UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended JuneSeptember 30, 2006

Or

Commission File No.: 001-16753

AMN HEALTHCARE SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (866) 871-8519

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨         Accelerated filer  x         Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 4,November 3, 2006, there were 31,998,92934,025,819 shares of common stock, $0.01 par value, outstanding.

AMN HEALTHCARE SERVICES, INC.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

AMN HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except par value)

See accompanying notes to unaudited condensed consolidated financial statements.

AMN HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

AMN HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (LOSS)

SixNine Months Ended JuneSeptember 30, 2006

(Unaudited and in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

AMN HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated balance sheets and related condensed consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows contained in this Quarterly Report on Form 10-Q, which are unaudited, include the accounts of AMN Healthcare Services, Inc. (the “Company”) and its wholly-owned subsidiaries. The Company completed its acquisition of The MHA Group, Inc. and subsidiaries (“MHA”) in November 2005. Thus, the condensed consolidated statements of operations for the three and sixnine month periods ended JuneSeptember 30, 2005, and the condensed consolidated statement of cash flows for the sixnine month period ended JuneSeptember 30, 2005 do not include the results of operations and cash flows of MHA. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such condensed consolidated financial statements have been included. These entries consisted only of normal recurring items, except as described below.items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Please refer to the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2005, contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”).

The preparation of financial statements in conformity with United States generally accepted accounting principles 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 may differ from those estimates.

During the three months ended March 31, 2005, the Company recorded a $0.9 million correcting adjustment to increase its workers’ compensation reserve, resulting in a $0.6 million decrease to net income, in order to expense claim administration fees incurred during fiscal years 2002, 2003 and 2004 that had been previously incorrectly applied against the workers’ compensation reserve. During the same period, the Company recorded a $0.3 million correcting adjustment to decrease accumulated depreciation and depreciation expense, resulting in a $0.2 million increase to net income, for excess depreciation incorrectly recorded during fiscal years 2003 and 2004. The Company recorded the cumulative impact of these two accounting corrections during the first quarter of 2005, as the amounts were not material to fiscal years 2002, 2003, 2004 or 2005.

Certain amounts in the condensed consolidated financial statements for the three and sixnine month periods ended JuneSeptember 30, 2005 have been reclassified to conform to the three and sixnine month periods ended JuneSeptember 30, 2006 presentation.

The Company adopted the provisions of Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 (SFAS No. 123R),Share-Based Payment, on January 1, 2006. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company adopted the provisions of SFAS No. 123R using a modified prospective application. The provisions of SFAS No. 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for unvested awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

purposes under SFAS Statement No. 123,Accounting for Stock-Based Compensation (SFAS No. 123), adjusted for estimated forfeitures. The Company previously applied Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations and provided the required pro forma disclosures under SFAS No. 123.

In November 1999, the Company established two performance stock option plans (the 1999 Plans), which were approved by the Company’s shareholders prior to the Company’s initial public offering, to provide for the grant of options to the Company’s upper management. Options under the 1999 Plans have a maximum contractual life of ten years and began vesting at 25% per year beginning in the year 2000 provided certain

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

earnings performance criteria were met and the grantee remained an employee. If the Company did not meet the performance criteria for a particular year, the portion of the option which was eligible to become vested terminated. Pursuant to the amended provisions of the 1999 Plans, all options previously granted under the 1999 Plans became fully vested upon the November 2001 common stock offering and at JuneSeptember 30, 2006 are fully exercisable. Upon optionee exercise of outstanding stock options, the Company issues shares from its authorized but unissued common stock or shares of common stock reacquired by the Company. All previously granted options under the 1999 Plans expire in 2009.

In July 2001, the Company established the 2001 Stock Option Plan to provide a means to attract and retain employees. In May 2004, the Company’s shareholders approved the amended and restated 2001 Stock Option Plan, which was renamed the Stock Option Plan. Stock options granted have a maximum contractual life of ten years. Exercise prices are determined at the time of grant and are no less than fair market value of the underlying common stock on the date of grant. Unless otherwise provided at the time of the grant, the options shall vest and become exercisable in increments of 25% on each of the first four anniversaries of the date of grant. Upon optionee exercise of outstanding stock options, the Company issues shares from its authorized but unissued common stock or shares of common stock reacquired by the Company. The plan expires on the tenth anniversary of the effective date.

OnIn April 12, 2006, the Company established the AMN Healthcare Equity Plan (“Equity Plan”), which has beenwas approved by the Company’s shareholders. Equity awards, based on the Company’s common stock, may be issued under the Equity Plan for a maximum of 723,275 shares plus the number of shares of common stock underlying any grants under the Company’s Stock Option Plan that are forfeited, cancelled or terminated (other than by exercise) from and after the effective date of the Equity Plan. There will be no further equity awards granted from the Stock Option Plan or the 1999 Plans. Pursuant to the Equity Plan, equity awards granted have a maximum contractual life of ten years and exercise prices will be determined at the time of grant and will be no less than fair market value of the underlying common stock on the date of grant. Any shares to be issued under the Equity Plan will be issued by the Company from authorized but unissued common stock or shares of common stock reacquired by the Company. On April 12,For the nine months ended September 30, 2006, 382,000386,000 stock appreciation rights (“SARs”) and 258,000262,000 restricted stock units (“RSUs”) were granted to employees, officers and directors of the Company under the Equity Plan. The SARs typically vest ratably over a three year period, with one third of the awards vesting annually. The RSUs typically vest at the end of a three year vesting period, however one-third of the awards may vest on each of the first and second anniversary date if certain performance targets are met. There were no stock options granted during the sixnine months ended JuneSeptember 30, 2006. The Equity Plan expires on the tenth anniversary of the effective date.

Stock Options and SARs

Stock options entitle the holder to purchase, at the end of a vesting period, a specified number of shares of the Company’s common stock at a price per share set at the date of grant. SARs, granted under the Company’s Equity Plan, entitle the holder to receive, at the end of a vesting period, shares of the Company’s common stock equal to the difference between the exercise price of the SAR, which is set at the date of grant, and the current fair market value of the Company’s common stock on the date of exercise.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Stock-based compensation cost of stock options and SARs is measured based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate, and award forfeiture rate. The input factors to be used in the valuation model are based on subjective future expectations combined with management judgment. The Company estimates the fair value of awards granted using the Black-Scholes option pricing model. After consideration of both its implied volatility and historical volatility, the Company determined its historical

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

volatility to be the most accurate estimate of future volatility and therefore utilizes this measure. The Company estimates the expected term based on historical exercise patterns, and based the dividend yield assumption on historical dividend payouts, which is zero. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the Company’s employee options. The Company uses historical data to estimate pre-vesting award forfeitures and records stock-based compensation expense only for those awards that are expected to vest. The fair value of awards granted is amortized on a straight-line basis over the requisite service periods of the awards, which are the vesting periods.

Prior to January 1, 2006, for disclosure purposes under SFAS No. 123, the Company estimated the fair value of awards granted consistent with the current methodology utilizing the Black-Scholes option pricing model. The Company estimated the option term, dividend yield, and risk-free interest rate assumptions consistent with the current methodology, however the volatility of the Company’s common stock at the date of grant was based on a combination of the Company’s historical volatility rate and the historical volatility rate of comparable companies. Also, prior to January 1, 2006, compensation expense previously recorded for unvested employee stock-based compensation awards that were forfeited upon employee termination was reversed in the period of forfeiture.

Stock-based compensation expense for the sixnine months ended JuneSeptember 30, 2006 and pro-forma stock-based compensation expense for the sixnine months ended JuneSeptember 30, 2005 for stock options and SARs granted was estimated at the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions (annualized percentages):

The weighted average grant date fair value of the 386,000 SARs granted during the nine months ended September 30, 2006 was $8.04 per SAR, and the weighted average grant date fair value of stock options granted during the nine months ended September 30, 2005 was $6.99 per stock option. As of September 30, 2006, there was $10.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock options and SARs. The Company expects to recognize such cost over a weighted average period of 2.1 years. The total intrinsic value of stock options exercised was $60,020,000 and $4,732,000 for the nine months ended September 30, 2006 and 2005, respectively.

The following table summarizes stock option and SAR activity for the nine months ended September 30, 2006:

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The grant date fair value of the 382,000 SARs granted during the six months ended June 30, 2006 was $8.02 per SAR, and the weighted average grant date fair value of stock options granted during the six months ended June 30, 2005 was $6.98 per stock option. As of June 30, 2006, there was $11.9 million of total unrecognized compensation cost related to non-vested stock options and SARs, which will be adjusted for future changes in forfeitures. The Company expects to recognize such cost over a weighted average period of 2.3 years. The total intrinsic value of stock options exercised was $25,178,000 and $4,488,000 for the six months ended June 30, 2006 and 2005, respectively.

The following table summarizes stock option and SAR activity for the six months ended June 30, 2006:

Restricted Stock Units

RSUs, granted under the Company’s Equity Plan, entitle the holder to receive, at the end of a vesting period, a specified number of shares of the Company’s common stock. Stock-based compensation cost of RSUs is measured by the market value of the Company’s common stock on the date of grant. The weighted average grant whichdate fair value was $18.03$18.08 per RSU for the 258,000262,000 RSUs granted during the sixnine months ended JuneSeptember 30, 2006. The Company uses historical data to estimate pre-vesting award forfeitures and records stock-based compensation expense only for those awards that are expected to vest. The fair value of awards granted is amortized on a straight-line basis over the requisite service periods of the awards, which are the vesting periods.

The following table summarizes RSU activity for non-vested awards for the sixnine months ended JuneSeptember 30, 2006:

As of JuneSeptember 30, 2006, there was $4.3$3.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested RSUs, which will be adjusted for future changes in forfeitures.RSUs. The Company expects to recognize such cost over a period of 2.82.5 years. The remaining contractual term is 9.89.5 years, and the aggregate intrinsic value is $5,207,000was $6,162,000 as of JuneSeptember 30, 2006.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Stock-Based Compensation under SFAS No. 123R

The following table shows the total estimated stock-based compensation expense, related to all of the Company’s equity awards, recognized for the three and sixnine month periods ended JuneSeptember 30, 2006, in accordance with SFAS No. 123R (in thousands, except per share amounts):

For the sixnine months ended JuneSeptember 30, 2006, the adoption of SFAS No. 123R resulted in cash flows from financing activities of $2,160,000$6,575,000 for excess tax benefits related to stock options exercised during the period.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Had compensation expense been recognized for stock-based compensation during the three and sixnine month periods ended JuneSeptember 30, 2005 by applying the fair value provisions of SFAS No. 123, net income and earnings per common share would have been recorded as follows (in thousands, except per share amounts):

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net income per common share reflects the effects of potentially dilutive common stock-based equity instruments.

Common stock-based equity instruments equivalent to 930,000902,000 and 1,236,0001,126,000 shares for the three and sixnine month periods ended JuneSeptember 30, 2006, respectively, and 1,499,000570,000 and 1,505,000585,000 shares for the three and sixnine month periods ended JuneSeptember 30, 2005, respectively, were not included in the calculations of diluted net income per common share because the effect of these instruments was anti-dilutive.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table sets forth the computation of basic and diluted net income per common share for the three and sixnine month periods ended JuneSeptember 30, 2006 and 2005 (in thousands, except per share amounts):

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SFAS No. 130,Reporting Comprehensive Income, establishes standards for the reporting of comprehensive income and its components. Comprehensive income (loss) includes net income, net gains and losses on derivative contracts and foreign currency translation adjustments. For the three months ended JuneSeptember 30, 2006 and 2005, comprehensive income was $8,007,000$7,818,000 and $4,220,000$6,927,000 and included a $736,000($1,585,000) and ($172,000)$66,000 unrealized (loss) gain (loss) on interest rate swap arrangements, net of tax, and a $0($69,000) and ($24,000)$13,000 foreign currency translation adjustment loss,(loss) gain, respectively. For the sixnine months ended JuneSeptember 30, 2006 and 2005, comprehensive income was $17,445,000$25,263,000 and $8,375,000$15,302,000 and included a $1,887,000$302,000 and ($20,000)$46,000 unrealized gain (loss) on interest rate swap arrangements, net of tax, respectively, and a ($14,000)83,000) and ($1,000) foreign currency translation adjustment loss, for both periods.respectively.

As of JuneSeptember 30, 2006 and December 31, 2005, the Company had the following intangible assets (in thousands):

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The carrying amount of goodwill was $241,307,000$240,324,000 and $240,844,000 as of JuneSeptember 30, 2006 and December 31, 2005, respectively. The increasedecrease in goodwill iswas related to a $983,000 tax related purchase accounting adjustment to reduce income tax payable during the three months ended September 30, 2006 related to the acquisition of MHA withMHA. The decrease was partially offset by $288,000 related toof acquisition costs incurred during the three months ended March 31, 2006 and the remainder due to insignificant purchase accounting adjustments during the three months ended June 30, 2006.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Aggregate amortization expense for the intangible assets presented in the above table was $1,450,000$1,193,000 and $419,000$247,000 for the three months ended JuneSeptember 30, 2006 and 2005, respectively, and $2,501,000$3,694,000 and $699,000$946,000 for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively. Amortization of deferred financing costs is included in interest expense. Estimated future aggregate amortization expense of intangible assets, including deferred financing costs, as of JuneSeptember 30, 2006 is as follows (in thousands):

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and for which discrete financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.

The Company provides hospital and healthcare facilities with temporary staffing for physicians, nurses and allied healthcare professionals and physician permanent placement services through the use of several brand names, each having their own marketing and supply distinction. The Company’s operating segments are identified in the same manner as they are reported internally and used by the Company’s chief operating decision maker for the purposes of evaluating performance and allocating resources. Prior to fiscal year 2005, the Company believes it operated in a singledisclosed one reportable segment, healthcare staffing for hospitals and healthcare facilities. With the acquisition of MHA in November 2005, the Company disclosed two reportable segments: nurse and allied healthcare staffing and physician staffing. Effective April 1, 2006, the Company will disclosedisclosed three reportable segments: nurse and allied healthcare staffing, locum tenens staffing (temporary physicians) staffingphysician staffing) and physician permanent placement services. The locums tenens staffing and physician permanent placement services segments are separate operating segments, which were previously aggregated into the physician staffing reportable segment.segment prior to April 1, 2006.

The Company’s management relies on internal management reporting processes that provide revenue and segment operating income for making financial decisions and allocating resources. Segment operating income includes income from operations before depreciation, amortization of intangible assets and amortization of stock-based compensation expense. Management believes that segment operating income is an appropriate measure of

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

evaluating the operational performance of the Company’s segments. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with United States generally accepted accounting principles. The Company’s management does not evaluate, manage or measure performance of segments using asset information; accordingly, asset information by segment is not prepared or disclosed. The information in the following table is derived from the segments’ internal financial information as used for corporate management purposes.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides a reconciliation of revenue and segment operating income by reportable segment to consolidated results (in thousands):

On November 2, 2005, the Company acquired MHA and recorded the acquisition using the purchase method of accounting. Thus, the results of operations from MHA are included in the Company’s consolidated financial statements from the acquisition date. The total purchase price of $210.3 million consisted of (i) an initial price of $160.0 million, paid approximately 75% in cash, excluding a $15.0 million holdback for potential claims indemnified by the MHA shareholders, and approximately 25% in unregistered shares of the Company’s common stock, (ii) a contingent purchase price of $47.3 million, paid in March 2006 approximately 75% in cash and 25% in unregistered shares of the Company’s common stock, and (iii) $3.0 million of direct acquisition costs. The purchase price included contingent consideration based on the financial performance of MHA for the twelve months ended December 31, 2005. The earn-out of $47.3 million was finalized on December 31, 2005 and recorded as additional purchase price at its fair value. The holdback, net of any indemnified claims made against the selling shareholders, will be released to the selling shareholders in March 2007. In addition to cash consideration paid, the Company issued 2.3 million unregistered shares of common stock in connection with the acquisition of MHA, and issued an additional 0.7 million unregistered shares on March 9, 2006 for payment of earnout amounts as provided in the acquisition agreement. The cash and stock components of the earnout and holdback, as well as the stock portion of the initial purchase price, have been recorded at their fair values, including discounts for restrictions on the marketability of the stock and the timing of expected future cash payments. The unregistered shares of common stock were registered in March 2006.

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following summary presents pro forma consolidated results of operations for the sixnine months ended JuneSeptember 30, 2005 as if the acquisition of MHA described above had occurred at the beginning of that period. The following unaudited pro forma financial information gives effect to certain adjustments, including the reduction in compensation expense related to non-recurring executive salary expense and non-recurring professional service fees, the amortization of intangible assets and interest expense on acquisition related debt and accretion of fair valued liabilities. The pro forma financial information is not necessarily indicative of the

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

operating results that would have occurred had the acquisition been consummated as of the date indicated, nor are they necessarily indicative of future operating results.

On April 28, 2006, the Company entered into a Stock Purchase Agreement with several former MHA stockholders to purchase from them an aggregate of 1,852,000 shares of the Company’s common stock issued in connection with the acquisition of MHA. The share purchase price was $20.17, calculated as the volume weighted average sales price of the common stock on the New York Stock Exchange for the 20 consecutive trading days immediately preceding the closing date, for a total aggregate purchase price of $37.5 million, including $0.2 million of transaction costs. The Stock Purchase Agreement contains customary representations and warranties.

On May 1, 2006, the Company entered into a First Amendment (the “First Amendment”) to its Credit Agreement dated November 2, 2005. The First Amendment provides that the Company may request, on a one-time basis, an additional term loan (“Incremental Term Loan”) in an amount not to exceed $45 million and permits the Company to repurchase up to $45 million of its capital stock (subject to certain conditions). The First Amendment also resetsreset the applicable interest rate for term loan borrowings based upon the Company’s then current leverage ratio. The Company incurred $0.3 million of financing costs in conjunction with the First Amendment. On May 15, 2006, the Company borrowed an Incremental Term Loan of $30 million, which along with cash on hand was used to fund the purchase of 1,852,000 shares of its common stock under the Stock Purchase Agreement. Effective May 15, 2006, the interest rate for all term loans outstanding (including the Incremental Term Loan) under the Credit Agreement initially bearbore interest, at the Company’s option, at either

AMN HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

LIBOR plus 2.00% or the Base Rate plus 1.00%. Beginning in August 2006 and thereafter, willbased on the Company’s leverage ratio, all term loans outstanding bear interest, at the Company’s option, at either LIBOR plus a spread of 1.75% to 2.00% or the Base Rate plus a spread of 0.75% to 1.00% to be determined based on the Company’s then current leverage ratio.. The terms of the Incremental Term Loan are consistent with the existing term loan under the Credit Agreement.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.

The following discussion should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements and the notes thereto and other financial information included elsewhere herein and in our Annual Report on Form 10-K for the year ended December 31, 2005. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” See “Special Note Regarding Forward-Looking Statements.”

Overview

We are the largest temporary healthcare staffing company in the United States. As the leading nationwide provider of travel nurse and allied healthcare staffing services and the largest provider of locum tenens (temporary physician staffing) and physician permanent placement services, we recruit physicians, nurses, and allied healthcare professionals, our “healthcare professionals”, nationally and internationally and place them on assignments of variable lengths and in permanent positions at acute-care hospitals, physician groups and other healthcare facilities throughout the United States.

We completed our acquisition of The MHA Group, Inc. (“MHA”) in November 2005, therefore the condensed consolidated statementstatements of operations for the three month and sixnine month periods ended JuneSeptember 30, 2005 and the condensed consolidated statement of cash flows for the sixnine month period ended JuneSeptember 30, 2005 do not include the results of operations and cash flows of MHA. For the three months ended JuneSeptember 30, 2006, we recorded revenue of $261.2$282.7 million, as compared to revenue of $160.7$166.9 million for the three months ended JuneSeptember 30, 2005. We recorded net income of $7.3$9.5 million for the three months ended JuneSeptember 30, 2006, as compared to net income of $4.4$6.8 million for the three months ended JuneSeptember 30, 2005. For the sixnine months ended JuneSeptember 30, 2006, we recorded revenue of $515.4$798.2 million, as compared to revenue of $317.5$484.4 million for the sixnine months ended JuneSeptember 30, 2005. We recorded net income of $15.6$25.0 million for the sixnine months ended JuneSeptember 30, 2006, as compared to net income of $8.4$15.3 million for the sixnine months ended JuneSeptember 30, 2005.

Both our temporary healthcare staffing services and permanent placement services are marketed to two distinct customer bases: (1) healthcare professionals and (2) hospitals, healthcare facilities and physician practice group clients. We use distinct brands to market our differentiated services throughout the healthcare staffing spectrum.

We use a multi-brand recruiting strategy to enhance our ability to successfully attract nursing and allied healthcare professionals in the United States and internationally. We market our nurse and allied healthcare professional staffing to our healthcare professionals under multiple recruitment brands including American Mobile Healthcare, Medical Express, NurseChoice InDemand, NursesRx, Preferred Healthcare Staffing, Med Travelers, RN Demand and O’Grady Peyton International. Each brand has distinct clinician focus, market strengths and brand reputation. We market our travel nursing services to hospitals and healthcare facilities under one brand, AMN Healthcare, as a single staffing provider with access to healthcare professionals from several recruitment brands. We market allied services to our clients under the brand name Med Travelers, and we market long-term nursing services to our clients under the brand name O’Grady Peyton International. We market our locum tenens and physician permanent placement services under the brand names Staff Care, Inc. and Merritt, Hawkins & Associates, respectively, to both healthcare professionals and hospital and healthcare facilities and physician staffing groups.

Physicians, nurses and allied healthcare professionals join us on temporary assignments for a wide variety of reasons that include: seeking flexible work opportunities, exploring different areas of the country, building their clinical skills and resume by working at prestigious healthcare facilities, escaping the demands and political environment of working as permanent staff and working through life and career transitions.

Our large number of hospital and healthcare facility clients provides us with the opportunity to offer temporary or permanent positions in all 50 states and in a variety of work environments and clinical settings. In

addition, we provide our temporary healthcare professionals with an attractive benefits package that may include free or subsidized housing, free or reimbursed travel, competitive pay, professional development opportunities, a 401(k) plan, and health and professional liability insurance. We believe that we attract temporary healthcare professionals due to our long-standing reputation for providing a high level of service, our numerous job opportunities, our benefit packages, our innovative marketing programs and word-of-mouth referrals from our thousands of current and former temporary healthcare professionals.

Our clients include hospitals and healthcare systems such as Georgetown University Hospital, HCA, NYU Medical Center, Stanford Health Care, UCLA Medical Center, The University of Chicago Hospitals and Mayo Health System. We also provide services to military facilities, sub-acute healthcare facilities, physician practice groups, dialysis centers, clinics and schools.

As of JuneSeptember 30, 2006, we had healthcare professionals on assignment at over 1,500 different healthcare facility clients. Our hospital and healthcare facility clients utilize our services to cost-effectively manage shortages in their staff due to a variety of circumstances such as attrition, the Family Medical Leave Act, (FMLA), new unit openings, seasonal patient census variations and other short-term, long-term and permanent staffing needs. In addition to providing continuity of care and quality patient care, we believe hospitals and healthcare facilities contract with us due to our high-quality temporary healthcare professionals, our ability to meet their specific staffing needs, our flexible staffing assignment lengths, our reliable and deep infrastructure, our superior customer service, our ability to offer a large national network of temporary healthcare professionals and our ability to provide temporary staffing solutions while we assist the facility in filling permanent staffing needs.

Recent Trends

It is estimated that from 1997 through 2005, the temporaryTemporary healthcare staffing industry revenues grew at a compound annual growth rate of approximately 9%, from 1997 through 2005, according to industry estimates, growing each year except 2003 and 2004, in which the industry declined on an annual basis. During the decline, the locum tenensIn 2006, industry revenues are expected to grow by 5% over 2005. The market was estimated to have grown by approximately 17% and 11%segments in 2003 and 2004, respectively, while thewhich we provide service offerings, travel nurse staffing market was estimated to have declined by approximately 9% in 2003 and 2004. In 2005, thenursing, locum tenens and allied healthcare professionals are expected to achieve positive growth in 2006. According to Staffing Industry Analysts, projected growth rates in 2006 are 6% for travel nurse staffing markets grew by approximatelynursing, 12% for locum tenens, and 1%, respectively, as compared to the overall temporary healthcare industry growth rate of approximately 3%.9% for allied healthcare. We believe that the relatively higherthis growth of the locum tenens market is in part attributable to the growing physician shortage, the relative immaturity of the market for temporary physicians and the financial justification for use of temporary physicians by hospitals and healthcare facilities to generate incremental revenue.

Thereflects generally favorable overall temporary healthcare staffing industry is expected to grow modestly in 2006, which we believe is due in part to favorable economic conditions and a modestcoupled with an increase in healthcare job openings and turnover. However,turnover that has led to relatively stable high demand.

In the nurse and allied healthcare segment, our largest reporting segment, this solid demand environment during 2005 and 2006 has resulted in increased bill rates for our healthcare facility clients as they seek to draw healthcare professionals to their facilities. These bill rate increases are passed on to our healthcare professionals in a targeted manner in an effort to attract them to our facility clients.

Although we have experienced recent improvements in our nurse supply, the supply market continues to be constrained relative to the demands of temporaryour healthcare facility clients. While roughly 90% of our nurse and allied healthcare segment is comprised of nurses and allied healthcare professionals trained in the United States, we recruit nurses from international channels through our O’Grady-Peyton International brand to meet our facility client needs. Our continued utilization of this international supply channel is not expected to keep pace with thereliant upon an increase in demand for these professionals.or exemption from current permanent immigrant visa quotas.

Critical Accounting Principles and Estimates

We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements. The preparation of our financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to asset impairment, accruals for self-insurance and compensation and related benefits,

allowance for doubtful accounts, contingencies and litigation and share-based payments. We state these accounting policies in the notes to the audited financial statements for the year ended December 31, 2005, contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission, and in

relevant sections in this discussion and analysis. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements:

Goodwill and Intangible Assets

We have recorded goodwill resulting from our past acquisitions. Commencing with the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets, on January 1, 2002, we ceased amortizing goodwill and have thereafter performed annual impairment analyses to assess the recoverability of the goodwill, in accordance with the provisions of SFAS No. 142. Upon our annual impairment analysis on December 31, 2005, we determined that there was no impairment of goodwill or indefinite lived intangible assets. If we are required to record an impairment charge in the future, it could have an adverse impact on our results of operations. SFAS No. 142 also requires that intangible assets with estimable useful lives continue to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. We analyze our amortizable intangible assets for impairment in accordance with the provisions of SFAS No. 144, and we have determined that there is no impairment. As of JuneSeptember 30, 2006 and December 31, 2005, we had $241.3$240.3 million and $240.8 million of goodwill, respectively, net of accumulated amortization, and $119.0$117.8 million and $121.2 million, respectively, of net intangible assets recorded on our consolidated balance sheets. The decrease in goodwill is primarily due to a $1.0 million tax related purchase accounting adjustment to reduce income tax payable recorded during the three months ended September 30, 2006, partially offset by acquisition costs incurred during the three months ended March 31, 2006.

Professional Liability Reserve

We maintain an accrual for professional liability self-insured retention limits, net of our insurance recoverable, which is included in accounts payable and accrued expenses and other long term liabilities in our consolidated balance sheets. We determine the adequacy of this accrual by evaluating our historical experience and trends, loss reserves established by our insurance carriers, management and third party administrators, as well as through the use of independent actuarial studies. For the nurse and allied healthcare staffing segment, we obtain updated actuarial studies on a regular basis that use actual claims data to determine the appropriate reserves for incurred, but not reported, professional liability claims for each year, and reserves for reported claims are based upon loss reserves established by management and our third party administrators. For the physician staffing segment, we obtain updated actuarial studies on a regular basis to determine the appropriate reserves for both reported claims and incurred, but not reported, claims. As of JuneSeptember 30, 2006 and December 31, 2005, we had $15.9$16.6 million and $13.9 million, respectively, accrued for professional liability retention, of which $2.2$2.6 million and $1.9 million, respectively, was classified as a current liability. The increase in the professional liability accrual was related to an increase in expected claims incurred but not reported, as a result of an increase in the number of healthcare providers on assignment during the sixnine months ended JuneSeptember 30, 2006, partially offset by payments made during the period.

Self-Insured Health Insurance Claims Reserve

We maintain an accrual for incurred, but not reported, claims arising from self-insured health benefits we provide to our temporary nurse and allied healthcare professionals, which is included in accrued

compensation and benefits in our consolidated balance sheets. We determine the adequacy of this accrual by evaluating our historical experience and trends related to both health insurance claims and payments, information provided to us by our insurance broker and third party administrator and industry experience and trends. If such information indicates that our accruals are overstated or understated, we reduce or provide for additional accruals. Our accrual at JuneSeptember 30, 2006 was based on (i) a monthly average of our actual historical health insurance claim amounts and (ii) the average

period of time from the date the claim is incurred to the date that it is reported to us and paid. We believe this is the best estimate of the amount of incurred, but not reported, self-insured health benefit claims. As of JuneSeptember 30, 2006 and December 31, 2005, we had $1.8 million and $2.4 million, respectively, accrued for incurred, but not reported health insurance claims. The decrease is due to a favorable trend in insurance claims paid and a decrease in the reporting and processing time for claims. Historically, our accrual for health insurance has been adequate to provide for incurred claims and has fluctuated with increases or decreases in the average number of temporary healthcare professionals on assignment, changes in our claims experience and changes in the reporting and processing time for claims.

Workers Compensation Reserve

We maintain an accrual for workers compensation self-insured retention limits, which is included in accrued compensation and benefits and other long term liabilities in our consolidated balance sheets. We determine the adequacy of these accruals by evaluating our historical experience and trends, loss reserves established by our insurance carriers and third party administrators, as well as through the use of independent actuarial studies. We obtain updated actuarial studies on a semi-annual basis that use actual claims data to determine the appropriate reserve both for reported claims and incurred, but not reported, claims for each policy year. The actuarial study for workers compensation provides us with the estimated losses for prior policy years and an estimated percentage of payroll compensation to be accrued for the current year. We record our accruals based on the amounts provided in the actuarial study, and we believe this is the best estimate of our liability for reported claims and incurred, but not reported, claims. As of JuneSeptember 30, 2006 and December 31, 2005, we had $8.6$8.9 million and $10.1 million, respectively, accrued for workers compensation claims, of which $2.6$2.7 million and $3.0 million, respectively, was classified as a current liability. The decrease in the accrual was attributable to an actuarial-based reserve reduction of $1.6$1.8 million based on favorable historical claims experience, offset by the fact that claim payments made against the reserve during the sixnine months ended JuneSeptember 30, 2006 for the current and prior years are lagging slightly behind the additions to the reserve, as reserves continue to remain outstanding for workers compensation claims incurred during the course of the last four years.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated credit losses resulting from collection risks, including the inability of our customers to make required payments. This results in a provision for bad debt expense. The allowance for doubtful accounts is reported as a reduction of accounts receivable in our consolidated balance sheets. We determine the adequacy of this allowance by evaluating historical delinquency and write-off trends, the credit risk for individual customer receivables, the financial condition and credit history of each customer, historical payment trends and current economic conditions. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances would be provided. As of JuneSeptember 30, 2006 and December 31, 2005, our allowance for doubtful accounts was $3.0$3.1 million and $2.4 million, respectively. The increase is primarily attributable to the passage of time since our acquisition of MHA in November 2005, at which time we recorded MHA’s accounts receivable at fair value. As MHA has generated revenue and accounts receivable since the acquisition date, the allowance for doubtful accounts has increased accordingly.

Contingent Liabilities

We are subject to various claims and legal actions in the ordinary course of our business. Some of these matters include payroll and employee-related matters and investigations by governmental agencies regarding our employment practices. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide disclosure, as appropriate. We may also become subject to claims, governmental inquiries and investigations, and legal actions relating to

services provided by our temporary healthcare professionals, and we maintain accruals for these matters if the amounts are probable and estimable. We currently are not aware of any such pending or threatened litigation that would be considered reasonably likely to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Share-Based Payments

Prior to January 1, 2006, we accounted for our share-based employee compensation plans under the measurement and recognition provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. We also provided disclosures in accordance with the requirements of SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation-Transition and Disclosure.

Effective January 1, 2006, we adopted the provisions of revised SFAS No. 123 (SFAS No. 123R), which established accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period. The measurement of stock based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, our stock price volatility, dividend rate, risk free interest rate, and award cancellationforfeiture rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. We estimate the fair value of stock options and stock appreciation rights granted using the Black-Scholes valuation model and the assumptions shown in Note 2 to the accompanying condensed consolidated financial statements. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We estimate the option term, dividend yield, and risk-free interest rate assumptions consistent with the methodologies used prior to January 1, 2006, however the volatility of our common stock at the date of grant was previously based on a combination of our historical volatility rate and the historical volatility rate of comparable companies. The fair value of equity awards granted is amortized on a straight-line basis over the requisite service periods of the awards, which are the vesting periods. If factors change, we may decide to use different assumptions under the Black-Scholes valuation model, or a different valuation model, in the future, which could materially affect our net income and earnings per share.

Results of Operations

The following table sets forth, for the periods indicated, certain condensed consolidated statements of operations data as a percentage of our revenue. Our results of operations include three reportable segments: (1) nurse and allied healthcare staffing segment,staffing; (2) locum tenens staffing segmentstaffing; and (3) physician permanent placement services segment. The locums tenens staffing and physician permanent placement services segments are separate operating segments which were previously aggregated into the physician staffing reportable segment prior to the three month period ending June 30, 2006.services. We completed our acquisition of MHA in November 2005, therefore the condensed consolidated statements of operations for the three and sixnine month periods ended JuneSeptember 30, 2005 do not include the results of operations of MHA. Our results of operations are reported on a consolidated basis as segment data is not meaningful due to the fact that there was only one reportable segment during the three and sixnine month periods ended JuneSeptember 30, 2005.

Comparison of Results for the Three Months Ended JuneSeptember 30, 2006 to the Three Months Ended JuneSeptember 30, 2005

Revenue.    Revenue increased 63%69%, to $261.2$282.7 million for the three months ended JuneSeptember 30, 2006 from $160.7$166.9 million for the same period in 2005. Of the $100.5$115.8 million increase, $91.6$94.6 million was attributable to the acquisition of MHA in November 2005, $7.9$10.0 million was attributable to the organic increase in revenue generated per temporary healthcare professional due primarily to an increase in the average bill rates charged to hospital and healthcare facility clients, $7.4 million was attributable to the increase in the average number of temporary healthcare professionals on assignment, and $4.0$3.8 million was attributable to a shift in the mix of temporary healthcare professionals working on flat rate contracts to hours and days worked contracts. These increases were partially offset by a decrease in the average number of temporary healthcare professionals on assignment which reduced revenue by $3.0 million.

Cost of Revenue.    Cost of revenue increased 55%62%, to $191.2$206.0 million for the three months ended JuneSeptember 30, 2006 from $123.5$127.3 million for the same period in 2005. Of the $67.7$78.7 million increase, $62.8$65.7 million was attributable to the acquisition of MHA in November 2005, $4.0$5.7 million was attributable to the increase in the average number of temporary healthcare professionals on assignment, $4.2 million was attributable to increases in compensation provided to our temporary healthcare professionals, which was net of a $1.6 million decrease in traveler health insurance costs due primarily to favorable health insurance claims experience, and $3.2$3.1 million was attributable to the shift in the mix of temporary healthcare professionals working on flat rate contracts to hours and days worked contracts. These increases were partially offset by a decrease in the average number of temporary healthcare professionals on assignment which reduced costs by $2.3 million.

Gross Profit.    Gross profit increased 88%94%, to $70.0$76.7 million for the three months ended JuneSeptember 30, 2006 from $37.2$39.5 million for the same period in 2005, representing gross margins of 26.8%27.1% and 23.1%23.7%, respectively. The increase in gross margin was primarily attributable to an organic increase in average bill rates, lower traveler health insurance costs and the addition of the higher gross margin locum tenens staffing and physician permanent placement services segments through the acquisition of MHA in November 2005.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased 96%115%, to $52.4$54.1 million for the three months ended JuneSeptember 30, 2006 from $26.7$25.2 million for the same period in 2005. Of the $25.7$28.9 million increase, $19.9$20.1 million was attributable to the acquisition of MHA in November 2005, $1.8$5.2 million was attributable to an increase in employee expenses to support growth in the nurse and allied healthcare staffing segment, $1.7 million was attributable to the increase in non-cash stock-based compensation charges resulting from the adoption of SFAS No. 123R on January 1, 2006, and the remaining $4.0$1.9 million increase was primarily attributable to increases in marketing,office expenses and travel and related expenses due to management initiatives focused on growing nurse supply and increases in professional liability insurance expenses and employee expenses.

Depreciation and Amortization Expenses.    Amortization expense increased to $0.8 million for the three months ended JuneSeptember 30, 2006 from less than $0.1 million for the same period in 2005. The increase was primarily attributable to the amortization of identifiable amortizable intangible assets recorded as a result of the acquisition of MHA in November 2005. Depreciation expense increased 21%20%, to $1.7$1.8 million for the three months ended JuneSeptember 30, 2006 from $1.4$1.5 million for the same period in 2005. The $0.3 million increase was primary attributable to the acquisition of MHA in November 2005.