Monarch Staffing 10QSB 2007 Q1 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007.

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM TO

COMMISSION FILE NUMBER 000-49915

Monarch Staffing, Inc.

(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

Nevada		88-0474056
(STATE OF OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

30950 Rancho Viejo Rd. #120, San Juan Capistrano, CA. 92675

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(949) 260-0150

(ISSUER’S TELEPHONE NUMBER)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The registrant had 10,060,078 shares of common stock outstanding as of May 4, 2007.

Transitional Small Business Disclosure Format (check one):

Yes o No x


		PAGE
PART I FINANCIAL INFORMATION

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

	Condensed Consolidated Balance Sheets at of March 31, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	4

	Condensed Consolidated Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2007	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	6

	Notes to Condensed Consolidated Financial Statements	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12

ITEM 3.	CONTROLS AND PROCEDURES	28

PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	29

ITEM 2.	CHANGES IN SECURITIES	29

ITEM 3.	DEFAULTS ON SENIOR SECURITIES	30

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS	30

ITEM 5.	OTHER INFORMATION	30

ITEM 6.	EXHIBITS	30

	SIGNATURES	31

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MONARCH STAFFING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

ASSETS
	March 31,			December 31,
	2007			2006
	(unaudited)
CURRENT ASSETS

Cash and cash equivalents	$	2		$	1
Accounts receivable, net		1,322,441			1,300,060

Total Current Assets		1,322,443			1,300,061

OTHER ASSETS

Deposits and other receivables		29,109			75,006
Goodwill		1,245,481			1,245,481

Total Other Assets		1,274,590			1,320,487

TOTAL ASSETS	$	2,597,033		$	2,620,548

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

CURRENT LIABILITIES

Accounts payable	$	534,578		$	491,990
Accounts payable - related party		133,925			30,167
Accrued expenses		371,577			418,851
Accrued interest		327,212			266,670
Factoring liability		519,025			579,780
Notes payable - current portion		60,446			59,401

Total Current Liabilities		1,946,763			1,846,859

LONG-TERM DEBT

Derivatives		268,651			175,046
Notes payable		104,768			120,277
Callable secured convertible notes payable (net of debt discount of $1,323,321 and $1,527,352, respectively)		1,749,873			1,547,648

Total Long-Term Debt		2,123,292			1,842,971

Total Liabilities		4,070,055			3,689,830

STOCKHOLDERS' (DEFICIT)

Common stock, $.001 par value; 400,000,000 shares authorized, 9,961,384 and 9,862,691 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		9,962			9,863
Additional paid-in capital		(435,009	)		(461,333	)
Accumulated deficit		(1,047,975	)		(617,812	)

Total Stockholders' (Deficit)		(1,473,022	)		(1,069,282	)

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)	$	2,597,033		$	2,620,548

The acompanying notes are an integral part of these unaudited consolidated financial statements.

MONARCH STAFFING, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

	For the 3 Months Ended
	March 31,
	2007			2006

REVENUES	$	1,897,940		$	1,913,567

COST OF REVENUES		1,546,958			1,599,705

GROSS PROFIT	$	350,982		$	313,862

OPERATING EXPENSES

Salaries and wages (including stock compensation expense)		178,215			31,709
Consulting		81,979			76,278
Professional fees		32,549			39,284
General and administrative		95,292			141,755
Bad debt expense		75			880

Total Operating Expenses		388,110			289,906

INCOME (LOSS) FROM OPERATIONS		(37,128	)		23,956

OTHER INCOME (EXPENSE)

Interest income		-			835
Gain (loss) on derivative valuation		(93,605	)		(294,373	)
Interest expense		(299,431	)		(300,857	)

Total Other Income (Expense)		(393,036	)		(594,395	)

INCOME (LOSS) BEFORE INCOME TAXES		(430,163	)		(570,439	)

Provision for income taxes		-			-

NET INCOME (LOSS)	$	(430,163	)	$	(570,439	)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED	$	(0.04	)	$	(0.06	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted		9,942,742			9,862,691

The acompanying notes are an integral part of these unaudited consolidated financial statements.

MONARCH STAFFING, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit)
For the Period Ended March 31, 2007

								Retained
					Additional			Earnings
	Common Stock				Paid-in			(Accumulated
	Shares		Amount		Capital			Deficit)			Total


Balance, December 31, 2005		9,862,691	$	9,863	$	(583,553	)	$	248,640		$	(325,050	)

Valuation of Stock Options		-		-		122,220			-			122,220

Net loss for the yea ended December 31, 2006		-		-		-			(866,452	)		(866,452	)

Balance, December 31, 2006		9,862,691	$	9,863	$	(461,333	)	$	(617,812	)	$	(1,069,282	)

Valuation of Stock Options		-		-		24,617			-			24,617

Issuance of common stock for note conversions		98,693		99		1,707			-			1,806

Net loss for the 3 months ended March 31, 2007		-		-		-			(430,163	)		(430,163	)

Balance, March 31, 2007 (unaudited)		9,961,384	$	9,962	$	(435,009	)	$	(1,047,975	)	$	(1,473,022	)

The acompanying notes are an integral part of these unaudited consolidated financial statements.

MONARCH STAFFING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)

	For the Three Months Ended
	March 31,
	2007			2006

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)	$	(430,163	)	$	(570,439	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of debt discount		204,031			201,073
(Gain)/loss on valuation of derivatives		93,605			294,373
Non-cash stock option expense		24,617			13,248
Changes in operating assets and liabilities (increase) decrease in:
(Increase)/decrease in accounts receivable		(22,381	)		(903,725	)
(Increase)/decrease in other assets		45,897			(20,863	)
Increase/(decrease) in accounts payable		13,346			(182,448	)
Increase/(decrease) in accrued expenses and other current liabilities		13,268			(49,955	)

Net Cash Provided by (Used in) Operating Activities		(57,780	)		(1,218,735	)

CASH FLOWS FROM INVESTING ACTIVITIES:

Net Cash Provided by (Used in) Investing Activities		-			-

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments made on notes payable		(14,464	)		(308,493	)
Net advances from factored receivables		(60,755	)		382,719
Proceeds from related party note		133,000			-
Proceeds received on convertible debt		-			425,000

Net Cash Provided by (Used in) Financing Activities		57,781			499,226

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1			(719,509	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		1			1,041,433

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2		$	321,924


SUPPLEMENTAL CASH FLOW INFORMATION

Cash Payments For:

Interest	$	5,504		$	6,336
Income taxes	$	-		$	-

The acompanying notes are an integral part of these unaudited consolidated financial statements.

MONARCH STAFFING, INC. AND SUBSIDIARIES

Notes To Consolidated Financials Statements (Unaudited)

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2006 Annual Report on Form 10-KSB. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2007.

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.

Certain amounts in the condensed consolidated financial statements for the three months ended March 31, 2006 have been reclassified to conform to the three months ended March 31, 2007 presentation.

NOTE 2 – STOCK BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” ("SFAS 123(R)") which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued SAB No. 107 relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. The Company's consolidated financial statements for the three months ended March 31, 2007 and 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statement of operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation." Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company's consolidated statements of operations, other than as related to option grants to employees and consultants below the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company's consolidated statement of operations for the three months ended March 31, 2007 and 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated statement of operations for the three months ended March 31, 2007 and 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rate for the three months ended March 31, 2007 and 2006, was approximately 0% and was based on historical forfeiture experience. The estimated pricing term of option grants for the three months ended March 31, 2007 and 2006 was 5.0 years.

SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. Due to the Company's loss position, there were no such tax benefits during the three months ended March 31, 2007 and 2006. Prior to the adoption of SFAS 123(R), those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises.

The fair value of stock-based awards to employees and directors is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate selected to value any particular grant is based on the U.S Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. The expected volatility is based on the historical volatility of the Company's stock price. These factors could change in the future, affecting the determination of stock-based compensation expense in future periods.

Valuation and Expense Information under SFAS 123(R)

The weighted-average fair value of stock-based compensation is based on the single option valuation approach. Forfeitures are estimated and it is assumed no dividends will be declared. The estimated fair value of stock-based compensation awards to employees is amortized using the straight-line method over the vesting period of the options.

The fair value calculations are based on the following assumptions for the three months ended March 31, 2006 (there were no stock options grants during the 3 months ended March 31, 2007):

	2006
Risk-free interest rate	4.47% - 5.12%
Expected life of the options	5.00 yrs
Expected volatility	461% - 497%
Expected dividend yield	0

The following table summarizes stock-based compensation expense related to stock options plans under SFAS 123(R) for the three months ended March 31, 2007 and 2006 which was allocated as follows:

	Three Months Ended March 31, 2006
	SFAS No. 123R			ABP Opinion No. 25

Net income (loss)	$	(570,439	)	$	(557,191	)

Net income (loss) per share	$	(0.06	)	$	(0.06	)


	Three Months Ended March 31, 2007
	SFAS No. 123R			APB Opinion No. 25

Net income (loss)	$	(430,163	)	$	(405,546	)

Net income (loss) per share	$	(0.04	)	$	(0.04	)

A summary of option activity under the Company's stock equity plans during the three months ended March 31, 2007 is as follows:

	Number of Shares(In Thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term(in Years)		Aggregate Intrinsic Value (In Thousands)

Outstanding at December 31, 2006		932	$	0.63
Granted		-	$	0.00
Forfeited		-	$	0.00
Exercised		-	$	0.00
Outstanding at March 31, 2007		932	$	0.63		4.07	$	590

Vested and expected to vest at March 31, 2007		430	$	0.64		4.28	$	274

Exercisable at March 31, 2007		430	$	0.64		4.28	$	274

The per share weighted average fair value of options granted during the three months ended March 31, 2007 and 2006 were $0 and $0.72, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $ 0 and $ 0, respectively, as there we no options exercised during those periods. As of March 31, 2007, total unrecognized forfeiture adjusted compensation costs related to nonvested stock options was $184,381, which is expected to be recognized as an expense over a weighted average period of approximately 1.45 years.

Prior to fiscal 2006, the weighted-average fair value of stock-based compensation to employees was based on the single option valuation approach. Forfeitures were recognized as they occurred and it was assumed no dividends would be declared.

The estimated fair value of stock-based compensation awards to employees was amortized using the straight-line method over the vesting period of the options.

NOTE 3 - NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share reflects the effects of potentially dilutive common stock – based equity instruments. Common stock equivalents, consisting of employee stock options of 931,589 and stock warrants, of 315,277 have been considered but have not been included in the calculations of diluted net income (loss) per common share because the effect of these instruments was anti-dilutive for the periods presented.

	March 31,
	2007			2006

Numerator - Net income (loss)	$	(430,163	)	$	(570,439	)

Denominator - weighted average number of shares outstanding		9,942,742			9,862,691

Net income (loss) per share	$	(0.04	)	$	0.06	)

NOTE 4 - GOING CONCERN

The Company’s consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has an accumulated deficit of $1,047,975 at March 31, 2007 and a net loss of $430,163 for the three months ended March 31, 2007. These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Management has taken various steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue its operations for the next twelve months.

In view of our net working capital deficit, operating cash flow deficit, long-term debt and the other matters described above, recoverability of a major portion of the recorded asset amounts shown in our consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to raise additional capital, obtain financing and to succeed in our future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. We project that our cash on hand and cash flow generated from operations will not be sufficient to fund operational liquidity requirements. As a result, our ability to continue our operations and growth strategy depends on our ability to access the capital markets in the near term.

NOTE 5 - LEGAL PROCEEDINGS

On January 19, 2006, Community Capital Bank filed a complaint in the Supreme Court of the State of New York (Kings County) against the Company, Macdonald S. Tudeme (our former CEO) and Marguerite Tudeme (our former Secretary). The complaint seeks payment of three loans made by Community Capital Bank having a total outstanding principal amount of $202,527.67 plus unpaid interest. The Company believes that the Community Capital Bank loans were made to MTM, a former subsidiary that was disposed of on December 15, 2005 as part of the disposition of Marathon (as described in Note 1), and are guaranteed by the Tudemes. As a result, the Company does not believe it is obligated to repay any amounts due under the Community Capital Bank loans.

On January 25, 2006, the Company received notice from the Internal Revenue Service (the “IRS”) that the IRS had concluded that the Company’s subsidiary (DCI) was a third-party payer to and thus employer of a pharmacist who provided services to DCI’s client, the California Department of Corrections. Although the IRS notice applies only to the case of the individual pharmacist, if unchanged, it could require DCI to classify other pharmacists and nurses in its registry who provide services to DCI’s clients as employees of DCI. Accordingly, compensation payable to such pharmacists and nurses would be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have a material adverse effect on the Company’s business, financial condition and results of operations. The Company disagrees with the conclusion of the IRS notice, believes that the pharmacist in question was properly classified as an independent contractor and is in the process of contesting the conclusion of the IRS.

On June 5, 2006, Phillip Evans, a former contractor of DCI, filed a complaint in the Superior Court of California (Riverside County) against DCI. The complaint alleges, among other things, libel and unfair business practices, and seeks general special and punitive damages of $2,170,000. The Company believes the claims are without merit and is contesting the suit.

NOTE 6 – RELATED PARTY TRANSACTIONS

As part of the Spin-off Agreement as described in Note 1 and Note 7 of the Company’s annual financial statements filed in its December 31, 2006 Annual Report on Form 10-KSB, a remaining amount of $30,441 is owed by the Company to the former controlling shareholders of the Company. The amount is non-interest bearing, unsecured, and payable on demand.

In November 2005, the Company agreed to issue an aggregate of 8,283,334 shares of common stock, to two entities, 4,141,667 shares to MEL Enterprises, Ltd., beneficially owned by Keith Moore, a Director of the Company and 4,141,667 shares to Monarch Bay Capital Group, LLC, beneficially owned by David Walters, our Chairman and Chief Financial Officer, in connection with the Company's acquisition of DCII.

Both Mr. Walters and Mr. Moore entered into Independent Contractor Agreements with DCII on February 1, 2005 (each a "Contractor Agreement" and collectively the "Contractor Agreements"). Mr. Moore's Contractor Agreement provides for him to serve DCII in the capacity of Secretary and Director and Mr. Walters' Contractor Agreement provides for him to serve DCII in the capacity of Chief Executive Officer. The Contractor Agreements were renewed on February 1, 2006 and expire December 31, 2008. The Contractor Agreements renew thereafter on an annual basis unless terminated by either party. Either of the Contractor Agreements may be terminated upon the breach of a term of either Contractor Agreement, which breach remains uncured for thirty (30) days or by either party, for any reason with thirty (30) days written notice. The Contractor Agreements contain confidentiality clauses and work for hire clauses. The Contractor Agreements provide that neither Mr. Walters nor Mr. Moore are employees of DCII. Mr. Walters and Mr. Moore are entitled to be paid $10,000 per month under the Contractor Agreements. The Company paid $60,000 and $170,000 (including $110,000 outstanding as of December 31, 2005) during the three months ended March 31, 2007 and 2006, respectively, related to the Contractor Agreements. Amounts owed by the Company totaled $0 and $0 at March 31, 2007 and December 31, 2006, respectively. In February 2006, the Company also paid Mr. Walters and Mr. Moore a consulting fee of $25,000 each for additional consulting services outside the scope of the above agreements. On May 11, 2007, these agreements were terminated by mutual consent.

In March 2006, the Company entered into an agreement with Monarch Bay Management Company, L.L.C. ("MBMC") for chief financial officer services. David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in, MBMC. Under the chief financial officer services agreement with MBMC, the Company is obligated to pay MBMC a monthly fee of $5,000 in cash. The Company also reimburses MBMC for certain expenses in connection with providing services to the Company. The initial term of the agreement expires on March 31, 2007 and renews thereafter on an annual basis unless terminated by either party. Services provided under this agreement commenced in March 2007, accordingly, $5,000 was accrued as of March 31, 2007. No services were provided during 2006, accordingly, no amounts were paid to MBMC and/or accrued as of and for the three months ended March 31, 2006. On May 11, 2007, this agreement was terminated by mutual consent.

On February 5, 2007, the Company borrowed $195,000 from MBMC pursuant to a working capital line of credit. Under the terms of working capital line of credit, MBMC may advance up to $500,000 in funding to the Company. The working capital line of credit is unsecured and bears interest at the rate of 10% of the unpaid principal balance or $150 per month, whichever is greater. All amounts outstanding under the working capital line of credit are due on or before December 31, 2008. The Company repaid $125,000 of the principal balance on February 8, 2007 and the remaining principal balance of $70,000 was repaid on February 15, 2007. On February 22, 2007, the Company borrowed $188,000 from MBMC. The Company repaid $55,000 during March 2007 and the remaining principal balance of $133,000 remained due and outstanding as of March 31, 2007. Interest payments relating to the above transactions totaled $103 for the three months ended March 31, 2007. Accrued interest totaled $1,955 as of March 31, 2007. On April 10, 2007, the Company repaid the remaining principal balance of $133,000.

On April 25, 2007, the Company borrowed $100,000 from MBMC pursuant to the working capital line of credit.

In March 2006, the Company made a $7,500 payment to a vendor on behalf of Monarch Bay Associates, L.L.C. (“MBA”). David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in MBA. The amount was non-interest bearing and owed to the Company as of December 31, 2006. The Company received payment in full in March 2007.

As discussed in Note 6 of the Company’s annual financial statements filed in its December 31, 2006 Annual Report on Form 10-KSB, on November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation (“Systran”). David Walters and Keith Moore have personally guaranteed $500,000 of the total available facility. Mr. Walters and Mr. Moore did not receive any compensation for this personal guarantee in 2006 or 2007.

NOTE 7 – SUBSEQUENT EVENTS

On May 11, 2007, the Company entered into a Support Services Agreement with MBMC. Under the Support Services Agreement, MBMC will provide the Company with financial management services, facilities and administrative services, business development services, creditor resolution services and other services as agreed by the parties. As a retainer for the services provided by MBMC under the Support Services Agreement, the Company issued to MBMC 5,000 shares of its Series A Preferred Stock. The Company will also pay to MBMC monthly cash fees of $22,000 for the services. In addition, MBMC will receive fees equal to (a) 6% of the revenue generated from any business development transaction with a customer or partner introduced to the Company by MBMC and (b) 20% of the savings to the Company from any creditor debt reduction resolved by MBC on behalf of the Company. The initial term of the Support Services Agreement expires May 11, 2008.

On May 11, 2007, the Company entered into a Placement Agency and Advisory Services Agreement with MBA. [MBA is a NASD member firm.] Under the agreement, MBA will act as the Company’s placement agent on an exclusive basis with respect to private placements of the Company’s capital stock and as the Company’s exclusive advisor with respect to acquisitions, mergers, joint ventures and similar transactions. As a retainer for the services provided by MBA under the Placement Agency and Advisory Services Agreement, the Company issued to MBA 5,000 shares of its Series A Preferred Stock. In addition, MBA will receive fees equal to (a) 9% of the gross proceed raised by the Company in any private placement (plus warrants to purchase 9% of the number of shares of common stock issued or issuable by the Company in connection with the private placement) and (b) 3% of the total consideration paid or received by the Company or stockholders in an acquisition, merger, joint venture or similar transaction. The initial term of the Placement Agency and Advisory Services Agreement expires May 11, 2008.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes and the other financial information included elsewhere in this report and in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

Information Regarding Forward-Looking Statements

Except for the historical information and discussions contained herein, statements contained in this Form 10-QSB may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements generally include our management's plans and objectives for future operations, including plans, objectives and expectations relating to our future economic performance, business prospects, revenues, working capital, liquidity, ability to obtain financing, generation of income and actions of secured parties not to foreclose on our assets. The forward-looking statements may also relate to our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements generally can be identified by the use of the words "believe," "intend," "plan," "expect," "forecast," "project,” "may," "should," "could," "seek," "pro forma," "estimate," "continue," "anticipate" and similar words. The forward-looking statements and associated risks may include, relate to, or be qualified by other important factors, including, without limitation:

·	anticipated trends in our financial condition and results of operations (including expected changes in our gross margin and general, administrative and selling expenses);

·	our ability to finance our working capital and other cash requirements;

·	our business strategy for expanding our presence in the markets we serve; and

·	our ability to distinguish ourselves from our current and future competitors.

We do not undertake to update, revise or correct any forward-looking statements. The forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements.

Important factors to consider in evaluating forward-looking statements include:

·	changes in external competitive market factors or in our internal budgeting process that might impact trends in our results of operations;

·	changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the markets; and

·	various other factors that may prevent us from competing successfully in the marketplace.

Overview

We provide healthcare staffing services to both commercial and government sector customers. We are focused on building a nationally recognized healthcare staffing company by growing our current customer bases, expanding our service offerings, and acquiring and growing profitable healthcare staffing services companies.

We operate our healthcare staffing services business through our wholly owned subsidiary Drug Consultants, Inc. ("DCI"). DCI furnishes personnel to perform a range of pharmacy, nursing and other health care services in support of the operations of government and commercial facilities, including its largest client, the State of California Department of Corrections and Rehabilitation ("CDCR"). DCI was formed in 1977 and is located in San Juan Capistrano, California.

DCI has experience in providing its services in rural areas of California where many state facilities are located and healthcare professionals are not readily available. This experience and DCI's database of healthcare professionals have allowed it to competitively price its services and expand its business to meet these unique requirements of the CDCR.

DCI currently operates under three master contracts with the CDCR. The master contracts are for terms of three years and currently expire between September 30, 2007 and June 30, 2008. DCI's contracts with the CDCR do not provide for a minimum purchase commitment of our services and can be terminated by the CDCR at any time on 30 days' notice. In April 2006, a federal court-appointed receiver assumed total control over CDCR's healthcare delivery system to address the court's findings of substandard medical care. Among the receiver's objectives is to reduce the CDCR's reliance on staffing service providers like DCI. Since the receiver's appointment, DCI has experienced a loss of several of its healthcare professionals who have accepted positions with the CDCR. We believe that the ongoing implications of the receiver's management of the CDCR's healthcare delivery system include lower demand from the CDCR for DCI's services, higher attrition of our healthcare professionals, increased competition for recruiting healthcare professionals to fill positions with the CDCR and reduced margins for the services we provide CDCR.

COMPARISON OF OPERATING RESULTS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2006

Revenues for the three months ended March 31, 2007 were $1,897,940 compared to $1,913,567 for the three months ended March 31, 2006. This is a decrease of $15,627 or 1% and is attributable to a decrease in sales to CDCR for the current period.

Costs of revenues for the three months ended March 31, 2007 were $1,546,958 compared to $1,599,705 for the three months ended March 31, 2006. This is a decrease of $52,747 or 3% and is attributable to an overall improvement of gross profit margins to 18.5% for the three months ended March 31, 2007 versus 16.4% for the comparable period in the prior year. This increase is primarily driven by improved pricing from contract renewals which occurred in July 2006.

Based on the above, the Company realized a gross profit for the three months ended March 31, 2007 of $350,982, versus a gross profit for the three months ended March 31, 2006 of $313,862.

Salaries and wages for the three months ended March 31, 2007 were $178,215 compared to $31,709 for the three months ended March 31, 2006. This is an increase of $146,506 or 462% and is attributable to additional headcount including executive management which were not in place in the comparable period in the prior year.

General and administrative expenses for the three months ended March 31, 2007 were $95,292 compared to $141,755 for the three months ended March 31, 2006. This is a decrease of $46,463 or 33% and is attributable to approximately $50,000 of consulting fees incurred during the prior period and not incurred during the current period.

As a result, the Company had an operating loss for the three months ended March 31, 2007 of $37,128 compared to income from operations of $23,956 for the three months ended March 31, 2006.

Other expense for the three months ended March 31, 2007 totaled $393,036 compared to $594,395 for the comparable period in the prior year. The decrease in expense is attributable to a decrease in the loss on derivative valuations compared to the same period in the prior year.

As a result, our net loss for the three months ended March 31, 2007 was $430,163 versus a net loss of $570,439 for the three months ended March 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2007, we had negative net working capital of $624,320. Our current assets of $1,322,443 consisted of cash and cash equivalents of $2 and accounts receivable, net of $1,322,441. Our current liabilities of $1,946,763 consisted of accounts payable and accrued expenses of $906,155; a factoring liability of $519,025; accrued interest of $327,212; notes payable, current of $60,446; and, accounts payable related parties of $133,925.

As of March 31, 2007, we had long-term debt of $2,123,292, consisting of $268,651 in derivatives, $3,073,194 outstanding under our convertible secured notes (less debt discount of $1,323,321) and $104,768 in notes payable.

Net cash used in operating activities for the three months ended March 31, 2007 was $57,780, compared to net cash used in operating activities of $1,218,735 for the three months ended March 31, 2006. Our decrease of net cash used in operating activities in 2007 versus the comparable period in the prior year is primarily attributable to a large increase in accounts receivables and a decrease in accounts payable during the three months ended March 31, 2006. These significant fluctuations were not experienced during the three months ended March 31, 2007.

There was no cash provided by or used in investing activities during the three months ended March 31, 2007 and 2006.

Net cash provided by financing activities for the three months ended March 31, 2007 totaled $57,781. We received proceeds of $133,000 from a related party note. These proceeds were partially offset by payments made on other notes payable and a decrease in net advances from factored receivables. Net cash provided by financing activities for the three months ended March 31, 2006 totaled $499,226 which includes $425,000 of proceeds from our issuance of convertible secured notes. Payments made on notes payable totaled $308,493 for the three months ended March 31, 2006.

Our consolidated financial statements are prepared using the accrual method of accounting in accordance with generally accepted accounting principles, and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We had $1,047,975 in accumulated deficit at March 31, 2007 and a net loss of $430,163 for the three months ended March 31, 2007. These factors combined raise substantial doubt about the Company’s ability to continue as a going concern. Our management has taken various steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue its operations for the next twelve months.

We had an operating cash flow deficit in 2006 as well as the first three months of 2007. We do not currently have enough capital to repay our outstanding convertible secured notes and other liabilities and we may never generate enough revenue to repay the amounts owed. In addition, execution of our acquisition-based growth strategy will require significant additional capital.

We currently rely on a working capital line of credit from Monarch Bay Management Company, LLC (“MBMC”) to meet our short-term liquidity needs. David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in, MBMC. Under the terms of working capital line of credit, MBMC may advance up to $500,000 in funding to us. The working capital line of credit is unsecured and bears interest at the rate of 10% of the unpaid principal balance or $150 per month, whichever is greater. All amounts outstanding under the working capital line of credit are due on or before December 31, 2008. As of the date hereof, the outstanding principal balance under the working capital line of credit was $100,000. Although the line of credit provides for total funding of up to $500,000, there can be no assurance that funding from this source will continue to be available, or if such funding is available, that it will be on terms that management deems sufficiently favorable.

Our secured convertible note investors are required to purchase an additional $625,000 principal amount of secured convertible notes and related warrants five days following the date that a registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied. There can be no assurance that we will satisfy the conditions to funding or, if we do, that we will do so on a timetable that meets our operational liquidity needs.

There also can be no assurance that capital from other outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, we could be forced to restructure or to default on our obligations or to curtail or abandon our business plan, any of which may devalue or make worthless an investment in the Company.

The operations of DCII and DCI, which will represent our entire business for the foreseeable future, were acquired in November 2005. Accordingly, we have a limited operating history upon which an evaluation of our prospects can be made. Our strategy is unproven and the revenue and income potential from our strategy is unproven. It is difficult for us to predict future liquidity requirements with certainty and our forecast is based upon certain assumptions, which may differ from actual future outcomes. Over the longer term, we must successfully execute our plans to increase revenue and income streams that will generate significant positive cash flow if we are to sustain adequate liquidity without impairing growth or requiring the infusion of additional funds from external sources.

RECEIVABLES FACTORING FACILITY

On November 8, 2005, DCII and DCI entered into a Factoring and Security Agreement to sell accounts receivables to Systran Financial Services Corporation. The purchase price for each invoice sold is the face amount of the invoice less a discount of 1.5%.

On July 24, 2006, the Factoring Agreement was amended and under the terms of the amendment a fee equal to prime plus 1.50% shall be charged on a daily basis based upon total of invoices purchased by Systran that remain unpaid and outstanding, less the deposit held by Systran. Further, the purchase price for each invoice sold was amended to be the face amount of the invoice less a discount of 0.65%. Additionally, a one time fee of 0.50% on all invoices that remain unpaid from the date sold shall be incurred on the 91st day from the date sold.

All accounts sold are with recourse by Systran. Systran may defer making payment to DCII of a portion of the purchase price payable for all accounts purchased which have not been paid up to 10.0% of such accounts (reserve).

All of DCII's and DCI's accounts receivable are pledged as collateral under the agreement. The initial term is for thirty-six months and will automatically renew for an additional twelve months at the end of the term, unless the Company gives thirty days written notice of its intention to terminate the factoring agreement.

CONVERTIBLE SECURED NOTES

On August 31, 2004, the Company entered into a securities purchase agreement with four accredited investors for the sale of secured convertible notes having an aggregate principal amount of $700,000, a 10% annual interest rate payable quarterly, and a term of two years. We also agreed to sell warrants to purchase up to an aggregate of 7,777 shares of our Common Stock at $40.50 per share. We only sold $500,000 principal amount of secured convertible notes under the 2004 agreement. As a result, we sold to the investors warrants to purchase up to an aggregate of 5,556 shares of our Common Stock at $40.50 per share. The investors have agreed to purchase the remaining $200,000 commitment under the terms of our 2005 securities purchase agreement with the investors.

On November 4, 2005, we entered into an additional securities purchase agreement with the same accredited investors, for the sale of secured convertible notes having an aggregate principal amount of $3,000,000, an 8% annual interest rate (payable quarterly), and a term of three years. We also agreed to sell warrants to purchase up to an aggregate of 166,667 shares of our Common Stock at $9.00 per share.

On March 29, 2007, the Company obtained an amendment to the 2005 securities purchase agreement whereby interest payments are payable at the same time the corresponding principal balance is due and payable, whether at maturity or upon acceleration or by prepayment.

As of May 4, 2007, we had issued under the two securities purchase agreements:

▪	$3,075,000 aggregate principal amount of secured convertible notes ($1,806 was converted to common stock in March 2007),

▪	Warrants to purchase 5,556 shares of our Common Stock at $40.50 per shares,

▪	Warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and

▪	Warrants to purchase 166,667 shares of our Common Stock at $4.50 per share.

▪	Warrants to purchase 166,667 shares of our Common Stock at $4.50 per share.

The investors are required to purchase an additional $625,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share and warrants to purchase 23,611 shares of our Common Stock at $9.00 per share five days following the date that the registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and if other conditions are satisfied, including: (i) the Company's representations and warranties contained in the 2005 securities purchase agreement being true and correct in all material respects on the date when made and as of the date of such purchase; (ii) the Company having performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the 2005 agreement; (iii) there being no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the 2005 agreement; (iv) no event having occurred which could reasonably be expected to have a material adverse effect on the Company; and (v) the shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants having been authorized for quotation on the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin Board having not been suspended by the Securities and Exchange Commission or the OTC Bulletin Board.

On November 1, 2006, we obtained an amendment to the 2005 securities purchase agreement extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to April 30, 2007 (or May 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments) in exchange for issuing warrants to purchase 166,667 shares of our Common Stock at $4.50 per share to the holders of the secured convertible notes.

On March 29, 2007, we obtained an amendment extending the date by which the Company must obtain the effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants to October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments).

In connection with the 2005 securities purchase agreement, we entered into a security agreement, whereby we granted the investors a continuing, first priority security interest in the Company's general assets including all of the Company's:

▪	Goods, including without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated;

▪	Inventory (except that the proceeds of inventory and accounts receivable;

▪	Contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds;

▪	Receivables including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each receivable, including any right of stoppage in transit; and documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing and the Company's intellectual property.

Additionally, we entered into an intellectual property security agreement with the investors, whereby we granted them a security interest in all of the Company's software programs, including source code and data files, then owned or thereafter acquired, all computers and electronic processing hardware, all related documentation, and all rights with respect to any copyrights, copyright licenses, intellectual property, patents, patent licenses, trademarks, trademark licenses or trade secrets.

Additional material terms of the 2005 securities purchase agreement, the secured convertible notes and the warrants are described below:

Conversion and Conversion Price

The secured convertible notes are convertible into our Common Stock, at the investors' option, at the lower of (i) $0.90 or (ii) 50% of the average of the three lowest intraday trading prices for the Common Stock on a principal market for the 20 trading days before but not including the conversion date. Accordingly, there is in fact no limit on the number of shares into which the notes may be converted.

The conversion price is adjusted after major announcements by the Company. In the event the Company makes a public announcement that the Company intends to consolidate or merge with any other corporation (other than a merger in which the Company is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Company or any person, group or entity (including the Company) publicly announces a tender offer to purchase 50% or more of the Company's Common Stock (or any other takeover scheme) then the conversion price will be equal to the lower of the conversion price that would be effect on the date the announcement is made or the current conversion price at the time the secured convertible note holders wish to convert.

The secured convertible notes also provide anti-dilution rights, whereby the conversion price shall be adjusted in the event that the Company issues or sells any shares of Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The conversion price is also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The conversion price is also adjusted in the event the Company effects a consolidation, merger or sale of substantially all its assets (which may also be treated as an event of default) or if the Company declares or makes any distribution of its assets (including cash) to holders of its Common Stock, as provided in the secured convertible notes.

If a note holder gives the Company a notice of conversion relating to the secured convertible notes and the Company is unable to issue such note holder the shares of Common Stock underlying the secured convertible note within five days from the date of receipt of such notice, the Company is obligated to pay the note holder $2,000 for each day that the Company is unable to deliver such Common Stock underlying the secured convertible note.

The secured convertible notes contain a provision whereby no note holder is able to convert any part of the notes into shares of the Company's Common Stock, if such conversion would result in beneficial ownership by the note holder and its affiliates of more than 4.99% of the Company's then outstanding shares of Common Stock.

In addition, we have the right under certain circumstances described below under "Company Call Option and Prepayment Rights" to prevent the note holders from exercising their conversion rights during any month after a month in which we have exercised certain prepayment rights.

Company Call Option and Prepayment Rights

Each secured convertible note contains a call option in favor of the Company, whereby as long as no event of default under the note has occurred, the Company has a sufficient number of authorized shares reserved for issuance upon full conversion of the secured convertible notes and our Common Stock is trading at or below $0.90 per share (subject to adjustment in the secured convertible note), the Company has the right to prepay all or a portion of the note. The prepayment amount is equal to the total amount of principal and accrued interest outstanding under the note, and any other amounts which may be due to the note holders, multiplied by 130%.

In the event that the average daily trading price of our Common Stock for each day of any month is below $0.90, the Company may at its option prepay a portion of the outstanding principal amount of the secured convertible notes equal to 104% of the principal amount thereof divided by thirty-six plus one month's interest on the secured convertible notes, or the amount of the remaining principal and interest, whichever is less. No note holder is entitled to convert any portion of the secured convertible notes during any month after the month on which the Company exercises this prepayment option.

Events of Default

Upon an event of default under the secured convertible notes, and in the event the note holders give the Company a written notice of default, an amount equal to 130% of the amount of the outstanding secured convertible notes and interest thereon shall become immediately due and payable or another amount as otherwise provided in the notes. Events of default under the secured convertible notes include the following:

▪	failure to pay any amount of principal or interest on the notes; failure to issue shares to the selling stockholders upon conversion of the notes, and such failure continues for ten days after notification by the note holders;

▪	failure to obtain effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and the exercise of the warrants on or before October 31, 2007 (or November 25, 2007 if the Company is making a good faith effort to respond to the Securities and Exchange Commission's comments), or an effective registration statement covering such shares ceases to be effective for any ten consecutive days or any twenty days in any twelve month period;

▪	breaches by the Company of any of the convents contained in the notes;

▪	breaches by the Company of any representations and warranties made in the 2005 securities purchase agreement or any related document;

▪	appointment by the Company of a receiver or trustee or makes an assignment for the benefit of creditors;

▪	filing of any judgement against the Company for more than $50,000;

▪	bringing of bankruptcy proceedings against the Company and sugn proceedings are not stayed within sixty days of such proceedings being brought; or

▪	delisting of the Common Stock from the OTC Bulletin Board or equivalent replacement exchange.

Stock Purchase Warrants

The warrants expire five years from their date of issuance. The warrants include anti-dilution rights, whereby the exercise price of the warrants shall be adjusted in the event that the Company issues or sells any shares of the Company's Common Stock for no consideration or consideration less than the average of the last reported sale prices for the shares of the Company's Common Stock on the OTC Bulletin Board for the five trading days immediately preceding such date of issuance or sale. The exercise price of the warrants are also proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The exercise price is also adjusted pursuant to the warrants in the event the Company effects a consolidation, merger or sale of substantially all of its assets and/or if the Company declares or makes any distribution of its assets (including cash) to holders of its common stock as a partial liquidating dividend, as provided in the warrants.

The warrants also contain a cashless exercise, whereby after February 2, 2006, and if a registration statement covering the warrants is not effective, the warrant holders may convert the warrants into shares of the Company's restricted Common Stock. In the event of a cashless exercise under the warrants, in lieu of paying the exercise price in cash, the selling stockholders can surrender the warrant for the number of shares of Common Stock determined by multiplying the number of warrant shares to which it would otherwise be entitled by a fraction, the numerator of which is the difference between (i) the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise and (ii) the exercise price, and the denominator of which is the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise. For example, if the selling stockholder is exercising 100,000 warrants with a per warrant exercise price of $0.75 per share through a cashless exercise when the average of the last reported sale prices for the Company's Common Stock on the OTC Bulletin Board for the five trading days preceding such date of exercise is $2.00 per share, then upon such cashless exercise the warrant holder will receive 62,500 shares of the Company's Common Stock.

Registration Rights Agreement

We also entered into a registration rights agreement with the investors that grants the investors demand registration rights with respect to 200% of the Common Stock underlying the secured convertible notes and 200% of the Common Stock underlying the warrants. The Company will be subject to the payment of certain damages in the event that it does not satisfy its obligations including its obligation to have a registration statement with respect to the Common Stock underlying the secured convertible notes and warrants declared effective by the Securities and Exchange Commission on or prior to October 31, 2007; in the event that after the registration statement is declared effective, sales of the Company's securities cannot be made pursuant to the registration statement; and in the event that the Company's Common Stock is not listed on the OTC Bulletin Board or the NASDAQ, New York or American stock exchanges. The damages are equal to 0.02 times the number of months (prorated for partial months) that any such event occurs (subject to adjustment as provided in the registration rights agreement).

Side Letter Agreement

We entered into a aide letter agreement with the investors on November 10, 2005. The Side Letter Agreement provided that in consideration for the November 2005 sale of the secured convertible notes, the investors agreed that the face amount of the $500,000 of secured convertible notes issued to the investors in August 2004 and the $200,000 in secured convertible notes which remained to be issued under the 2004 securities purchase agreement upon the effectiveness of a registration statement covering such secured convertible notes shall be included in the amount advanced to the Company under the November 2005 secured convertible notes. The side letter agreement also provided that the terms of the 2005 securities purchase agreement shall supercede the prior 2004 securities purchase agreement and that all interest, penalties, fees, charges or other obligations accrued or owed by the Company to the investors pursuant to the 2004 securities purchase agreement are waived, provided that in the event of any material breach of the 2005 securities purchase agreement by the Company, which breach is not cured within five days of receipt by the Company of written notice of such breach, the novation of the 2004 securities purchase agreement and the waiver of the prior obligations thereunder shall be revocable by the selling stockholders and all such prior obligations shall be owed as if the 2004 securities purchase agreement was never superceded.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with GAAP. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Principles of Consolidation

The consolidated financial statements include the accounts of Monarch Staffing, Inc. (formerly MT Ultimate Healthcare Corp.) (Monarch), and its wholly-owned subsidiaries, Drug Consultants International, Inc., formerly known as iTechexpress, Inc., (DCII) and Drug Consultants, Inc. (DCI), and DCII's wholly-owned subsidiary, Success Development Group, Inc. (SDG). All significant intercompany balances and transactions have been eliminated in the consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists of amounts billed to customers upon performance of service. The Company performs ongoing credit evaluations of customers and adjusts credit limits based upon payment history and the customer current creditworthiness, as determined by its review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon its historical experience and any customer-specific collection issues that it has identified. Accounts receivable are shown net of an allowance for doubtful accounts of $0 at March 31, 2006 and December 31, 2006, respectively. An allowance is established whenever receivables are over 90 days old and the customer has not responded to efforts to reconcile differences. Such receivables are deemed to be uncollectible after 180 days. There were no such receivables for the current year or prior year.

Cash

Cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of acquisition.

Long-Lived Assets

The Company accounts for its long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.

Goodwill

The excess of purchase price and related costs over the fair value of net assets of entities acquired is recorded as goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company evaluates goodwill annually for impairment at the reporting unit level and whenever circumstances occur indicating that goodwill might be impaired. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the Company’s reporting units with the reporting unit’s carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the expected present value of future cash flows, giving consideration to the market valuation approach. If the carrying amount of the Company’s reporting units exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the Company’s reporting unit’s goodwill with the carrying amount of that goodwill. At December 31, 2006 and 2005, the Company performed the annual impairment test and determined there was no impairment of goodwill.

Beneficial Conversion Feature

From time to time, the Company has debt with conversion options that provide for a rate of conversion that is below market value. This feature is normally characterized as a beneficial conversion feature ("BCF"), which is recorded by the Company pursuant to Emerging Issues Task Forces ("EITF") Issue No. 98-5 ("EITF 98-05"), "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments."

If a BCF exists, the Company records it as a debt discount and amortizes it to interest expense over the life of the debt on a straight-line basis, which approximates the effective interest method.

Derivative Financial Instruments

The Company's derivative financial instruments consist of embedded derivatives related to the convertible notes, since the notes are not conventional convertible debt. These embedded derivatives include certain conversion features, monthly payment options, variable interest features, call options, liquidated damages clauses in the registration rights agreement and certain default provisions. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date.

Any change in fair value of these instruments will be recorded as non- operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, we will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, we will record non-operating, non-cash income. The derivative and warrant liabilities are recorded as long-term liabilities in the consolidated balance sheet.

Revenue Recognition

Revenues and costs of revenues from services are recognized during the period in which the services are provided. The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial Statements ("SAB 104"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to monthly contracted amounts for services provided when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured.

The Company has contracts with various governments and governmental agencies. Government contracts are subject to audit by the applicable governmental agency. Such audits could lead to inquiries from the government regarding the allowability of costs under applicable government regulations and potential adjustments of contract revenues. To date, the Company has not been involved in any such audits.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations. We currently have recorded a valuation allowance against all of our deferred tax assets. We have considered future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance. If actual results differ favorably from these estimates, we may be able to realize some or all of the deferred tax assets, which could favorably impact our operating results.

Issuance of Shares for Non-Cash Consideration

The Company accounts for the issuance of equity instruments to acquire goods and/or services based on the fair value of the goods and services or the fair value of the equity instrument at the time of issuance, whichever is more reliably determinable. The majority of equity instruments have been valued at the market value of the shares on the date issued.

The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of EITF 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and EITF 00-18, "Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees." The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance to EITF 00-18, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes.

RISK FACTORS

The more prominent risks and uncertainties inherent in our business are described below. However, additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. Any of these or other factors could harm our business and future results of operations and may cause you to lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

WE MAY CONTINUE TO BE UNPROFITABLE AND MAY NOT GENERATE PROFITS TO CONTINUE OUR BUSINESS PLAN.

We have historically lost money. As of March 31, 2007, we had $1,047,975 in accumulated deficit. There is a risk that our healthcare staffing services business will fail. If our business plan is not successful, we will likely be forced to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock.

WE DO NOT HAVE SUFFICIENT CASH ON HAND AND CASH FLOW FROM OPERATIONS TO MEET OUR LIQUIDITY REQUIREMENTS, AND WILL REQUIRE ADDITIONAL NEAR-TERM FINANCING TO CONTINUE OUR BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY.

We project that our cash on hand and cash flow generated from operations will not be sufficient to fund operational liquidity requirements. As a result, our ability to continue our operations and growth strategy depends on our ability to access the capital markets in the near term.

OUR AUDITORS HAVE EXPRESSED AN OPINION THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our auditors have expressed an opinion that there is substantial doubt about our ability to continue as a going concern primarily because we have yet to generate sufficient working capital to support our operations and our ability to pay outstanding employment taxes. Our most recent financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments that might result from our inability to continue as a going concern. If we are unable to continue as a going concern, investors will lose their entire investment in our Common Stock.

OUR OPERATIONS ARE RECENTLY ACQUIRED WHICH MEANS THAT WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION.

Prior to August 2003, we were a development stage company. Although we were incorporated only six years ago, we have undergone a number of changes in our business strategy and organization. In August 2003, we entered the payroll nurse staffing and homecare business. We adjusted our business strategy again in November 2005 by broadening our service offerings and to focus our activities on growing profitable operations. We have begun to implement this strategy by acquiring DCII and DCI.

The operations of DCII and DCI, which will represent our entire business for the foreseeable future, were acquired in November 2005. Accordingly, we have a limited operating history upon which an evaluation of our prospects can be made. Our strategy is unproven and the revenue and income potential from our strategy is unproven. Our business strategy may not be successful and we may not be able to successfully address these risks. If we are unsuccessful in the execution of our current strategic plan, we could be forced to reduce or cease our operations. If this happens, investors could lose their entire investment in our Common Stock.

WE WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL TO REPAY MONIES BORROWED BY US, CONTINUE OUR BUSINESS OPERATIONS AND PURSUE OUR GROWTH STRATEGY.

We have sold $3,075,000 in secured convertible notes and have agreed to sell an additional $625,000 of secured convertible notes to the note investors. We do not currently have enough capital to repay the amounts outstanding under the notes and we may never generate enough revenue to repay the amounts owed. As a result, we could be forced to curtail or abandon our business plan, making any investment in our Common Stock worthless.

Our continued operations and growth strategy depend on our ability to access the capital markets. There can be no assurance that capital from outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, it would have a material adverse impact upon our ability to continue our business operations and pursue our growth strategy. In the event we do not raise additional capital, it is likely that our growth will be restricted and that we may be forced to scale back or curtail implementing our business plan. If this happens, investors would likely experience a devaluing of our Common Stock.

WE MAY BE FORCED TO SELL SHARES OF COMMON STOCK AND/OR ENTER INTO ADDITIONAL CONVERTIBLE NOTE FINANCING AGREEMENTS IN ORDER TO REPAY AMOUNTS OWED AND CONTINUE OUR BUSINESS PLAN.

Assuming the sale of all of our secured convertible notes, we will owe $3,698,194 to the holders of the notes (not including any accrued interest). We do not currently have enough capital to repay any of these amounts and we may never generate enough revenue to repay the amounts owed. We may be forced to raise additional funds to repay these amounts through the issuance of equity, equity-related or convertible debt securities. The issuance of additional common stock dilutes existing stockholdings. Additionally, in furtherance of our convertible secured note transaction, we may issue additional shares of common stock throughout the term, and accordingly, our stockholders may experience significant dilution. Further procurement of additional financing through the issuance of equity, equity-related or convertible debt securities or preferred stock may further dilute existing stock. The perceived risk of dilution may cause the holders of our secured convertible notes, as well as other holders, to sell their shares, which would contribute to downward movement in the price of your shares. Additionally, if such additional shares are issued, investors would likely experience a devaluing of our Common Stock.

WE HAVE PLEDGED ALL OF OUR ASSETS TO EXISTING CREDITORS.

Our secured convertible notes are secured by a lien on substantially all of our assets, including our equipment, inventory, contract rights, receivables, general intangibles, and intellectual property. A default by us under the secured convertible notes would enable the holders of the notes to take control of substantially all of our assets. The holders of the secured convertible notes have no operating experience in our industry and if we were to default and the note holders were to take over control of our Company, they could force us to substantially curtail or cease our operations. If this happens, investors could lose their entire investment in our Common Stock.

DCII and DCI, our principal operating subsidiaries, have pledged substantially all of their accounts receivable to secure the payment of accounts receivable sold under a factoring agreement with Systran Financial Services Corporation ("Systran"). If Systran is unable to collect our accounts receivable purchased from us, they could take control of all of our accounts receivable, which would substantially reduce our working capital and could force us to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock.

In addition, the existence of these asset pledges to the holders of the secured convertible notes and to Systran will make it more difficult for us to obtain additional financing required to repay monies borrowed by us, continue our business operations and pursue our growth strategy.

THE SECURED CONVERTIBLE NOTES BECOME IMMEDIATELY DUE AND PAYABLE UPON DEFAULT AND WE MAY BE REQUIRED TO PAY AN AMOUNT IN EXCESS OF THE OUTSTANDING AMOUNT DUE UNDER OF THE SECURED CONVERTIBLE NOTES, AND WE MAY BE FORCED TO SELL ALL OF OUR ASSETS.

The secured convertible notes become immediately due and payable upon an event of default including:

▪	failure to obtain effectiveness of the registration statement covering the resale of the shares of our Commons Stock issuable upon conversion of the secured convertible notes and exercise of the warrants on or before October 31, 2007 (or November 25, 2007) if the Company is making good faith efforts to respond to Securities and Exchange Commission comments with respect to the registration statement);

▪	failure to pay interest and principal payments when due;

▪	a breach of us of any material covenant or term or condition of the secure convertible notes or any agreement made in connection therewith;

▪	a breach by us of any material representation or warranty made in the 2005 securities purchase agreement or in any agreement made in connection therewith;

▪	we make an assignment for the benefit of our creditors, or a receiver or trustee is appointed for us;

▪	the entering of any money judgment, writ or similar process against us or any of our subsidiaries or any of our property or other assets for more than $50,000;

▪	any form of bankruptcy or insolvency proceeding is instituted by or against us; and

▪	our failure to timely deliver shares of Common Stock when due upon conversions of the secured convertible notes.

If we default on the secured convertible notes and the holders demand all payments due and payable, we will be required to pay the holders of the secured convertible notes an amount equal to the greater of (x) 130% times the sum of the outstanding amount of the secured convertible notes per month plus accrued and unpaid interest on the secured convertible notes plus additional amounts owed to the holders of the notes under the 2004 securities purchase agreement and the 2005 securities purchase agreement and related documents or (y) the value of the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to the amount calculated under clause (x) determined based on the highest closing price of the Common Stock during the period beginning on the date of default and ending on the date of the payment described herein. We do not currently have the cash on hand to repay this amount. If we are unable to raise enough money to cover this amount we may be forced to restructure, file for bankruptcy, sell assets or cease operations. If any of these events happen, investor could lose their entire investment in our Common Stock.

WE MAY BE SUBJECT TO LIQUIDATED DAMAGES IN THE AMOUNT OF 3% OF THE OUTSTANDING AMOUNT OF THE SECURED CONVERTIBLE NOTES PER MONTH PLUS ACCRUED AND UNPAID INTEREST ON THE SECURED CONVERTIBLE NOTES FOR BREACHES BY US OF OUR REPRESENTATIONS AND WARRANTIES AND CERTAIN COVENANTS UNDER THE 2005 SECURITIES PURCHASE AGREEMENT.

In the 2005 securities purchase agreement relating to our secured convertible notes, we made certain representations and warranties and agreed to certain covenants that are customary for securities purchase agreements. In the event that we breach those representations, warranties or covenants, we will be subject to liquidated damages in the amount of 3% of the outstanding amount of the secured convertible notes, per month, plus accrued and unpaid interest on the notes for such breaches. As of the May 4, 2007, the outstanding amount of the secured convertible notes was $3,073,194. We have not previously been required to pay any liquidated damages, however if we do breach the representations, warranties or covenants, we will be forced to pay liquidated damages to the note holders. If we do not have enough cash on hand to cover the amount of the liquidated damages, we could be forced to sell part or all of our assets, which could force us to scale back our business operations. If this happens, investors would likely experience a devaluing of our Common Stock.

WE ARE HEAVILY DEPENDENT ON THE OPERATIONS OF DCI FOR OUR REVENUES, WHICH ITSELF IS HIGHLY DEPENDENT ON THE STATE OF CALIFORNIA DEPARTMENT OF CORRECTIONS AND REHABILITATION AS ITS MAJOR CUSTOMER.

We anticipate approximately 95% of our revenues for the foreseeable future will come from the operations of DCI. Approximately 95% of DCI's revenue comes from the CDCR. DCI's agreements with the CDCR do not provide for a minimum purchase commitment of our services and can be terminated by the CDCR at any time on 30 days' notice. Our dependence on the CDCR as our major customer subjects us to significant financial risks in the operation of our business if the CDCR were to terminate or materially reduce, for any reason, its business relationship with us.

We recently have experienced a loss of several of our healthcare professionals who have accepted positions with the CDCR due to a federal court-appointed receiver’s management of the CDCR healthcare delivery system. See “THE COURT-APPOINTED RECEIVER MANAGING THE CDCR’S HEALTHCARE DELIVERY SYSTEM INTENDS TO REDUCE THE CDCR’S UNTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI” below.

Further, the CDCR is subject to unique political and budgetary constraints and has special contracting requirements that may affect our ability to obtain additional contacts or business. In addition, future sales to the CDCR and other governmental agencies, if any, will depend on our ability to meet government contracting requirements, certain of which may be onerous or impossible to meet, resulting in our inability to obtain a particular contract. Common requirements in government contracts include bonding; provisions permitting the purchasing agency to modify or terminate, at will, the contract without penalty; and provisions permitting the agency to perform investigations or audits of our business practices. If we are unable to maintain our contracts in the CDCR and/or gain new contracts in California and elsewhere, we could be forced to curtail or abandon our business plan. If this happens, investors could lose their entire investment in our Common Stock.

THE COURT-APPOINTED RECEIVER MANAGING THE CDCR’S HEALTHCARE DELIVERY SYSTEM INTENDS TO REDUCE UTILIZATION OF STAFFING SERVICE PROVIDERS LIKE DCI.

In April 2006, a federal court-appointed receiver assumed total control over CDCR’s healthcare delivery system to address the court’s findings of substandard medical care. Among the receiver’s objectives is to reduce the CDCR’s reliance on staffing service providers like DCI. Since the receiver’s appointment, DCI has experienced a loss of several of its healthcare professionals who have accepted positions with the CDCR. We believe that the ongoing implications of the receiver’s management of the CDCR’s healthcare delivery system include lower demand from the CDCR for DCI’s services, higher attrition of our healthcare professionals, increased competition for recruiting healthcare professionals to fill positions with the CDCR and reduced margins for the services we provide the CDCR. These factors will have a material adverse impact on our results of operations, and could have an adverse effect on the value of our Common Stock, unless we can successfully reduce our dependence on the CDCR and obtain higher margin contracts with other customers.

WE HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT OUR TEMPORARY HEALTHCARE PROFESSIONALS SHOULD BE CLASSIFIED AS EMPLOYEES AND NOT INDEPENDENT CONTRACTORS.

We have received notice from the Internal Revenue Service (the "IRS") that the IRS had concluded that our subsidiary DCI was a third-party payer to and thus employer of a pharmacist who provided services to DCI's client, the California Department of Corrections. Although the IRS notice applies only to the case of the individual pharmacist, if unchanged, it could require DCI to classify other pharmacists and nurses in its registry who provide services to DCI's clients as employees of DCI. Accordingly, compensation payable to such pharmacists and nurses would be subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. This result would have a material adverse effect on our business, financial condition and results of operations. The Company is evaluating its response to the IRS notice.

WE FACE SIGNIFICANT COMPETITION FOR OUR SERVICES AND AS A RESULT, WE MAY BE UNABLE TO COMPETE IN THE HEALTHCARE STAFFING INDUSTRY.

We face significant competition for our staffing services. The markets for our services are intensely competitive and we face significant competition from a number of different sources. Several of our competitors have significantly greater name recognition as well as substantially greater financial, technical, service offerings, product development and marketing resources than we do. Additionally, competitive pressures and other factors may result in price or market share erosion that could have a material adverse effect on our business, results of operations and financial condition.

THERE IS A SHORTAGE OF WORKERS IN THE HEALTHCARE INDUSTRY THAT MAY IMPEDE OUR ABILITY TO ACQUIRE QUALIFIED HEALTHCARE PROFESSIONALS FOR OUR CONTINUED GROWTH.

Presently, the healthcare industry is experiencing a growing shortage of healthcare professionals. As the operations of DCI are in part based on the placement of healthcare professionals, there can be no assurance that we will be able to acquire qualified healthcare professionals to meet our growing needs. Any shortage in the number of professionals in the healthcare industry could impede the Company's ability to place such healthcare professionals into jobs and/or impede our growth rate. If we are unable to find qualified healthcare professionals to place in jobs, it would prevent us from continuing our current business strategy. If this happens, investors would likely experience a devaluing of our Common Stock.

WE ARE ACTIVELY SEEKING TO ACQUIRE COMPANIES RELATED TO OUR BUSINESS OPERATIONS, BUT OUR EFFORTS MAY NOT MATERIALIZE INTO DEFINITIVE AGREEMENTS.

Our business model is dependent upon growth through acquisition of other staffing service providers. We completed the acquisition of DCI in November 2005. Although we currently have no commitments with respect to any other acquisitions, we expect to continue making acquisitions that will enable us to expand our staffing services and build our customer base. There can be no assurance that we will be successful in identifying suitable acquisition candidates or in coming to definitive terms with respect to any negotiations which we may enter into, or, assuming that we reach definitive agreements, that we will close the acquisitions. In the event that we do not reach any additional definitive agreements or close any additional acquisitions, our expansion strategy will not proceed as intended which will have a material adverse effect on our growth.

OUR FUTURE ACQUISITIONS, IF ANY, MAY BE COSTLY AND MAY NOT REALIZE THE BENEFITS ANTICIPATED BY US.

We may engage in future acquisitions, which may be expensive and time- consuming and from which we may not realize anticipated benefits. We may acquire additional businesses, technologies, products and services if we determine that these additional businesses, technologies, products and services are likely to serve our strategic goals. We currently have no commitments or agreements with respect to any acquisitions. The specific risks we may encounter in these types of transactions include the following:

▪	Potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets, which could adversely affect our results of operations and financial conditions;

▪	The possible adverse impact of such acquisitions on existing relationships with third-party partners and suppliers of services;

▪	The possibility that staff or customers of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships;

▪	The possibility that the due dilligence process in any such acquisition may not completely identify material issues associated with product quality, intellectual property issues, key personnel issues or legal and financial contingencies; and

▪	Difficulty in integrating acquired operations due to geographical distance, and language and cultural differences.

A failure to successfully integrate acquired businesses for any of these reasons could have a material adverse effect on our results of operations.

WE MAY BE UNABLE TO MANAGE OUR GROWTH.

Any growth that we experience is expected to place a significant strain on our managerial and administrative resources. We have limited employees who perform management or administrative functions. Further, if our business grows, we will be required to manage multiple relationships with various clients, healthcare professionals and third parties. These requirements will be exacerbated in the event of further growth. There can be no assurance that our other resources such as our systems, procedures or controls will be adequate to support our growing operations or that we will be able to achieve the rapid execution necessary to successfully offer our services and implement our business plan. Assuming that our business grows, our future success will depend on our ability to add additional management and administrative personnel to help compliment our current employees as well as other resources. If we are unable to add additional managerial and administrative resources, it will prevent us from continuing our business plan, which calls for expanding our operations, and could have an adverse effect on the value of our Common Stock.

WE HEAVILY DEPEND ON OUR CHIEF EXECUTIVE OFFICER, JOEL WILLIAMS, AND OUR CHAIRMAN, DAVID WALTERS.

The success of the Company heavily depends upon the personal efforts and abilities of Joel Williams and David Walters. Mr. Williams serves as the Company's Chief Executive Officer and Mr. Walters serves as our Chairman and together they are primarily responsible for the operation of the Company's wholly owned subsidiaries DCII and DCI. If either were to leave unexpectedly; we may not be able to execute our business plan. Our future performance depends in significant part upon the continued service of Mr. Williams and Mr. Walters as they have acquired specialized knowledge and skills with respect to our business. Additionally, because we have a relatively small number of employees when compared to other leading companies in the same industry, our dependence on maintaining our relationship with Mr. Williams and Mr. Walters is particularly significant. We cannot be certain that we will be able to retain Mr. Williams or Mr. Walters in the future. The loss of Mr. Williams or Mr. Walters could have a material adverse effect on our business and operations and cause us to expend significant resources in finding a replacement, which could cause the value of our Common Stock to decline or become worthless.

WE HEAVILY DEPEND ON OUR RELATIONSHIPS WITH ENTITIES OWNED BY OUR DIRECTORS

We depend on relationships with MBMC and another entity controlled by David Walters and Keith Moore (our sole directors) for short-term working capital as well as for outsourced financial management, administrative, investment banking and other services. Accordingly, the success of the Company heavily depends upon our relationships with, and the performance of, these entities.

We currently rely on a working capital line of credit from MBMC. Although the line of credit provides for total funding of up to $500,000, there can be no assurance that funding from this source will continue to be available, or if such funding is available, that it will be on terms that management deems sufficiently favorable. In addition, any failure to perform adequately the outsourced services could have a material adverse effect on our business and operations and cause us to expend significant resources in finding replacement providers, which could cause the value of our Common Stock to decline or become worthless.

DAVID WALTERS AND KEITH MOORE CAN VOTE AN AGGREGATE OF 88.2% OF OUR COMMON STOCK AND CAN EXERCISE CONTROL OVER CORPORATE DECISIONS INCLUDING THE APPOINTMENT OF NEW DIRECTORS.

David Walters and Keith Moore can vote an aggregate of 13,283,333 shares (or 88.2%) of our outstanding Common Stock. Accordingly, Mr. Walters and Mr. Moore will exercise control in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. All of our other stockholders are minority stockholders and as such will have little to no say in the direction of the Company and the election of Directors. Additionally, it will be difficult if not impossible for stockholders to remove Mr. Walters and Mr. Moore as Directors of the Company, which will mean they will remain in control of who serves as officers of the Company as well as whether any changes are made in the Board of Directors.

Messrs. Walters and Moore beneficially own 10,000 shares of our Series A Preferred Stock. The Series A Preferred Stock is convertible into a number of shares of our Common Stock determined by dividing (i) the sum of liquidation preference of such share of Series A Preferred Stock ($100 per share), plus any accrued but unpaid dividends thereon, by (ii) a conversion price equal to (a) at any time prior to November 15, 2007, $0.20 and (b) from and after November 15, 2007, the lower of (x) $0.20 or (y) 75% of the average of the three lowest intraday trading prices for the Common Stock on a principal market for the 20 trading days before but not including the conversion date. If converted on May 11, 2007, the Series A Preferred Stock beneficially owned by Messrs. Walters and Moore would be convertible into 5,000,000 shares of our Common Stock based upon a current conversion price of $0.20 The number of shares issuable could prove to be significantly greater in the event the trading price of our Common Stock is less than $0.20 per share on or after November 15, 2007. Accordingly, the floating conversion price feature of the Series A Preferred Stock could enable Messrs. Walters and Moore to retain substantial voting control of the Company while other existing stockholders experience substantial dilution of their ownership interests.

OUR RESULTS OF OPERATIONS HAVE FLUCTUATED IN THE PAST AND AS A RESULT, THE RESULTS OF ONE QUARTER MAY NOT BE INDICATIVE OF OUR YEARLY RESULTS, MAKING ANY INVESTMENT IN US SPECULATIVE.

Our quarterly operating results and revenue has historically fluctuated in the past and may do so in the future from quarter to quarter and period to period, as a result of a number of factors including, without limitation:

▪	the size and timing of orders from clients;

▪	changes in pricing policies or price reductions by us or our competitors;

▪	changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board or other rule-making bodies;

▪	our success in expanding our sales and marketing programs;

▪	execution of or changes to Company strategy;

▪	personnel changes; and

▪	general market/economic factors.

Due to all of the foregoing factors, it is possible that our operating results may be below the expectations of public market analysts and investors. In such event, the price of our Common Stock would likely decline and any investment in us could become worthless.

WE FACE POTENTIAL LIABILITY FOR SECURITY BREACHES RELATING TO OUR TECHNOLOGY.

We face the possibility of damages resulting from internal and external security breaches, and viruses. The systems with which we may interface, such as the Internet and related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. The effect of these security breaches and related issues could reduce demand for our services. Accordingly, we believe that it is critical that these facilities and related infrastructures not only be secure, but also be viewed by our customers as free from potential breach. Maintaining such standards, protecting against breaches and curing security flaws, may require us to expend significant capital.

RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT

IF THE REGISTRATION STATEMENT COVERING THE RESALE OF THE SHARES OF OUR COMMON STOCK ISSUABLE UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND EXERCISE OF THE WARRANTS IS NO DECLARED EFFECTIVE BEFORE OCTOBER 31, 2007, WE MAY BE FORCED TO INCUR SUBSTANTIAL PENALTIES.

The Company is subject to a $53,000 per month penalty payable to the secured convertible note holders, if the registration statement fails to become effective on or before October 31, 2007 (or November 25, 2007 if the Company is making good faith efforts to respond to Securities and Exchange Commission comments with respect to the registration statement). If this penalty becomes payable, the Company will likely be forced to pay this amount out of the proceeds of the sale of the secured convertible notes. This will likely have a materially adverse affect on the Company's financial condition, and could force the Company to curtail its business plan.

THE ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.

As of May 4, 2007, we had 10,060,078 shares of Common Stock issued and outstanding. We plan to register for resale the shares of Common Stock issuable upon conversion of $3,698,194 of secured convertible notes and related warrants (341,112 shares as of May 4, 2007). As sequential conversions and sales take place, the price of our Common Stock may decline, and as a result, the holders of the secured convertible notes could be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, to the detriment of the investors in this Offering. All of the shares issuable upon conversion of the secured convertible notes and upon exercise of the warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our Common Stock.

THE ISSUANCE AND SALE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS REPRESENT OVERHANG.

In addition, the Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants may represent overhang that may also adversely affect the market price of our Common Stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the company's Common Stock will decrease, and any additional shares which shareholders attempt to sell in the market will only decrease the share price even more. The secured convertible notes may be converted at a conversion price of $0.02 per share, as of May 4, 2007. Warrants to purchase 5,556 shares of our Common Stock may be exercised at a price of $40.50 per share, warrants to purchase 143,056 shares of our Common Stock may be exercised at a price of $9.00 per share, and warrants to purchase 166,667 shares of our Common Stock may be exercised at $4,50 per share. As of May 4, 2007, the market price for one share of our Common Stock was $0.058. Therefore, the secured convertible notes and warrants may be converted into Common Stock at a discount to the market price, providing holders with the ability to sell their Common Stock at or below market and still make a profit. In the event of such overhang, holders will have an incentive to sell their Common Stock as quickly as possible. If the share volume of the Company's Common Stock cannot absorb the discounted shares, the market price per share of our Common Stock will likely decrease.

THE ISSUANCE OF COMMON STOCK UNDERLYING THE SECURED CONVERTIBLE NOTES AND THE WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.

The issuance of Common Stock upon conversion of the secured convertible notes and exercise of the warrants by the holders of the notes and warrants will result in immediate and substantial dilution to the interests of other stockholders since the note holders may ultimately receive and sell the full amount issuable on conversion or exercise. Although the note holders may not convert their secured convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.9% of our outstanding Common Stock, this restriction does not prevent the note holders from converting and/or exercising some of their holdings, selling those shares, and then converting the rest of their holdings, while still staying below the 4.9% limit. In this way, the note holders could sell more than this limit while never actually holding more shares than this limit allows. If the note holders choose to do this it will cause substantial dilution to the holders of our Common Stock.

THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.

Our existing stockholders will experience substantial dilution of their investment upon conversion of the secured convertible notes and exercise of the warrants by the holders thereof. The secured convertible notes are convertible into shares of our Common Stock at the lesser of $0.90 or 50% of the average of the three lowest trading prices of our Common Stock during the 20 trading day period ending one trading day before the date that a holder sends us a notice of conversion. If converted on May 4, 2007, the secured convertible notes would be convertible into approximately 200,343,350 shares of Common Stock based upon a conversion price of $0.02. The number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our Common Stock that would cause dilution to our existing stockholders. The sale of shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants may adversely affect the market price of our Common Stock. As sequential conversions and sales take place, the price of our Common Stock may decline and if so, the holders of secured convertible notes would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders. Additionally, there are no provisions in the 2005 securities purchase agreement, the secured convertible notes, the warrants, or any other document which restrict the holders' ability to sell short our Common Stock, which they could do to decrease the price of our Common Stock and increase the number of shares they would receive upon conversion and thereby further dilute other stockholders.

The following is an example of the amount of shares of our Common Stock that are issuable upon conversion of the secured convertible notes based on conversion prices that are 25%, 50% and 75% below the conversion price as of May 4, 2007 of $0.02.

Percentage Below Conversion Price as of May 4, 2007 Estimated

Percentage Below Conversion Price As of May 4, 2007			Estimated Conversion Price		Approximate Number of Shares Issuable (1)		% of Outstanding Common Stock (1,2)
	25	%	$	0.015		267,124,467		96.37	%
	50	%	$	0.010		400,686,701		97.55	%
	75	%	$	0.005		801,373,401		98.76	%

(1) Includes shares of Common Stock issuable upon conversion of the secured convertible notes. Does not include 341,112 shares of Common Stock issuable upon exercise of outstanding warrants.

(2) As of May 4, 2007, we had 10,060,078 shares of Common Stock issued and outstanding.

As illustrated, the number of shares of Common Stock issuable upon conversion of the secured convertible notes will increase if the conversion price of our Common Stock declines, which will cause dilution to our existing stockholders.

THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE SECURED CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS, INCLUDING THE NOTE HOLDERS, TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.

The secured convertible notes are convertible into shares of our Common Stock at the lesser of $0.90 or 50% of the average of the three lowest trading prices of our Common Stock during the 20 trading day period ending one trading day before the date that a holder sends us notice of conversion. The significant downward pressure on the price of our Common Stock as the note holders convert and sell material amounts of our Common Stock could encourage investors, including the selling stockholders, to short sell our Common Stock. This could place further downward pressure on the price of our Common Stock. In addition, not only the sale of shares issued upon conversion of the secured convertible notes or exercise of the warrants, but also the mere perception that these sales could occur, may adversely affect the market price of our Common Stock.

WE MUST SATISFY CERTAIN CONDITIONS BEFORE THE INVESTORS ARE OBLIGATED TO PURCHASE THE REMAINING SECURED CONVERTIBLE NOTES AND WARRANTS.

As of May 4, 2007, we had issued to the secured convertible note investors $3,073,194 aggregate principal amount of secured convertible notes, warrants to purchase 5,556 shares of our Common Stock at $40.50 per share, warrants to purchase 143,056 shares of our Common Stock at $9.00 per share, and warrants to purchase 166,667 shares of our Common Stock at $4.50 per share. The investors are required to purchase an additional $625,000 principal amount of secured convertible notes and warrants to purchase 2,222 shares of our Common Stock at $40.50 per share and warrants to purchase 23,611 shares of Common Stock at $9.00 per share five days following the date that the registration statement for the resale of the shares of common stock issuable upon conversion of the secured convertible notes and exercise of the warrants is declared effective by the Securities and Exchange Commission and conditioned upon certain other conditions, including: (i) the Company's representations and warranties contained in the 2005 securities purchase agreement being true and correct in all material respects on the date when made and as of the date of such purchase; (ii) the Company having performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the 2005 agreement; (iii) there being no litigation, statute, rule, regulation, executive order, decree, ruling or injunction that has been enacted, entered, promulgated or endorsed by or in any court or government authority of competent jurisdiction or any self-regulatory organization having requisite authority which prohibits the transactions contemplated by the 2005 agreement; (iv) no event having occurred which could reasonably be expected to have a material adverse effect on the Company; and (v) the shares of Common Stock issuable upon conversion of the secured convertible notes and exercise of the warrants having been authorized for quotation on the OTC Bulletin Board and trading in our Common Stock on the OTC Bulletin Board having not been suspended by the Securities and Commission or the OTC Bulletin Board.

If the registration statement is not declared effective within the agreed- upon time frame or we fail to satisfy these additional conditions, the investors have no obligation to purchase the remaining secured convertible notes and warrants. If the investors do not purchase the remaining secured convertible notes and warrants, the Company may be required to curtail or abandon its business plan, which would decrease the value of our Common Stock.

THE NOTE HOLDERS MAY EXPLOIT A MAJOR ANNOUNCEMENT MADE BY THE COMPANY TO CONVERT THE SECURED CONVERTIBLE NOTES AT A PRICE SUBSTANTIALLY LOWER THEN THE CONVERSION PRICE WOULD BE OTHERWISE.

Under the terms of the secured convertible notes, the conversion price which the note holders must pay is changed after major announcements by the Company, discussed below. In the event the Company makes a major announcement, the conversion price of the secured convertible notes is equal to the lower of the conversion price that would be in effect on the date the announcement is made or the current conversion price at the time the note holders wish to convert. Therefore, if the Company's stock price was to increase substantially after a major announcement the note holders could still convert the secured convertible notes the lower price which applied before the announcement. In this way, the note holders could hold shares of Common Stock worth much more then the note holders originally paid for them. Therefore, the note holders could sell the shares at a price lower then the current market prices, still making a profit on their investment which would drive down the price of the Common Stock.

IF THE COMPANY WISHES TO MERGE OR CONSOLIDATE ITS ASSETS WITH ANOTHER COMPANY PRIOR TO FULLY PAYING BACK THE SECURED CONVERTIBLE NOTES, IT COULD LEAD TO A DEFAULT UNDER THE NOTES, MAKING THEM IMMEDIATELY DUE.

Under the terms of the secured convertible notes, any sale, conveyance or disposition of all or substantially all of the assets of the Company in which more than 50% of the voting power of the Company is disposed of, or the consolidation, merger or other business combination of the Company with or into any other entity when the Company is not the survivor shall either: (i) be deemed to be an event of default under the notes which could cause the Company to pay substantial penalties, or (ii) require the Company to get written approval by the successor entity that such successor entity assumes the obligations of the secured convertible notes. Additionally, if the Company makes any issuance of shares of Common Stock, options for shares of Common Stock, or issues any additional convertible notes for consideration less than the conversion price then in effect, the conversion price of the secured convertible notes will become the price the shares or options were issued for or the price the additional convertible notes will be convertible for. If the Company is forced to pay penalties under the secured convertible notes or the conversion price of the notes is decreased substantially, the Company could be forced to curtail its business operations or issue more shares of Common Stock, which would have a dilutive effect on the then shareholders.

RISKS RELATING TO OUR COMMON STOCK

THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE.

The market price of our Common Stock historically has fluctuated significantly based on, but not limited to, such factors as: general stock market trends, announcements of developments related to our business, actual or anticipated variations in our operating results, our ability or inability to generate new revenues, conditions and trends in the healthcare industry and in the industries in which our customers are engaged.

Our Common Stock is traded on the OTC Bulletin Board. In recent years the stock market in general has experienced extreme price fluctuations that have oftentimes have been unrelated to the operating performance of the affected companies. Similarly, the market price of our Common Stock may fluctuate significantly based upon factors unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our Common Stock.

OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE COMMISSION WHICH LIMITS THE TRADING MARKET IN OUR COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK.

Our Common Stock is considered a "penny stock" as defined in Rule 3a51-1 promulgated by Commission under the Securities Exchange Act of 1934. In general, a security which is not quoted on NASDAQ or has a market price of less than $5 per share where the issuer does not have in excess of $2,000,000 in net tangible assets (none of which conditions the Company meets) is considered a penny stock. The Commission's Rule 15g-9 regarding penny stocks impose additional sales practice requirements on broker- dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus, the rules affect the ability of broker-dealers to sell our Common Stock should they wish to do so, because of the adverse effect that the rules have upon liquidity of penny stocks. Unless the transaction is exempt under the rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the "penny stock" rules, the market liquidity for our Common Stock may be adversely affected by limiting the ability of broker-dealers to sell our Common Stock and the ability of purchasers to resell our Common Stock. Additionally, the value of the Company's securities may be adversely affected by the "penny stock" rules, because of the additional disclosures required by broker-dealers, which take additional time and effort from broker-dealers, decreasing the likelihood that broker-dealers will sell the Company's Common Stock. This may in turn have an adverse effect on the liquidity of the Company's securities which in turn could adversely affect the price of the Company's securities.

In addition, various state securities laws impose restrictions on transferring "penny stocks" and as a result, investors in the Common Stock may have their ability to sell their shares of the Common Stock impaired.

THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS.

The Company has paid no cash dividends on its Common Stock to date and it is not anticipated that any cash dividends will be paid to holders of the Company's Common Stock in the foreseeable future. While the Company's dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance the future expansion of the Company.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by the Exchange Act Rules 13a-15(b) and 15d-15(b).

Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2007, our disclosure controls and procedures were not effective, due to the identification of the material weaknesses in internal control over financial reporting described below. Notwithstanding the material weaknesses described below, management believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Material Weaknesses in Internal Control Over Financial Reporting

A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with the preparation of our 2006 consolidated financial statements, we have identified the following control deficiencies, which represent material weaknesses in the Company’s internal control over financial reporting as of December 31, 2006 and as of March 31, 2007:

	•	We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles commensurate with our existing financial reporting requirements and the requirements we face as a public company. Accordingly, management has concluded that this control deficiency constitutes a material weakness, and that it contributed to the following material weakness.

	•	We did not maintain effective controls with respect to reviewing and authorizing related party transactions during the 2006 fiscal year. Specifically, our control procedures did not prevent the Company from making payments on behalf of other related parties. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

Management’s Remediation Initiatives

During the second quarter of 2007, we plan to remediate these material weaknesses as follows:


	•	We assessed the organization of our accounting personnel and the technical expertise within the accounting function. We plan to appoint a new Chief Financial Officer in order to increase our depth of experience in generally accepted accounting principles and guidelines required by the Securities and Exchange Commission.

	•	We plan to add an independent director to the Company’s board of directors. This independent director will approve all related party transactions prior to occurring and ensure appropriate preventative controls are in place.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 11, 2007, we issued 5,000 shares of our newly designated Series A Preferred Stock to each of Monarch Bay Management Company, LLC (“MBMC”) and Monarch Bay Associates, LLC (“MBA”) as retainer payments under service agreements with the entities. David Walters, our Chairman and Chief Financial Officer, and Keith Moore, our director, each are members of, and each beneficially owns 50% of the ownership interests in each of MBMC and MBA. The shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, on the basis that the issuance did not involve a public offering.

The terms of the Series A Preferred Stock are set forth in the Certificate of Designations, Preferences and Rights of the Series A Preferred Stock, the most significant of which are as follows:

Dividends. Holders of shares of Series A Preferred Stock are entitled to receive cumulative dividends in an amount equal to $6.00 per share per annum.

Liquidation Preference. The Series A Preferred Stock ranks senior to our Common Stock with respect to payment of dividends and amounts upon any liquidation, dissolution or winding up of the Company. The liquidation preference of the Series A Preferred Stock is $100 per share.

Redemption. The Series A Preferred Stock is not redeemable.

Conversion. Each holder of Series A Preferred Stock has the right to convert its shares of Series A Preferred Stock into a number of shares of our Common Stock determined by dividing (i) the sum of liquidation preference of such share of Series A Preferred Stock, plus any accrued but unpaid dividend thereon, by (ii) a conversion price equal to (a) at any time prior to November 15, 2007, $0.20 and (b) from and after November 15, 2007, the lower of (x) $0.20 or (y) 75% of the average of the three lowest intraday trading prices for the Common Stock on a principal market for the 20 trading days before but not including the conversion date. Accordingly, there is in fact no limit on the number of shares into which the Series A Preferred Stock may be converted.

The conversion price is proportionately increased or decreased in the event of a reverse stock split or forward stock split, respectively. The conversion price is also adjusted in the event the Company effects a consolidation, merger or sale of substantially all its assets (which may also be treated as an event of default) or if the Company declares or makes any distribution of its assets (including cash) to holders of its Common Stock.

The Series A Preferred Stock contains a provision whereby no holder is able to convert any shares of Series A Preferred Stock into shares of our Common Stock, if such conversion would result in beneficial ownership by the holder and its affiliates of more than 4.99% of our then outstanding shares of Common Stock. This provision has been waived by each of MBMC and MBA.

Voting Rights. In addition to any voting rights provided by law, each holder of Series A Preferred Stock has the right to vote on all matters before the common stockholders on an as-converted basis voting together with the common stockholders as a single class.

Protective Provisions. So long as 50% of the issued Series A Preferred Stock are outstanding, we are not permitted to take any of the following corporate actions without first obtaining the approval of the majority holders of Series A Preferred Stock:

▪	alter or change the rights, preferences or privileges of the Series A Preferred Stock , whether by merger, consolidation or otherwise, where such alteration or change would adversely affect the Series A Preferred Stock;

▪	redeem, repurchase or pay dividends with respect to any shares of stock junior to the Series A Preferred Stock; or

▪	authorize a voluntary dissolution, liquidation or winding up of the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

On May 11, 2007, we entered into a Support Services Agreement with MBMC. Under the Support Services Agreement, MBMC will provide us with financial management services, facilities and administrative services, business development services, creditor resolution services and other services as agreed by the parties. As a retainer for the services provided by MBMC under the Support Services Agreement, we issued to MBMC 5,000 shares of iour Series A Preferred Stock. We will also pay to MBMC monthly cash fees of $22,000 for the services. In addition, MBMC will receive fees equal to (a) 6% of the revenue generated from any business development transaction with a customer or partner introduced to us by MBMC and (b) 20% of the savings to us from any creditor debt reduction resolved by MBMC on our behalf. The initial term of the Support Services Agreement expires May 11, 2008. In connection with entering into the Support Services Agreement, MBMC and we mutually agreed to terminate our prior agreement related to the provision of chief financial officer services.

On May 11, 2007, we entered into a Placement Agent and Advisory Services Agreement with MBA. [MBA is a NASD member firm.] Under the agreement, MBA will act as our placement agent on an exclusive basis with respect to private placements of our capital stock and as our exclusive advisor with respect to acquisitions, mergers, joint ventures and similar transactions. As a retainer for the services provided by MBA under the Placement Agent and Advisory Services Agreement, we issued to MBA 5,000 shares of our Series A Preferred Stock. In addition, MBA will receive fees equal to (a) 9% of the gross proceed raised by us in any private placement (plus warrants to purchase 9% of the number of shares of common stock issued or issuable by us in connection with the private placement) and (b) 3% of the total consideration paid or received by us or our stockholders in an acquisition, merger, joint venture or similar transaction. The initial term of the Placement Agent and Advisory Services Agreement expires May 11, 2008.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

EXHIBIT NO.		DESCRIPTION OF EXHIBIT

10.1		Certificate of Designation for Series A Preferred Stock

10.2		Support Services Agreement with Monarch Bay Management Company

10.3		Placement Agent and Advisory Services Agreement with Monarch Bay Associates

31.1		Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2		Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Monarch Staffing, Inc.

DATED: May 11, 2007		/S/ Joel Williams
		Joel Williams
		Chief Executive Officer

DATED: May 11, 2007		/S/ David Walters
		David Walters
		Chief Financial Officer

Monarch Staffing (MSTF) Inactive 10QSB2007 Q1 Quarterly report (small business)