				*
Barry McDonald (12) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				25,000				*

Name of Shareholder				Number of Shares Currently Owned (1)				Percent of Company's Outstanding Stock
Nationwide Financial Services (12) One Nationwide Plaza Mail Stop 01-12-13 Columbus, OH 43215					2,256,488				14.4	%
Wynnefield Capital Management, LLC (13) 450 Seventh Ave New York, NY 10123					1,441,500				9.2	%
Wynnefield Capital Inc. (14) 450 Seventh Ave New York NY 10123					481,500				3.1	%
All officers and directors as a group (9) persons (2,3,4,5,6,7,8,9,10)					813,369				5.2	%

Name				Number of Shares Currently Owned (1)				Percent of Company's Outstanding Stock
T. Kent Smith (13) c/o TeamStaff, Inc. 300 Atrium Drive Somerset, NJ 08873				500,000				2.59%
Wachovia Corp (14) One First Union Center Charlotte, NC 28288				2,822,417				14.64%
Nationwide Financial Services (15) One Nationwide Plaza Mail Stop 01-12-13 Columbus, OH 43215				2,256,488				11.70%
Wynnefield Capital Management, LLC (16) 450 Seventh Ave New York, NY 10123				1,675,875				8.69%
Wynnefield Capital Inc. (17) 450 Seventh Ave New York NY 10123				559,625				2.90%
Hummingbird Value Fund (18) 460 Park Avenue, 12th Flr. New York NY 10022				698,995				3.63%
Hummingbird Microcap Value Fund (19) 460 Park Avenue, 12th Flr. New York NY 10022				636,115				3.30%
All officers and directors as a group (12) persons (2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 16, 17)				3,609,653				18.72%

(1) *	Less than 1 percent.

1.	Ownership consists of sole voting and investment power except as otherwise noted.

(2) 2.	Excludes unvested options to purchase 7,500 shares of TeamStaff’s common stock.

3.	Excludes unvested options to purchase 7,500 shares of TeamStaff’s common stock. Mr. Black is a member of the Company’s Board of Directors and is an Investment Analyst and Portfolio Manager at Wynnefield Capital, Inc. Mr. Black expressly disclaims beneficial ownership of the securities owned by Wynnefield Capital and its affiliates.

4.	Includes options to purchase 120,000 shares of TeamStaff’s common stock. Also includes warrants to purchase 10,000 shares of TeamStaff’s common stock.

5.	Includes options to purchase 20,000 shares of TeamStaff'sTeamStaff’s common stock and excludes unvested options to purchase 5,000 shares of TeamStaff's common stock. Also includes warrants to purchase 10,000 shares of TeamStaff's common stock.

(3) 6.	Includes options to purchase 20,00015,000 shares of TeamStaff'sTeamStaff’s common stock and excludes unvested options to purchase 5,000 shares of TeamStaff'sTeamStaff’s common stock.

(4) 7.	Includes options to purchase 10,000100,000 shares of TeamStaff's common stock and excludes unvested options to purchase 5,000 shares of TeamStaff'sTeamStaff’s common stock.

(5) 8.	Excludes unvested options to purchase 75,000 shares of TeamStaff's common stock.None.

(6) 9.	Includes an aggregate of 147,790 shares owned by or on behalf of certain of the holder'sholder’s family members and as to which shares the listed holder expressly disclaims beneficial ownership. Includes options to purchase 15,00020,000 shares of TeamStaff'sTeamStaff’s common stock, and excludes unvested options to purchase 5,000 shares of TeamStaff'sTeamStaff’s common stock.

(7) 10.	Includes options to purchase 60,00015,000 shares of TeamStaff's common stock and excludes unvested options to purchase 50,000 shares of TeamStaff's common stock.

(8)	Includes warrants to purchase 2,000 shares of TeamStaff's common stock, options to purchase 10,000 shares of TeamStaff'sTeamStaff’s common stock and excludes unvested options to purchase 5,000 shares of TeamStaff'sTeamStaff’s common stock. Also includes warrants to purchase 2,000 shares of TeamStaff’s common stock.

(9) 11.	Excludes unvestedIncludes options to purchase 50,000 shares of TeamStaff'sTeamStaff’s common stock.

(10) 12.	Includes options to purchase 200,00025,000 shares of TeamStaff's common stock and excludes unvested options to purchase 200,000 shares of TeamStaff'sTeamStaff’s common stock.

(11)	13. Includes options to purchase 500,000 shares of TeamStaff’s common stock.

14.	Wachovia Corporation obtained these shares in connection with the acquisition of BrightLane completed as of August 31, 2001.

(12) 15.	Nationwide Financial Services obtained these shares in connection with the acquisition of BrightLane completed as of August 31, 2001.

(13) 16.	Beneficial ownership is based upon Schedule 13G, Schedule 13G/A, Form 3, and Form 4's4’s filed with the Securities and Exchange Commission. Mr. Peter Black, one of our directors, is an affiliate of Wynnefield Capital and its affiliated entities. Mr. Black expressly disclaims beneficial ownership of the securities owned by Wynnefield Capital and its affiliates.

(14) 17.	Beneficial ownership is based upon Schedule 13G, Schedule 13G/A, Form 3, and Form 4's4’s filed with the Securities and Exchange Commission. Mr. Peter Black, one of our directors, is an affiliate of Wynnefield Capital and its affiliated entities. Mr. Black expressly disclaims beneficial ownership of the securities owned by Wynnefield Capital and its affiliates.

18.	Beneficial ownership is based upon Schedule 13D filed with the Securities and Exchange Commission. Includes 118,750 shares issuable upon exercise of warrants to purchase common stock.

19.	Beneficial ownership is based upon Schedule 13D filed with the Securities and Exchange Commission. Includes 118,750 shares issuable upon exercise of warrants to purchase common stock.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information concerning employment and severance agreements with, and compensation of, the Corporation's present executive officers and directors, see "Executive‘‘Executive Compensation."’’ The Directors' Plan

provides that directors, upon joining the Board, and for one year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000.

Effective August 31,2001,31, 2001, TeamStaff, Inc. completed its acquisition of BrightLane. As a result of a reverse subsidiary merger with a subsidiary of TeamStaff, BrightLane is now a wholly owned subsidiary of TeamStaff.

In connection with the transaction, persons holding BrightLane options to acquire approximately 2.1 million BrightLane shares (the equivalent of approximately 481,000 TeamStaff shares) exercised their options. BrightLaneTeamStaff made recourse loans of approximately $1.0 million principal amount to the holders of these options to assist them in payment of tax obligations incurred with exercise of the options. The loans arewere repayable upon the earlier of (i) sale of the TeamStaff sharesshares; or (ii) three years. As of September 30, 2004, approximately $0.7 millionall of these loans hashave been repaid or forgiven. All loans were to be repaid in cash with the exception of one loan.forgiven or otherwise disposed of. Under the terms of TeamStaff's employment agreement with an executive officer of TeamStaff's BrightLane subsidiary, the loan ($131,000) was forgiven over a two-year period of time. We are considering pursuing litigation against certain of the debtors to recover amounts due. One of our current directors, Ben J. Dyer, was a former shareholder of Brightlane,BrightLane, and received a loan in the amount of $67,840 in connection with the transaction. The loan was on the same terms as provided to all other option holders of BrightLane. The loan was made and repaid prior to Mr. Dyer joining the Board.

Wachovia Corporation, through an affiliate held all of the BrightLane Series B Preferred stock, and therefore owns 2,822,417 shares of TeamStaff's Common Stock (approximately 18%15%). In addition,

Nationwide Financial Services, Inc. held all of the BrightLane Series C Preferred stock, and therefore owns 2,256,488 shares of TeamStaff's Common Stock (approximately 14%12%). The two classes of preferred stock were converted into Common Stock in connection with the acquisition of BrightLane.

As part of its acquisition of BrightLane, completed in August 2001, TeamStaff entered into a two-year, extendable marketing relationship with First Union Corporation (renamed Wachovia). The Wachovia relationship provided TeamStaff with the ability to market its PEO services to Wachovia's small business customers through Wachovia's network of small business bankers. The agreement terminated effective as of October 14, 2003. Wachovia Corporation continues as a major shareholder of TeamStaff's stock.

Under the terms governing the transaction, certain option holders were restricted from selling TeamStaff shares acquired from the exercise of their BrightLane options for a period of up to two years. T. Stephen Johnson and his spouse, Mary Johnson, also a former director of BrightLane, were the only option holders who exercised their options and who were subject to these lockup provisions. Due to the significant rise in TeamStaff's stock price and the significant increase in the amount of the tax loans to be made to T. Stephen Johnson and Mary Johnson, the Board of Directors of TeamStaff concluded it would be more appropriate to allow Mr. and Mrs. Johnson to sell a portion of their TeamStaff shares to cover their tax liability rather than carry a large loan receivable on TeamStaff's financial statements. The Board therefore agreed to allow the sale of up to 40% of Mr. and Mrs. Johnson's option shares (approximately 56,230 TeamStaff shares) as an exempt transaction under SEC Rule 16(b)(3).

Under the terms of the agreements governing the BrightLane transaction, TeamStaff agreed to register for resale shares obtained by former BrightLane shareholders who would be deemed "affiliates" under SEC rules and regulations. The registration statement included 6,096,946 shares of common stock owned by these persons. Certain former shareholders of BrightLane, who are selling security holders, including First Union Corporation, Nationwide Financial Services and T. Stephen Johnson agreed to the terms of a "lockup" agreement whereby they have agreed that the shares of TeamStaff obtained by them may only be sold as follows: commencing on the first anniversary of the transaction (August 31, 2002) 50% of the acquired shares may be sold and commencing on the second anniversary the remaining shares may be sold. The Board of Directors has reserved the right to release all of part of the shares from the lockup prior to its expiration.

In addition, Rocco J. Marano agreed to step down as a director upon consummation of the transaction with BrightLane. Effective September 4, 2001, Mr. Marano resigned as a director. In connection with

the termination of his services, he received 1,000 warrants for each year of service on the TeamStaff Board of Directors (an aggregate of 16,000 warrants). The grant of the warrants was approved by the Board of Directors as an exempt transaction under SEC Rule 16(b)(3). Mr. Marano has since rejoined the Board of Directors.

TeamStaff entered into a one year, automatically renewable marketing agreement with Directo, Inc. effective as of February 1, 2004. Directo provides financial and direct deposit services to companies and their employees. Pursuant to the terms of the agreement, TeamStaff is compensated based on its sales of Directo pay card services. TeamStaff offers these services primarily through its payroll services division. For the fiscal yearyears ended September 30, 2005 and 2004, TeamStaff has not earned any commissions from its sales of Directo's services. T. Stephen Johnson, TeamStaff's Chairman, is also Chairman of Directo. TeamStaff's entry into the marketing agreement with Directo was approved by the disinterested members of the Board.Board and was believed to be fair and reasonable to the Company.

During the year ended September 30, 2004,2005, the company shared a portion of its leased office space in Alpharetta, Georgia with an affiliated entity of the Chairman of the Board of Directors, T. Stephen Johnson & Associates, Inc. As part of the agreement, TeamStaff shared the cost of a receptionist, phone service, and leased common area furniture. During the fiscal year ended September 30, 2004,2005, TeamStaff paid $28,000$12,000 in shared costs. TeamStaff was responsible for payment of the monthly lease obligation and T. Stephen Johnson & Associates reimbursed TeamStaff in the amount of $34,000$9,000 in fiscal year ended September 30, 20042005 for their prorated portion of the space. We no longer use these facilities.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

As described in greater detail earlier in this Annual Report on Form 10-K (see Item 9 - "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure), Lazar Levine & Felix LLP served as our independent auditor for the fiscal year ended September 30, 2004 and 2003 and PricewaterhouseCoopers LLP and Arthur Andersen LLP served as our independent auditors during the fiscal year ended September 30, 2002. As described above, Lazar Levine & Felix LLP also provided audit services to us in connection with the audit of our financial statements for the fiscal year ended September 30, 2002. The following table presents the total fees paid for professional audit and non-audit services rendered by our independent auditors for the audit of our annual financial statements for the years ended September 30, 20042005 and September 30, 2003,2004, and fees billed for other services rendered by our independent auditors during those periods.

				Fiscal Years Ended September 30,
				2004				2003
Audit Fees (1)				$	114,000			$	284,000
Audit-Related Fees (2)					18,000				41,000
Tax Fees (3)					137,000				192,000
All Other Fees (4)					3,000				11,000
Total				$	272,000			$	528,000

(1)    Audit services consist of audit work performed in the examination of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

(2)    Audit-related services consist of assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.

(3)    Tax services consist of all services performed by the independent auditor's tax personnel, except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

(4)    Other services consist of those service not captured in the other categories.

				Fiscal Years Ended September 30,
				2005				2004
Audit Fees (1)				$	132,000			$	114,000
Audit-Related Fees (2)					94,000				18,000
Tax Fees (3)					198,000				137,000
All Other Fees (4)					1,000				3,000
Total				$	425,000			$	272,000

	(1)    Audit services consist of audit work performed in the examination of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

	(2)    Audit-related services consist of assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions and special procedures required to meet certain regulatory requirements.

	(3)    Tax services consist of all services performed by the independent auditor's tax personnel, except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.

	(4)    Other services consist of those service not captured in the other categories.

Our Audit Committee has determined that the services provided by our independent auditors and the fees paid to them for such services has not compromised the independence of our independent auditors.

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor. Prior to engagement of the independent auditor for the next year's audit, management will submit a detailed description of the audit and permissible non-audit services expected to be rendered during that year for each of four categories of services provided by the independent auditor to the Audit Committee for approval. The four categories of services provided by the independent auditor are as defined in the footnotes to the fee table set forth above. In addition, management will also provide to the Audit Committee for its approval a fee proposal for the services proposed to be rendered by the independent auditor. Prior to the engagement of the independent auditor, the Audit Committee will approve both the description of audit and permissible non-audit services proposed to be rendered by the independent auditor and the budget for all such services. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service.

During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires separate pre-approval before engaging the independent auditor. To ensure prompt handling of unexpected matters, the Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K(a)

(a) 1. Financial Statements

The financial statements and schedules of TeamStaff are included in Part II, Item 8 of this report beginning on page F-1 and including page S-1.

2. All other schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.

3. Exhibit List

The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits.

EXHIBIT NO.    DESCRIPTION

2.1				—Agreement and Plan of Merger by and among TeamStaff, Inc., TeamSub, Inc and BrightLane.com, Inc., dated as of March 6, 2001, as amended by Amendment No. 1 dated as of March 21, 2001 and Amendment No. 2 dated as of April 6, 2001 (filed as Appendix A to the Proxy Statement/prospectus filed on August 7, 2001, SEC File no. 333-61730, as part of Registrant'sRegistrant’s Registration Statement on Form S-4).

2.2.1
2.2	—Form of Asset Purchase Agreement between TeamStaff, Inc and Gevity HR, Inc. dated as of November 14, 2003 (filed as Exhibit 2 to Form 8K8-K dated November 14, 2003).

3.1				—Amended and Restated Certificate of Incorporation (filed as Exhibit A to Definitive Proxy Statement dated May 1, 2000 as filed with the Securities and Exchange Commission).

3.2
3.2	—Form of Form of Certificate of Designation of Series A Preferred Stock (filed as Exhibit 3.1 to Form 8-K dated April 6, 2001).

3.3
3.3	—Amended By-Laws of Registrant adopted as of May 15, 2001 (filed as Exhibit 3.4 to the Registration Statement on Form S-4 File No. 333-61730).

3.4
3.4	—Amended and restated by-laws of Registrant adopted as of August 29, 2001 (filed as Exhibit 3,53.5 to the Registrant'sRegistrant’s Form S-3 filed on December 19,2001)

	.
4.1				—Form of the Common Stock Certificate (Exhibit 4.1 to Registration Statement on Form S-18, File No. 33-46246-NY).

4.2
4.2	—2000 Employee Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000).

4.3
4.3	—2000 Non-Executive Director Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000).

10.1
10.1	—Lease dated May 30, 1997 for office space at 300 Atrium Drive, Somerset, New Jersey (Exhibit 10.6.1 to Form 10-K for the fiscal year ended September 30, 1997).

10.2
10.2	—Form of Stock Purchase Agreement dated as of April 6, 2001 between TeamStaff, Inc. and BrightLane.com, Inc. with respect to purchase of Series A Preferred Stock (filed as Exhibit 10.1 to Form 8-K dated April 6, 2001).

10.3
10.3	—Form of Escrow Agreement between TeamStaff, Inc. and BrightLane Shareholders with respect to the placement of 150,000 shares into escrow by the BrightLane shareholders (filed as Appendix B to the proxy statement/prospectus filed on August 7, 2001 SEC File No. 333.61730).

10.4
10.4	—Form of Severance Agreement dated as of May 22, 2002 between the Registrant and Donald Kappauf.

	Kappauf (filed as Exhibit 10.12 to the Form 10-K filed on February 10, 2003).
10.5				—Form of Severance Agreement dated as of May 22, 2002 between the Registrant and Donald Kelly.

	Kelly (filed as Exhibit 10.13 to the Form 10-K filed on February 10, 2003).
10.6			—Form of Loan and Security Agreement dated as of April 9, 2002 by and among the Registrant, its subsidiaries and Fleet National Bank

10.7	—Form of Master Note dated as of April 9, 2002 by and by and among the Registrant, its subsidiaries and Fleet National Bank.

10.8	—Form of Employment Agreement made as of June 18, 2003 between TeamStaff, Inc. and T. Kent Smith.

	Smith (filed as Exhibit 10.16 to the Form 10-K filed on December 23, 2004).
10.9 10.7				—Form of Securities Purchase Agreement dated as of November 5, 2004 including Form of Warrant (filed as Exhibit 10.1 to the Form 8-K filed on November 12, 2004)

10.8
10.10	—Form of Asset Purchase Agreement by and among Nursing Innovations, Inc., Vitriarc, Inc., and William L. Booth and Teamstaff Rx, Inc. dated as of November 5, 2004 (filed as Exhibit 10.1 to the Form 8-K filed on November 18, 2004)

	.
10.11 10.9				—Form of Agreement for Sale of Goodwill dated as of November 5, 2004 by and between William Lee Booth and TeamStaff Rx, Inc. (filed as Exhibit 10.2 to the Form 8-K filed on November 18, 20004)

	2004).
10.12 10.10				—Form of Client Transfer Agreement as of November 14, 2004, by and among Nursing Innovations, Inc., Vitriarc, Inc., and William L. Booth and TeamStaff Rx Inc. (filed as Exhibit 10.3 to the Form 8-K filed on November 18, 20004)

	2004)
10.13* 10.11				—Form of Employee Incentive Stock Option Certificate and Agreement.Agreement (filed as Exhibit 10.13 to the Form 10-K filed on December 23, 2004).

10.14* 10.12				—Form of Employee Non-Qualified Stock Option Certificate and Agreement.

	Agreement (filed as Exhibit 10.14 to the Form 10-K filed on December 23, 2004).
10.15* 10.13				—Form of 2000 Director Plan Non-Qualified Stock Option Agreement

	(filed as Exhibit 10.15 to the Form 10-K filed on December 23, 2004).
10.16* 10.14				—Form of Employee Incentive Stock Option Certificate and Agreement dated as of June 18, 2003 between TeamStaff, Inc. and T. Kent Smith. (filed as Exhibit 10.16 to the Form 10-K filed on December 23, 2004).

10.15				—Form of Lease for our business premises located at 18167 U.S. Highway 19N, Suite 400, Clearwater, Fl 33764 (filed as Exhibit 10.1 to Form 8-K dated February 29, 2005).
21.0 * 10.16				—Form of Stock Purchase Agreement among TeamStaff, Inc. and the Shareholders of RS Staffing Services, Inc. dated as of May 26, 2005 (filed as Exhibit 10.1 to Form 8-K dated June 8, 2005).
10.16.1				—Form of Note dated June 8, 2005 issued by TeamStaff, Inc. to Roger Staggs (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005).
10.16.2				—Form of Note dated June 8, 2005 issued by Team Staff, Inc. to Barry Durham (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005).
10.16.3*				—Form of Employment Agreement between TeamStaff, Inc. and Roger Staggs, dated as of June 8, 2005
10.16.4*				—Form of Employment Agreement between TeamStaff, Inc. and Barry Durham, dated as of June 8, 2005.
10.17				—Form of Revolving Credit Agreement, Promissory Notes and related documents between TeamStaff, Inc. and PNC Bank, NA, dated as of June 8, 2005 (filed as Exhibits 10.4 and 10.5 to the Form 10-Q filed on August 12, 2005).
10.18				—Form of Employment Agreement between TeamStaff, Inc. and T. Kent Smith, dated as of June 30, 2005 (filed as Exhibit 10.1 to the Form 8-K filed on July 14, 2005).
10.19				—Form of Employment Agreement between TeamStaff, Inc. and Rick J. Filippelli, dated as of June 30, 2005 (filed as Exhibit 10.2 to the Form 8-K filed on July 14, 2005).
10.20*				—Form of Director Stock Option Agreement for options granted September 1, 2005.
10.21				—Form of Settlement Agreement between TeamStaff, Inc. and the CNA Entities dated as of October 10. 2005 (filed as Exhibit 10.1 to the Form 8-K filed on October 20, 2005).
21.0*				—Subsidiaries of Registrants.

23.1*
23.1*	—Consent of Lazar Levine and Felix LLP.

31.1*
31.1*	—Certification of Chief Executive Officer pursuant to Section17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a)

31.2*
31.2*	—Certification of Chief Financial Officer pursuant to Section17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a)

32.1*
32.1*	—Certification of Chief Executive Officer and Chief Financial Officer pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

(b)	Reports on Form 8-K

	On August 2, 2004, TeamStaff filed a report on Form 8-K under Item 7 Financial Statements and Exhibits and Item 12 Results of Operations and Financial Condition in connection with its earnings release for the fiscal quarter ended June 30, 2004.

	On August 3, 2004, TeamStaff filed a report on Form 8-K under Item 7 Financial Statements, Pro Forma Financial Information and Exhibits and Item 9 Regulation FD Disclosure in connection with its investor relations presentation posted on its website, www.teamstaff.com, on August 3, 2004 and presented at its annual meeting of shareholders.

	On August 5, 2004, TeamStaff filed a report on Form 8-K under Item 5 Other Events in connection with its appointment of Cheryl Presuto as its Controller on August 3, 2004.

(c)	Exhibits. See Item (a)(3) above.

(d)	Valuation of qualifying accounts. See Schedule I annexed to the financial statements.

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.

TEAMSTAFF, INC.

				TEAMSTAFF, INC.
				/s/T. Kent Smith
				T. Kent Smith President and Chief Executive Officer

				/s/ Rick Filippelli
				Rick Filippelli Vice President, Finance and Chief Financial Officer

Dated: December 21, 200416, 2005

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.

/s/ T. Stephen Johnson		Chairman of the Board		December 21, 200416, 2005
T. Stephen Johnson
/s/Karl W. Dieckmann		Vice-Chairman of the Board		December 21, 200416, 2005
Karl W. Dieckmann
/s/ Ron Aldrich		Director		December 16, 2005
Ron Aldrich
/s/ Peter Black		Director		December 16, 2005
Peter Black
/s/ Martin J. Delaney		Director		December 21, 200416, 2005
Martin J. Delaney
/s/ Ben J. Dyer		Director		December 21, 200416, 2005
Ben J. Dyer
/s/ Rocco Marano		Director		December 21, 200416, 2005
Rocco Marano
/s/ T. Kent Smith		President, Chief Executive Officer and Director		December 21, 200416, 2005
T. Kent Smith
/s/ Rick Filippelli		Chief Financial Officer, Principal Accounting Officer		December 16, 2005
Rick Filippelli

TeamStaff, Inc. and Subsidiaries

Index to Consolidated Financial Statements

				Page
Report Of Registered Independent Public Accountants							F-2
Consolidated Balance Sheets As Of September 30, 20042005 and 20032004							F-3
Consolidated Statements Of Operations and Comprehensive Operations For the Years Ended September 30, 2005, 2004, 2003, and 20022003							F-5
Consolidated Statements Of Shareholders' Equity For The Years Ended September 30, 2005, 2004, 2003, and 20022003							F-6
Consolidated Statements Of Cash Flows For The Years Ended September 30, 2005, 2004, 2003, and 20022003							F-7
Notes To Consolidated Financial Statements							F-8	F-9
Schedule I — Valuation And Qualifying Accounts For The Years Ended September 30, 2005, 2004, 2003, and 20022003							S-1
Schedules other than those listed above have been omitted as they are either not required or because the related information has been included in the notes to consolidated financial statements

Schedules other than those listed above have been omitted as they are either not required or because the related information has been included in the notes to consolidated financial statements

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
TeamStaff, Inc.
Somerset, NJ:NJ

We have audited the accompanying consolidated balance sheets of TeamStaff, Inc. and Subsidiaries as of September 30, 20042005 and 2003,2004, and the related consolidated statements of operations and comprehensive operations, shareholders'income, shareholders’ equity, and cash flows for the three years in the period ended September 30, 2004.2005. Our audits also included the financial statement schedule listed in Part IV, Item 15. These financial statements and schedule are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We performed our audits in accordance with standards of the Public Company Accounting Oversight Board(UnitedBoard (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required 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 financial statements referred to above present fairly, in all material respects, the financial position of TeamStaff, Inc. and Subsidiaries as of September 30, 20042005 and 2003,2004, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004,2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Lazar Levine & Felix LLP Lazar Levine & Felix LLP

New York, NY
December 1, 2004November 23, 2005

TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 20042005 AND 20032004
(AMOUNTS IN THOUSANDS)

Page 1 of 2

ASSETS				2004				2003
CURRENT ASSETS:
Cash and cash equivalents				$	3,060			$	4,329
Restricted cash					1,800				1,264
Accounts receivable, net of allowance for doubtful accounts of $39 and $142 at September 30, 2004 and 2003, respectively					3,013				4,926
Deferred tax asset					90				—
Prepaid workers' compensation					1,000				963
Other current assets					1,267				1,447
Total current assets					10,230				12,929
EQUIPMENT AND IMPROVEMENTS:
Furniture & equipment					2,795				2,795
Computer equipment					367				367
Computer software					1,120				1,101
Leasehold improvements					224				224
					4,506				4,487
Less accumulated depreciation and amortization					(3,589	)			(3,180	)
Equipment and improvements, net					917				1,307
DEFERRED TAX ASSET, net of current portion					16,723				14,875
TRADENAME					4,199				4,199
GOODWILL					1,710				1,710
OTHER ASSETS:
Prepaid workers' compensation, net of current portion					3,341				2,682
Other assets					309				555
Total other assets					3,650				3,237
TOTAL ASSETS-CONTINUING OPERATIONS					37,429				38,257
ASSETS FROM DISCONTINUED OPERATIONS					—				22,360
TOTAL ASSETS				$	37,429			$	60,617

ASSETS				September 30, 2005				September 30, 2004
CURRENT ASSETS:
Cash and cash equivalents				$	1,304			$	3,060
Restricted cash					—				1,800
Accounts receivable, net of allowance for doubtful accounts of $41 and $39 as of September 30, 2005 and September 30, 2004, respectively					9,470				3,013
Deferred tax asset					634				90
Prepaid workers' compensation					1,461				1,000
Other current assets					1,155				1,267
Total current assets					14,024				10,230
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment					3,360				2,795
Computer equipment					516				367
Computer software					1,250				1,134
Leasehold improvements					177				210
					5,303				4,506
Less accumulated depreciation and amortization					(4,037	)			(3,589	)
Equipment and improvements, net					1,266				917
DEFERRED TAX ASSET, net of current portion					17,848				16,723
TRADENAME					4,199				4,199
GOODWILL					10,281				1,710
OTHER ASSETS:
Prepaid workers' compensation, net of current portion					2,200				3,341
Other assets					236				309
Total other assets					2,436				3,650
TOTAL ASSETS				$	50,054			$	37,429

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.financial statements

TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 20042005 AND 20032004
(AMOUNTS IN THOUSANDS)

Page 2 of 2

LIABILITIES AND SHAREHOLDERS' EQUITY				2004				2003
CURRENT LIABILITIES:
Current portion of long-term debt				$	112			$	61
Accrued workers' compensation					1,626				1,653
Accrued payroll					782				2,856
Accrued pension liability					588				776
Deferred tax liability					—				538
Accounts payable					731				669
Accrued expenses and other current liabilities					770				1,528
Total current liabilities					4,609				8,081
LONG-TERM DEBT, net of current portion					24				94
ACCRUED PENSION LIABILITY, net of current portion					840				948
LIABILITIES FROM DISCONTINUED OPERATIONS					963				16,384
Total liabilities					6,436				25,507
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; authorized 5,000 shares; 0 issued and outstanding					—				—
Common Stock, $.001 par value; authorized 40,000 shares; issued 15,721 and 16,267 respectively; outstanding 15,714 and 15,714 respectively					16				16
Additional paid-in capital					62,963				65,256
Retained (deficit) earnings					(31,651	)			(27,572	)
Accumulated comprehensive losses					(311	)			(273	)
Treasury Stock, 7 and 553 shares at cost, respectively					(24	)			(2,317	)
Total shareholders' equity					30,993				35,110
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY				$	37,429			$	60,617

LIABILITIES AND SHAREHOLDERS' EQUITY				September 30, 2005				September 30, 2004
CURRENT LIABILITIES:
Bank line of credit				$	4,006			$	—
Current portion of captial lease obligations					120				112
Notes payable					1,543				—
Accrued workers' compensation					2,050				1,626
Accrued payroll					1,512				782
Accrued pension liability					294				588
Accounts payable					1,537				731
Accrued expenses and other current liabilities					1,960				770
Total current liabilities					13,022				4,609
CAPITAL LEASE OBLIGATIONS, net of current portion					220				24
NOTES PAYABLE, net of current portion					1,500				—
ACCRUED PENSION LIABILITY, net of current portion					578				840
LIABILITIES FROM DISCONTINUED OPERATIONS					422				963
Total liabilities					15,742				6,436
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value; authorized 5,000 shares; 0 issued and outstanding					—				—
Common Stock, $.001 par value; authorized 40,000 shares; issued 19,285 and 15,721 respectively; outstanding 19,278 and 15,714 respectively					19				16
Additional paid-in capital					68,615				62,963
Retained (deficit) earnings					(34,140	)			(31,651	)
Accumulated comprehensive losses					(158	)			(311	)
Treasury stock, 7 shares at cost at September 30, 2005 and September 20, 2004, respectively					(24	)			(24	)
Total shareholders' equity					34,312				30,993
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY				$	50,054			$	37,429

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.financial statements

TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

				For the Years Ended September 30,
				2004				2003				2002
REVENUES				$	37,288			$	62,805			$	79,820
DIRECT EXPENSES					28,545				50,615				63,796
Gross profit					8,743				12,190				16,024
OPERATING EXPENSES					11,371				14,594				12,085
DEPRECIATION AND AMORTIZATION					409				329				198
(Loss) income from operations					(3,037	)			(2,733	)			3,741
OTHER INCOME (EXPENSE)
Interest income					38				63				171
Interest expense					(81	)			(220	)			(168	)
Other income					232				538				947
					189				381				950
(Loss) income from continuing operations before tax					(2,848	)			(2,352	)			4,691
INCOME TAX BENEFIT (EXPENSE)					1,083				861				(1,717	)
(Loss) income from continuing operations					(1,765	)			(1,491	)			2,974
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
(Loss) income from operations, net of tax benefit (expense) of $856, $3,015 and $(68) for the years ended					(1,387	)			(27,394	)			101
(Loss) from disposal, net of tax benefit of $575, $0 and $0 for the years ended					(927	)			—				—
					(2,314	)			(27,394	)			101
Net (loss) income					(4,079	)			(28,885	)			3,075
OTHER COMPREHENSIVE EXPENSE
Minimum pension liability adjustment, net of tax					(38	)			(131	)			(79	)
COMPREHENSIVE (LOSS) INCOME				$	(4,117	)		$	(29,016	)		$	2,996
EARNINGS PER SHARE – BASIC & DILUTED
(Loss) income from continuing operations				$	(0.11	)		$	(0.10	)		$	0.18
(Loss) income from discontinued operations					(0.15	)			(1.74	)			0.01
Net (loss) income				$	(0.26	)		$	(1.84	)		$	0.19
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING					15,714				15,732				16,014
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING					15,714				15,732				16,183

				For the Years Ended September 30,
				2005				2004				2003
REVENUES				$	55,804			$	37,288			$	62,805
DIRECT EXPENSES					43,652				28,545				50,615
Gross profit					12,152				8,743				12,190
OPERATING EXPENSES					14,330				11,371				14,594
DEPRECIATION AND AMORTIZATION					561				409				329
Loss from operations					(2,739	)			(3,037	)			(2,733	)
OTHER INCOME (EXPENSE)
Interest income					48				38				63
Interest expense					(222	)			(81	)			(220	)
Other income					180				232				538
					6				189				381
Loss from continuing operations before tax					(2,733	)			(2,848	)			(2,352	)
INCOME TAX BENEFIT					1,039				1,083				861
Loss from continuing operations					(1,694	)			(1,765	)			(1,491	)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
Loss from operations, net of tax benefit of $494, $856, and $3,015 for the years ended					(796	)			(1,387	)			(27,394	)
Income (loss) from disposal, net of tax benefit of $0, $575, and $0 for the years ended					1				(927	)			—
					(795	)			(2,314	)			(27,394	)
Net loss					(2,489	)			(4,079	)			(28,885	)
OTHER COMPREHENSIVE INCOME (EXPENSE)
Minimum pension liability adjustment, net of tax					153				(38	)			(131	)
COMPREHENSIVE LOSS				$	(2,336	)		$	(4,117	)		$	(29,016	)
EARNINGS PER SHARE - BASIC & DILUTED
Loss from continuing operations				$	(0.09	)		$	(0.11	)		$	(0.10	)
Loss from discontinued operations				$	(0.05	)			(0.15	)			(1.74	)
Net loss				$	(0.14	)		$	(0.26	)		$	(1.84	)
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING					18,206				15,714				15,732
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING					18,206				15,714				15,732

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
financial statements

TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004, 2003 AND 20022003
                (AMOUNTS(AMOUNTS IN THOUSANDS)

				Common Stock								Additional Paid-in Capital				Accumulated Retained Earnings Deficit/Income				Receivable from Shareholder				Treasury Stock								Other Comprehensive Loss				Total Shareholder's Equity
				Shares				Amount																Shares				Amount
BALANCE, September 30, 2001					16,189			$	16			$	63,544			$	(1,762	)		$	(90	)			87			$	(502	)		$	(63	)		$	61,143
Exercise of stock options					37								129																								129
Exercise of stock warrants					3								14																								14
Income tax benefit from stock options exercised													1,513																								1,513
Common stock repurchased to treasury																									243				(1,146	)							(1,146	)
Repayment of loan to shareholder																					90
Minimum pension liability adjustment																																	(79	)			(79	)
Net income																	3,075																				3,075
BALANCE, September 30, 2002					16,229				16				65,200				1,313				—				330				(1,648	)			(142	)			64,739
Common stock repurchased to treasury																									251				(782	)							(782	)
Common stock retirement from treasury					(28	)							(113	)											(28	)			113								0
Common Stock issued in connection with buyout obligation of Corporate Staffing Concepts					27								79																								79
Minimum pension liability adjustment																																	(131	)			(131	)
Director stock purchase					39								90																								90
Net loss																	(28,885	)																			(28,885	)
BALANCE, September 30, 2003					16,267				16				65,256				(27,572	)			—				553				(2,317	)			(273	)			35,110
Common stock retirement from treasury					(546	)							(2,293	)											(546	)			2,293								—
Minimum pension liability adjustment																																	(38	)			(38	)
Net loss																	(4,079	)																			(4,079	)
BALANCE, September 30, 2004					15,721			$	16			$	62,963			$	(31,651	)		$	—				7			$	(24	)		$	(311	)		$	30,993

				Common Stock								Additional Paid-in Capital				Accumulated Retained Earnings Deficit				Treasury Stock								Other Comprehensive Loss				Total Shareholder's Equity
				Shares				Amount												Shares				Amount
BALANCE, September 30, 2002					16,229			$	16			$	65,200			$	1,313				330				($1,648	)			($142	)		$	64,739
Common stock repurchased to treasury																					251				(782	)							(782	)
Common stock retirement from treasury					(28	)							(113	)							(28	)			113								0
Common Stock issued in connection with buyout obligation of Corporate Staffing Concepts					27								79																				79
Minimum pension liability adjustment																													(131	)			(131	)
Director stock purchase					39								90																				90
Net loss																	(28,885	)															(28,885	)
BALANCE, September 30, 2003					16,267				16				65,256				(27,572	)			553				(2,317	)			(273	)			35,110
Common stock retirement from treasury					(546	)							(2,293	)							(546	)			2,293								—
Minimum pension liability adjustment																													(38	)			(38	)
Net loss																	(4,079	)															(4,079	)
BALANCE, September 30, 2004					15,721				16				62,963				(31,651	)			7				(24	)			(311	)			30,993
Common stock issued in connection with private stock offering, net of expense					2,392				2				3,455																				3,457
Common stock issued in connection with acquisition of RS Staffing Services					1,207				1				1,749																				1,750
Warrants granted in connection with private stock offering													498																				498
Minimum pension liability adjustment																													153				153
Return of shares related to forgiveness of shareholder note					(35	)							(50	)																			(50	)
Net Income																	(2,489	)															(2,489	)
BALANCE, September 30, 2005					19,285			$	19			$	68,615				($34,140	)			7				($24	)			($158	)		$	34,312

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

TEAMSTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

				For the Years Ended September 30,
				2004				2003				2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income from continuing operations				$	(1,765	)		$	(1,491	)		$	2,974
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:
Increase (decrease) in deferred income taxes					1,444				(1,083	)			1,173
Depreciation and amortization					409				329				198
Pension amortization					—				612				58
Provision for doubtful accounts					12				128				—
Changes in operating assets and liabilities:
Decrease in accounts receivable					1,901				2,563				2,259
Decrease (increase) in other current assets					52				320				(4,296	)
(Increase) in other assets					(3,704	)			(4,963	)			(117	)
(Decrease) in accounts payable, accrued expenses and other					(3,335	)			(2,162	)			(733	)
(Increase) in restricted cash					(536	)			(1,135	)			—
(Decrease) increase in pension liability					(296	)			453				267
Change in net assets from disposal of discontinued operations					4,625				(377	)			(3,068	)
Net cash used in operating activities					(1,193	)			(6,806	)			(1,285	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, leasehold improvements and software					(19	)			(525	)			(449	)
Earn out provision on prior acquisition					—				79				—
Net cash used in investing activities					(19	)			(446	)			(449	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on capital lease obligations					(69	)			(51	)			(57	)
Proceeds from capital lease					50				—				—
Retirement of treasury stock					—				113				—
Net proceeds from issuance of common stock, net of expense					—				(23	)			—
Repurchase of common shares					—				(782	)			(1,146	)
Net proceeds from the exercise of stock options and warrants					—				—				144
Repayment of loan from Shareholder					—				—				90
Income tax benefit on stock options exercised					—				—				1,512
Net comprehensive expense on pension					(38	)			(131	)			(79	)
Net cash used in financing activities					(57	)			(874	)			464
Net decrease in cash and cash equivalents					(1,269	)			(8,126	)			(1,270	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					4,329				12,455				13,725
CASH AND CASH EQUIVALENTS AT END OF YEAR				$	3,060			$	4,329			$	12,455
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest				$	81			$	144			$	168
Income taxes				$	60			$	556			$	1,190
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS
Note receivable in connection with sale of regional office (El Paso)					—				—			$	125

				For the Years Ended September 30,
				2005				2004				2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations				$	(1,694	)		$	(1,765	)		$	(1,491	)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Deferred income taxes					(1,575	)			1,444				(1,083	)
Depreciation and amortization					561				409				329
Pension amortization					—				—				612
Provision for doubtful accounts					30				12				128
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable					(1,762	)			1,901				2,563
(Increase) decrease in other current assets					(30	)			52				320
Decrease (increase) in other assets					1,248				(3,704	)			(4,963	)
Increase (decrease) in accounts payable, accrued expenses and other					1,261				(3,335	)			(2,162	)
Decrease (increase) in restricted cash					1,800				(536	)			(1,135	)
(Decrease) increase in pension liability					(556	)			(296	)			453
Change in net assets from disposal of discontinued operations					(1,336	)			4,625				(377	)
Net cash used in operating activities					(2,053	)			(1,193	)			(6,806	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, leasehold improvements and software					(129	)			(19	)			(525	)
Payment for acquisition of RS Staffing Services, net of cash acquired					(2,847	)			—				—
Payment for acquisition of Nursing Innovations					(1,866	)			—				—
Earn out provision on prior acquisition					—				—				79
Net cash used in investing activities					(4,842	)			(19	)			(446	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit					32,084				—				—
Payment on revolving line of credit					(28,078	)
Payment of bank line of credit acquired from RS Staffing Services					(2,560	)			—				—
Repayments on capital lease obligations					(237	)			(69	)			(51	)
Principal payments on notes payable					(178	)			—				—
Proceeds from capital lease					—				50				—
Retirement of treasury stock					—				—				113
Net proceeds from issuance of common stock, net of expense					3,955				—				(23	)
Repurchase of common shares					—				—				(782	)
Net comprehensive income (expense) on pension					153				(38	)			(131	)
Net cash provided by (used in) financing activities					5,139				(57	)			(874	)
Net decrease in cash and cash equivalents					(1,756	)			(1,269	)			(8,126	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					3,060				4,329				12,455
CASH AND CASH EQUIVALENTS AT END OF YEAR				$	1,304			$	3,060			$	4,329

				For the Years Ended September 30,
				2005				2004				2003
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest				$	222			$	81			$	144
Income taxes				$	212			$	60			$	556

SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING ACTIVITIES:

The company recorded $391,000 in capital leases during the fiscal year ended September 30, 2005.

The company retired shares valued at $50,000 in connection with forgiveness of shareholder note.

The company purchased all the capital stock of RS Staffing Services for $8.0 million as of June 4, 2005. In conjunction with the acquisition, liabilities were assumed as follows:

Fair value of assets acquired				$	13,034
Cash paid for capital stock					(3,250	)
Notes payable issued for capital stock					(3,000	)
Common stock issued for capital stock					(1,750	)
Acquisition related expenses					(315	)
Liabilities assumed				$	4,719

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
financial statements

TEAMSTAFF, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005, 2004 2003 AND 20022003

(1)    ORGANIZATION AND BUSINESS:BUSINESS:

TeamStaff, Inc., a New Jersey corporation (‘‘TeamStaff’’ or the ‘‘Company’’), was founded in 1969 as a payroll service company and has evolved into a leadingnational provider of payroll and temporary and permanent medical and administrative staffing services throughout the 50 states. TeamStaff'sservices. TeamStaff’s corporate headquarters is in Somerset, New Jersey and itJersey. TeamStaff has offices located in Clearwater, Florida, Woburn, Massachusetts, Memphis, Tennessee, New Orleans, LouisianaMonroe, Georgia, Decatur, Georgia and Atlanta, Georgia. TeamStaff's

When we use the term ‘‘TeamStaff,’’ we mean TeamStaff and its subsidiaries. Currently, we operate only through the parent corporation, TeamStaff, Inc., and our TeamStaff Rx, Inc. (including its Nursing Innovations division) and RS Staffing Services, Inc. subsidiaries. TeamStaff’s wholly-owned subsidiaries also include TeamStaff Rx, Inc., DSI Staff ConnXions Northeast, Inc., DSI Staff ConnXions Southwest, Inc., TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff V, Inc., TeamStaff VI, Inc., TeamStaff Insurance Services, Inc., TeamStaff VIII, Inc., Employer Support Services, Inc., TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc., and BrightLane.com, Inc. When we use the term TeamStaff, we mean TeamStaff and its subsidiaries. As a result of the sale of our PEO business in fiscal year 2004 as described in Note 3, many4, ‘‘Discontinued Operations’’, none of these subsidiaries are not actively operating.

TeamStaff provides a variety of employment related servicesspecialized medical, nursing and administrative staffing and payroll administration services. TeamStaff provides allied healthcare and nursing professionals and administrative personnel through two business units: (1) itsthree staffing units. The Company’s TeamStaff Rx unit provides medical allied health professionals and nurses to doctors' offices and medical facilitiessubsidiary operates throughout the United States and specializes in providing allied medical employees and nurses, especially ‘‘travel’’ staff (typically on a thirteen-week assignment basis). Allied medical staff includes MRI technicians, mammographers, dosimetrists, ultrasound staff and physicists. TeamStaff Rx places temporary employees for over 250 clients.

TeamStaff Rx’s Nursing Innovations unit provides travel nursing, per diem nursing, temporary-to-permanent nursing and permanent basis;nursing placement services. Nursing Innovations places temporary employees for over 85 clients. The Company’s RS Staffing subsidiary specializes in providing medical and (2)office administration/technical professionals through nationwide Schedule contracts with both the payroll servicesGeneral Services Administration and Veterans Affairs. RS Staffing places temporary employees at over 75 facilities.

Through its DSI Payroll Services division, TeamStaff provides customized payroll management and tax filing services, primarily to select industries, such as construction. We believe our medical staffing subsidiary is one of the top providers in the niche medical imaging field, placing temporary employees for over 275 clients. Theconstruction industry. DSI’s service offerings include payroll check processing divisionvia web, phone or fax, federal and state quarterly and year-end tax compliance reports, W-2 processing and financial management reports, including certified payroll reports and custom software interfaces. DSI processes payrolls for approximatelyover 700 clients withthat have more than 30,000 employees.

During this fiscal year ended September 30, 2004, TeamStaff sold certain of the assets of the subsidiaries through which it operated its professional employer organization ("PEO") business to Gevity HR, Inc. See Note 3, "Discontinued Operations."

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation-

The accompanying consolidated financial statements include the accounts of TeamStaff, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

Use of Estimates-

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the

financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition-

As of and for the period ended September 30, 2004,2005, TeamStaff operated two different lines of business temporary staffing and payroll services, from which it derived substantially all of its revenue.revenue: temporary and permanent staffing and payroll services.

TeamStaff accounts for its revenues in accordance with EITF 99-19, Reporting Revenues Gross as a Principal Versus Net as an Agent and SAB 104, Revenue Recognition. TeamStaff recognizes all amounts billed to its temporary staffing customers as gross revenue because, among other things, TeamStaff is the primary obligor in the temporary staffing arrangement, TeamStaff has pricing

latitude, TeamStaff selects temporary employees for a given assignment from a broad pool of individuals, TeamStaff is at risk for the payment of its direct costs, and TeamStaff assumes a significant amount of other risks and liabilities as an employer of its temporary employees, and therefore, is deemed to be a principal in regard to these services. TeamStaff also recognizes as gross revenue and as unbilled receivables, on an accrual basis, any such amounts that relate to services performed by temporary employees which have not yet been billed to the customer as of the end of the accounting period.

The Medical Staffing (whether medical or administrative) revenue is recognized as service is rendered. TeamStaff bills its clients based on an hourly rate. The hourly rate is intended to cover TeamStaff'sTeamStaff’s direct labor costs of the temporary employees, plus an estimate to cover overhead expenses and a profit margin. Additionally, commissions from permanent placements are included in revenue related to Medical Staffing are commissions from permanent placements.Staffing. Commissions from permanent placements result from the successful placement of a medical staffing employee to a customer'scustomer’s workforce as a permanent employee.

The payroll servicesPayroll Services revenue is recognized as service is rendered and consists primarily of administrative service fees charged to clients for the processing of paychecks as well as preparing quarterly and annual payroll related reports.

Direct costs of services are reflected in TeamStaff's Statement of Operations as ‘‘direct expenses’’ and are reflective of the type of revenue being generated. Direct costs of the temporary staffing business include wages, employment related taxes and reimbursable expenses. Payroll services' direct costs include salaries and supplies associated with the processing of the payroll service.

In connection with its discontinued operation, TeamStaff'sTeamStaff’s professional employer organization division revenues were derived from its PEO division billings, net of worksite employee payroll costs (net method), which included payroll taxes, benefit costs, workers'workers’ compensation charges and administrative fees. The net method was used because TeamStaff was not generally responsible for the output and quality of work performed by the worksite employees. These amounts are reflected as part of income (loss) from discontinued operations in the consolidated financial statements.

Concentrations of Credit Risk-

Financial instruments that potentially subject TeamStaff to concentrations of credit risk consist principally of cash and accounts receivable. TeamStaff maintains substantially all its cash balances in a limited number of financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. TeamStaff monitors the financial health of these banking institutions.

TeamStaff's customer base consists of approximately 975over 1,100 client companies, representing approximately 30,000over 31,000 employees (including payroll services employees) as of September 30, 2004.2005. More than 75% of the customers in the payroll processing area are in the construction industry and substantiallyindustry. Substantially all of the customers of our TeamStaff Rx's customersRx, Inc. and Nursing Innovations subsidiary are engaged in the healthcare industry. Substantially all of the business of RS Staffing Services, Inc. is accomplished through contracts with the General Services Administration and Veterans Affairs. Credit, when given, is generally granted on an unsecured basis.

Cash Equivalents-

For purposes of the statements of cash flows, TeamStaff considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.

Restricted Cash-

RestrictedTeamStaff had restricted cash is in connection with a certificate of deposit held by SunTrust Bank asrelated to collateral for a letter of credit related to the Zurich workers'for its workers’ compensation program. Effective March 31, 2005, Zurich withdrew the requirement for a letter of credit and $1.8 million of restricted cash held in the form of a certificate of deposit at SunTrust Bank was released to TeamStaff. As of September 30, 2005, the company had no restricted cash.

Allowance for Doubtful Accounts-

TeamStaff maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay. However, if the financial condition of TeamStaff'sTeamStaff’s customers were to deteriorate rapidly, resulting in nonpayment, TeamStaff'sTeamStaff’s accounts receivable balances could grow and TeamStaff could be required to provide for additional allowances, which would decrease net income in the period that such determination was made.

Fair Value-

TeamStaff has financial instruments, none of which isare held for trading purposes. TeamStaff estimates that the fair value of all financial instruments at September 30, 20042005 and 2003,2004, does not differ

materially from the aggregate carrying values of these financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by TeamStaff using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that TeamStaff could realize in a current market exchange.

Equipment and Improvements-

Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 5 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Advertising Costs-

The companyCompany expenses advertising costs as they are incurred. Total advertising costs were $0.3 million, $0.7$0.3 million, and $0.7 million for fiscal years ended September 30, 2005, 2004, and 2003, and 2002, respectively.

Occupancy Lease Commitments-

The Company has occupancy leases with various payment terms to include a fixed payment schedule over the lease term, variable payment schedule over the lease term, or a lease that may have a rent abatement period or ‘‘rent holiday’’ period. The Company records occupancy expense using the straight-line method over the lease term, regardless of actual payment terms.

Acquired Intangible Assets-

(Amountsamounts in thousands)

Tradename				$	4,199

TeamStaff determined that no impairment of its tradename existed as of September 30, 2004.2005. TeamStaff will continue to review annually its remaining indefinite life intangible assets for possible impairment or loss of value.

Impairment of Wachovia Relationship Intangibles:

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. As part of its acquisition of BrightLane, completed in August 2001, TeamStaff entered into a two-year, extendable marketing relationship with First Union Corporation (renamed Wachovia). The Wachovia relationship was intended to provide TeamStaff with the ability to market its PEO services to Wachovia's small business customers through Wachovia's network of small business bankers. The relationship did not produce the anticipated number of PEO clients or worksite employees. During the fiscal quarter ended March 31, 2003, TeamStaff determined that, based on estimated future cash flows, the carrying amount of the Wachovia marketing relationship, which was assigned to TeamStaff's PEO reporting segment, exceeded its fair value by $5.7 million; accordingly, an impairment loss of that amount, as indicated by an independent outside valuation, was recognized and was included in impairment of intangible assets. TeamStaff received written notice from Wachovia terminating the current agreement effective October 14, 2003. TeamStaff therefore wrote off the full remaining value of the Wachovia relationship, $1.2 million during the third fiscal quarter 2003. The impairment of these intangible assets is included in discontinued operations.

Goodwill:

(Amounts in thousands)

					Medical Staffing
	Balance as of September 30, 2003				$	1,710
	Goodwill impairment writedown					—
	Goodwill adjustment during year					—
	Balance as of September 30, 2004				$	1,710

Impairment of Goodwill:Goodwill-

Goodwill is assigned to specific reporting units and, in accordance with SFAS 142, is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit'sunit’s carrying amount may be greater than its fair value. As of the fiscal quarter ended December 31, 2002, TeamStaff carried a total of $27.2 million in goodwill. During the fiscal quarter ended March 31, 2003, TeamStaff determined that the carrying amount of the PEO reporting segment exceeded its fair value, which was estimated based on the present value of expected future cash inflows and the market approach which compares TeamStaff to other comparable entities. The decision to test for impairment was based on a variety of factors, including, but not limited to, the overall downturn in the nation'snation’s economy, the relatively recent substantial decrease in the number of TeamStaff PEO worksite employees, the performance of the Wachovia marketing relationship, the reduced valuations of individual PEOs by various market analysts and the associated market downgrade in the PEO industry generally. Accordingly, a goodwill impairment loss of $20.4 million, as indicated by an independent outside valuation, was recognized in the PEO reporting unit for the fiscal quarter ended March 31, 2003. The goodwill impairment loss is included in discontinued operations. As a result of the sale of the PEO business, TeamStaff has writtenwrote off the remaining goodwill related to the PEO business of $5.4 million in the fiscal year ended September 30, 2004. This write off is included in discontinued operations.

TeamStaff determined that no impairment of its remaining goodwill existed as of September 30, 2004.2005. TeamStaff will continue to review annually its remaining goodwill for possible impairment or loss of value.

Goodwill:

(Amounts in thousands)

Balance as of September 30, 2004				$	1,710
Goodwill acquired through acquisition					8,571
Balance as of September 30, 2005				$	10,281

$1.7 million of goodwill was recorded as part of the acquisition of the assets of Nursing Innovations on November 14, 2004, all of which is deductible for tax purposes. $6.9 million of goodwill was recorded as part of the acquisition of the stock of RS Staffing Services, effective as of June 4, 2005, none of which is deductible for tax purposes. (See Note 3)

Long-Lived Assets-

TeamStaff reviews itits long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management of TeamStaff believes that no such events or changes in circumstances have occurred though September 30, 2004.2005. If such events or changes in circumstances are present, a loss is recognized to the extent that the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.

Workers'Workers’ Compensation-

TeamStaff applies loss-development factors to its open years' workers'years’ workers’ compensation incurred losses in order to estimate fully developed losses as well as other formula driven methodologies supplied by its current third party administrator. (See Note 8)10)

Income Taxes-

TeamStaff accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting‘‘Accounting for Income Taxes."’’ Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and

liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. (See Note 5)

Reclassifications-

Certain reclassifications have been made to prior years amounts to conform to the current year presentation. These changes include a portion of prepaid workers' compensation reclassified as a long term asset, a portion of liability insurance for the fiscal year ended September 30, 2003 reclassified from continuing operations to discontinued operations, reclassification of certain fixed assets to discontinued operations, and a reclassification of late fee income earned by the medical staffing division from interest income to other income.

Stock-Based Compensation-

Stock-based compensation for employees and directors is recognized using the intrinsic value method under APB No. 25. TeamStaff uses the fair value method for options issued to non-employees. For disclosure purposes, pro forma net income (loss) impacts are provided as if the fair market value method has been applied.

In accordance with Statement of Financial Accounting Standards No. 123, "Accounting‘‘Accounting for Stock-Based Compensation" ("Compensation’’ (‘‘SFAS 123"123’’), which was effective October 1, 1996, as amended, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for proforma footnote purposes with the following assumptions; dividend yield of 0%, risk-free interest rate of 3.56%, 3.68%, 2.58% and 4.16%2.58% in fiscal years ended September 30, 2005, 2004, 2003, and 20022003 respectively, and expected option life of 4 years. Expected volatilityVolatility was assumed to be 68%47%, 73%68%, and 72%73%, in fiscal years ended September 30, 2005, 2004, 2003, and 2002,2003, respectively.

As permitted by SFAS 123, TeamStaff has chosen to continue to account for its employee stock-based compensation at their intrinsic value in accordance with Accounting Principle Board Opinion No. 25, "Accounting‘‘Accounting for Stock Issued to Employees"Employees’’ and related Interpretations. No stock-based employee compensation cost is reflected in net income,the Statement of Operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net incomeloss and earningsloss per share if the company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation.

(Amounts in thousands, except per share data)				2004				2003				2002
Net (loss) income, as reported				$	(4,079	)		$	(28,885	)		$	3,075
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					(250	)			(471	)			(627	)
Pro forma net income (loss)				$	(4,329	)		$	(29,356	)		$	2,448
Earnings (loss) per share Basic:
As reported				$	(0.26	)		$	(1.84	)		$	0.19
Pro forma				$	(0.28	)		$	(1.87	)		$	0.15
Earnings (loss) per share Diluted:
As reported				$	(0.26	)		$	(1.84	)		$	0.19
Pro forma				$	(0.28	)		$	(1.87	)		$	0.15

(Amounts in thousands, except per share data)				2005				2004				2003
Net loss, as reported				$	(2,489	)		$	(4,079	)		$	(28,885	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					(294	)			(250	)			(471	)
Pro forma net loss				$	(2,783	)		$	(4,329	)		$	(29,356	)
Loss per share Basic:
As reported				$	(0.14	)		$	(0.26	)		$	(1.84	)
Pro forma				$	(0.15	)		$	(0.28	)		$	(1.87	)
Loss per share Diluted:
As reported				$	(0.14	)		$	(0.26	)		$	(1.84	)
Pro forma				$	(0.15	)		$	(0.28	)		$	(1.87	)

Effective August 29, 2005, in anticipation of the adoption of new accounting standards required under SFAS No. 123 (R), TeamStaff accelerated the vesting of certain unvested and ‘‘out-of-the-money’’ stock options previously awarded to employees and officers that have exercise prices per share of $1.60 or higher. As a result, options to purchase 368,000 shares of TeamStaff stock became exercisable immediately. Proforma expense related to these accelerated options is included in the table above for fiscal year 2005. Under the recently revised Financial Accounting Standards Board Statement SFAS No. 123 (R), ‘‘Share-Based Payment,’’ TeamStaff will apply the expense recognition provisions relating to stock options beginning in the first quarter of 2006. See ‘‘Recent Accounting Standards’’ below for further explanation.

Options held by non-employee directors issued under the Company's Non-Employee Director Plan are excluded from the vesting acceleration. In addition, in order to prevent unintended personal benefits to executive officers, restrictions will be imposed on any shares received through the exercise

of accelerated options held by those individuals. Those restrictions will prevent the sale of any shares received from the exercise of an accelerated option prior to the original vesting date of the option or the individual's termination of employment, whichever is earlier.

Under the recently revised Financial Accounting Standards Board Statement SFAS No. 123 (R), ‘‘Share-Based Payment,’’ TeamStaff will apply the expense recognition provisions relating to stock options beginning in the first quarter of 2006. See ‘‘Recent Accounting Standards’’ below for further explanation.

Earnings (Loss) Per Share-

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period adjusted to reflect potentially dilutive securities.

In accordance with SFAS 128, the following table reconciles basic shares outstanding to fully diluted shares outstanding.

				Years Ended September 30, (Amounts in thousands, except per share data)
				2004				2003				2002
Weighted average number of common shares outstanding – Basic					15,714				15,732				16,014
Incremental shares for assumed conversions of stock options/warrants					—				—				169
Weighted average number of common and equivalent shares outstanding-Diluted					15,714				15,732				16,183

				Years Ended September 30, (Amounts in thousands, except per share data)
				2005				2004				2003
Weighted average number of common shares outstanding — Basic					18,206				15,714				15,732
Incremental shares for assumed conversions of stock options/warrants					—				—				—
Weighted average number of common and equivalent shares outstanding-Diluted					18,206				15,714				15,732

Stock options and warrants outstanding at September 30, 2005, 2004, 2003, and 20022003 to purchase 1,942,000, 1,252,941, 1,456,900, and 257,2981,456,900 shares of common stock respectively were not included in the computation of Diluted EPS as they were antidilutive.

On November 5, 2004, subsequent to the balance sheet date, TeamStaff issued approximately 2.4 million shares of restricted stock in a private placement offering (See note 4). These shares would have been included in the basic and dilutive earnings per share computation. TeamStaff also issued 598,000 common stock warrants as part of the offering, which would not have been included in the computation of diluted earnings per share as they were antidilutive.

Comprehensive Income (Loss)-

TeamStaff has comprehensive losses resulting from its Supplemental Executive Retirement Plan (SERP) (See Note 12)13). When TeamStaff'sthe Company’s SERP obligations were measured at September 30, 2004,2005, the amount ofrecorded SERP liability exceeded the Projected Benefits Obligation (PBO) exceeded the recorded SERP liability.. This was due to changes in discount rate assumptions used in the fact that rates earned on fixed income investments steadily decreased.SERP calculations. The discount rates used in the PBO calculations dropped from 5.5% in 2003, to 3.0% in 2004 and 2005. The discount rates used in the periodic benefit cost calculations dropped from 6.5% in September 20022003, to 5.5% in 2003,2004, and to 3.0% in 2004.2005. These changes resulted in comprehensive income net of tax in fiscal year 2005 of $153,000, and a comprehensive loss net of tax of $38,000 and $131,000, in fiscal year 2004 of $38,000, in fiscal yearand 2003, of $131,000, and in fiscal year 2002 of $79,000.respectively. No other sources of comprehensive gains or losses occurred.

Recent Accounting Standards:

On November 17, 2003, the Financial Accounting Standards Board (FASB) issued the final FASB Staff Position (FSP) FAS 150-3, "Effective Date for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests under FASB Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.' " The final FSP affects how public and nonpublic entities classify, measure, and disclose certain mandatorily redeemable non-controlling interests associated with finite-lived subsidiaries and mandatorily redeemable financial instruments and requires entities that have already adopted FAS 150 to rescind the adoption of certain provisions of FAS 150 and to permit them to present the adoption of the FSP either by restating previously issued financial statements or as a cumulative effect in the period of adoption. The Company has analyzed its financial instruments in light of FAS 150 and has determined that this statement is not applicable to its financial position and that the adoption of this statement has no impact on its consolidated statements.

In December 2003,2004, the Financial Accounting Standards Board issued Statement of Financial Accounting StandardsSFAS No. 132123 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements2004) Share-Based Payments (SFAS No. 87, 88, and 106" ("SFAS 132 (revised 2003)"), effective for fiscal years beginning after December 15, 2002, subject to certain exemptions. SFAS 132 (revised 2003) revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in

Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"123(R)), which it replaces. Itreplaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) requires additional disclosuresall share-based payments to thoseemployees, including grants of employee stock options, to be recognized in the originalfinancial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. The pro forma disclosures previously permitted under SFAS 132 aboutNo. 123 no longer will be an alternative to financial statement recognition. In April 2005, the assets, obligations, cash flows, and net periodic benefit costSEC issued a press release that revises the required date of defined benefit pension plans and other defined benefit postretirement plans.adoption under SFAS 123(R). The required information should be provided separately for pension plans and for other postretirement benefit plans. The Company adoptednew rule allows companies to adopt the provisions of SFAS 132 (revised 2003) as of January 1, 2004. The effect of123(R) beginning on the adoption of this statement was not material.

In March 2004, the FASB reached a consensus on Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which provides guidance to determine the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity (including individual securities and investments in mutual funds), and investments accounted for under the cost method or the equity method. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periodsfirst annual period beginning after June 15, 2004. The adoption of Issue No. 03-1 has not had any impact2005. Based on the Company's financial statements and results of operations.

On March 31, 2004,new required adoption date, the FASB issued an exposure document relatedCompany will adopt SFAS 123(R) effective October 1, 2005.

SFAS 123(R) permits public companies to share-based payments that would amend SFAS No. 123, "Accounting for Stock-Based Compensation." The FASB has tentatively concluded that companies could adopt the new standard inits requirements using one of two ways: the methods: (1) a ‘‘modified prospective transitionprospective’’ method and the modified retrospective transition method. Using the modified prospective transition method, a company would recognize share-based employeeunder which compensation cost fromis recognized beginning with the beginningeffective date based on the requirements of the fiscal period in which the recognition provisions are first applied as if the fair-value based accounting method had been used to accountSFAS 123(R) for all employee awardsshare-based payments granted modified, or settled after the effective date and based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that are unvested on the effective date; or (2) a ‘‘modified retrospective’’ method which includes the requirements of the modified prospective method and also has entities restate either all prior periods presented or prior interim periods of the year of adoption using the amounts previously calculated for pro forma disclosure under SFAS 123. The Company intends to follow the modified prospective method upon adoption in the first fiscal quarter of 2006.

(3)    BUSINESS COMBINATIONS:

Acquisition of RS Staffing Services, Inc.:

On June 8, 2005 TeamStaff, Inc. completed its acquisition of RS Staffing Services, Inc., a privately held Georgia corporation, pursuant to the terms of a Stock Purchase Agreement dated as of May 26, 2005. RS Staffing, headquartered in Monroe, GA, specializes in providing medical and office administration/technical professionals through nationwide Schedule contracts with both the General Services Administration (‘‘GSA’’) and Veterans Affairs (‘‘VA’’). Closing of the transaction was completed for accounting purposes as of June 4, 2005. TeamStaff acquired all of the capital stock of RS Staffing for a purchase price of $8 million consisting of $3.25 million in cash, $3 million in a 2-year note, and $1.75 million in TeamStaff common stock (1,206,896 shares). The shares are restricted shares. The Sellers guaranteed a minimum net worth of $1.4 million and any amounts above or below this amount after a finalized accounting are subject to a purchase price adjustment. In addition, there is a one-year earn out of up to $2 million based upon the achievement of specified performance targets for the business. Principals of RS Staffing, namely Roger Staggs and Barry Durham, have continued as management of RS pursuant to employment agreements with each of them. The agreement also provided for mutual indemnification for breaches of representations and warranties. Further, the note issued by TeamStaff as part of the purchase price bears interest at 5% per annum, is payable one half in one year and the remainder in two years, and is secured by a lien on certain assets of the business, subordinate to any awardsliens granted in connection with financing for the transaction. In connection with the acquisition, TeamStaff obtained financing from PNC Bank, National Association.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

(Amounts in thousands)

Current assets				$	5,865
Property, plant, and equipment					204
Goodwill					6,890
Other assets					75
Total assets acquired					13,034
Current liabilities					4,680
Long term liabilities					39
Total liabilities assumed					4,719
Net assets acquired				$	8,315

Included in Goodwill is $315,000 of expenses directly related to the acquisition.

Acquisition of Certain Assets of Nursing Innovations, Inc.:

On November 14, 2004, TeamStaff's medical staffing subsidiary, TeamStaff Rx, Inc. acquired the assets of the staffing business of Nursing Innovations, Inc., a Memphis, Tennessee-based provider of travel and per diem nurses. The terms of the agreement provided for TeamStaff Rx to acquire certain assets from Nursing Innovations and its primary shareholder. The combined purchase price was approximately $1.8 million, of which $180,000 was held in an escrow account for a period of one year

to provide security for the sellers' indemnification obligations. The purchase price was subject to downward adjustment based upon the percentage of former Nursing Innovations business that were not fully vestedsuccessfully transferred to TeamStaff Rx. Subsequent to the balance sheet date, it was determined that no additional purchase price adjustment was due after the first year and on November 18, 2005, we authorized the release of the $180,000 of funds held in escrow to the sellers. In addition, there are certain deferred purchase price provisions which may increase the total purchase price based upon the performance of the former Nursing Innovations business during the two years following closing of the transaction. It was determined that no additional purchase price was due for year one of the two year earn-out period.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:

(Amounts in thousands)

Property, plant, & equipment				$	185
Goodwill					1,681
Total assets acquired					1,866
Total liabilities assumed					—
Net assets acquired				$	1,866

Included in Goodwill is $66,000 of expenses directly related to the acquisition.

The following unaudited pro forma information presents a summary of consolidated financial results of operations of the Company and acquired companies as if the acquisitions had occurred on October 1, 2002, the beginning of the earliest period presented.

				Years Ended September 30,
				2005				2004				2003
(amounts in thousands)
Revenues				$	87,419			$	88,535			$	108,684
Net loss				$	(2,318	)		$	(3,527	)		$	(29,491	)
Earnings per share — basic and diluted				$	(0.12	)		$	(0.18	)		$	(1.53	)

The number of common shares outstanding used to calculate pro forma earnings per share have been adjusted to include 2,392,000 shares issued as the source of financing for the Nursing Innovations acquisition and 1,206,896 shares issued as part of the RS Staffing Services acquisition, as if these shares had been outstanding as of the effective date. Usingearliest period presented.

These proforma results for the modified retrospective method, a company would recognizefiscal year ended September 30, 2005 include $175,000 of additional expense recorded by RS Staffing, prior to acquisition, predominately related to outstanding former employee compensation cost for periods presentedclaims, as well as $300,000 of non recurring incentives paid to its owners, prior to the adoptionacquisition. This table also does not reflect cost savings of approximately $115,000, $417,000 and $444,000 for the twelve months ended September 30, 2005, 2004 and 2003, respectively, that would have potentially been eliminated due to cost synergies between the companies as part of the proposed Standard in accordance with the original provisions of SFAS No. 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro-forma disclosures provided in accordance with SFAS No. 123. A company would not be permitted to make any changes to those amounts upon adoption of the proposed Statement unless those changes represent a correction of an error (and are disclosed accordingly.). For the periods after the date of adoption of the proposed Standard, the modified prospective transition method described above would be applied. The FASB expects to issue the final standard by December 31, 2004. The Company continues to evaluate the impact the final standard will have on the Company's results of operations and financial statements.acquisition.

In April 2004, the EITF reached consensus on EITF Issue No. 03-6, "Participating Securities and the Two Class Method under FASB Statement No. 128" ("EITF 03-6"). EITF 03-6 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in the dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-6 also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and requires retroactive restatement of prior earning per share amounts. The adoption of Issue No. 03-6 has not had a material impact on the Company's financial statements and results of operations.

(3)(4)    DISCONTINUED OPERATIONS:

Effective November 17, 2003, TeamStaff sold certain of the assets of the subsidiaries through which it operated its professional employer organization ("PEO"(‘‘PEO’’) business to Gevity HR, Inc. ("Gevity"(‘‘Gevity’’) for the sum of $9.5 million in cash, $2.5 million of which had been placed in escrow. Under the terms of the asset sale, the escrowed payment was scheduled to be determined approximately 90 days from the November 17, 2003, closing, but was subject to downward adjustment based on any reduction in annualized administrative fees payable by the former TeamStaff PEO clients. Any such downward

adjustment could be offset by annualized administrative fees of certain clients produced by former TeamStaff sales representatives during the 90-day period. The assets sold consisted primarily of client contracts, marketing agreements and internally developed software for use in reconciling certain benefit provider monthly invoices. As part of the transaction, Gevity agreed, among other things, to hire certain former TeamStaff employees assigned to the PEO division and assume certain of TeamStaff's lease obligations. Further, TeamStaff agreed to a non-competition agreement which prohibits us from engaging in the PEO business for a period of five years.

As of September 30, 2003, TeamStaff met the criteria for reporting the pending sale of the PEO division as an asset held for sale and discontinued operations per SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and has accounted for the discontinued operation as such within the consolidated financial statements and notes to consolidated financial statements included in this Form 10-K filing.

On April 23, 2004, TeamStaff and Gevity agreed that TeamStaff'sTeamStaff’s share of the $2.5 million placed in escrow was $2.25 million. That amount was released from escrow for TeamStaff'sTeamStaff’s benefit. When added to the $7.0 million previously paid by Gevity, the total purchase price paid was $9.25 million. Concurrently, TeamStaff settled obligations to Gevity of $1.2 million related to payroll for TeamStaff'sTeamStaff’s internal employees under a co-employment arrangement of $1.2 million, and settled obligations predominantly related to PEO client payments received by TeamStaff during the period following the sale, offset in

part by invoices paid by TeamStaff on Gevity'sGevity’s behalf, totaling $1.1 million.

Additionally, effective May 2, 2004, TeamStaff sold certain of the assets of TeamStaff Solutions, Inc., the subsidiary through which it operated its temporary technical staffing business, to Metro Tech Consulting Services, Inc. for the sum of $65,000.

The following chart details assets and liabilities from discontinued operations:

				For Fiscal Years Ended September 30,
ASSETS				2004				2003
Accounts receivable				$	—			$	14,191
Other current assets					—				353
Total current assets					—				14,544
Fixed assets					—				5,294
Accumulated depreciation					—				(3,056	)
Net fixed assets					—				2,238
Goodwill					—				5,390
Intangible assets					—				10
Other assets					—				178
Total assets				$	—			$	22,360
LIABILITIES
Accounts payable				$	—			$	1,199
Accrued payroll					—				13,905
Accrued expenses and other current liabilities					963				859
Total current liabilities					—				15,963
Deferred taxes					—
Client security deposits					—				421
Total liabilities				$	963			$	16,384

Net revenues for the PEO segment for fiscal years ended September 30, 2005, 2004, and 2003 and 2002 were $0, $12.1 million, and $88.0 million, and $101.0 million, respectively.

(4)    SUBSEQUENT EVENTS:

Private Placement Offering

TeamStaff entered into Securities Purchase Agreements as of November 5, 2004, with several accredited investors for the private sale, under Section 4(2) of the Securities Act of 1933 and/or Regulation D, of securities for an aggregate purchase price of $4,305,600. The offering consisted of the sale of 2,392,000 shares of Common Stock and 598,000 common stock warrants. The investors in the transaction received one three-year warrant to purchase an additional share of common stock at a price of $2.50 per share for every four shares of common stock purchased in the transaction.

Closing of the offering occurred on Wednesday, November 10, 2004. TeamStaff received net proceeds of approximately $4,000,000 after payment of commissions and related offering expenses. SunTrust Robinson Humphrey Capital Markets and Maxim Group LLC served as selling agents on TeamStaff's behalf and received combined commissions of 6.5% of the gross proceeds. The net proceeds will be used principally to fund the Company's internal growth initiatives and to execute on its strategy of completing complementary acquisitions in the temporary medical staffing industry.

The private placement was made only to accredited investors in a transaction exempt from the registration requirements of the Securities Act. The shares of common stock and warrants issued are restricted securities and have not been registered under the Securities Act, or any state securities laws, and unless so registered, may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. On November 12, 2004, TeamStaff filed a Registration Statement on Form S-3 with the Securities and Exchange Commission providing for the resale by the investors of the securities sold in the offering. The Securities and Exchange Commission has not yet declared the Registration Statement effective.

Acquisition of Certain Assets of Nursing Innovations, Inc.

On November 14, 2004, TeamStaff's medical staffing subsidiary, TeamStaff Rx, Inc., completed the purchase of certain of the assets of Nursing Innovations, Inc., a Memphis, Tennessee-based provider of travel and per diem nurses and its affiliate, Vitriarc, Inc., which is engaged in permanent medical staffing. Nursing Innovations had offices in Memphis, Tennessee and New Orleans, Louisiana, which have become TeamStaff offices servicing the medical staffing division. TeamStaff Rx also acquired the goodwill of Nursing Innovations' principal shareholder, William L. Booth, related to the business. The combined purchase price was approximately $1.8 million, of which $180,000 will be held in an escrow account for a period of one year following closing to provide security for the sellers' indemnification obligations. The purchase price is subject to downward adjustment based on the percentage of former Nursing Innovations business that successfully transfers to TeamStaff Rx. Additionally, TeamStaff entered into a two-year employment agreement with Mr. Booth pursuant to which Mr. Booth will oversee TeamStaff Rx's temporary nurse staffing business at an initial base salary of $100,000, increasing to $125,000 in the second year of the agreement's term. There are also certain deferred purchase price provisions which may increase the total purchase price based upon on the performance of the former Nursing Innovations business during the two years following closing of the transaction.

The following table summarizes the estimated fair values of thechart details assets acquired and liabilities assumed at the acquisition date of November 14, 2004:from discontinued operations:

	(Amounts in thousands)
	Current assets				$	—
	Plant, property & equipment					268
	Goodwill					1,532
	Total assets acquired					1,800
	Total liabilities assumed					—
	Net assets acquired				$	1,800

				For Fiscal Years Ended September 30,
				2005				2004
ASSETS				$	—			$	—
LIABILITIES
Accrued expenses and other current liabilities				$	422			$	963
Total current liabilities					422				963
Total liabilities				$	422			$	963

Liability Balances (amounts in thousands)				September 30, 2004 Balance				Expensed This Year				Paid This Year				September 30, 2005 Balance
Accrued expenses and other current liabilities				$	963			$	1,289			$	(1,830	)		$	422
Total				$	963			$	1,289			$	(1,830	)		$	422

(5)    INCOME TAXES:TAXES:

At September 30, 2004,2005, TeamStaff has available operating loss carryforwards of approximately $32.5$41.0 million to reduce future periods' taxable income. Approximately $21.0 million of the operating loss carryforwards were acquired in connection with the acquisition of BrightLane on August 31, 2001. The BrightLane carryforwards extend through 2021. TeamStaff also has tax credits available of approximately $1.1 million to reduce future taxable income that begin to expire in 2020. In accordance with IRS regulations, the utilization of operating losses acquired from BrightLane are limited to approximately $2.1 million per year.

TeamStaff has recorded a $16.8$18.5 million and a $14.9$16.8 million deferred tax asset at September 30, 20042005 and 2003,2004, respectively. This represents management's estimate of the income tax benefits to be realized upon utilization of its net operating losses and tax credits as well as temporary differences between the financial statement and tax bases of certain assets and liabilities, for which management believes utilization to be more likely than not. In fiscal 2003 and 2002, TeamStaff reduced itsManagement believes TeamStaff's operations can generate sufficient taxable income to realize this deferred tax provision by $0.3 million and $0.2 million respectively for certain tax credits which were previously available to TeamStaff. These tax credits were no longer available to TeamStaffasset as a result of historical profitability and its ability to generate operating income in the salefuture. The acquisitions of RS Staffing and Nursing Innovations, two historically profitable companies, coupled with an improving business climate for temporary medical staffing will help drive TeamStaff's return to profitability. Management believes it will generate enough future profits to utilize the PEO division.carrying value of its deferred tax asset.

An analysis of TeamStaff's deferred tax asset and liability is as follows-

(Amounts in thousands)

				Years Ended September 30,
				2004				2003
Deferred income tax asset:
Net operating loss carry forwards and tax credits				$	16,869			$	14,456
Workers' compensation reserves					(922	)			—
Allowance for doubtful accounts					18				121
Occupancy leases					312				—
Pension					486				248
Other items, net					50				50
					16,813				14,875
Deferred income tax liability:
Workers' compensation reserves					—				(683	)
Other items, net					—				145
					—				(538	)
Net deferred tax asset				$	16,813			$	14,337

				Years Ended September 30,
				2005				2004
Deferred income tax asset:
Net operating loss carry forwards and tax credits				$	18,620			$	16,869
Workers’ compensation reserves					(527	)			(922	)
Occupancy leases					143				312
Pension					207				486
Other items, net					39				68
					18,482				16,813

The components of the income tax expense for income taxes from continuing operations are summarized as follows-

				Years Ended September 30, (Amounts in thousands)
				2004				2003				2002
Current expense				$	361			$	153			$	544
Deferred (benefit) expense					(1,444	)			(1,083	)			1,173
Total (benefit) expense				$	(1,083	)		$	(930	)		$	1,717

				Years Ended September 30, (Amounts in thousands)
				2005				2004				2003
Current (benefit) expense				$	(1,069	)		$	361			$	222
Deferred expense (benefit)					30				(1,444	)			(1,083	)
Total (benefit) expense				$	(1,039	)		$	(1,083	)		$	(861	)

The following table indicates the significant elements contributing to the difference between the Federal statutory rates and TeamStaff'sTeamStaff’s effective tax rate-

				Years Ended September 30,
				2004				2003				2002
Federal statutory rate					(34	)%			(34	)%			34	%
State taxes, net of federal income tax benefit					(4	)			(7	)			8
Tax credits									(7	)			(5	)
Valuation allowance									11				0
					(38	)%			(37	)%			37	%

The tax benefits associated with the exercise of non-qualified stock options reduce taxes currently payable by $1.5 million for 2002. Such benefits are credited to additional paid-in capital.

				Years Ended September 30,
				2005				2004				2003
Federal statutory rate					(34	)%			(34	)%			(34	)%
State taxes, net of federal income tax benefit					(4	)			(4	)			(7	)
Tax credits					—				—				(7	)
Valuation allowance					—				—				11
					(38	)%			(38	)%			(37	)%

(6)    DEBT:

On April 9, 2002, TeamStaff entered into a revolving loan facility with Fleet National Bank ("Fleet"). The total outstanding loan amount could not exceed at any one time the lesser of $7.0 million or the sum of 85% of qualified accounts receivable, less an amount reserved by Fleet to support direct debit processing exposure. The annual interest rate was either the Fleet prime rate or LIBOR, at the discretion of TeamStaff. The facility was collateralized by substantially all of the assets of TeamStaff, including its accounts receivable. The facility was subject to certain covenants including, but not limited to, interest rate coverage of 2.0 to 1.0, total liabilities to tangible net worth ratio of 2.0 to 1.0, and minimum working capital of $10.0 million.

Effective March 21, 2003, the Company and Fleet agreed to a renewal of the revolving loan facility, which expired on March 31, 2004. The terms of the facility were substantially as described above, except that the total outstanding loan amount at any one time could not exceed the lesser of $6.0 million or the sum of 85% of the qualified accounts receivable less an amount reserved by Fleet. TeamStaff used this loan agreement as collateral for a letter of credit in the amount of $3.5 million issued with respect to TeamStaff's workers' compensation program with Zurich effective April 1, 2003 described in Note 8. In connection with the saleacquisition of certain PEO assets to Gevity HR,RS Staffing Services, Inc. (see Note 3), TeamStaff was required to obtain the consent of Fleet to the transaction. As part of its agreement to the sale of PEO assets (which served as collateral for the loan) Fleet required that TeamStaff provide substitution collateralsecured financing with PNC Bank, National Association in the form of a $3.5$7.0 million cash depositrevolving credit facility. The credit facility was provided by PNC Bank effective on June 8, 2005 to (i) provide for the acquisition of RS Staffing; (ii) refinance an outstanding senior loan facility; and (iii) provide ongoing working capital. Revolving Credit advances under the credit facility will bear interest at Fleet.either a PNC bank internal rate that approximates the Prime Rate plus 25 basis points or LIBOR plus 275 basis points, whichever is higher. The revolving loan facility has a three-year life and contains term and line of credit borrowing options. The facility is subject to certain restrictive covenants, including minimum EBITDA, and minimum consolidated debt service coverage ratio. For the period ended September 30, 2005, TeamStaff was not in compliance with the EBITDA covenant. PNC issued an Amendment to Revolving Credit and Security Agreement, waiving the minimum EBITDA requirement because the Company met the minimum consolidated debt service coverage ratio. The facility is subject to acceleration upon non-payment or various other standard default clauses. In addition, we granted PNC a lien and security interest on all of our assets. At September 30, 2005, the outstanding balance of the credit facility was $4.0 million and there was $1.8 million of unused availability under the line, based on billed accounts receivable. The average amount of borrowing since the date of inception on June 8, 2005 through September 30, 2005, was $4.3 million. The weighted average interest rate on advances since the date of inception on June 8, 2005 through September 30, 2005, was 6.54%. The interest rate effective as of September 30, 2005 was 7.0%

In connection with the acquisition of RS Staffing, TeamStaff issued two promissory notes to the former owners of RS Staffing as part of the acquisition price, in the aggregate principal amount of $3.0 million. The notes bear interest at 5% per annum, and are subordinate to the financing provided by PNC Bank described above. One half of the principal and interest is due on June 8, 2006 and the letterremaining is due in June 2007.

In connection with the acquisition of credit expired on March 31, 2004. As a result, the $3.5 million cash deposit was released by Fleet.

Effective March 31, 2004, Zurich reduced the amount of the letter of credit collateralization requirementRS Staffing, TeamStaff also assumed several short term notes payable with AI Credit Corp for the workers' compensation programfinancing of various RS Staffing insurance premiums. As of September 30, 2005, the remaining principal balance on these notes was approximately $43,000. Interest rates range from 4.75% to $1.8 million. TeamStaff has secured a letter of credit in that amount6.0% with maturity dates ranging from SunTrust Bank. The letter of credit is collateralized by a certificate of deposit for $1.8 million deposited at SunTrust.August 2005 through February 2006.

Long-term debt from continuing operations at September 30, 20042005 and 20032004 consists of the following-

(Amounts in thousands)

					2004				2003
	Capital leases				$	136			$	155
	Less- Current portion					(112	)			(61	)
	Long-term debt				$	24			$	94

				2005				2004
Notes payable				$	3,043			$	—
Less- Current portion					(1,543	)			(112	)
Long-term debt				$	1,500			$	24

Maturities of long-term debt as of September 30, 20042005 are as follows-

(Amounts in thousands)

	Years Ending September 30,
	2005				$	112
	2006					24
	Total				$	136

Years Ending September 30,
2006				$	1,543
2007					1,500
Total				$	3,043

(7)CAPITAL LEASES:

The company leases certain office equipment under non-cancelable capital lease agreements that expire at various dates through 2009. Terms range from 36 to 60 months. Interest rates range from 4.0% to 13.3%. As of September 30, 2005, the company has recorded $1.1 million in gross capital leases and accumulated depreciation of $0.8 million.

Future minimum lease payments at September 30, 2005 are as follows:

(amounts in thousands)

Fiscal year:
2006				$	135
2007					110
2008					70
2009					54
Total minimum lease payments					369
Amounts representing interest					(29	)
					340
Less current portion					(120	)
Long term portion of capital leases				$	220

(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

Accrued expenses and other current liabilities at September 30, 20042005 and 20032004 consist of the following-
(Amounts in thousands)

					2004				2003
	Bank overdraft					0				731
	Accrued Bonus & Commission					456				245
	Accrued Audit and Tax Fees					170				312
	Other				$	144				240
					$	770			$	1,528

(8)    COMMITMENTS AND CONTINGENCIES:

Leases-

Minimum payments net of anticipated sublease income, under noncancellable lease obligations at September 30, 2004 are as follows-

(Amounts in thousands)

	Years Ending September 30,
	2005				$	1,249
	2006					470
	2007					306
					$	2,025

				2005				2004
Accrued bonus and commission				$	528			$	456
Accrued medical insurance and employee benefit expense					420				—
Accrued audit and tax fees					222				194
Accrued subcontracting expense					168				—
Accrued rebates					128				—
Accrued interest expense					74				—
Accrued payroll taxes and workers’ compensation					74				—
Accrued occupany expense					34				63
Accrued professional fees					33				15
Other miscellaneous accrued expenses					279				42
				$	1,960			$	770

(9) OTHER CURRENT ASSETS:

Other current assets at September 30, 2005 and 2004 consist of the following-

(amounts in thousands)

				2005				2004
Miscellaneous receivables				$	516			$	754
Prepaid insurance					283				363
Miscellaneous prepaid expense					126				103
Other miscellaneous current assets					230				47
				$	1,155			$	1,267

(10) COMMITMENTS AND CONTINGENCIES:

Leases—

Minimum payments net of sublease income, under non-cancelable operating lease obligations at September 30, 2005 are as follows-

(Amounts in thousands)

Years Ending September 30,
2006				$	644
2007					661
2008					363
2009					372
2010					326
2011					132
				$	2,498

Rent expense net of sublease income, under all operating leases in fiscal year ended September 30, 2005, was $1.1 million, of which $0.7 million is attributed to continuing operations and $0.4 million is attributed to discontinued operations. Rent expense net of sublease income, under all operating leases in fiscal year ended September 30, 2004, was $2.6 million, of which $0.8 million was attributed to continuing operations $0.2and $1.8 million was attributed to discontinued operations, and $1.6 million was disposal.operations. Rent expense was $1.9 million in 2003, and $1.8 million in 2002.2003.

The PEO office space located in Boca Raton, Florida has been subleased by GevityHR, Inc for a remaining lease term as of September 30, 2004,2005, of 3321 months for $0.5$0.3 million. The PEO office space located in Clearwater, FloridaNew York, New York has been subleased by Mercury Insurance groupBig Brothers Big Sisters of New York for the remaining lease term as of September 30, 2004,2005, of 1110 months for $0.1$0.06 million.

Workers' Compensation Policy-

TeamStaff'sTeamStaff’s current workers'workers’ compensation insurance providerprogram is provided by Zurich American Insurance Company. The program is managed by Cedar Hill Insurance Agency, Inc., whose duties include underwriting analysis, loss control services, and other program management services.

The Zurich program originally covered the period from March 22, 2002 through March 31, 2003, inclusive. On March 28, 2003, TeamStaff renewed its workers'workers’ compensation program with Zurich for the period from April 1, 2003, through March 31, 2004, inclusive. (See Note 3) The renewal program contained a large deductible feature of $0.5 million for each claim, with a maximum liability cap of the greater of 104.41% of manual premium or $15.6 million. The premium for the program was paid monthly based upon estimated payroll for the year and is subject to a policy year-end audit. The renewal program was collateralized by a letter of credit inuring to the benefit of Zurich, and cash held in a trust account withby a third party. A letter of credit for $3.5 million was secured through Fleet Bank, as part of TeamStaff'sTeamStaff’s line of credit. However, effectiveEffective March 31, 2004, Zurich agreed to a reduction in the amount of the letter of credit to $1.8 million. As a result, on March 31, 2004, TeamStaff secured a new letter of credit in the amount of $1.8 million with SunTrust Bank. Effective March 31, 2005, Zurich withdrew the requirement for a letter of credit and $1.8 million of restricted cash held in the form of a certificate of deposit at SunTrust Bank was released to TeamStaff. Payments were made to the trust monthly based on projected claims for the year. Interest on all assets held in the trust is credited to TeamStaff. Payments for claims and claims expenses are made from the trust. Assets in the trust may be adjusted from time to time based on program experience. Claims handling services for the program are provided by GAB Robins, a third party administrator.administrator, provide claims handling services for the program. On May 12, 2004, TeamStaff received approximately $1.0 million$963,000 in return premiums from Zurich. At September 30, 2004,2005, TeamStaff has a prepaid asset of $4.3$3.6 million for the premiums and the prepayments made to the trust for both years of the Zurich plan. A reduction of the prepaid asset in the amount of $0.5 million was recorded in the fiscal year ended September 30, 2005 as a result of adverse claims development for the period April 1, 2002 through November 17, 2003. This write-down was predominantly driven by one claim that caused the Company to increase its maximum exposure to equal the policy deductible. TeamStaff believesestimates that, of this amount,the remaining prepaid asset, approximately an additional $1.0$1.4 million in return premiums will be received within the next twelve months, and this is reflected on the balance sheet at September 30, 20042005 as a current asset.

In conjunction with the sale of its PEO assets to Gevity,GevityHR, Inc., TeamStaff requested and received a pro rata cancellation of thisthe policy effectivedescribed immediately above as of November 17, 2003.

TeamStaff then entered into a new workers'workers’ compensation program with Zurich covering TeamStaff'sTeamStaff’s temporary employees and, as of January 1, 2004, its corporate employees. The program is managed by Cedar Hill and GAB Robins provide claims handling services for the program are provided by GAB Robins.services. This program iswas a fully-insured,fully insured, guaranteed cost program that containscontained no deductible or retention feature. This policy terminatedfeature (the ‘‘Zurich Policy’’). The Zurich Policy expired April 1, 2004. Effective April 1, 2004, TeamStaff entered into a new workers'workers’ compensation program with Zurich coveringfor the period from April 1, 2004 through March 31, 2005 identical to the Zurich Policy. Effective April 1, 2005, TeamStaff renewed its workers’ compensation program with Zurich for the same terms asperiod from April 1, 2005 through March 31, 2006. This renewal is also identical to the previous policy.Zurich Policy.

As of September 30, 2004,2005, the adequacy of the workers'workers’ compensation reserves was determined, in management'smanagement’s opinion, to be reasonable. In determining our reserves we rely in part upon information regarding loss data received from our workers'workers’ compensation insurance carriers whichthat may include

loss data for claims incurred during prior policy periods. TeamStaff has encountered difficulties in receiving timely reporting of claims from CNA for the workers' compensation programs covering January 22, 2001, through March 22, 2002. CNA claims that TeamStaff owes approximately $4.4 million under the programs. TeamStaff is disputing certain of the amounts that CNA claims is due. TeamStaff's own analysis of its ultimate financial liability under the programs yields a substantially lower amount due under the programs. TeamStaff not only believes that its ultimate program expenses are dramatically lower than those calculated by CNA, but TeamStaff believes that its program expenses were exacerbated by CNA's claims handling practices. TeamStaff also filed a complaint with the New Jersey Division of Insurance, which referred the matter to the New Jersey Compensation Rating and Inspection Bureau. Although the New Jersey Compensation Rating and Inspection Bureau investigated the complaint and proposed a fine against CNA as well as a refund of $0.2 million in policy issuance costs to TeamStaff, the matter remains unresolved between the parties. In the future, similar problems from our insurance carriers may result in adjustments to our reserves. In addition, these reserves are for claims that have not been sufficiently developed due to their relatively young age, and such variables as timing of payments and investment returns thereon are uncertain or unknown, therefore actual results may vary from current estimates. TeamStaff will continue to monitor the development of these reserves, the actual payments made against the claims incurred, the timing of these payments, the interest accumulated in TeamStaff'sTeamStaff’s prepayments and adjust the reserves as deemed appropriate.

As was previously reported in TeamStaff's Exchange Act filing on Form 8-K, filed on October 20, 2005, the Company settled certain disputed workers compensation insurance premium and loss claims totaling nearly $4.4 million for $2.05 million payable over two (2) years (subject to certain prepayment requirements), and was fully reserved as of the Company's June 30, 2005 balance sheet. The settlement was entered on or about October 10, 2005. In or about January, 2001, TeamStaff purchased from Transportation Insurance Company (‘‘TPIC’’), Transcontinental Insurance Company (‘‘TCIC’’), Continental Casualty Company (‘‘CCC’’), CNA Claimplus, Inc. (‘‘ClaimPlus’’) and North Rock Insurance Company Limited (‘‘North Rock’’) (together, the ‘‘CNA Entities’’) a workers' compensation insurance program to provide workers' compensation insurance and claims services for TeamStaff's professional employee operations nationwide (the ‘‘Program’’). The Program provided TeamStaff with workers' compensation insurance coverage and claims services for all covered claims incurred during the period from January 22, 2001 to January 22, 2002 (the ‘‘Initial Policy Term’’). TeamStaff secured its obligations under the Program through its February 5, 2001 purchase of an Exposure Buyback Policy numbered EBP 006/001 from North Rock (the ‘‘Exposure Buyback Policy’’), also covering the period from January 22, 2001 to January 22, 2002. On or around January 22, 2002, TeamStaff purchased from TCIC and RSKCo an extension of the Program (the ‘‘Program Extension’’). The Program Extension provided TeamStaff with workers' compensation insurance coverage and claims services for all covered claims incurred during the period from January 22, 2002 to March 22, 2002 (the ‘‘Extended Policy Term’’).

TeamStaff contested the CNA Entities' accounting of the amount due and owing under the Program, the Program Extension and the Exposure Buyback Policy, and of the ultimate losses projected to be due from TeamStaff. TeamStaff additionally asserted that the CNA Entities committed certain errors in claims management which unjustifiably increased the losses incurred under the Program and the Program Extension, and inappropriately included certain non-recoverable items in the premium calculations for both the Program and the Program Extension, thereby entitling TeamStaff to a credit against the amounts ultimately due and owing under the Program, the Program Extension and the Exposure Buyback Policy. The CNA Entities maintained that there was due and owing from TeamStaff the sum of $1,824,975 in premiums, deductibles, claims services fees, losses and allocated loss adjustment expenses under the Program and the Program Extension, and $835,596 in premiums and losses under the Exposure Buyback Policy. The CNA Entities projected that TeamStaff would be liable for an additional $1,181,301 of losses under the Program and the Program Extension, and an additional $556,176 of losses under the Exposure Buyback Policy. The aggregate amounts totaled $4,398,048.

The settlement fully and completely resolves, without litigation, all of the issues addressed above on the material terms described below and in the Agreement, without admitting and, in fact, expressly denying, the allegations and claims each party could have made against the other. TeamStaff will pay the CNA Entities the sum of $2,050,000, plus interest at a rate of 6.0%, as follows: (1) $300,000 upon execution of the Agreement; (2) $250,000 every 90 days thereafter, plus interest on the unpaid sum at a rate of 6.0% from the date of the preceding payment, for a total of eight (8) payments. The first $300,000 payment is in settlement of the outstanding premiums, deductibles, claims services fees, losses and allocated loss adjustment expenses due and owing under the Program, the Program Extension and the Exposure Buyback Policy. The second through eighth payments are in settlement of liabilities that become due and/or may become due under the Program, the Program Extension and the Exposure Buyback Policy, including but not limited to, premiums, deductibles, claims services fees, losses and allocated loss adjustment expenses. It was also agreed that the payment schedule would be accelerated by and in the amount of any and all payments TeamStaff receives from Zurich North American in settlement of the receivable TeamStaff is carrying from its prior years' workers compensation insurance programs, up and to the then outstanding balance due the CNA Entities.

Payroll Taxes

TeamStaff has received notices from the IRS concerningclaiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations. TeamStaff has also received notices from the IRS reporting overpayments of taxes. Management believes that these notices are

predominantly the result of misapplication of payroll tax payments between its legal entities, which ifentities. If not resolved favorably, the Company may result inincur interest and penalties. Until the sale of certain assets as described in Note 4, TeamStaff operated through 17 subsidiaries, and management believes that the IRS has not correctly identified payments made through certain of the different entities, therefore leading to the notices. To date, TeamStaff has been working with the IRS to resolve these discrepancies and has had somecertain interest and penaltiespenalty claims abated. TeamStaff has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. TeamStaff believes the notices from the Social Security Administration are directly related to the IRS notices received. TeamStaff has retained the services of Ernst & Young LLP as a consultant to assist it in resolving certain of these matters with the IRS and Social Security Administration. TeamStaff believes that after the IRS applies all the funds correctly, allany significant interest and penalties will be abated.abated; however, there can be no assurance that each of thesematters will be resolved favorably.

Legal Proceedings

In July 2000, TeamStaff made claims for indemnification against the selling shareholders of the TeamStaff Companies (the Sellers), which were acquired by TeamStaff in January 1999. The claims consisted of various potential liabilities and expenses incurred based on breaches of representations and warranties contained in the acquisition agreement. The Sellers disputed these claims and attempted to assert claims of their own. On January 12, 2001, TeamStaff entered into a settlement agreement with the Sellers. Under the settlement agreement, the Sellers agreed to be liable and responsible for certain potential liabilities estimated at approximately $0.5 million and agreed that 55,000 shares of TeamStaff common stock, which had been held in escrow since the acquisition, were to be cancelled andcancelled. TeamStaff also agreed to release 29,915 escrow shares to the Sellers. TeamStaff retains 75,000 shares in escrow to provide security for the Seller'sSeller’s obligations. Each party agreed to release each other from all other claims under the acquisition agreements. No third parties have contacted TeamStaff seeking payment in the last fiscal year for these potential liabilities. In the event that TeamStaff incurs liability to third parties with respect to the claims, TeamStaff would declare an event of default under the settlement agreement and seek collection from the Sellers.

TeamStaff'sTeamStaff’s subsidiary, BrightLane, is party to a suit brought by one of its former shareholders (Atomic Fusion, Inc. v. BrightLane.com, Inc. Civil Action No ONS02246OE, Fulton County State Court, Georgia)Georgia). The plaintiff seeks damages for alleged unpaid contractual services provided to BrightLane, alleging that the shares (both in number and value) of BrightLane stock provided to the plaintiff in payment of services were inadequate to pay for the alleged agreed upon value of services. TeamStaff andIn connection with TeamStaff’s acquisition of BrightLane, intend to defend themselves vigorously in this matter and believes that they have meritorious and valid defenses to plaintiff's claims. In addition, the former shareholders of BrightLane have placedwere required to place approximately 158,000 shares in escrow to provide indemnification for any claims made by TeamStaff under the acquisition agreement, subject to a $0.3 million threshold. Some or all of these shares may be canceled in an amount equal to the amount of any claim or expense in excess of the threshold. Under the terms of the agreements between TeamStaff and BrightLane, the

value of the shares held in escrow is $8.10 per share. It is possible that an award in favor of Atomic Fusion would result in monetary damages against TeamStaff, which could not be recovered under the indemnification provisions because cancellation of the shares in escrow is the sole method of satisfying these indemnification obligations. On November 20, 2003, the Fulton County Superior Court (to which the action was transferred) awarded summary judgment in BrightLane'sBrightLane’s favor on all counts of Atomic Fusion'sFusion’s complaint except for a beach of contract claim. AIn August, 2004, a trial was held on Atomic Fusion'sFusion’s breach of contract claim before a jury over four days, from August 16 through August 19, 2004.jury. The jury returned a verdict in Atomic Fusion'sFusion’s favor, awarding $534,246 in damages and $116,849 in attorney'sattorney’s fees, for a total verdict of $651,095, including interest and costs. BrightLane has filed a motion for judgment notwithstanding the verdict, which currently is pending beforewas denied by the court. BrightLane believes that the jury'sjury’s award of damages and attorneysattorney's fees wasis not supported by Georgia law.law, and BrightLane also believes the trial court erred in denying its motion for judgment notwithstanding the verdict. Therefore, BrightLane has filed appeals on both the jury’s verdict on liability and damages and the denial of the motion for judgment notwithstanding the verdict. BrightLane also has filed a motion to recover certain of its attorneys'attorneys’ fees expended in pursuing its motion for summary judgment. This motion also is pending before the court. Depending upon the outcome of these motions, BrightLane intends to appeal the jury's verdict on liability or damages or both.is no longer an operating entity and has minimal assets.

In connection with TeamStaff'sTeamStaff’s acquisition of BrightLane effective as of August 31, 2001, persons holding BrightLane options to acquire approximately 2.1 million BrightLane shares (the equivalent of approximately 481,000 TeamStaff shares) exercised their options. BrightLane made recourse loans of approximately $1.0 million principal amount to the holders of these options to assist them in payment of tax obligations incurred with exercise of the options. The loans were repayable upon the earlier of (i) sale of the TeamStaff shares or (ii) three years. The shares that were received for the option exercise secured the loans. As of September 30, 2004, approximately $0.7 million2005 all of these loans hashave been repaid or forgiven. All loans were to be repaid in cash with the exception of one loan. Under the terms of TeamStaff'sTeamStaff’s employment agreement with ana former executive officer of TeamStaff'sTeamStaff’s BrightLane subsidiary, the loan ($131,000) was forgiven over a two-year period of time. We are considering pursuingpreviously commenced litigation against certaintwo of the debtorspersons who received loans, and these persons filed counterclaims against BrightLane and our Chairman. Both of the actions were settled. Pursuant to recover amounts due.one of the settlements, the shareholder returned all shares of TeamStaff stock and the note was forgiven. This settlement has been completed. The other action was settled on identical terms. However, TeamStaff is awaiting delivery of the shares to be returned and at that time the accounting with respect to the return of the shares will be completed. TeamStaff recognized an expense in the amount of $190,000 in the second fiscal quarter of 2005, representing a partial write-down of the original principal amount of the loan.

As a commercial enterprise and employer and with respect to its employment-related businesses in particular, TeamStaff is engaged in litigation from time to time during the ordinary course of business in connection with employment-relations issues, workers'workers’ compensation and other matters. Generally, TeamStaff is entitled to indemnification or repayment from its former PEO clients for claims brought by worksite employees related to their employment. However, there can be no assurance that the client employer will have funds or insurance in amounts to cover any damages or awards, and as co-employer, TeamStaff may be subject to liability. Additionally, in connection with its medical staffing business, TeamStaff is exposed to potential liability for the acts, errors or omissions of its temporary medical employees. The professional liability insurance policy provides up to $5,000,000 aggregate coverage with a $2,000,000 per occurrence limit. Although TeamStaff believes it has procuredthe liability insurance that is reasonable under the circumstances to protect it from liability for any such claims, of liability, there can be no assurance that such insurance will be adequate to cover all potential claims.

TeamStaff is engaged in no other litigation, the effect of which would be anticipated to have a material adverse impact on TeamStaff'sTeamStaff’s financial conditionscondition or results of operations.

Employment Agreements

Effective as of June 18, 2003, TeamStaff entered into an employment agreement with T. Kent Smith pursuant to which Mr. Smith serves as TeamStaff's President and Chief Executive Officer. The agreement expiresexpired on September 30, 2005. Under the terms of the agreement, Mr. Smith iswas paid an annual base salary of $250,000 and iswas eligible to receive a bonus of up to 50% of his base salary based on the achievement of revenue, income and other objectives established by the Management Resources and Compensation Committee. Pursuant to the Agreement, Mr. Smith also was granted an option to purchase 400,000 shares of TeamStaff common stock, one-fourth of which vested on June 18, 2003, one-fourth of which vested one year thereafter,on June 18, 2004 and the remainder of which will vestvested on June 18, 2005. Mr. Smith also receivesreceived four weeks annual vacation and iswas offered welfare benefit plans, 401(k) and fringe benefits generally made available to other TeamStaff employees. The agreement provides,provided, among other things, that Mr. Smith willwould be paid a severance payment of three months of his base salary if Mr. Smith and TeamStaff dodid not enter into a new employment agreement by September 30, 2005. Additionally, the agreement providesprovided for certain post-termination payments depending upon the

reason for the termination of Mr. Smith's employment. The agreement also providesprovided for the payment of nine months of base salary and the provision of certain other benefits should Mr. Smith's employment terminatehave terminated in connection with a change in control, as defined in the agreement.

Effective January 1, 2003,On June 30, 2005 TeamStaff entered into a one-yearnew two-year employment agreement with Edmund C. Kenealy pursuant to which Mr. Kenealy served as ViceT. Kent Smith, its President General Counsel, at an annualand Chief Executive Officer. The term of the agreement commenced on

October 1, 2005 and terminates on September 30, 2007. The material terms of Mr. Smith's employment agreement provide for a base salary of $160,000.$250,000 per annum and standard Company executive benefits. In addition, Mr. Kenealy wasSmith is eligible to receive a bonus equal to up to 70% of his base salary upon satisfaction of performance based criteria. Mr. Smith will be considered for future salary increases as may be determined by the Management Resources and Compensation Committee of the Board of Directors. Mr. Smith will be eligible to participate in the Company's incentive stock ownership plan as may be determined by the Management Resources and Compensation Committee of the Board of Directors. The agreement also includes provisions for payment of all compensation otherwise payable under the agreement in the event that Mr. Smith is terminated without cause and one year of severance in all circumstances other than for termination ‘‘for cause.’’ In the event that there is a change of control of TeamStaff and Mr. Smith's employment is terminated (or his position is changed), Mr. Smith will be entitled to receiveacceleration of all incentive compensation, all compensation otherwise due under the agreement and an increase in annual compensation asadditional twelve (12) months of October 1, 2003 andhis then in-effect base salary. A ‘‘change of control’’ is defined generally to constitute a bonus to be determined based on the achievementchange of certain performance criteria determined as20% of more of the commencementbeneficial ownership of each fiscal year. Mr. Kenealy received certain other benefits granted to other TeamStaff employees, including health and other insurance benefits, as well asthe Company's outstanding Common Stock, or a car allowancechange in two thirds of $500 per month and three weeks annual vacation. This agreement was not renewed by TeamStaff. However, the Board of Directors, approved TeamStaff's entrysubject to certain exceptions.

On June 30, 2005 TeamStaff entered into a severancetwenty seven month employment agreement with Mr. Kenealy effectiveRick J. Filippelli, its Vice President and Chief Financial Officer. The term of the agreement commenced on June 30, 2005 and terminates on September 30, 2007. The material terms of Mr. Filippelli's employment agreement provide for a base salary of $225,000 per annum, a potential bonus of up to 70% and standard Company executive benefits, upon substantially the same terms as provided for Mr. Smith. Mr. Filippelli will be considered for future compensation increases as may be determined by the Management Resources and Compensation Committee of January 1, 2004, providing him with six monthsthe Board of Directors. Mr. Filippelli will be eligible to participate in the Company's incentive stock ownership plan as may be determined by the Management Resources and Compensation Committee of the Board of Directors. The agreement also includes provisions for payment of all compensation otherwise payable under the agreement in the event that Mr. Filippelli is terminated without cause and one year of severance should his employment terminatein all circumstances other than for "cause," astermination ‘‘for cause.’’ In the event that there is a change of control of TeamStaff and Mr. Filippelli's employment is terminated (or his position is changed), Mr. Filippelli will be entitled to acceleration of all incentive compensation, all compensation otherwise due under the agreement and an additional twelve (12) months of his then in-effect base salary. A ‘‘change of control’’ is defined generally to constitute a change of 20% of more of the beneficial ownership of the Company's outstanding Common Stock, or a change in two thirds of the agreement. The Board of Directors, approved substantially identical severance agreements with Rick J. Filippelli and Timothy Nieman, our Chief Financial Officer and President of TeamStaff Rx, respectively, also effective as of January 1, 2004.subject to certain exceptions.

TeamStaffPursuant to the RS Staffing Services, Inc. acquisition, the Company entered into an employment agreement with Mr. Donald Kappauf, TeamStaff's former President and Chief Executive Officer effective April 2, 2001 and terminating on September 30, 2003. Mr. Kappauf agreedRoger Staggs to relinquish his positionbe employed as President and Chief Executive Officer of TeamStaff as of June 18, 2003. Mr. Kappauf terminated his employment effective as of September 30, 2003. Under theRS Staffing Services, Inc. The material terms of the employmentMr. Staggs’ agreement Mr. Kappauf'sare for a period of one (1) year from on or about June 4, 2005 and provide for a base compensation was initially $230,000, increasing to $300,000 commencing September 1, 2001, and subject to yearly increases thereaftersalary of $150,000 per annum, a potential bonus at the discretion of the compensation committee. ForBoard of Directors and standard Company executive benefits.

Pursuant to the fiscal year ended September 30, 2003, Mr. Kappauf received a base salary of $300,000. Mr. Kappauf also was entitled to an annual bonus based onRS Staffing Services, Inc. acquisition, the achievement of certain performance criteria as determined by the compensation committee. In addition, Mr. Kappauf received certain other benefits including insurance benefits as are provided to all other executives, a car lease allowance in the maximum amount of $1,000 per month, participation in the supplemental executive retirement plan and a split dollar life insurance arrangement. The agreement also provided for the grant of 300,000 stock options, which vested in annual increments of one third commencing on the date of the agreement. TeamStaff also entered into a severance agreement with Mr. Kappauf, as described below, which governed the termination of his employment and certain other events including a change of control of TeamStaff.

TeamStaffCompany entered into an employment agreement with Mr. Donald Kelly, TeamStaff's former Chief Financial Officer, effective April 2, 2001 and terminating on September 30, 2003. In June 2003, Mr. Kelly notified TeamStaff that he wouldBarry Durham to be terminating his employment on July 2, 2003 purportedly for "good reason,"employed as defined in his severance agreement, as described below. Under theVice-President of RS Staffing Services, Inc. The material terms of his employmentMr. Durham's agreement Mr. Kelly'sare for a period of one (1) year from on or about June 4, 2005 and provide for a base compensation was initially $170,000, increasing to $200,000 commencing September 1, 2001, and subject to yearly increases thereaftersalary of $150,000 per annum, a potential bonus at the discretion of the compensation committee. For the fiscal year ended September 30, 2003, Mr. Kelly received a base salary of $200,000. Mr. Kelly also was entitled to a bonus based on the achievement of certain performance criteria as determined by the compensation committee. In addition, Mr. Kelly received certain other benefits including insurance benefits as are provided to all other executives, a car allowance in the amount of $800 per month, participation in the supplemental executive retirement plan and a split dollar life insurance arrangement. The agreement also provided for the grant of 150,000 stock options, which vested in annual increments of one third commencing on the date of the agreement. TeamStaff also entered into a severance agreement with Mr. Kelly, as described below, which governed the termination of his employment and certain other events including a change of control of TeamStaff.

The split dollar life insurance agreements and supplemental retirement plan were approved by the Compensation Committee of the Board during the 2000 fiscal year and implemented effective October 1, 2000. Under the terms of the SERP, a participant receives a benefit sufficient to provide lump sum annual payments equal to approximately one-third of the participant's base salary on the date the participant becomes a participant. Payment of benefits commences when the participant reaches 65

years of age. The benefit under the SERP is subject to a seven-year vesting schedule (0%, 0%, 20%, 40%, 60%, 80%, 100%), based on the participant's original date of employment with TeamStaff and contingent on the participant's reaching age 55; provided, however, a participant's benefit becomes fully vested upon a change of control, as defined in the SERP, if within two years of the change of control there is a material change in the participant's job title or responsibilities or if the participant's employment is terminated by TeamStaff for any reason other than conviction for theft or embezzlement from TeamStaff. Additionally, if a participant retires by means of total disability (as defined in the SERP), the participant's benefit becomes fully vested and benefit payments commence as of the disability retirement date. The SERP does not provide a death benefit. Mr. Kappauf and Mr. Kelly were the only SERP participants.

SERP participants also were provided with a split dollar life insurance policy, insuring the life of the participant until the participant reached age 65. Although the participant was the owner of the Policy, TeamStaff paid all Policy premiums. Each participant had collaterally assigned the Policy to TeamStaff to secure repayment of the premiums through either its cash surrender value or the Policy proceeds. The participant's right to the Policy vested in accordance with the same schedule as the SERP and with similar change of control provisions. Upon the participant's 65th birthday (and in certain other circumstances provided by the Policy agreement), TeamStaff would release the collateral assignment of the Policy provided the participant released TeamStaff from all obligations it may have with respect to the participant (including those under the SERP). However, given the uncertainty of TeamStaff's ability to continue to maintain this payment arrangement in light of certain of the provisions of the Sarbanes-Oxley Act of 2002, TeamStaff had, with the President and Chief Executive Officer's consent, deferred paying Policy premiums on behalf of the Chief Executive Officer, pending review of the SERP to comply with the Sarbanes-Oxley Act. For the fiscal quarter ended December 31, 2002, TeamStaff paid the Chief Executive Officer a bonus in the amount of the Policy premiums, grossed-up to cover allocable income taxes. Pursuant to the severance agreement with Mr. Kappauf, in the event he were terminated for cause, he would be entitled only to his accrued compensation, which means his base salary, reimbursement of business expenses, vacation pay and earned but unpaid bonuses to the date of termination. "Cause" is defined to include conviction of a felony, an intentional and continual failure to substantially perform his duties or an intentional failure to follow or perform a lawful direction of the Board of Directors. If Mr. Kappauf were terminated for disability or death, he would be entitled to his accrued compensation and certain other payments, such as the pro rata bonus amount. The pro rata bonus amount is defined as the amount equal to the greater of the most recent annual bonus amount paid or the annual bonus paid or payable for the full fiscal year ended prior to the termination, in either case pro-rated through the date of death or disability. In the event that Mr. Kappauf's employment terminated for any otherreason, the agreement provided for payment of his accrued compensation, a pro rata bonus amount, a bonus amount allocated to the remainder of the term of his employment agreement, his base salary through the remainder of the term of his employment agreement, a severance payment equal to one year's base compensation, a payment equal to the cost of health and other similar benefits for a period of two years and costs associated with outplacement services.

On June 18, 2003, Donald W. Kappauf relinquished his positions of President and Chief Executive Officer of TeamStaff. In light of the circumstances regarding the relinquishment by Mr. Kappauf of his positions, Mr. Kappauf may have had reason to terminate his employment with TeamStaff for "good reason" and exercise his rights under the severance agreement. The term good reason includes "a change in the [e]xecutive's status, title, position or responsibilities . . . ." In addition, TeamStaff may have been required to contribute funds to an irrevocable trust to meet the premium obligations of the split dollar life insurance policy granted to Mr. Kappauf in connection with the SERP.

The severance agreement with Mr. Kelly had terms which are substantially similar to those described above for Mr. Kappauf. Until December 10, 2002, Mr. Kelly held the positions of Chief Financial Officer, Vice President, Finance and Secretary of TeamStaff. As a result of the previously disclosed change in his duties, the former Chief Financial Officer may have had "good reason" to terminate his employment with TeamStaff and may have had claims for the severance payments and benefits provided by the severance agreement. The term good reason includes "a change in the [e]xecutive's

status, title, position or responsibilities .. . . ." In June 2003, Mr. Kelly notified the Board of Directors that he would terminate his employment, effective July1, 2003, for "good reason" and exercise his rightsstandard Company executive benefits.

Government Assignment of Contracts

Availability under the severance agreement. Additionally,PNC line of credit is directly related to the changesuccessful assignment of certain accounts receivable. Certain government accounts of RS Staffing Services are required to execute ‘‘Acknowledgements of Assignment.’’ There can be no assurance that every RS Staffing government account will execute the documentation to effectuate the assignment and secure availability. The failure of government third parties to sign the required documentation could result in Mr. Kelly's duties may have caused his benefitsa decrease in availability under the SERP to become fully vested.

In connection with the change in their employment status, TeamStaff engaged in negotiations with its former President and Chief Executive Officer and the former Chief Financial Officer regarding the paymentline of certain severance benefits and the satisfaction of TeamStaff's obligations to each of them under the SERP and the split dollar life insurance arrangements. On December 31, 2003, TeamStaff executed an agreement with its former President and Chief Executive Officer pursuant to which TeamStaff agreed to, among other things, release the collateral assignment of the split dollar life insurance policy as of December 31, 2003 and to accelerate the payment of certain agreed upon payments under the SERP in complete satisfaction of TeamStaff's obligations under the SERP. TeamStaff entered into a similar agreement with its former Chief Financial Officer effective as of December 30, 2003. That agreement also provided for the payment of severance and other benefits over time in satisfaction of TeamStaff's obligations to its former Chief Financial Officer under his severance agreement effective May 22, 2002.credit.

Related Party Transactions

TeamStaff entered into a one year, automatically renewable marketing agreement with Directo, Inc. effective as of February 1, 2004. Directo provides financial and direct deposit services to companies and their employees. Pursuant to the terms of the agreement, TeamStaff is compensated based on its sales of Directo pay card services. TeamStaff offers these services primarily through its payroll services division. For the fiscal yearyears ended September 30, 2005 and 2004, TeamStaff has not earned any commissions from its sales of Directo'sDirecto’s services. T. Stephen Johnson, TeamStaff'sTeamStaff’s Chairman, is also Chairman of Directo. TeamStaff'sTeamStaff’s entry into the marketing agreement with Directo was approved by the disinterested members of the Board.

During the year ended September 30, 2004, the company shared a portion of its leased office space in Alpharetta, Georgia with an affiliated entity of the Chairman of the Board of Directors, T. Stephen Johnson & Associates, Inc. As part of the agreement, TeamStaff shared the cost of a receptionist, phone service, and leased common area furniture. During the fiscal year ended September 30, 2004, TeamStaff paid $28,000 in shared costs. TeamStaff was responsible for payment of the monthly lease obligation and T. Stephen Johnson & Associates reimbursed TeamStaff in the amount of $34,000 in fiscal year ended September 30, 2004 for their prorated portion of the space. We no longer use these facilities.

(9)(11)    SHAREHOLDERS' EQUITY:SHAREHOLDERS’ EQUITY:

Stock Warrants-

The following is a summary of the outstanding warrants to purchase TeamStaff's common stock at September 30, 2004:2005:

Exercise Period From

Exercise Period To

Exercise Price Per Common Share

Number of Shares of Common Stock Reserved

December 2000

December 2005

3.20

10,000

September 2001

September 2006

5.16

16,000

26,000

Exercise Period From				Exercise Period To				Exercise Price Per Common Share				Number of Shares of Common Stock Reserved
December 2000				December 2005				$	3.20				10,000
September 2001				September 2006					5.16				16,000
November 2004				November 2007					2.50				598,000
													624,000

During the fiscal year ending September 31, 2005, TeamStaff issued 598,000 warrants as part of a private placement offering. During 2005, no warrants expired unexercised and no warrants were exercised. During the fiscal year ending September 30, 2004, TeamStaff granted no warrants and 21,428 warrants expired unexercised. During 2004, no warrants were exercised. During the fiscal year ended September 30, 2003, TeamStaff granted no warrants and 58,856 warrants expired unexercised. During 2003, no warrants were exercised. During the fiscal year ended September 30, 2002, TeamStaff granted no warrants and no warrants expired unexercised. For warrants issued to third parties for services, TeamStaff utilizes the Black-Scholes option pricing model to determine fair value and compensation expense.

On November 5, 2004, subsequent to the balance sheet date, TeamStaff issued 598,000 common stock warrants as part of a private placement offering (See note 4). The exercise period is from November 2004 to November 2007 and the exercise price per common share is $2.50.

Stock Option Plans - -

The 1990 Employees Stock Option Plan (the "1990 Plan"‘‘1990 Plan’’) provided for the grant of options to purchase up to 285,714 shares of TeamStaff's common stock. Under the terms of the 1990 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs"(‘‘ISOs’’) under Section 422A of the Code, or options which do not so qualify ("Non-ISO's"(‘‘Non-ISO's’’).

The 1990 Non-Executive Director Stock Option Plan (the "Director Plan"‘‘Director Plan’’) provided for issuance of a maximum of 142,857 shares of common stock upon the exercise of stock options arising under the Director Plan.

The 1990 Senior Management Incentive Plan (the "Management Plan"‘‘Management Plan’’) provided for the issuance of stock, options and other stock purchase rights to executive officers and other key employees and consultants who render significant services to TeamStaff and its subsidiaries. A total of 1,428,571 shares of common stock were reserved for issuance under the Management Plan.

The forgoing plans have expired and options are no longer being granted under these plans.

2000 Employee Stock Option Plan

During 2000, the Board of Directors and shareholders approved the adoption of the 2000 Employees Stock Option Plan (the "2000 Plan"‘‘2000 Plan’’) to provide for the grant of options to purchase up to 1,714,286 shares of TeamStaff's common stock to all employees, including senior management. The 2000 Plan replaces the 1990 Employee Plan and Senior Management Plans, both of which expired. Under the terms of the 2000 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs"(‘‘ISOs’’) under Section 422A of the Code, or options which do not so qualify ("Non-ISO's"(‘‘Non-ISO's’’). As of September 30, 2004,2005, there were 1,069,0001,193,000 options outstanding under the 2000 Plan.

The 2000 Plan is administered by the Management Resources and Compensation Committee designated by the Board of Directors. The Management Resources and Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or Non-ISOs, subject to applicable law; the periods during which each option will be exercisable; and the number of shares subject to each option. The Committee has full authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto.

Under the 2000 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent (10%) shareholder, as defined, such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value.

The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year shall not exceed $100,000.

The Management Resources and Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arise in connection with the exercise or cancellation of an option. The Management Resources and Compensation Committee can also permit the payment of the exercise price in the common stock of the Corporation held by the optionee for at least six months prior to exercise.

Non-Executive Director Plan

In fiscal 2000, the Board of Directors and stockholders approved the adoption of the 2000 Non-Executive Director Stock Option Plan (the "Director Plan"‘‘Director Plan’’) to provide for the grant of options

to non-employee directors of TeamStaff. Under the terms of the Director Plan, each non-executive director is automatically granted an option to purchase 5,000 shares upon joining the Board and each September lst, pro rata, based on the time the director has served in such capacity during the previous year. The Directors' Plan also provides that directors, upon joining the Board, and for one (1) year thereafter, will be entitled to purchase restricted stock from TeamStaff at a price equal to 80% of the closing bid price on the date of purchase up to an aggregate purchase price of $50,000. The Director Plan replaced the previous Director Plan that expired in April 2000. As of September 30, 2004,2005, there were 100,000125,000 options held by directors outstanding under the Director Plan.

Under the Director Plan, the exercise price for options granted under the Director Plan shall be 100% of the fair market value of the common stock on the date of grant. Until otherwise provided, the exercise price of options granted under the Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of common stock of TeamStaff or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the Director Plan, expires five (5) years from the date of grant. The Compensation Committee has no discretion to determine which non-executive director will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the

Committee will make all determinations of the interpretation of the Director Plan. Options granted under the Director Plan are not qualified for incentive stock option treatment.

The following tables summarize the activity in TeamStaff's stock option plans for the years ended September 30, 2005, 2004, 2003, and 2002:2003:

				Number Of Shares				Weighted Average Exercise Price				Weighted Average Fair Value
Options outstanding, September 30, 2001					875,269			$	4.82
Granted					256,430			$	5.87			$	3.47
Exercised					(38,210	)		$	3.39
Cancelled					(100,847	)		$	6.85
Options outstanding, September 30, 2002					992,642			$	4.94
Granted					558,000			$	2.96			$	1.42
Exercised					—				—
Cancelled					(141,170	)		$	5.15
Options outstanding, September 30, 2003					1,409,472			$	3.97
Granted					225,000			$	2.24			$	1.21
Exercised					—				—
Cancelled					(407,531	)		$	4.81
Options outstanding, September 30, 2004					1,226,941			$	3.59

				Number Of Shares				Weighted Average Exercise Price				Weighted Average Fair Value
Options outstanding, September 30, 2002					992,642			$	4.94
Granted					558,000			$	2.96			$	1.42
Exercised					—				—
Cancelled					(141,170	)		$	5.15
Options outstanding, September 30, 2003					1,409,472			$	3.97
Granted					225,000			$	2.24			$	1.21
Exercised					—				—
Cancelled					(407,531	)		$	4.81
Options outstanding, September 30, 2004					1,226,941			$	3.59
Granted					315,000			$	1.89			$	0.84
Exercised					—				—
Cancelled					(223,941	)		$	4.27
Options outstanding, September 30, 2005					1,318,000			$	3.07

As of September 30, 2005, 2004, and 2003, 1,283,000, 759,941, and 2002, 759,941, 917,472 and 666,642 options, respectively, were exercisable.

Range of Exercise Prices				Options Outstanding at 9/30/04				Weighted Average Remaining Life				Weighted Average Exercise Price				Options Exercisable at 9/30/04				Weighted Average Exercise Price
$2.08 - - 4.10					836,142			4.0				$	2.90				369,142			$	2.55
$4.11 - - 6.13					305,799			1.5				$	4.63				305,799			$	4.63
$6.14 - - 8.15					70,000			1.9				$	6.97				70,000			$	6.97
$8.16 - - 10.18					15,000			1.9				$	9.83				15,000			$	9.83

Range of Exercise Prices				Options Outstanding at 9/30/05				Weighted Average Remaining Life				Weighted Average Exercise Price				Options Exercisable at 9/30/05				Weighted Average Exercise Price
$2.08 – 4.10					998,000				3.5			$	2.60				963,000			$	2.63
$4.11 – 6.13					305,000				0.6			$	4.63				305,000			$	4.63
$6.14 – 8.15					—				—				—				—				—
$8.16 – 10.18					15,000				0.9			$	9.83				15,000			$	9.83

During 2005 and 2004, TeamStaff did not repurchase any of its common stock. During 2003, and 2002, TeamStaff repurchased 0, 251,214 and 242,945 shares respectively of its common stock for $0, $781,341, and $1,146,000 respectively.$781,341. As of September 30, 2004, TeamStaff retired a total of 574,470 shares of treasury stock.

(10)(12)    SEGMENT REPORTING:

As a part of continuing operations, TeamStaff operates two different lines of business: staffing (principally medical staffingstaffing) and payroll services.

TeamStaff currently provides temporarynursing and permanent staffing for allied healthcare professionals and operates through three medical staffing units. TeamStaff’s RS Staffing subsidiary specializes in providing medical and office administration/technical professionals through nationwide schedule contracts with both the General Services Administration and Veterans Affairs, among other customers. The TeamStaff Rx subsidiary operates throughout the US and specializes in the supply of allied medical employees and nurses, with hospitals, clinicsespecially ‘‘travel’’ staff (typically 13 week assignments). Allied medical staff includes MRI technicians, mammographers, dosimetrists, ultrasound staff and therapy centers. Medical staffing enables clients to attain managementphysicists. TeamStaff’s Nursing Innovations unit provides travel nursing, per diem nursing, temporary-to-permanent nursing and productivity goals by matching highly trained professionalspermanent nursing placement services. All TeamStaff Rx and technical personnel to specific project requirements.Nursing Innovations revenues, and approximately 70 percent of RS Staffing revenues, are derived from medical staffing.

Through its DSI Payroll Services business segment,division, TeamStaff provides basiccustomized payroll management and tax services, primarily to its clients, approximately 75% of which are in the construction industry. Services providedDSI’s service offerings include the preparation of payroll checks, filing ofcheck processing via web, phone or fax, federal and state quarterly and year-end tax compliance reports, W-2 processing and financial management reports, including certified payroll taxes, government reports W-2's, remote processing directly to the client's offices and certified payrolls.custom software interfaces. DSI processes payrolls for approximately 700 clients that have more than 30,000 employees.

All corporate expenses, amortization of goodwill (until October 1, 2001), interest expense, as well as depreciation on corporate assets and miscellaneous charges, are reflected in a separate unit called Corporate.

TeamStaff changed its segment reporting as of October 1, 2002. As of that date, TeamStaff's voucher processing service business was managed and reported in the Payroll Services group. TeamStaff discontinued its voucher processing service business as of April 30, 2003. BrightLane costs have been allocated to Corporate since BrightLane provides information technology services to the entire company. Prior year figures have been adjusted to conform to the current year presentation.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. TeamStaff evaluates the performance of its business lines based on pre-tax income. TeamStaff has no revenue derived from outside the United States.

The following table represents the financial results for each of TeamStaff'sTeamStaff’s segments:

(Amounts in thousands)

				Medical Staffing				Payroll Services				Corporate				Consolidated
2004
Revenues				$	32,856			$	4,432			$	—			$	37,288
Depreciation and amortization					154				67				188				409
Income/(loss) from operations					1,108				1,705				(5,850	)			(3,037	)
Interest income					—				—				38				38
Interest expense					—				—				(81	)			(81	)
Other income					224				—				8				232
Income/(loss) from continuing operations before income taxes					1,333				1,706				(5,887	)			(2,848	)
Capital spending					14				—				5				19
Total assets from continuing operations				$	6,121			$	2,909			$	28,399			$	37,429
2003
Revenues				$	58,119			$	4,686			$	—			$	62,805
Depreciation and amortization					138				9				182				329
Income/(loss) from operations					3,805				1,580				(8,118	)			(2,733	)
Interest income					—				—				63				63
Interest expense					(25	)			—				(195	)			(220	)
Other income					525				—				13				538
Income/(loss) from continuing operations before income taxes					4,305				1,580				(8,237	)			(2,352	)
Capital spending					170				215				140				525
Total assets from continuing operations				$	18,353			$	2,252			$	17,652			$	38,257
2002
Revenues				$	74,866			$	4,954			$	—			$	79,820
Depreciation and amortization					141				12				45				198
Income/(loss) from operations					7,652				2,057				(5,968	)			3,741
Interest income					—				—				171				171
Interest expense					(15	)			—				(153	)			(168	)
Other income					947				—				—				947
Income/(loss) from continuing operations before income taxes					8,583				2,057				(5,949	)			4,691
Capital spending					184				6				259				449
Total assets from continuing operations				$	16,873			$	3,969			$	21,698			$	42,540

(Amounts in thousands)				Staffing Services				Payroll Services				Corporate				Consolidated
2005
Revenues				$	51,179			$	4,625			$	—			$	55,804
Depreciation and amortization					250				135				176				561
Income/(loss) from operations					1,999				1,649				(6,387	)			(2,739	)
Interest income					1				—				47				48
Interest expense					(29	)			(11	)			(182	)			(222	)
Other income					162				—				18				180
Income/(loss) from continuing operations before income taxes					2,133				1,638				(6,504	)			(2,733	)
Capital spending					83				16				30				129
Total assets from continuing operations				$	20,498			$	986			$	28,570			$	50,054
2004
Revenues				$	32,856			$	4,432			$	—			$	37,288
Depreciation and amortization					154				67				188				409
Income/(loss) from operations					1,108				1,705				(5,850	)			(3,037	)
Interest income					—				—				38				38
Interest expense					—				—				(81	)			(81	)
Other income					224				—				8				232
Income/(loss) from continuing operations before income taxes					1,333				1,706				(5,887	)			(2,848	)
Capital spending					14				—				5				19
Total assets from continuing operations				$	6,121			$	2,909			$	28,399			$	37,429
2003
Revenues				$	58,119			$	4,686			$	—			$	62,805
Depreciation and amortization					138				9				182				329
Income/(loss) from operations					3,805				1,580				(8,118	)			(2,733	)
Interest income					—				—				63				63
Interest expense					(25	)			—				(195	)			(220	)
Other income					525				—				13				538
Income/(loss) from continuing operations before income taxes					4,305				1,580				(8,237	)			(2,352	)
Capital spending					170				215				140				525
Total assets from continuing operations				$	18,353			$	2,252			$	17,652			$	38,257

TeamStaff has no revenue derived outside of the United States.

(11)    (13) QQUARTERLYUARTERLY FINANCIAL DATA (UNAUDITED):

(Amounts in thousands, except per share data)

				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2004
Net revenues				$	9,738			$	8,798			$	9,642			$	9,110
Gross profit					2,230				1,923				2,309				2,281
Income from continuing operations					(538	)			(651	)			(431	)			(145	)
(Loss) from discontinued operations net of tax					(1,309	)			(333	)			(425	)			(247	)
Net income					(1,847	)			(984	)			(856	)			(392	)
Earnings per share – Basic and Diluted				$	(0.12	)		$	(0.06	)		$	(0.05	)		$	(0.03	)

(Amounts in thousands, except per share data)				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2005
Net revenues				$	10,201			$	10,899			$	13,516			$	21,188
Gross profit					2,589				2,626				2,763				4,174
(Loss) income from continuing operations					(394	)			(585	)			(718	)			3
Loss from discontinued operations net of tax					(185	)			(36	)			(532	)			(42	)
Net loss					(579	)			(621	)			(1,250	)			(39	)
Loss per share – Basic and Diluted				$	(0.03	)		$	(0.03	)		$	(0.07	)		$	(0.00	)

				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2003
Net revenues				$	18,457			$	16,378			$	14,654			$	13,316
Gross profit					3,523				3,163				2,901				2,603
Income from continuing operations					299				(764	)			(861	)			(165	)
(Loss) from discontinued operations net of tax					(214	)			(25,193	)			(1,403	)			(584	)
Net income					85				(25,957	)			(2,264	)			(749	)
Earnings per share – Basic and Diluted				$	0.01			$	(1.65	)		$	(0.14	)		$	(0.05	)

				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2004
Net revenues				$	9,738			$	8,798			$	9,642			$	9,110
Gross profit					2,230				1,923				2,309				2,281
Loss from continuing operations					(538	)			(651	)			(431	)			(145	)
Loss from discontinued operations net of tax					(1,309	)			(333	)			(425	)			(247	)
Net loss					(1,847	)			(984	)			(856	)			(392	)
Loss per share – Basic and Diluted				$	(0.12	)		$	(0.06	)		$	(0.05	)		$	(0.03	)

				First Quarter As Restated				Second Quarter As Restated				Third Quarter As Restated				Fourth Quarter
Fiscal 2002
Net revenues				$	21,265			$	19,523			$	19,397			$	19,635
Gross profit					4,511				3,943				3,928				3,642
Income from continuing operations					1,195				871				611				297
Loss from discontinued operations net of tax					(568	)			(426	)			1,426				(331	)
Net income					627				445				2,037				(34	)
Earnings per share –Basic and Diluted				$	0.04			$	0.03			$	0.13			$	0.00

				First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Fiscal 2003
Net revenues				$	18,457			$	16,378			$	14,654			$	13,316
Gross profit					3,523				3,163				2,901				2,603
Income (loss) from continuing operations					299				(764	)			(861	)			(165	)
(Loss) from discontinued operations net of tax					(214	)			(25,193	)			(1,403	)			(584	)
Net income (loss)					85				(25,957	)			(2,264	)			(749	)
Earnings (loss) per share – Basic and Diluted				$	0.01			$	(1.65	)		$	(0.14	)		$	(0.05	)

(12)(14) EMPLOYEE BENEFIT PLANS:

During the fiscal year ended September 30, 2004,2005, TeamStaff and its subsidiaries maintained fourfive defined contribution pension plans for the benefit of its non-worksite and former worksite employees. The Digital Solutions, Inc. and Affiliated Corporations 401(k) Savings Plan, was "frozen"‘‘frozen’’ by TeamStaff as of January 1, 1999, and terminated effective as of December 31, 2002 in accordance with the provisions of Rev. Proc. 2002-21, providing a method for the termination of single employer plans maintained by professional employer organizations. No deferrals or other contributions currently are made to that plan. All assets of the frozen plan were transferred to the Digital Solutions, Inc. & Affiliated Corporations Spinoff 401(k) Savings Plan, which became effective as of August 1, 2003, in accordance with the provisions of Rev. Proc. 2002-21. The spinoff plan was terminated as of December 31, 2003 and all assets that were not otherwise transferred to former PEO client plans will be distributed to participants.

TeamStaff also maintained The TeamStaff Retirement Savings Plan. This plan was assumed by Gevity HR, Inc., effective as of November 17, 2003, as part of Gevity'sGevity’s purchase of the PEO operating segment. This plan was designed to qualify as a multiple employer plan as described in Section 413(c) of the Internal Revenue Code, and TeamStaff was an adopting employer under that plan. As of January 1, 2004, TeamStaff adopted the TeamStaff 401(k) Plan for the benefit of its internal and

temporary staffing employees and all assets attributable to TeamStaff'sTeamStaff’s internal and staffing employees under the plan assumed by Gevity were ultimately transferred to the TeamStaff 401(k) Plan. Because plan participants have their own account, manage their own plan investments and make their own investment decisions from a broad range of investment options, TeamStaff believes that it is afforded protection from liability for participants' investment decisions under Section 404(c) of the Code under the prior plan assumed by Gevity and the TeamStaff 401(k) Plan. Any TeamStaff corporate employee (including its medical temporary staffing employees), is eligible for participation in the TeamStaff 401(k) Plan upon completing three months of service with TeamStaff. TeamStaff provides a discretionary matching contribution of 25% of each of the first 4% of a participant's elective contributions under the TeamStaff 401(k) Plan and did so under the plan assumed by Gevity. TeamStaff recorded expense for this matching of $27,000$76,000 in fiscal 20042005 and $67,000$99,000 in fiscal 2003.2004. A participant is always fully vested in his elective contributions. A participant's interest in TeamStaff discretionary matching contributions vests in accordance with the following schedule:

	Years of Service:				Vested Interest:
	Less than 1 Year of Service							0	% 0%
	1 Year, but less than 2 Years							25	% 25%
	2 Years, but less than 3 Years							50	% 50%
	3 Years, but less than 4 Years							75	% 75%
	4 Years or more							100	% 100%

RS Staffing Services maintains a 401(k) retirement plan for the benefit of its internal and staffing employees. Employees are eligible to participate upon meeting certain length of service and minimum compensation requirements. RS Staffing does not provide a discretionary matching contribution.

TeamStaff received favorable determination letters regarding the tax qualified status of the plan assumed by Gevity on June 25, 1999 and November 23, 2003. The frozen Digital Solutions plan was audited by independent auditors for the plan years ended December 31, 2003 and December 31, 2002, in connection with their required From 5500 Annual Report filed with the Pension and Welfare Benefits Administration for the plan year ended December 31, 2003. The spinoff plan did not require a plan audit in connection with the Form 5500 Annual Report filed with the PWBA for the plan year ended December 31, 2003. Gevity assumed responsibility for obtaining an audit of and filing the Form 5500 Annual Report for the TeamStaff plan assumed by Gevity. Because calendar year 2004 is the first plan year of the TeamStaff 401(k) Plan (the ‘‘Plan’’), a Form 5500 Annual Report and plan audit if required, willwas not be due for the TeamStaff 401(k) Plan until calendar year 2005. Compliance testing for calendar year 2004 was undertaken by Principal Financial Group, the Plan's record keeper (‘‘Principal’’). Initially, the Company did not pass the ‘‘coverage test.’’ Principal is in the process of running an ‘‘average benefits test.’’ If the Company passes the average benefits test, nothing further is required. If the Company fails the average benefits test it could be required to provide additional funding to the Plan. As of December 16, 2005, the Company had no knowledge as to (a) whether or not it has passed or will pass the average benefits test; or (b) if it does not pass the average benefits test, how much additional funding will be required.

Effective October 1, 2000, TeamStaff adopted a non-qualified, supplemental retirement plan covering certain corporate officers of TeamStaff (the "SERP"‘‘SERP’’). Under the terms of the SERP, a participant receivesreceived a benefit sufficient to provide lump sum annual payments equal to approximately one-third of the participant'sparticipant’s base salary on the date the participant becomesbecame a participant. Payment of benefits commenceswas to commence when the participant reachesreached 65 years of age. The benefit under the SERP iswas subject to a seven-year vesting schedule (0%,0%,20%,40%, 0%, 20%, 40%, 60%, 80%, 100%), based on the participant'sparticipant’s original date of employment with TeamStaff and was contingent on the participant'sparticipant’s reaching age 55; provided, however, a participant'sparticipant’s benefit becomesbecame fully vested upon a change of control, as defined in the SERP, if within two years of the change of control there iswas a material change in the participant'sparticipant’s job title or responsibilities or if the participant'sparticipant’s employment iswas terminated by TeamStaff for any reason other than conviction for theft or embezzlement from TeamStaff. Additionally, if a participant retiresretired by means of total disability (as defined in the SERP), the participant'sparticipant’s benefit becomesbecame fully vested and benefit payments commencewould have commenced as of the

disability retirement date. The SERP doesdid not provide a death benefit. TeamStaff'sTeamStaff’s former Chief Executive Officer and its former Chief Financial Officer were the only SERP participants.

SERP participants were also are provided with a split dollar life insurance policy ("Policy"(‘‘Policy’’), insuring the life of the participant until the participant reachesreached age 65. Although the participant iswas the owner of the Policy, TeamStaff payspaid all Policy premiums. Each participant has collaterally assigned the Policy to

TeamStaff to secure repayment of the premiums through either its cash surrender value or the Policy proceeds. The participant'sparticipant’s right to the Policy vestsvested in accordance with the same schedule as the SERP and with similar change of control provisions. Upon the participant'sparticipant’s 65^th birthday (and in certain other circumstances provided by the Policy agreement), TeamStaff willwas to release the collateral assignment of the Policy provided the participant releasesreleased TeamStaff from all obligations the Corporation may have had with respect to the participant (including those under the SERP).

The following table illustrates TeamStaff'sTeamStaff’s changes in benefit costs and pension benefit obligations for the fiscal years ending September 30, 20042005 and September 30, 20032004 under the SERP.

(Amounts in thousands)

				Fiscal Year
				2004				2003
Change in benefit obligation
Benefit obligation at beginning of year				$	1,724			$	1,271
Service cost					0				17
Interest Cost					82				91
Benefits paid					(777	)			0
Actuarial (gain)/loss					399				345
Benefit obligation at end of year				$	1,428			$	1,724
Change in plan assets
Employer contribution				$	777				0
Benefits paid					(777	)			0
Fair value of plan assets at end of year				$	0			$	0
Reconciliation of funded status
Funded status				$	(1,428	)		$	(1,724	)
Unrecognized net actuarial (gain)/loss					519				455
Net amount recognized				$	(909	)		$	(1,269	)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability				$	(1,428	)		$	(1,724	)
Accumulated other comprehensive income					519				455
Net amount recognized				$	(909	)		$	(1,269	)
Assumptions used to determine benefit obligations at September 30:
Discount rate used to determine net periodic benefit costs					5.50	%			6.50	%
Discount rate used to determine benefit obligations					3.00	%			5.50	%
Components of net periodic benefit cost
Service cost				$	0			$	17
Interest cost					82				91
Amortization of prior service cost					0				29
Recognized actuarial (gain)/loss					59				14
Net periodic benefit cost				$	141			$	151
Curtailment charges					0				700
Settlement charges					276				0
Total benefit cost				$	417			$	851
Other disclosure items at end of year:
Accumulated benefit obligation				$	1,428			$	1,724
Fair value of plan assets					—				—
Increase in minimum liability included in other comprehensive income				$	64			$	215

				Fiscal Year
(Amounts in thousands)				2005				2004
Change in benefit obligation
Benefit obligation at beginning of year				$	1,428			$	1,724
Service cost					0				0
Interest Cost					32				82
Benefits paid					(588	)			(777	)
Actuarial (gain)/loss					0				399
Benefit obligation at end of year				$	872			$	1,428
Change in plan assets
Employer contribution				$	588			$	777
Benefits paid					(588	)			(777	)
Fair value of plan assets at end of year				$	0			$	0
Reconciliation of funded status
Funded status				$	(872	)		$	(1,428	)
Unrecognized net actuarial (gain)/loss					263				519
Net amount recognized				$	(609	)		$	(909	)
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability				$	(872	)		$	(1,428	)
Accumulated other comprehensive income					263				519
Net amount recognized				$	(609	)		$	(909	)
Assumptions used to determine benefit obligations at September 30:
Discount rate used to determine net periodic benefit costs					3.00	%			5.50	%
Discount rate used to determine benefit obligations					3.00	%			3.00	%
Components of net periodic benefit cost
Service cost				$	0			$	0
Interest cost					32				82
Amortization of prior service cost					0				0
Recognized actuarial (gain)/loss					63				59
Net periodic benefit cost				$	95			$	141
Curtailment charges					0				0

				Fiscal Year
(Amounts in thousands)				2005				2004
Settlement charges					193				276
Total benefit cost				$	288			$	417
Other disclosure items at end of year:
Accumulated benefit obligation				$	872			$	1,428
Fair value of plan assets					—				—
Increase in minimum liability included in other comprehensive income				$	(255	)		$	64

For unfunded plans, contributions to the plan are the benefit payments made to participants. TeamStaff, Inc. made $776,000$588,000 in benefit payments during fiscal 2004.2005. The following benefit payments are expected to be paid in future fiscal years:

	Fiscal year ending				Pension Benefits
	2005				$	588,325
	2006					294,285
	2007					209,695
	2008					209,695
	2009					70,590
	2010					70,590
	2011					70,590
	2012 and thereafter					0

Fiscal year ending				Pension Benefits
2006				$	294,285
2007					209,605
2008					209,605
2009					70,590
2010					70,590
2011					70,590
2012 and thereafter					0

During fiscal 2004, TeamStaff, Inc. and plan participants agreed on optional payment forms effectively accelerating benefit payments. Beginning in fiscal 2004 and ending in fiscal 2011, this plan will settle liabilities by paying benefit obligations to participants. Each quarter, a settlement charge will be recognized in accordance with SFAS No. 88 to account for settling of liabilities. During fiscal 2005 and 2004, a settlement charge of $193,000 and $276,000, respectively, was recognized.

During fiscal 2003, two events were recognized as curtailments under SFAS No. 88. Donald Kelly was relieved of his duties as Chief Financial Officer. A curtailment charge related to this event of $254,000 was recognized during the second quarter.quarter of fiscal 2003. Donald Kappauf relinquished his positions as President and Chief Executive Officer. A curtailment charge related to this event of $445,000 was taken during the third quarter.quarter of fiscal 2003. TeamStaff is not aware of any other events that might constitute settlement or curtailment under SFAS No. 88. Total curtailment during fiscal 2003 was $699,000.

(15) ECONOMIC DEPENDENCY:

A major customer is defined as a customer from which the Company derives at least 10% of its sales. For fiscal year ended September 30, 2005, no one customer represents 10% or more of the Company’s overall consolidated revenues. Since the date of acquisition effective June 4, 2005 to September 30, 2005, RS Staffing Services had three customers who each individually comprised greater than 10% of the division’s revenue, and collectively comprised 50.1% of the division’s revenue. Since the date of acquisition effective June 4, 2005 to September 30, 2005, RS Staffing Services generated approximately 94% of its revenues from the United States Government. Since the date of acquisition effective November 14, 2004 to September 30, 2005, the Nursing Innovations division of TeamStaff Rx had two customers who each individually comprised greater than 10% of the division’s revenue and collectively comprised 24.2% of the division’s revenue.

SCHEDULE I

TEAMSTAFF, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004, 2003, AND 20022003
(Amounts in thousands)

(a) Description				(b) Balance at Beginning of Year				(c) Additions Charged to (reversed from) Costs and Expenses				(d) Deductions – Net Write- Offs				(e) Balance at End of Year
Allowance for doubtful accounts, year ended September 30, 2004				$	142			$	(55	)		$	(48	)		$	39
September 30, 2003				$	17			$	125			$	(0	)		$	142
September 30, 2002				$	92			$	0				($75	)		$	17

(a) Description				(b) Balance at Beginning of Year				(c) Additions Charged to (reversed from) Costs and Expenses				(d) Deductions – Net Write-Offs				(e) Balance at End of Year
Allowance for doubtful accounts, year ended–
September 30, 2005				$	39			$	30			$	(28	)		$	41
September 30, 2004				$	142			$	(55	)		$	(48	)		$	39
September 30, 2003				$	17			$	125			$	(0	)		$	142