Accumulated Comprehensive Loss and Minimum Pension Liability Adjustment

A minimum pension liability adjustment is required when the actuarial present value of accumulated benefit obligation exceeds the plan assets and accrued pension liabilities. The minimum pension liability adjustment, net of income taxes, is recorded as a component of ‘‘Accumulated comprehensive income’’ on the balance sheet and is reflected in Statement of Comprehensive Income (Loss) as ‘‘Minimum pension liability adjustment, net of tax’’. The Company used a discount rate of 3.0% each to calculate the projected benefit obligation and the periodic benefit cost calculation for the three and six months ended DecemberMarch 31, 2006.2007. The Company recorded a gain from such adjustment, net of tax of $23,000$15,000 and $45,000$5,000 for the three months ended DecemberMarch 31, 2007 and 2006, respectively. The Company recorded a gain from such adjustment, net of tax of $38,000 and 2005,$50,000 for the six months ended March 31, 2 007 and 2006, respectively. At DecemberMarch 31, 20062007 and September 30, 2006, accumulated comprehensive loss on the balance sheet reflects the cumulative balance due to the minimum pension liability adjustment.

(3)    RECENT EVENTS:

On April 17, 2007, a Federal Grand Jury subpoena was issued by the Northern District of Illinois to RS Staffing Services, Inc. (‘‘RS Staffing’’) requesting production of certain documents dating back to 1997. According to the cover letter accompanying the subpoena, the U.S. Department of Justice, Antitrust Division, along with members of the Veterans Affairs Office of Inspector General are responsible for the current criminal investigation. The subpoena states that it is issued in connection with an investigation of possible violations of federal criminal laws and related crimes concerning procurement at the Veterans Administration. RS Staffing provides temporary staffing at certain Veterans Administration hospitals that may be part of the investigation. The return date for documents called for by the subpoena is May 17, 2007. In connection with the same investigation, agents with the United States Department of Vetera ns Affairs, Office of Inspector General, executed a search warrant at the Monroe, Georgia offices of RS Staffing. The Company has been advised that neither it nor RS Staffing is currently a target of the investigation. The Company is actively cooperating with the government’s investigation.

The Company originally acquired RS Staffing in May of 2005 and is reviewing its rights to seek indemnification from the sellers for costs that may be incurred in connection with the investigation.

(4)    BUSINESS COMBINATIONS: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 and can only be sold in accordance with the provisions of Rule 144 of the Securities Act of 1933. The Sellers guaranteed a minimum net worth of $1.4 million and any amounts above or below this amount after a finalized accounting at one year post acquisition, were subject to a purchase price adjustment. As a result, for the quarter ended June 30, 2006, a downward purchase price adjustment ini n the amount of approximately $132,000 was made and deducted from the amount due under the first installment of the note payable. In addition, there was a one-year earn out of up to $2.0 million based

upon the achievement of specified performance targets for the business. The performance targets were met and the Company made payment of the full amount on August 14, 2006. Principals of RS Staffing, namely Roger Staggs and Barry Durham, initially continued as management of RS Staffing pursuant to employment agreements with each of them. Barry Durham resigned his position effective as of

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December, 2005. Roger Staggs’ employment agreement expired on June 4, 2006 and was not renewed. The acquisition 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, of which one half has been paid and the remainder is payable in June 2007, and is secured by a lien on certain assets of the business, subordinate to any liens granted in connection with financing for the transaction. The Company paid $1.5 million of the note payable plus accrued interest of $150,000 on June 8, 2006. In connection with the acquisition, TeamStaff obtained financing from PNC Bank, National Association (‘‘PNC Bank’’).

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

(Amounts in thousands)
Current assets				$	5,865
Property, plant, and equipment					204
Goodwill					8,960
Other assets					75
Total assets acquired					15,104
Current liabilities					4,680
Long term liabilities					39
Total liabilities assumed					4,719
Net assets acquired				$	10,385

Included in Goodwill is $330,000 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 successfully transferred to TeamStaff Rx. 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 either year of the earn-out period.

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

(Amounts in thousands)
Property, plant, and 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.

(4)    DISCONTINUED OPERATIONS:

Disposal of DSI Payroll Services

Effective May 31, 2006, the Company sold substantially all of the assets of its DSI Payroll Services (‘‘DSI’’) division to CompuPay, Inc. (‘‘CompuPay’’) for $9.0 million. The general terms of the transaction were an all-cash sale for $9.0 million, subject to an escrow of $250,000 for potential post-closing contingencies. On November 30, 2006, CompuPay released $125,000 of the escrow to TeamStaff and is scheduled to release the remaining escrow on May 31, 2007. The agreement called for minimum working capital requirements that resulted in a purchase price adjustment of $248,677, which was paid to TeamStaff on September 11, 2006. The agreement also included a transition agreement whereby CompuPay would sublease certain office space at DSI’s current location from TeamStaff, Inc., among other standard agreements.

Net revenues for the payroll services segment during the three and six months ended DecemberMarch 31, 2005 was $1.5 million.2006 were $1.2 million and $2.7 million, respectively, and due to the sale of DSI, there were no revenues during the three and six months ended March 31, 2007.

The following chart details assets and liabilities from all discontinued operations:

(amounts in thousands)			December 31, 2006						September 30, 2006						March 31, 2007						September 30, 2006
ASSETS				$	—					$	—					$	—					$	—
LIABILITIES
Accrued expenses and other current liabilities					321						454					$	205					$	454
Total current liabilities					321						454						205						454
Total liabilities				$	321					$	454					$	205					$	454

Liability Balances (amounts in thousands)			September 30, 2006 Balance						Expensed This Quarter						Paid This Quarter						December 31, 2006 Balance
Accrued expenses and other current liabilities				$	454					$	37					$	170					$	321
Total				$	454					$	37					$	170					$	321

(5)    COMMITMENT AND CONTINGENCY:

New Lease Agreement

The Company’s Nursing Innovations division renewed its lease on the office space located at 6555 Quince Road, Suite 303, Memphis, Tennessee for thirty-seven (37) months beginning January 1, 2007. The premises square footage will decrease from 5,777 rentable square feet to 1,894 rentable square feet due to the consolidation of Nursing Innovations travel platform into TeamStaff Rx’s Clearwater, Florida location. The total value of the commitment over the life of the lease is approximately $100,000.

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Liability Balances (amounts in thousands)			December 31, 2006 Balance						Expensed This Quarter						Paid This Quarter						March 31, 2007 Balance
Accrued expenses and other current liabilities				$	321					$	0					$	116					$	205
Total				$	321					$	0					$	116					$	205

(6)    COMMITMENT AND CONTINGENCY:

Payroll Taxes    

TeamStaff has received notices from the IRSInternal Revenue Service (‘‘IRS’’) claiming 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. If not resolved favorably, the Company may incur interest and penalties. Until the sale of certain PEO assets in November, 2003, 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 certain interest and penalty claims abated. TeamStaff has also received notices from the Social Security Administration claimingc laiming 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, any significant interest and penalties will be abated; however, there can be no assurance that each of these matters will be resolved favorably.

(6)    (7)    WORKERS’ COMPENSATION:COMPENSATION:

Prepaid Workers’ Compensation

TeamStaff’s current workers’ compensation insurance program is provided by Zurich American Insurance Company (‘‘Zurich’’). This program covers TeamStaff’s temporary employees and its corporate employees. The program is managed by Cedar Hill and GAB Robins provides claims handling services. This program is a fully insured, guaranteed cost program that contains no deductible or retention feature. The premium for the program is paid monthly based upon actual payroll and is subject to a policy year-end audit.

As part of the Company’s discontinued PEO operations, TeamStaff had a workers’ compensation program with Zurich, which covered the period from March 22, 2002 through November 17, 2003, inclusive. Payments for the policy were made to the trust monthly based on projected claims for the policy period. 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. On March 3, 2006, Zurich reduced the collateral requirements on outstanding workers’ compensation claims and released $2.25 million in trust account funds back to TeamStaff. On March 5, 2007, Zurich further reduced the collateral requirements on outstanding workers’ compensation claims and released an additional $0.76 million in trust account funds back to TeamStaff. After the release of t hese trust account funds, Zurich further reviewed the collateral requirements on outstanding worker’s compensation claims and on April 3, 2007, subsequent to the balance sheet date, released an additional $0.43 million in trust account funds back to TeamStaff. TeamStaff estimates that ofat March 31, 2007, the remaining prepaid asset an additional approximately $1.0of $0.7 million in return premiums(which includes the $0.43 million received on April 3, 2007,) will be received within the next twelve months. This is reflected on TeamStaff’s balance sheet as of DecemberMarch 31, 20062007 as a current asset.

As of DecemberMarch 31, 20062007 the adequacy of the workers’ compensation reserves was determined, in management’s opinion, to be reasonable. In determining our reserves we rely in part upon information

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regarding loss data received from our workers’ compensation insurance carriers that may include loss data for claims incurred during prior policy periods. 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’s prepayments and adjust the reserves as deemed appropriate.

(7)    DEBT:(8)    DEBT:

In connection with the acquisition of RS Staffing Services, Inc. (see Note 3)4), TeamStaff secured financing with PNC Bank in the form of a $7.0 million revolving 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. Effective

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February 13, 2006, TeamStaff entered into an amendment to the revolving credit note, increasing the revolving credit facility to $8.0 million. Revolving credit advances under the credit facility bear interest at 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 facility has a three-year life and contains term and line of credit borrowing options. The facility is subject to certain restrictive covenants includinga fixed charge coverage ratio if the Company failsfai ls to maintain invested cash and line availability minimum requirements. For the period ended DecemberMarch 31, 2006,2007, TeamStaff was in compliance with all loan covenants. The facility is subject to acceleration upon non-payment or various other standard default clauses. In addition, the Company granted PNC Bank a lien and security interest on all of its assets. The facility was paid off with the proceeds from the sale of DSI Payroll Services on May 31, 2006 and the line was not drawn upon in the first fiscal quartersubsequently until February 8, 2007. As of DecemberAt March 31, 2006,2007, there was no debt outstanding under the credit facility and $6.1$5.9 million of unused availability under the line, based on billed accounts receivable. The average daily outstanding balance from February 8, 2007 through March 31, 2007, was $0.07 million. The weighted average interest rate effectiveon advances from February 8, 2007 through March 31, 2007 was 8.5% for balances not subject to LIBOR. The interest rate ef fective at DecemberMarch 31, 20062007 was 8.5%.

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 was due on June 8, 2006 and payment was made in the amount of $1.65 million. The remaining principal and interest is due in June 2007.

Long-term debt from continuing operations at DecemberMarch 31, 20062007 and September 30, 2006 consists of the following-

(Amounts in thousands)			December 31, 2006						September 30, 2006						March 31, 2007						September 30, 2006
Notes payable				$	1,500					$	1,500					$	1,500					$	1,500
Less: Current portion					(1,500	)					(1,500	)					(1,500	)					(1,500	)
Long-term debt				$	—					$	—					$	—					$	—

(8)    (9)    STOCK WARRANTS:

During the quarterthree and six months ended DecemberMarch 31, 2006,2007, no warrants were issued, no warrants expired unexercised and no warrants were exercised. There were 598,000 warrants outstanding as of DecemberMarch 31, 2006.2007. During the quarter ended DecemberMarch 31, 2005,2006, no warrants were issued, no warrants expired unexercised and no warrants were exercised. During the six months ended March 31, 2006, no warrants were issued, 10,000 warrants expired unexercised, and no warrants were exercised. There were 614,000 warrants outstanding as of March 31, 2006.

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(9)    (10)    SUPPLEMENTAL RETIREMENT PLAN:

Effective October 1, 2000, TeamStaff adopted a non-qualified Supplemental Executive Retirement Plan (SERP)(‘‘SERP’’) covering certain TeamStaff corporate officers. TeamStaff’s former President and Chief Executive Officer and its former Chief Financial Officer were the only SERP participants. No current employees are covered under SERP. SERP participants also were provided with a split dollar life insurance policy, insuring the life of the participant. Each participant collaterally assigned his policy to TeamStaff to secure repayment of policy premiums. 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 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 SERP in complete satisfaction of TeamStaff’s obligations under SERP.

TeamStaff entered into a similar agreement with its former Chief Financial Officer effective as of December 30, 2003 in complete satisfaction of TeamStaff’s obligations under the SERP. That

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agreement also provided for the payment of severance and other benefits over time in complete satisfaction of TeamStaff’s obligations to its former Chief Financial Officer under his severance agreement effective May 22, 2002.

Cash payments aggregating $0.1$0.2 million have been made to the former President and Chief Executive Officer and the former Chief Financial Officer during the first threesix months of fiscal 2007.

Components of Net Periodic Benefit Cost:Cost:

			Three Months Ended December 31,												Three Months Ended March 31,												Six Months Ended March 31,
(amounts in thousands)			2006						2005						2007						2006						2007						2006
Interest cost				$	4					$	5					$	3					$	5					$	7					$	10
Amortization of net loss					14						11						11						8						25						19
Settlement charges					32						65						14						—						46						65
Total pension cost				$	50					$	81					$	28					$	13					$	78					$	94

(10)    SEGMENT REPORTING:

TeamStaff previously reported segment information, however, due to the sale of the DSI Payroll Services division effective May 31, 2006, the Company’s remaining operations are all within the staffing business segment (principally temporary and permanent medical and administrative staffing).

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

Forward Looking and Cautionary Statements

This Quarterly Report on Form 10-Q contains ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995 (the ‘‘1995 Reform Act’’), Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. TeamStaff desires to avail itself of certain ‘‘safe harbor’’ provisions of the 1995 Reform Act and is therefore including this special note to enable TeamStaff to do so. Forward-looking statements are identified by words such as ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘will,’’ ‘‘may’’ and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations ofo f future events or circumstances are forward-looking statements. Forward-looking statements included in this report involve known and unknown risks, uncertainties and other factors which could cause TeamStaff’s actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. We based these forward-looking statements on our current expectations and best estimates and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. The

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following factors (among others) could cause our actual results to differ materially from those implied by the forward-looking statements in this Quarterly Report: our ability to continue to recruit qualified temporary and permanent healthcare professionals and administrative staff at reasonable costs; our ability to retain qualified temporary healthcare professionals and administrative staff for multiple assignments at reasonable costs; our ability to attract and retain sales and operational personnel; our ability to enter into contracts with hospitals, healthcare facility clients, affiliated healthcare networks, physician practice groups and the United States government on terms attractive to us and to secure orders related to those contracts; our ability to demonstrate the value of our services to our healthcare and other facility clients; changes in the timing of hospital, healthcare facility clients’, physician practice groups’ and U.S. Government orders for and our placement of temporary andan d permanent healthcare professionals and administrative staff; the general level of patient occupancy at our hospital, healthcare facility clients’ and physician practice groups’ facilities; the overall level of demand for services offered by temporary and permanent healthcare staffing providers; the ability of our hospital, healthcare facility and physician practice group clients to retain and increase the productivity of their permanent staff; the variation in pricing of the healthcare facility contracts under which we place temporary and permanent healthcare professionals; our ability to successfully implement our strategic growth, acquisition and integration strategies; our ability to successfully integrate completed acquisitions into our current operations; our ability to manage growth effectively; our ability to leverage our cost structure; the performance of our management information and communication systems; the effect of existing or future government legislation and regulation; our abilityabi lity to grow and operate our business in compliance with these legislation and regulations; the impact of medical malpractice and other claims asserted against us; the disruption or adverse impact to our business as a result of a terrorist attack; the disruption or adverse impact to our business as a result of the failure of our information systems; our ability to carry out our business strategy; the loss of key officers, and management personnel that could adversely affect our ability to remain competitive; the effect of recognition by us of an impairment to goodwill; other tax and regulatory issues and developments; and the effect of adjustments by us to accruals for self-insured retentions.

Other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report on Form 10-Q are set forth in our Annual Report on Form 10-K for the year ended September 30, 2006 and our Current Reports on Form 8-K. We undertake no obligation to update the forward-looking statements in this filing. References in this filing to ‘‘TeamStaff’’ the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to TeamStaff, Inc. and its wholly owned subsidiaries.

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Restructuring of Management

InEffective January 5, 2007, subsequent toMr. Robert P. Traficanti resigned as General Manager of the balance sheet date,Nursing Innovations division of TeamStaff Rx.

Effective January 8, 2007, Mr. T. Kent Smith left the Company restructured its senior management and its Board of Directors in an effort to reduce expenses and restructure its operations to accelerate revenue growth and contribute to a return to profitability. In connection with the restructuring, the Company’shaving served as President, and Chief Executive Officer T. Kent Smith, resigned effective January 8, 2007. Mr. Smith also resigned fromand Member of the Board of Directors. Mr. James L. Donahue left the Company having served as its Vice President of Sales and President of the Company’s TeamStaff Rx subsidiary. Mr. Peter Rosen left the Company having served as its Vice President of Human Resources.

Effective January 10, 2007, Mr. Rick J. Filippelli, the Company’s Chief Financial Officer was appointed President and Chief Executive Officer and also retained his position as Chief Financial Officer.

Effective January 18, 2007, Mr. Filippelli was also elected to the Board of Directors. Further, James D. Houston, the Company’s General Counsel, Vice President of Business and Legal Affairs and Corporate Secretary was also appointed to the position of Chief Operating Officer. Additional members ofEffective April 30, 2007, subsequent to the senior management team that resigned were James Donahue, Vice President of Sales and Marketing and President of TeamStaff Rx, Inc., Peter Rosen, Vice President of Human Resources and Robert Traficanti, Vice President of Nursing Innovations.balance sheet date, Mr. Houston’s employment with the Company was terminated.

Effective January 16, 2007, Mr. Ben Dyer resigned as a member of the Company’s Board of Directors.

Effective January 23,19, 2007, Mr. Ronald R. Aldrich resigned from the Company’s Board of Directors. The Company’s Board of Directors elected Mr. Rick Filippelli, the Company’s President, CEO and CFO to the Board of Directors.

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Effective January 19, 2007, the Company’s Board of Directors elected Mr. William H. Alderman and Mr. Rick Wasserman to the Company’s Board of Directors to fill vacancies in accordance with the Company’s by-laws. Rick Wasserman has been named Chairman

Effective January 23, 2007, Mr. Ronald R. Aldrich resigned from the Company’s Board of Directors.

Effective March 2, 2007, Mr. Timothy Nieman left the Company having served as President of RS Staffing. Ms. Julie Thompson was concurrently rehired on a consultant basis to assist at RS Staffing.

As part of the Audit Committee. In connection therewith, each memberCompany’s initiative on sales and marketing in its allied and nursing staffing division, Mr. Terry Merlin was hired as Director of Sales and Marketing for TeamStaff Rx, the Board of Directors agreed to forego all cash compensation, with non-employee directors agreeing to receive grants of restricted stock following TeamStaff’s 2007 annual meeting of shareholders.Company’s allied and nursing staffing subsidiary and commenced employment on March 15, 2007.

Critical Accounting Policies and Estimates

TeamStaff believes the accounting policies below represent its critical accounting policies due to the significance or estimation process involved in each. See Note 2 of TeamStaff’s 2006 annual report on Form 10-K as well as ‘‘Critical Accounting Policies’’ contained therein for a detailed discussion on the application of these and other accounting policies.

Revenue Recognition

From October 1, 2005 through May 31, 2006, TeamStaff operated two different lines of business from which it derived substantially all of its revenue: temporary and permanent staffing and payroll services. Effective May 31, 2006, TeamStaff sold substantially all of the assets of its DSI Payroll Services division (see Note 4)5), and as a result, TeamStaff now operates in only one segment, which is the temporary and permanent medical and administrative staffing business.

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 deemedde emed 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.

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’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. Commissions from permanent placements result from the successful placement of a medical staffing employee to a customer’s workforce as a permanent employee.

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In connection with the Company’s discontinued payroll services operation, payroll services revenue was recognized as service was rendered and consisted primarily of administrative service fees charged to clients for the processing of paychecks as well as the preparation of quarterly and annual payroll related reports. These amounts are reflected as part of income (loss) from discontinued operations in the consolidated financial statements.

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. In connection with the Company’s discontinued payroll services operation, payroll services’ direct costs include salaries and supplies associated with the processing of the payroll service.

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Workers’ Compensation

Prepaid Workers’ Compensation

TeamStaff’s current workers’ compensation insurance program is provided by Zurich American Insurance Company (‘‘Zurich’’). This program covers TeamStaff’s temporary employees and its corporate employees. The program is managed by Cedar Hill and GAB Robins provides claims handling services. This program is a fully insured, guaranteed cost program that contains no deductible or retention feature. The premium for the program is paid monthly based upon actual payroll and is subject to a policy year-end audit.

As part of the Company’s discontinued PEO operations, TeamStaff had a workers’ compensation program with Zurich, which covered the period from March 22, 2002 through November 17, 2003, inclusive. Payments for the policy were made to the trust monthly based on projected claims for the policy period. 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. On March 3, 2006, Zurich reduced the collateral requirements on outstanding workers’ compensation claims and released $2.25 million in trust account funds back to TeamStaff. On March 5, 2007, Zurich further reduced the collateral requirements on outstanding workers’ compensation claims and released an additional $0.76 million in trust account funds back to TeamStaff. After the release of these trust account funds, Zurich further reviewed the collateral requirements on outstanding worker’s compensation claims and on April 3, 2007, subsequent to the balance sheet date, released an additional $0.43 million in trust account funds back to TeamStaff. TeamStaff estimates that ofat March 31, 2007, the remaining prepaid asset an additional approximately $1.0of $0.7 million in return premiums(which includes the $0.43 million received on April 3, 2007,) will be received within the next twelve months. This is reflected on theTeamStaff’s balance sheet at Decemberas of March 31, 20062007 as a current asset.

As of DecemberMarch 31, 20062007 the adequacy of the workers’ compensation reserves was determined, in management’s opinion, to be reasonable. In determining our reserves we rely in part upon information regarding loss data received from our workers’ compensation insurance carriers that may include loss data for claims incurred during prior policy periods. 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’s prepayments and adjust the reserves as deemed appropriate.

Deferred Taxes

TeamStaff accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, ‘‘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 bases 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. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

At DecemberMarch 31, 2006,2007, the Company provided a 100% deferred tax valuation allowance of approximately $17.0$17.4 million. In assessing the need for a valuation allowance, the Company historically

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has considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies and recent financial performance. The Company determined that negative evidence, including historic and current taxable losses, as well as uncertainties related to the ability to utilize certain Federal and state net loss carry forwards, outweighed any objectively verifiable positive factors, and as such, concluded that a valuation allowance was necessary. The Company is providing a 100% valuation allowance that it is more likely than not that it will not be able to realize the full benefit of the deferred tax asset. The establishment

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of the deferred tax asset allowance does not preclude the Company from reversing any or all of the allowance in future periods if the Company believes the positive evidence is sufficient enough to utilize the deferred tax asset, nor does it limit the ability to utilize losses for tax purposes, subject to loss carry forward limitations and periods permitted by law.

Results of Continuing Operations

TeamStaff’s revenues for the three months ended DecemberMarch 31, 2007 and 2006 and 2005 were $17.5$17.8 million and $19.4$18.5 million, respectively, which represents a decrease of $1.9$0.7 million, or 9.7%3.7%, from firstsecond fiscal quarter 2006 to firstsecond fiscal quarter 2007. All revenues are related to the staffing services divisions. Revenues for the firstsecond fiscal quarter 2007 and 2006 include $11.1$11.2 million and $11.0$10.9 million, respectively, related to the RS Staffing Services subsidiary, a Monroe, Georgia-based provider of medical and office administration/technical professionals.subsidiary. This acquisition, effective as of June 2005, helped offset a decrease of $2.1$0.9 million in the revenues of the travel allied and nursing portion (‘‘travel’’) of our staffing services division from firstsecond fiscal quarter 2006 to firstsecond fiscal quarter 2007.

TeamStaff’s revenues for the six months ended March 31, 2007 and 2006 were $35.3 million and $37.9 million, respectively, which represents a decrease of $2.6 million, or 6.8%, from fiscal year 2006 to fiscal year 2007. All revenues relate to the staffing services division. Revenues for the six months ended March 31, 2007 and 2006include $22.3 million and $21.9 million, respectively, related to RS Staffing.

The Company’s travel allied and nursing divisions continued to underperformunder perform the market during the firstsecond fiscal quarter of 2007. In response to this, in January 2007, the Company restructured its senior management and its Board of Directors in an effort to reduce expenses and restructure its operations, to accelerate revenue growth and contribute to a return to profitability, in January 2007, subsequent to the balance sheet date, the Company restructured its senior management and its Board of Directors.profitability. In connection with the restructuring, the Company’s President and Chief Executive Officer, T. Kent Smith, resigned effective January 8, 2007. Mr. Smith also resigned from the Board of Directors. Rick J. Filippelli, the Company’s Chief Financial Officer, was appointed President and Chief Executive Officer and also retained his position as Chief Financial Officer. Mr. Filippelli was also elected to the Board of Directors. James D. Houston, the Company’s General Counsel, Vice President of Business and Legal Affairs and Corporate Secretary, was also appointed to the position of Chief Operating Officer. Effective April 30, 2007, subsequent to the balance sheet date, Mr. Houston’s employment with the Company was terminated. Additional members of the senior management team that resigned in January 2007 were James Donahue, Vice President of Sales and Marketing and President of TeamStaff Rx, Inc., Peter Rosen, Vice President of Human Resources and Robert Traficanti, Vice President of Nursing Innovations.

The Company is leading several initiatives to position the staffing services divisions for growth in fiscal 2007. TheseSales initiatives include assessing, restructuring and restructuringadding to its sales force and recruiting efforts, in the allied segment into more active modalities in high demand geographical locations, restructuring sales force incentive compensation to better reflect pay for performance hiringand implementation of a Directorpricing and gross margin improvement plan. As part of Salesa marketing initiative, the Company has contracted with an advertising agency to oversee the allied and nursing sales efforts, andlaunch an aggressive ad campaign to attract travelers. The Company seeks continued elimination of overhead costs deemed to be non-essential to growth or infrastructure. In November 2006,On March 15, 2007, the Company consolidatedhired a Director of Sales and Marketing to oversee the Nursing Innovations travel platform into TeamStaff Rx’s Clearwater, Florida location.allied and nursing sales efforts.

Longer term, we continue to believe the demand for temporary medical personnel will increase. Key drivers in our business segment include the declining health of an aging population, advances in medical technology and growth in hospital admissions. We believe demand will also increase as more states introduce legislation for mandatory minimum nurse to patientcaregiver-to-patient ratios and overtime limitations. The introduction of such legislation should favorably impact our temporary nurse staffing business. Our acquisition of RS Staffing completed in early June 2005 gives us a strong presence in the government sector and provides us with an opportunity to bid on awards for large multi-year contracts with solid operating margins. We continue to focus on our sales and marketing efforts throughout the divisions in order to increase our contact with current and prospective clients.

Direct expenses for the three months ended DecemberMarch 31, 2007 and 2006 and 2005 were $14.8$15.1 million and $16.2$15.4 million, respectively, which represents a decrease of $1.4$0.3 million, or 8.3%1.6%, from firstsecond fiscal quarter

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quarter 2006 to firstsecond fiscal quarter 2007. This decrease is a direct result of decreased revenues. As a percentage of revenue, direct expenses for the three months ended DecemberMarch 31, 2007 and 2006 were 85.3% and 200583.4%, respectively. Direct expenses for the six months ended March 31, 2007 and 2006 were 84.5%$30.0 million and $31.6 million, respectively, which represents an decrease of $1.6 million, or 5.0%, from fiscal year 2006 to fiscal year 2007. As a percentage of revenue, direct expenses for the six months ended March 31, 2007 and 2006 were 84.9% and 83.3%, respectively.

Gross profit for the three months ended DecemberMarch 31, 2007 and 2006 and 2005 was $2.7$2.6 million and $3.3$3.1 million, respectively, which represents a decrease of $0.6$0.5 million, or 16.614.4 %, from firstsecond fiscal quarter 2006 to firstsecond fiscal quarter 2007. This decrease is attributable to the decline in revenues. Gross profits,profit, as a percentage of revenue, decreased to 15.5%14.6% from 16.7%16.6%, for the three months ended DecemberMarch 31, 2007 and 2006, respectively. Gross profit for the six months ended March 31, 2007 and 2005, respectively.2006 was $5.3 million and $6.3 million, respectively, which represents an decrease of $1.0 million, or 15.5%, from fiscal year 2006 to fiscal year 2007. Gross profit, as a percentage of revenue, decreased to 15.0% in fiscal year 2007 from 16.6% in fiscal year 2006. This decrease is primarily due to RS Staffing comprising a larger percentage of total revenue in the first fiscal quarter of 2007 compared to the first fiscal quarter of 2006. The gross profit calculation includesi ncludes costs paid to RS Staffing teaming partners (subcontractors) that are included as a direct expense. Teaming partners (subcontractors) is a business practice expected by government entities who prefer their suppliers to provide more of a master vendor service where the supplier looks to outside sources when needed to fill open staffing positions.

Selling, general and administrative (‘‘SG&A’’) expenses for the three months ended DecemberMarch 31, 2007 and 2006 remained approximately the same at $3.5 million. Included in SG&A for the three months ended March 31, 2007 is approximately $0.3 million in accrued severance costs related to the management restructuring that occurred during the quarter. SG&A expenses, as a percentage of revenue, were 19.8% and 200519.2%, for the three months ended March 31, 2007 and 2006, respectively. SG&A expenses for the six months ended March 31,2007 and 2006 were $3.3$6.8 million and $3.7$7.2 million, respectively, which represents a decrease of $0.4 million, or 10.4%5.7% from firstfiscal year 2006 to fiscal year 2007. Adjusting for the $0.3 million of severance included in the second fiscal quarter 2006 to first fiscal quarter 2007.of 2007, SG&A expenses as a percentage of revenue, were 18.8%for the current fiscal year decreased by approximately $0.7 million or nine p ercent.

Depreciation and 19.0%,amortization for the three months ended DecemberMarch 31, 2007 and 2006 was approximately $86,000 and 2005,$91,000, respectively.

Depreciation and amortization for each of the threesix months ended DecemberMarch 31, 20062007 and 20052006 was approximately $91,000.$177,000 and $182,000, respectively.

Other income, which primarily consists of late fee income, for the three months ended DecemberMarch 31, 20062007 and 20052006 was approximately $51,000$46,000 and $39,000, respectively, which represents an increase of $12,000.$7,000. Other income for the six months ended March 31,2007 and 2007 was approximately $97,000 and $78,000, respectively, representing an increase of $19,000. Late fee income is earned only in the allied healthcare division.

Interest expense for the three months ended DecemberMarch 31, 20062007 and 20052006 was approximately $57,000$56,000 and $175,000,$193,000, respectively, representing a decrease of $118,000.$137,000. Interest expense for the six months ended March 31, 2007 and 2006 was $113,000 and $368,000, respectively, representing a decrease of $255,000. This decrease is primarily due to the pay off of the revolving credit facility with the proceeds from the sale of DSI Payroll Services on May 31, 2006. Interest income for the three months ended DecemberMarch 31, 20062007 and 20052006 was approximately $23,000$11,000 and $3,000,$8,000, respectively, representing an increase of $20,000.$3,000. Interest income for the six months ended March 31, 2007 and 2006 was approximately $34,000 and $11,000 respectively, representing an increase of $23,000. This increase is a result of interest earned on the cash proceeds of the sale of the DSI Payroll Services division.

IncomeThe income tax benefit from continuing operations for the three months ended DecemberMarch 31, 2007 and 2006 was $0.01 million and 2005$0.3 million, respectively. Income tax benefit from continuing operations for the six months ended March 31, 2007 and 2006 was $0.1 million and $0.3$0.5 million, respectively. As a component of this net tax benefit, the Company provided a deferred tax valuation allowance for the quarterthree and six months ended DecemberMarch 31, 20062007 of $0.16 million.$0.4 million and $0.5 million,

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respectively. The Company has provided a 100% valuation allowance that it is more likely than not that it will not be able to realize the full benefit of the deferred tax asset. These tax benefits are a result of losses from operations.

Loss from continuing operations for the three months ended DecemberMarch 31, 20062007 was $0.6$1.0 million, or $(0.03)$(0.05) per fully diluted share, as compared to loss from continuing operations for the three months ended DecemberMarch 31, 20052006 of $0.4$0.5 million, or $(0.02) per fully diluted share. Loss from continuing operations for the six months ended March 31, 2007 was $1.5 million, or $(0.08) per fully diluted share, as compared to loss from continuing operations for the six months ended March 31, 2006 of $0.9 million, or $(0.04) per fully diluted share.

Loss from discontinued operations, net of tax, for the three months ended March 31, 2007 was $0.03 million, with no effect on earnings per share. Income from discontinued operations, net of tax, for the three months ended DecemberMarch 31, 2006 was $0.05$0.2 million, or $0.00$0.01 per fully diluted share. Income from discontinued operations, net of tax, for the threesix months ended DecemberMarch 31, 20052007 was $0.4$0.02 million, with no effect on earnings per share. Income from discontinued operations, net of tax, for the six months ended March 31, 2006 was $0.6 million, or $0.02$0.03 per fully diluted share. ThisIncome from discontinued operations in fiscal 2006 is primarily a result of a reclassification of the profitable operations of the DSI Payroll Services division to discontinued operations for fiscal 2006.operations.

Net loss for the three months ended DecemberMarch 31, 20062007 was $0.5$1.0 million, or $(0.03)$(0.05) per fully diluted share, as compared to a net loss of $0.02$0.2 million, or $0.00$(0.01) per fully diluted share, for the three months ended DecemberMarch 31, 2005.2006. Net loss for the six months ended March 31, 2007 was $1.5 million, or $(0.08) per fully diluted share, as compared to a net loss of $0.2 million, or $(0.01) per fully diluted share, for the six months ended March 31, 2006.

Liquidity and Capital Resources

Net cash used in operating activities for the threesix months ended DecemberMarch 31, 20062007 was $1.0$1.8 million compared to net cash used in operating activities of $2.3$0.2 million for the threesix months ended

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December March 31, 2005.2006. Losses from continuing operations as well as increased accounts receivable and decreased current liabilities contributed to the use of cash during the threesix months ended DecemberMarch 31, 2006.2007. This was partially offset by $0.76 million in cash received from Zurich related to the reduction in collateral requirements on outstanding workers’ compensation claims.

Cash used in investing activities for the threesix months ended DecemberMarch 31, 20062007 was $0.03$0.04 million compared to $0.02$0.08 million for the threesix months ended DecemberMarch 31, 2005. This2006. Use of cash isfor investing activities in the first six months of fiscal 2007 was primarily for the purchase of telephone and technology equipment.

Cash provided by financing activities for the threesix months ended DecemberMarch 31, 20062007 approximated zero. Cash provided byused in financing activities was $1.3$0.2 million for the threesix months ended DecemberMarch 31, 2005,2006, primarily as a resultfor principal payments made on notes payable for the financing of borrowings on the revolving line of credit.insurance premiums.

Effective June 8, 2005, TeamStaff 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. Effective February 13, 2006, TeamStaff entered into an amendment to the revolving credit note, increasing the revolving credit facility to $8.0 million. 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 a fixed charge coverage ratio if the Company fails to maintain invested cash and line availability minimum requirements. For the quarter ended DecemberMarch 31, 2006,2007, TeamStaff was in compliance with all loan covenants. The facility is subjectsub ject to acceleration upon non-payment or various other standard default clauses. In addition, the Company granted PNC Bank a lien and security interest on all of its assets. As of DecemberMarch 31, 2006,2007, there was no debt outstanding under the credit facility and $6.1$5.9 million of unused availability under the line of credit, based on billed accounts receivable.

Availability under the PNC Bank line of credit is directly related to the successful assignment of certain accounts receivable. Certain government accounts of RS Staffing Services are required to execute ‘‘

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‘‘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 a decrease in availability under the line of credit.

As of DecemberMarch 31, 2006,2007, TeamStaff had unrestricted cash and cash equivalents of $1.1$0.3 million and net accounts receivable of $8.8$9.1 million. TeamStaff also had $6.1$5.9 million of unused availability under the revolving credit facility provided by PNC Bank. As of DecemberMarch 31, 2006,2007, TeamStaff had working capital of $3.7$3.0 million. The Company believes it has enough sources ofis in discussions with its lender, PNC Bank, regarding possible amendments to its revolving credit facility. The Company is reliant upon the credit facility to provide sufficient liquidity to meet demand over the next twelve months.

Obligations (Amounts in thousands)															Payments Due By Period
																																	Payments Due By Period
Obligations (Amounts in thousands)			Total						Less than 1 year						1-3 years						4-5 years						Total						Less than 1 year						1-3 years						4-5 years
				$	1,793					$	1,562					$	197					$	34					$	1,778					$	1,563					$	190					$	25
Operating leases(2)					1,799						480						1,223						96						1,653						435						1,197						21
Pension liability(3)					479						210						269												411						210						201						—
Severance liability(4)																													263						263						—						—
Total Obligations				$	4,071					$	2,252					$	1,689					$	130					$	4,105					$	2,471					$	1588					$	46

(1)	Represents notes payable related to acquisition of RS Staffing, and capital lease obligations.

(2)	Represents lease payments net of sublease income.

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

(4)	Represents severance payments related to former employees.

Contractual Obligations

There have been no significant changes outsideOn January 19, 2007, TeamStaff, Inc. and T. Kent Smith entered into a formal separation agreement that became effective on January 29, 2007. The material terms of the ordinary courseagreement provide: (a) Mr. Smith agreed to resign, which TeamStaff agreed is ‘‘without cause’’ under the terms and conditions of businesshis 2005 Employment Agreement (the ‘‘Agreement’’); (b) Mr. Smith agreed to resign from the board of directors according to Article 9.5 of the Agreement; (c) the non-compete provisions of the Agreement were incorporated by reference; (d) TeamStaff will properly disburse Mr. Smith’s 401(k) funds by January 30, 2007; (e) Mr. Smith will receive Continuation Benefits (as defined in the Agreement) for life insurance and long-term disability insurance only; (f) TeamStaff will pay Mr. Smith the Accrued Compensation, ‘‘Accrued Compensation’’ defined as two days of vacation pay, two floating holidays and two expense reports for approximately $1000; and (g) TeamStaff will pay Mr. Smith, according to Article 9.4(c) of the Agreement, base salary under the Agreement through and including September 30, 2007 on the Company’s contractual obligationssalary payment dates. The separation agreement provides for other immaterial consideration, mutual and general releases and other standard legal covenants.

TeamStaff, Inc. entered into a formal letter agreement dated and effective as of February 14, 2007 with Rick J. Filippelli, President and CEO, as further described below.

The material terms of Mr. Filippelli’s letter agreement provide for a modification to his employment agreement dated October 1, 2005 (the ‘‘Filippelli Agreement’’) as follows: (1) Term: the term of the Filippelli Agreement will be from January 10, 2007 until September 30, 2009 (the ‘‘Term’’); (2) Position: Mr. Filippelli’s position is amended to include President and CEO; (3) Salary: the initial salary during the first quarter ended December 31, 2006.Term will be the sum of $265,000.00 per annum; (4) Fiscal Year Cash Bonus: Mr. Filippelli will be entitled to a cash bonus of up to 70% of Mr. Filippelli’s annual salary in the discretion of the Company’s Board of Directors as recommended by the Compensation Committee, subject to certain performance and EBITDA requirements; (5) Incentive Compensation

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(Equity): Mr. Filippelli will receive 130,000 shares of restricted stock issued under the Company’s 2006 Long Term Incentive Plan at the closing market price per share of the Company’s stock on the date of the modification letter (the ‘‘Shares’’); the Shares will vest according to the following schedule: (a) 30,000 Shares will vest immediately; (b) 50,000 Shares will vest on September 30, 2008, subject to the Company achieving four prior consecutive quarters of EBITDA profitability, and (c) 50,000 Shares will vest on September 30, 2009 subject to at least a 50% improvement in EBITDA profitability in fiscal 2009 as compared to fiscal 2008; (6) Severance Amount: ‘‘Severance Amount’’ in the Filippelli Agreement is amended to mean the aggregate sum of one year’s salary, payable on the Termination Date (as defined therein); ‘‘Continuation Period’’ in the Filippelli Agreement is modified to mean the period of one (1) year; and (7) If Mr. Filippelli’s employment is terminated for any reason, Mr. Filippelli retains any stock options, restricted stock or other incentive compensation that has vested upon such termination in accordance with the terms and conditions of the Company’s 2006 Long Term Incentive Plan, and all accrued and unused vacation time will be paid out on the Termination Date. All accrued and unused vacation time will carry over from year-to-year until used. Mr. Filippelli will notify the Company’s Compensation Committee annually of amounts being carried over. In all other respects, the Filippelli Agreement remains in full force and effect and applicable to Mr. Filippelli’s employment. In the case of any conflict between the modification letter and the Filippelli Agreement, the letter will control.

Subsequent to the balance sheet date, effective April 30, 2007, the employment of James D. Houston, Chief Operating Officer, Vice President and General Counsel with the Company was terminated. On May 11, 2007, TeamStaff, Inc. and James D. Houston entered into a formal separation agreement related to Mr. Houston’s termination effective April 30, 2007. The material terms of the agreement provide: (a) TeamStaff will pay Mr. Houston the sum of $220,000 representing one year of base salary, in accordance with the terms and conditions of paragraph 5.3(d) of his 2005 Severance Agreement (the ‘‘Agreement’’); (b) TeamStaff will pay Mr. Houston the sum of $89,024 on August 1, 2007, representing a 2007 pro rata bonus, in accordance with the terms and conditions of paragraph 5.3(d) of the Agreement; and (c) Mr. Houston will receive Continuation Benefits (as defined in the Agreement) fo r standard employee health benefits until March 31, 2008. The agreement provides for other immaterial consideration, mutual and general releases and other standard legal covenants.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are, in the opinion of management, likely to have a current or future material effect on the Company’s financial condition or results of operations.

Effects of Inflation

Inflation and changing prices have not had a material effect on TeamStaff’s net revenues and results of operations, as TeamStaff has been able to modify its prices and cost structure to respond to inflation and changing prices.

ITEM 3.3:    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 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 prior workers’ compensation programs, prepayments of future claims were 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’ compensation expense. If interest rates in these periods decrease , TeamStaff’s workers’ compensation expense would

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increase because TeamStaff would be entitled to less interest income on the deposited funds. Further, and as discussed elsewhere in this filing, TeamStaff, Inc. has an $8.0 million revolving credit facility by PNC Bank. 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 combined cash and line availability. 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 4.4:    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of ‘‘disclosure controls and procedures’’ in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluatingevalu ating the controls and procedures.

Based on their evaluation, as of DecemberMarch 31, 2006,2007, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s fiscalsecond quarter ended DecemberMarch 31, 2006,2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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As discussed in detail in Item 2 above,previously disclosed, effective January 8, 2006, T. Kent Smith, the Company’s Chief Executive Officer resigned. Rick J. Filippelli, the Company’s Chief Financial Officer, was appointed President and Chief Executive Officer and retained his position as Chief Financial Officer.

Part II — OTHER INFORMATION

ITEM 1.1:    LEGAL PROCEEDINGS

On April 17, 2007, a Federal Grand Jury subpoena was issued by the Northern District of Illinois to RS Staffing requesting production of certain documents dating back to 1997. According to the cover letter accompanying the subpoena, the U.S. Department of Justice, Antitrust Division, along with members of the Veterans Affairs Office of Inspector General are responsible for the current criminal investigation. The subpoena states that it is issued in connection with an investigation of possible violations of federal criminal laws and related crimes concerning procurement at the Veterans Administration. RS Staffing provides temporary staffing at certain Veterans Administration hospitals that may be part of the investigation. The return date for documents called for by the subpoena is May 17, 2007. In connection with the same investigation, agents with the United States Department of Veterans Affairs, Office of Inspector General, executed a searc h warrant at the Monroe, Georgia offices of RS Staffing. The Company has been advised that neither it nor RS Staffing is currently a target of the investigation. The Company is actively cooperating with the government’s investigation. The Company originally acquired RS Staffing in May of 2005 and is reviewing its rights to seek indemnification from the sellers for costs that may be incurred in connection with the investigation.

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In July 2000, TeamStaff made claims for indemnification against the selling shareholders of the TeamStaff Companies (the Sellers)‘‘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. TeamStaff also agreed to release 29,915 escrow shares to the Sellers. TeamStaff retains 75,000 shares in escrow to provide securitys ecurity for the Seller’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.

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’ 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 the liability insurance is reasonable under the circumstances to protect it from liability for such claims, 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’s financial condition or results of operations.

ITEM 1A.1A:    RISK FACTORS

Refer to the September 30, 2006 Form 10-K. The Company believes that there have not been any material changes from risk factors as previously disclosed in the registrant’s Form 10-K in response to Item 1A to Part 1 of Form 10-K, other than the addition of the following two risk factors:

We are dependent upon certain of our management personnel.

Our performance to date has resulted in part from the contributions of the Company’s executive officers. Our present executive officers are expected to make important contributions towards improved future performance. The loss of our key personnel could materially affect our operations. Competition for qualified management personnel is intense, and in the event that we experience further turnover in senior management positions, we cannot assure you that we will be able to recruit suitable replacements on a timely basis. We must also successfully integrate all new management and other key positions within our organization to achieve our operating objectives. Even if we are successful, further turnover in key management positions could temporarily harm our financial performance and results of operations until any new management becomes familiar with our business.

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As discussed in detail in Item 2 above,previously disclosed, effective January 8, 2006, T. Kent Smith, the Company’s Chief Executive Officer resigned. Rick J. Filippelli, the Company’s Chief Financial Officer, was appointed President and Chief Executive Officer and retained his position as Chief Financial Officer. James D. Houston, the Company’s General Counsel, Vice President of Business and Legal Affairs and Corporate Secretary, was also appointed to the position of Chief Operating Officer. The Company is dependent on Messrs.Mr. Filippelli and Houston as ourits sole executive officersofficer presently, and the loss of either individualMr. Filippelli could temporarily or permanently harm our financial performance and results of operations until we are able to recruit suitable replacements, if ever, and such new management becomes familiar with our business, if ever. Other than with our CEO and CFO, we generally do not have long-term employment contracts with our key personnel, nor do we maintain ‘‘key person’’ life insurance policies on any of our key personnel.

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We aredependent on the proper functioning of our information systems.

We are dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations identify and match staffing resources and client assignments and perform billing and accounts receivable functions. Additionally, we rely on our information systems in managing our accounting and financial reporting. Although we have risk mitigation measures in place, our information systems and our access to these systems are not impervious to flood, fire, storm, power loss, telecommunications failures or similar events. If our information systems fail or are otherwise unavailable, our business and financial results could be materially adversely affected.

ITEM 2.2:    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.3:    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.4:     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.5:     OTHER INFORMATION    

None.

ITEM 6.6:    EXHIBITS

(a)    Exhibits

	10	.1				Form of Amendment to Revolving Credit and Security Agreement dated December 13, 2006 between TeamStaff, Inc. and PNC Bank, N.A.
	10	.2				Lease, dated as of December 4, 2006, for our business premises located at 6555 Quince Road, Suite 303, Memphis, Tennessee.
	10	.3				Form of Separation Agreement with T. Kent Smith dated as of January 17, 2007 (filed as Exhibit 99.1 to the Form 8-K filed on January 29, 2007)*.
	31	.1				Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1				Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	10	.1				Separation Agreement with T. Kent Smith dated as of January 19, 2007 (filed as Exhibit 99.1 to the Form 8-K filed on February 1, 2007)*
	10	.2				Form of Letter of Agreement with Rick Filippelli dated as of January 10, 2007 (filed as Exhibit 99.1 to the Form 8-K filed on February 14, 2007)*
	10	.3				Form of Letter of Agreement with James Houston dated as of January 10, 2007 (filed as Exhibit 99.2 to the Form 8-K filed on February 14, 2007)*
	10	.4				Form of Agreement and Release with James Houston dated as of May 11, 2007
	31	.1				Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1				Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	In accordance with Rule 12b-23 and Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference.

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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.

/s/ Rick J. Filippelli                                 Rick J. Filippelli Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer)

Dated:   February 13,May 15, 2007