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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
---------

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 30, 2001.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

Commission File Number: 0-26094

SOS STAFFING SERVICES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Utah 87-0295503
- -------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)

1415 South Main Street, Salt Lake City, Utah 84115
- -------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (801) 484-4400

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.01 par value
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

The aggregate market value of the Common Stock held by non-affiliates of the
registrant, on March 8, 2002, based upon the closing sales price of the Common
Stock of $0.90 per share on that date as reported on the NASDAQ/NNM Stock
Market, was approximately $7,047,412. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of March 8, 2002, the registrant had outstanding 12,691,398 shares of Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 2002 Annual Meeting of
Shareholders to be held May 16, 2002 are incorporated by reference in Part III
of this Report.








PART I

This Annual Report on Form 10-K (the "Report") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties.
The reader is cautioned that the actual results of SOS Staffing Services, Inc.
may differ (and may differ materially) from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those factors discussed herein under "Factors That May
Affect Future Results" and elsewhere in this Report generally.

ITEM 1. BUSINESS
--------
Development of Business

SOS Staffing Services, Inc. ("SOS" or the "Company") is a provider of
staffing services throughout the western United States. As of December 30, 2001,
SOS operated a network of 100 offices located in 15 states. Services the Company
provides include light industrial, clerical, industrial, technical, specialty
and other professional services.

The Company's offices are supported by centralized administrative
functions at corporate headquarters that include marketing, human resources and
training, insurance services including workers' compensation, accounts
receivable and accounts payable, purchasing, credit, legal and other
administrative support services. Generally, each staffing office has access to
the Company's central management information system and its proprietary software
that provides information on customer requirements, available applicants,
temporary associates on assignment and other information that facilitates
efficient response to customer job orders and the financial performance of each
unit.

Discontinued Operations

On December 29, 2000, Inteliant Corporation ("Inteliant"), a wholly
owned subsidiary of the Company, sold to Herrick Douglass, Inc. ("HD") its
consulting division and related tangible and intangible assets. The consulting
division sold to HD consisted of a full suite of information technology
consulting, e-business and telecommunication services, which services were
marketed to Fortune 1000, mid-tier and early stage companies, government
agencies and educational institutions. As part of this transaction, the Company
retained accounts receivable of approximately $9.0 million, of which
approximately $7.6 million was collected during fiscal 2001 and the remaining
$1.4 million was uncollectable and was written off as bad debt. As part of the
sale of the consulting division, the Company agreed to extend a one-year
subordinated loan to HD of up to a maximum of $3.5 million to meet HD's
operating needs. The promissory note from HD evidencing the loan bore interest
at 10% per annum on outstanding principal and was due and payable on or before
December 31, 2001. The note was amended in May 2001 to provide for an
accumulated interest payment on December 31, 2001, with the principal balance to
be paid in 36 monthly installments beginning in January 2002 at an annual
interest rate of 12%. As of December 30, 2001, the Company had advanced to HD
approximately $3.4 million. As of the date of this filing, HD has been
liquidated and the Company has been unable to collect against the note.
Accordingly, the Company has written off the entire note to reflect that the
Company will not receive the balance due on the note issued by HD. For fiscal
2000, the Company recorded an estimated loss on the disposition, net of tax, of
approximately $28 million. For fiscal 2001, an additional loss of approximately
$5.0 million was recorded as a result of the greater than expected write-off of
receivables and the write-off of the note. The Company does not expect to incur
any additional loss related to this discontinued operation.

In November 2001, the Company resolved to sell or abandon the assets of
its IT staffing business, which represented the remaining assets and business of
Inteliant. The Company currently is negotiating with various parties, including
former owners of some of the IT businesses, for the sale of these assets. The
Company believes that the dispositions of these assets will be completed by the
end of the second quarter of fiscal 2002. The Company recorded an estimated loss
on disposal of these businesses of approximately $12.5 million, including the
write-off of all of the remaining goodwill and intangible assets associated
therewith of approximately $10.0 million. Also included in the loss on disposal
of the Company's IT staffing business is an estimated $367,000 loss from
operations from December 31, 2001 through the anticipated disposition dates.
These projected losses represent management's best estimates based upon all
available information. However, estimates generally are subject to inherent
uncertainties and, accordingly, the ultimate loss may differ from estimates and
the difference could be significant.

2



Subsequent to December 30, 2001, the Company entered into an asset
purchase agreement with Abacab Software, Inc. ("Abacab"), pursuant to which the
Company sold certain assets of Inteliant's Northern California operations for
contingent payments not to exceed $600,000 in the aggregate over three years
following the closing date of the transaction, based on the gross profit of the
business acquired by Abacab. Abacab also assumed liabilities of approximately
$40,000. The Company retained accounts receivable of approximately $1.1 million.
The Company originally acquired a portion of the assets sold in the transaction
from Abacab. The principal of Abacab was engaged by the Company as an
independent contractor and was managing the Company's Northern California
operations at the time of the closing of the transaction. The Company believes
that the terms of the transaction were no less favorable than it would have
received from an unrelated third party.

On December 5, 2001, the Company formalized a plan to sell its wholly
owned subsidiary, ServCom Staff Management, Inc., a professional employee
organization. On December 31, 2001, the Company sold substantially all of the
assets of this business to an unrelated entity. The Company retained accounts
receivable of approximately $480,000. The terms of the transaction were
immaterial to the financial results of the Company. The Company recorded a loss
on disposal as part of discontinued operations of approximately $107,000.

Subsequent to December 30, 2001, the Company settled a dispute with
NeoSoft, Inc. ("NeoSoft"), which had been acquired by Inteliant in July 1998.
Neosoft and its principal had alleged that the Company owed more than the final
earnout payment paid by the Company pursuant to the purchase agreement with
Neosoft. As a result of Neosoft's allegations, as of December 30, 2001 the
Company had accrued approximately $625,000 for defense costs and additional
earnout payments to settle the dispute. Pursuant to the terms of the settlement,
the Company paid NeoSoft $550,000 and transferred the NeoSoft operations back to
NeoSoft. In return, the Company retains all of the accounts receivable and
unbilled revenue of approximately $639,000; however, the Company will pay
NeoSoft 15% of all accounts receivable collected as consideration for NeoSoft's
assistance in collecting the receivables. Additionally, NeoSoft will assume
approximately $53,000 in accrued paid time off liability and will assume all
operating leases. Furthermore, the parties will release all claims including,
without limitation, any claims arising under the original asset purchase
agreement and under the principal's original employment agreement.

Continuing Operations

Financial information concerning the Company is included in Item 8 in
Part II of this report.

Description of Business

Principal services and markets: Historically, the Company's customers
have consisted primarily of small to mid-sized companies. Sales to these
businesses are developed either locally or regionally. Generally, the Company
provides clerical, light industrial and industrial services through SOS Staffing
Services, Skill Staff, Industrial Specialists, TOPS Staffing and Century
Personnel offices. The Company also offers other specialized services provided
by other divisions such as SOS Technical Services (engineers, designers,
drafters, illustrators, artists, writers and other technical personnel); Devon &
Devon and Truex (administrative staffing and permanent placement); and CGS
Personnel (mining and mineral exploration engineers, geologists and
hydrologists).

The Company also provides services such as payrolling, outsourcing,
on-site and other professional services:

o Payrolling typically involves the transfer of a customer's short-term
seasonal or special use employees to the Company's payroll for a
designated period.

o Outsourcing represents a growing trend among businesses to contract
with third parties to provide a particular function or business
department for an agreed price over a designated period.

o On-site services involve locating SOS manager(s) at the customer's
place of business to manage the customer's entire temporary staffing
requirements.

o Other professional services offer SOS customers skills assessments,
drug testing and risk management services:

o Skills assessments available to SOS customers include, among
others, dexterity analysis, technical literacy and
job-specific competencies.

3


o Drug testing includes comprehensive testing, with results
processed through an independent certified laboratory.

o Risk management services include on-site safety inspection and
consulting services.

The Company has traditionally focused on initially opening hub offices
in key metropolitan areas, followed by establishing offices in surrounding
markets. This decentralized office management strategy locates multiple offices
in close proximity to customers and temporary associates. The Company believes
that this strategy has allowed it to rapidly gain market share with low entry
costs. Once a hub office has been established, the Company focuses on leveraging
hub office resources in order to market and deliver services to surrounding
smaller markets and to cross-sell other specialty staffing services.

Additionally, the Company targets large multi-state companies through
its national marketing team. The contacts for these national accounts are
centralized at the Company's headquarters in Salt Lake City, Utah. The accounts
are serviced by local offices in markets in which the Company has an established
presence and by subcontractors where the Company has not established an office.

The Company provides services through a network of 100 offices located
in 15 states. The Company currently services major markets in Arizona, Colorado,
Idaho, Nevada, Utah and Wyoming. In larger markets, the Company generally
provides light industrial and clerical personnel through SOS Staffing Services
offices, while service-specific offices provide specialty services. In smaller
markets, SOS offices offer a broader variety of commercial staffing and
specialty services. The Company also has commercial staffing offices in Alaska,
California, Hawaii, Kansas, Missouri, New Mexico, Oregon, Texas and Washington.

Management believes that the Company has substantial opportunities to
expand its office network and the range of services it offers to its customers.
The Company intends to evaluate continuing operations and develop its core
competencies while divesting non-core operations. Furthermore, the Company
intends, for the foreseeable future, to concentrate on strengthening its office
network by capitalizing on its present infrastructure and leveraging existing
resources to develop internal growth.

Seasonality: The Company's business follows the seasonal trends of its
customers' businesses. Historically, the Company has experienced lower revenues
in the first quarter, with revenues accelerating during the second and third
quarters and then slowing again during the fourth quarter.

Trademarks: The Company uses a variety of trademarks and trade names
that generally are descriptive of the temporary staffing services offered,
including SOS Staffing Services(R), Century Personnel, Devon & Devon, Skill
Staff, Industrial Specialists, SOS Technical Services, PAMS Employment Services,
CGS Personnel, Mortgage Staffing, TOPS Staffing Services(R) and Truex. The
Company has registered or reserved the majority of these names in the
appropriate states.

Customers: Management believes that significant opportunities remain to
deliver profitable commercial staffing services to small and mid-sized
customers. However, as the Company expands its network and develops its national
sales force, the Company anticipates that it will provide more services to
larger customers.

No customer accounted for more than ten percent of the Company's net
service revenues during fiscal 2001, and the Company's top ten customers
accounted for less than eight percent of the Company's service revenues during
the same period.

Competition: The Company's competitors consist of national, regional
and local companies operating offices throughout the nation, making the industry
highly competitive and highly fragmented, with limited barriers to entry. The
Company faces intense competition from large national and international
companies with substantially greater financial and marketing resources, as well
as strong local and regional staffing companies.

The Company competes for qualified temporary associates and for
customers who require the services of such employees. The principal competitive
factors in attracting and retaining qualified temporary associates are
competitive salaries and benefits, quality and frequency of assignments and
responsiveness to employee needs. The Company believes that many persons who
seek temporary employment also are seeking regular employment and that the
availability of temporary staffing assignments, which may lead to regular
employment, is an important factor in its ability to attract qualified temporary
associates.

The principal competitive factors in obtaining customers are a strong
sales and marketing program, having qualified temporary associates to assign in
a timely manner, matching of customer requirements with available resources,


4


competitive pricing and satisfactory work production. The Company believes that
its strong emphasis on providing service and value to its customers and
employees are important competitive advantages.

Staff Employees

At December 30, 2001, the Company had approximately 418 staff employees
in its continuing operations. As of March 8, 2002, the Company had reduced its
staff by an additional 36 full-time equivalent employees. The Company's training
department provides general and job-specific training to all staff employees,
including continuing training with experienced counterparts, and leadership and
management development. None of the Company's staff employees are covered by
collective bargaining agreements. The Company considers its relationship with
its staff employees to be good.

Sales and Marketing

SOS generally markets its services through its network of offices whose
managers, supported by the Company's marketing and sales staff, make
sales/service visits to accounts as well as to prospects. The Company emphasizes
long-term professional relationships with its customers and develops these
relationships through regular contact, periodic assessment of customer
requirements and consistent monitoring of employee performance. New customers
are obtained through customer referrals, telemarketing, cold calls and
advertising in a variety of local and regional media, including television,
radio, direct mail, yellow pages, newspapers, magazines and trade publications.
The Company also is a sponsor of job fairs and other community events. In
addition, the Company increasingly is using the Internet to support its
marketing efforts and clients can research the Company and order staffing
services on-line.

Recruiting

The Company believes that a key element of its growth and profitability
is its ability to recruit and retain qualified temporary associates. In an
effort to attract quality personnel, the Company's employees regularly visit
schools and professional associations and present career development programs to
various organizations. In addition, the Company obtains applicants from
referrals by its temporary associates and from advertising on radio, television,
in the yellow pages and through other print media. The Company actively utilizes
the Internet to recruit professional and technical staffing and other employees.
Each applicant is interviewed with emphasis on past work experience and
individual skills. The Company utilizes the Dictionary of Occupational Titles,
published by the U.S. Department of Labor, to evaluate and assign temporary
associates. The Company maintains software-training programs at its offices for
applicants and employees.

To promote loyalty and retention among its temporary associates, the
Company offers certain employee benefits, including a Section 401(k) defined
contribution plan, a cafeteria plan, vacation pay and health insurance programs.
In addition, the Company has the ability to issue paychecks to temporary
associates on a daily basis for work performed.

Risk Management

SOS is responsible for all employee-related expenses for its staff and
temporary employees, including workers' compensation, unemployment insurance,
social security taxes, state and local taxes and other general payroll expenses.
The Company has implemented a deductible workers' compensation program through
ACE USA ("ACE"), an insurer, with a deductible of $300,000 per occurrence and an
aggregate cap of approximately $10.8 million, adjusted based on actual payroll.
The Company also is required to provide letters of credit to ACE to provide
security for the Company's performance under the insurance plan. Employees in
Washington and Wyoming are insured through those states' insurance funds because
private insurance is not permitted in those states. The Company employs a
full-time professional risk manager and staff who work closely with the
insurance carrier to manage claims.

The Company also has developed workers' compensation loss control
programs that seek to limit claims through employee training and avoidance of
high-risk job assignments such as underground mining, roofing or logging.
Additionally, the Company has implemented back-to-work programs whereby
temporary associates who have been injured are placed in other less demanding
jobs until they are able to resume full employment. Except where prohibited by


5


law, all employees are required to agree in advance to drug testing following
any work-related accident and all major accidents are investigated. The Company,
in cooperation with its insurer, monitors all claims and regularly reviews the
claims with an emphasis on early closure.

Information Systems

The Company's central management information system is linked to most
of the Company's offices. The centralized system is designed to support
Company-wide operations such as job skill matching, payroll, billing,
accounting, sales and management reports. The Company has some operations,
obtained through acquisition, that have their own centralized systems in place.
Systems have been implemented to automate the reporting of these entities to the
Company.

Factors that May Affect Future Results

The statements contained in this Report that are not purely historical
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All forward-looking
statements involve various risks and uncertainties. Forward-looking statements
contained in this Report include statements regarding the Company's
opportunities, existing and proposed service offerings, market opportunities,
expectations, goals, revenues, financial performance, strategies and intentions
for the future and are indicated by the use of the words "estimate," "believe,"
"expect," "anticipate," "plan" or other similar expressions. Such
forward-looking statements are included under Item 1. "Business", Item 2.
"Properties", Item 3. "Legal Proceedings" and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations." All
forward-looking statements included in this Report are made as of the date
hereof, based on information available to the Company as of such date, and the
Company assumes no obligation to update any forward-looking statements. It is
important to note that such statements may not prove to be accurate, and that
the Company's actual results and future events could differ materially from
those anticipated in such statements. Many factors could cause actual results to
differ materially from the Company's expectations, including, without
limitation, the factors identified below.

The Company's future results may be impacted by, among other factors,
the Company's ability to implement its growth strategy, which, in turn, is
dependent upon a number of factors, including: the availability of working
capital to support such growth; management's ability and resources to implement
the growth strategy; the Company's ability to attract and retain skilled
employees needed to implement the Company's business plan and meet customer
needs; and the successful hiring, training and retention of qualified field
management. Future results also will be affected by other factors associated
with the operation of the Company's business, including the Company's response
to existing and emerging competition, demand for the Company's services, the
Company's ability to maintain profit margins in the face of increased pricing
pressures, the Company's efforts to develop and maintain customer and employee
relationships, economic fluctuations, employee-related risks and expenses, and
the unanticipated results of pending or future litigation.

As of December 30, 2001, the Company was out of compliance with minimum
EBITDA requirements under its note purchase agreements with its senior
noteholders and its revolving credit agreement with its lenders. However,
subsequent to December 30, 2001, the Company entered into a Fifth Amendment to
Amended and Restated Credit Agreement and Waiver, dated as of April 15, 2002,
with its lenders and an Amendment No. 3 to Note Purchase Agreement, dated as of
April 15, 2002, with its senior noteholders, whereby the lenders and the senior
noteholders waived such covenant violations in the revolving credit facility and
senior notes, respectively (see "Liquidity and Capital Resources" in Item 7. for
further discussion on these recent events).

As of December 30, 2001, the Company was not in compliance with the
minimum requirements for net tangible assets for continued listing on the Nasdaq
National Market (the "NNM"). Although the Company has not received any notice
from the NNM regarding such non-compliance, the Company's securities may, as a
result, be delisted from the NNM. Delisting would adversely affect the liquidity
of the Company's common stock and its ability to raise additional capital
through a sale of its common stock. Additionally, in order to have its common
stock relisted on the NNM, the Company would be required to meet the criteria
for initial listing, which are more stringent than the maintenance criteria to
which the Company currently is subject.

As of December 30, 2001, the Company's consolidated balance sheet
reflected approximately $48.1 million of goodwill and other intangible assets, a
substantial portion of total assets at such date. The Company continuously
evaluates whether events and circumstances have occurred that indicate that the
remaining balance of intangible assets may not be recoverable. When factors


6


indicate that assets should be evaluated for possible impairment, the Company
may be required to reduce the carrying value of intangible assets, which could
harm operating results during the periods in which such a reduction is
recognized. The Company is required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" for fiscal
2002. As of March 8, 2002, the Company's market capitalization was approximately
$11.4 million, significantly lower than the carrying value of approximately
$48.1 million for intangible assets. Consequently, the Company expects that it
will be required to write down a significant portion of the intangible assets
during fiscal 2002 as a result of adopting SFAS No. 142.

The Company maintains workers' compensation insurance with ACE, with a
deductible of $300,000 per incident and an aggregate cap of $10.8 million,
adjusted based on actual payroll. The Company also is required to provide
letters of credit to ACE to provide security for the Company's performance under
the insurance plan. As of December 30, 2001, letters of credit provided to ACE
were approximately $6.7 million. The Company has established reserve amounts
based upon information provided by ACE as to the status of claims plus
development factors for incurred but not yet reported claims and anticipated
future changes in underlying case reserves. On an annual basis, the Company's
claims history is subjected to an independent actuarial review to determine
appropriate development factors, which are used in developing the Company's
reserve estimates. Such reserve amounts are only estimates and there can be no
assurance that the Company's future workers' compensation obligations will not
exceed the amount of its reserves.

The Company has renewed its workers' compensation insurance for fiscal
2002. As part of the renewal, the Company is required to pay higher premium
costs and to provide an additional $3.3 million in letters of credit to ACE. The
Company believes that some of the increase in costs will be passed through as
price increases to its customers. However, given the competitive nature of the
staffing industry, the Company is unsure whether it will be successful in
passing through all cost increases. Accordingly, the Company believes that its
gross margin could be negatively impacted in fiscal 2002.

All written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section and other factors included elsewhere in this report, as
well as by other factors identified from time to time in the Company's periodic
reports to the Securities and Exchange Commission.

ITEM 2. PROPERTIES
----------
As of December 30, 2001, the Company provided services through 100
offices in 15 states. These offices are typically 1,000 to 5,000 square feet in
size and generally are leased by the Company for terms of three to five years.
Offices in larger or smaller markets may vary in size from the typical office.
The Company does not expect that maintaining or finding suitable lease space at
reasonable rates in its markets or in areas where the Company contemplates
expansion will be difficult.

During the 52-week period ended December 30, 2001, the Company closed
and/or consolidated 35 branch offices. The Company is endeavoring to reduce
potential future lease payments by subleasing these facilities or negotiating
discounted buyouts of the lease contracts.

The Company's executive and administrative offices are located in Salt
Lake City, Utah. The premises consist of approximately 15,600 square feet and
are leased from the adult children of certain significant shareholders of the
Company for a term ending on March 31, 2005, with an option to renew for 10
additional years. The Company believes that the terms of the lease are at least
as favorable as could be obtained from any unrelated third party.

ITEM 3. LEGAL PROCEEDINGS
-----------------
In the ordinary course of its business, the Company is periodically
threatened with or named as a defendant in various lawsuits or administrative
proceedings. The Company maintains insurance in such amounts and with such
coverage and deductibles as management believes to be reasonable and prudent.
The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity losses,
employer practices liability and general liability.

On April 11, 2001, Royalty Carpet Mills, Inc. ("Royalty") filed a
complaint against Inteliant for breach of contract for services to be provided
by Inteliant and for professional negligence (the "Complaint") in the state of
California. The Complaint requests unspecified damages, consequential damages,
and attorneys' fees and costs. To date, Royalty has not quantified the precise


7


amount of damages it is seeking from Inteliant, but has informed Inteliant that
it will be seeking damages of approximately $1.9 million. Inteliant denies the
allegations set forth in the Complaint and is seeking to recover in excess of
$150,000 that Inteliant claims Royalty owes to Inteliant. The case is proceeding
with discovery, with the trial currently set to commence in August 2002.

Inteliant believes that it is insured against any potential liability
for the claims filed by Royalty under its general liability coverage and has
tendered defense of Royalty's lawsuit to its insurance carrier. While its
insurance carrier has reserved its right to assert certain policy exclusions
against Inteliant, which the insurance carrier contends exclude claims based
upon (i) an express or implied warranty or guarantee, (ii) breach of contract
with respect to any agreement to perform work for a specified fee, and (iii)
claims for bodily injury or property damage, Inteliant presently believes that
the claims asserted by Royalty against Inteliant are not only without merit, but
that any judgment that potentially might be entered against Inteliant is covered
in whole or in substantial part by its policy with the insurance carrier.

There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the 52 weeks ended December 30, 2001.



8


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Stock Listing
- -------------
The Company's common stock, par value $0.01 per share (the "Common
Stock"), is traded on the Nasdaq National Market tier of The Nasdaq Stock Market
under the symbol: "SOSS". The stock table abbreviation is "SOS Stffg".

As of March 8, 2002, the Company had 71 stockholders of record. Based
upon shareholder mailings, the Company believes that there are in excess of
4,000 shareholders of beneficial interest.

The following table sets forth the high and low bid prices of the
Common Stock for the periods indicated:

High Low
---- ---
1999
First Quarter----------------- $ 10.938 $ 7.000
Second Quarter---------------- 8.125 5.000
Third Quarter----------------- 6.938 5.000
Fourth Quarter---------------- 7.000 3.750

2000
First Quarter----------------- 5.688 4.000
Second Quarter---------------- 4.750 2.625
Third Quarter----------------- 3.188 2.000
Fourth Quarter---------------- 3.625 1.000

2001
First Quarter----------------- 2.188 1.125
Second Quarter---------------- 1.700 1.110
Third Quarter----------------- 1.940 1.100
Fourth Quarter---------------- 1.250 1.000

On March 8, 2002, the closing price of the Company's Common Stock, as
reported on the Nasdaq National Market, was $0.90.

The Company has never paid any dividends. The Company currently intends
to retain future earnings for its operations and expansion of its business and
does not anticipate paying any cash dividends in the future.





9




ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the Company
derived from the Company's consolidated financial statements. The selected
financial data should be read in conjunction with Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
consolidated financial statements and the related notes thereto, included
elsewhere in this report.



Fiscal Year (52/53 Weeks) Ended
--------------- -------------- --------------- --------------- ---------------
2001 2000(1) 1999(1,2) 1998(1,2) 1997(1,2)
--------------- -------------- --------------- --------------- ---------------
Statement of Operations Data: (in thousands, except per share data)

Service revenues $ 216,358 $ 262,822 $ 249,803 $ 240,980 $ 170,177
Gross profit 47,082 58,489 56,358 53,157 36,394
Income from operations 2,785 4,755 7,485 9,210 9,077
(Loss) income from continuing operations
(5,300) 160 2,508 5,206 5,737
(Loss) income from discontinued
operations, net of tax (52,044) (29,361) 2,843 4,563 1,791
Net (loss) income (57,344) (29,201) 5,351 9,858 7,526


(Loss) income from continuing operations
per common share
Basic $ (0.42) $ 0.01 $ 0.20 $ 0.41 $ 0.59
Diluted (0.42) 0.01 0.20 0.41 0.59

Net (loss) income per common share
Basic $ (4.52) $ (2.30) $ 0.42 $ 0.78 $ 0.78
Diluted (4.52) (2.30) 0.42 0.77 0.77

Weighted average common shares
Basic 12,691 12,691 12,691 12,675 9,654
Diluted 12,691 12,692 12,699 12,810 9,780

Balance Sheet Data:
Working capital $ 4,353 $ 20,012 $ 37,969 $ 26,989 $ 42,791
Total assets 78,743 161,388 200,624 182,909 118,290
Total debt 29,095 44,273 55,687 39,925 -
Shareholders' equity 33,541 90,885 120,086 114,606 104,336



(1) In fiscal 2001, the Company adopted a plan to dispose of the staffing
divisions of Inteliant, as well as the Company's wholly owned subsidiary,
ServCom Staff Management, Inc. The related statement of operations data is
reflected as discontinued operations for all years presented.
(2) In fiscal 2000, the Company sold the IT consulting division of Inteliant.
The statement of operations data for this division is reflected as
discontinued operations for all years presented.


10


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
The following discussion should be read in conjunction with the
consolidated financial statements of SOS Staffing Services, Inc. and notes
thereto appearing elsewhere in this report. The Company's fiscal year consists
of a 52- or 53-week period ending on the Sunday closest to December 31.

The Company provides staffing services through a network of 100 offices
located in 15 states. The Company discontinued its information technology ("IT")
consulting business in fiscal 2000 and adopted a plan to dispose of its
remaining IT staffing businesses in fiscal 2001. These IT businesses represent
all of the Company's IT segment. In addition, in fiscal 2001 the Company
discontinued some of its non-core commercial staffing businesses. The Company's
remaining business provides supplemental staffing to companies by furnishing
temporary clerical, light-industrial, industrial, technical and professional
services.

Recent Developments

As of December 30, 2001, the Company was out of compliance with the
minimum EBITDA requirements under its note purchase agreements with its senior
noteholders and its revolving credit agreement with its lenders. However,
subsequent to December 30, 2001, the Company entered into a Fifth Amendment to
Amended and Restated Credit Agreement and Waiver, dated as of April 15, 2002,
with its lenders and an Amendment No. 3 to Note Purchase Agreement, dated as of
April 15, 2002, with its senior noteholders, whereby the lenders and the senior
note holders waived such covenant violations in the revolving credit facility
and senior notes, respectively (see "Liquidity and Capital Resources" in Item 7.
for further discussion on these recent events).

As of December 30, 2001, the Company was not in compliance with the
minimum requirements for net tangible assets for continued listing on the Nasdaq
National Market (the "NNM"). Although the Company has not received any notice
from the NNM regarding such non-compliance, the Company's securities may, as a
result, be delisted from the NNM. Delisting would adversely affect the liquidity
of the Company's common stock and its ability to raise additional capital
through a sale of its common stock. Additionally, in order to have the common
stock relisted on the NNM, the Company would be required to meet the criteria
for initial listing, which are more stringent than the maintenance criteria to
which the Company currently is subject.

On March 9, 2002, the Job Creation and Work Assistance Act of 2002 (the
"2002 Job Act") was signed into law, which includes certain provisions that the
Company believes will provide favorable tax treatment for the Company. Among
such provisions is the extension of the net operating loss carryback period from
two years to five years for net operating losses arising in tax years ending in
2001 and 2002. These provisions also allow companies to use the net operating
loss carrybacks and carryforwards to offset 100 percent of alternative minimum
taxable income. The Company has not yet determined the impact these provisions
of the 2002 Job Act will have on its operations, nor whether the tax treatment
provided thereby to the Company would allow it to regain compliance under the
NNM listing requirements for continued listing. In fiscal 1996, the earliest
year to which the carryback provisions of the 2002 Job Act would apply, the
Company paid approximately $2.8 million in federal income tax. In fiscal 1997,
the Company paid approximately $4.5 million in federal income tax.

The Company's financial situation presents risks to investors during
fiscal 2002. See "Liquidity and Capital Resources" within this Item 7 for
further information on these recent developments.

Discontinued Operations

On December 29, 2000, Inteliant Corporation ("Inteliant") sold to
Herrick Douglass, Inc. ("HD") its consulting division and related tangible and
intangible assets. The consulting division sold to HD consisted of a full suite
of information technology consulting, e-business and telecommunication services,
which services were marketed to Fortune 1000, mid-tier and early stage
companies, government agencies and educational institutions. As part of this
transaction, the Company retained accounts receivable of approximately $9.0
million, of which approximately $7.6 million was collected during fiscal 2001
and the remaining $1.4 million was uncollectable and was written off as bad
debt. As part of the sale of the consulting division, the Company agreed to
extend a one-year subordinated loan to HD of up to a maximum of $3.5 million to
meet HD's operating needs. The promissory note from HD evidencing the loan bore
interest at 10% per annum on outstanding principal and was due and payable on or
before December 31, 2001. The note was amended in May 2001 to provide for an


11


accumulated interest payment on December 31, 2001, with the principal balance to
be paid in 36 monthly installments beginning in January 2002 at an annual
interest rate of 12%. As of December 30, 2001, the Company had advanced to HD
approximately $3.4 million. As of the date of this filing, HD has been
liquidated and the Company has been unable to collect against the note.
Accordingly, the Company has written off the entire note to reflect that the
Company will not receive the balance due on the note issued by HD. For fiscal
2000, the Company recorded an estimated loss on the disposition, net of tax, of
approximately $28 million. For fiscal 2001, an additional loss of approximately
$5.0 million was recorded as a result of the greater than expected write-off of
receivables and the write-off of the note. The Company does not expect to incur
any additional loss related to this discontinued operation.

In November 2001, the Company resolved to sell or abandon the assets of
its IT staffing business, which represented the remaining assets and business of
Inteliant. The Company currently is negotiating with various parties, including
former owners of some of the IT businesses, for the sale of these assets. The
Company believes that the dispositions of these assets will be completed by the
end of the second quarter of fiscal 2002. The Company recorded an estimated loss
on disposal of these businesses of approximately $12.5 million, including the
write-off of all of the remaining goodwill and intangible assets associated
therewith of approximately $10.0 million. Also included in the loss on disposal
of the Company's IT staffing business is an estimated $367,000 loss from
operations from December 31, 2001 through the anticipated disposition dates.
These projected losses represent management's best estimates based upon all
available information. However, estimates generally are subject to inherent
uncertainties and, accordingly, the ultimate loss may differ from estimates and
the difference could be significant.

Subsequent to December 30, 2001, the Company entered into an asset
purchase agreement with Abacab Software, Inc. ("Abacab"), pursuant to which the
Company sold certain assets of Inteliant's Northern California operations for
contingent payments not to exceed $600,000 in the aggregate over three years
following the closing date of the transaction based on the gross profit of the
business acquired by Abacab. Abacab also assumed liabilities of approximately
$40,000. The Company retained accounts receivable of approximately $1.1 million.
The Company originally acquired a portion of the assets sold in the transaction
from Abacab. The principal of Abacab was engaged by the Company as an
independent contractor and was managing the Company's Northern California
operations at the time of the closing of the transaction. The Company believes
that the terms of the transaction were no less favorable than it would have
received from an unrelated third party.

On December 5, 2001, the Company formalized a plan to sell its wholly
owned subsidiary, ServCom Staff Management, Inc., a professional employee
organization. On December 31, 2001, the Company sold substantially all of the
assets of this business to an unrelated entity. The Company retained accounts
receivable of approximately $480,000. The terms of the transaction were
immaterial to the financial results of the Company. The Company recorded a loss
on disposal as part of discontinued operations of approximately $107,000.

Subsequent to December 30, 2001, the Company settled a dispute with
NeoSoft, Inc. ("NeoSoft"), which had been acquired by Inteliant in July 1998.
Neosoft and its principal had alleged that the Company owed more than the final
earnout payment paid by the Company pursuant to the purchase agreement with
Neosoft. As a result of Neosoft's allegations, as of December 30, 2001 the
Company had accrued approximately $625,000 for defense costs and additional
earnout payments to settle the dispute. Pursuant to the terms of the settlement,
the Company paid NeoSoft $550,000 and transferred the NeoSoft operations back to
NeoSoft. In return, the Company retains all of the accounts receivable and
unbilled revenue of approximately $639,000; however, the Company will pay
NeoSoft 15% of all accounts receivable collected as consideration for NeoSoft's
assistance in collecting the receivables. Additionally, NeoSoft will assume
approximately $53,000 in accrued paid time off liability and will assume all
operating leases. Furthermore, the parties will release all claims including,
without limitation, any claims arising under the original asset purchase
agreement and under the principal's original employment agreement.

Critical Accounting Policies

The Company's critical accounting policies for its continuing
operations include the following:

o revenue recognition;

o allowance for doubtful accounts receivable;

o reserves for workers' compensation costs;

o impairment of goodwill and intangibles;

o restructuring charges; and

12


o valuation allowances against deferred income tax assets.

Service revenues generated from temporary associates on customer
assignments are recognized as income at the time the service is provided.
Service revenues from permanent placement services, which represent
approximately 1.3% of fiscal 2001 revenues, are recognized at the time the
customer agrees to hire a candidate supplied by the Company.

The Company provides customary credit terms to its customers and
generally does not require collateral. The Company performs ongoing credit
evaluations of the financial condition of its customers and maintains an
allowance for doubtful accounts receivable based upon historical collection
experience and expected collectibility of accounts. As of December 30, 2001, the
Company had recorded an allowance for doubtful accounts of approximately $2.3
million. The actual bad debts may differ from estimates and the difference could
be significant.

The Company maintains workers' compensation insurance with ACE USA
("ACE"), an independent insurance company, with a deductible of $300,000 per
incident. The Company also is required to provide letters of credit to ACE to
provide security for the Company's performance under the insurance plan. As of
December 30, 2001, letters of credit provided to ACE were approximately $6.7
million. Subsequent to December 30, 2001, the Company was required to provide an
additional $3.3 million in letters of credit as part of its workers'
compensation insurance renewal for fiscal 2002. Under the terms of the insurance
policy with ACE, the Company is required to deposit into an account an amount
equal to the amount of actual payments made by ACE during the previous month as
reimbursement to ACE for such deductibles. If claims payments on any specific
claim exceed the deductible amount of $300,000, the Company is not required to
reimburse the fund for those payments over and above the deductible. Some states
in which the Company operates do not permit private insurance for workers'
compensation; where this is the case, the Company is covered by appropriate
state insurance funds.

The Company has established reserve amounts based upon information
provided by ACE as to the status of claims plus development factors for incurred
but not yet reported claims and anticipated future changes in underlying case
reserves. On an annual basis, the Company's claims history is subjected to an
independent actuarial review to determine appropriate development factors, which
are used in developing the Company's reserve estimates. As of December 30, 2001,
the workers' compensation reserve totaled approximately $5.5 million. Such
reserve amounts are only estimates and there can be no assurance that the
Company's future workers' compensation obligations will not exceed the amount of
its reserves. However, management believes that any difference between the
amounts recorded for its estimated liability and the costs of settling the
actual claims would not be material to the results of operations.

Intangible assets less amortization were $48.1 million and $92.0
million as of December 30, 2001 and December 31, 2000, respectively. Goodwill
and trademarks and tradenames are amortized using the straight-line method over
30 years; non-competition agreements and other intangible assets generally are
being amortized using the straight-line method over three to six years.

Goodwill and other intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the book value of the assets
may not be recoverable. The Company determines at each balance sheet date
whether events or circumstances have occurred that indicates possible
impairment. The Company uses an estimate of the future undiscounted net cash
flows of the related asset over the remaining life of the asset in measuring
whether the assets are recoverable. Where such estimate of the future
undiscounted cash flows is less than the carrying amount of goodwill, a
potential impairment exists. The Company is required to adopt SFAS No. 142,
"Goodwill and Other Intangible Assets" for fiscal 2002. See "Impact of Recent
Accounting Pronouncements" for further discussion on how this standard will
impact the Company.

To align staff costs and branch office requirements with existing
revenue, the Company is streamlining its corporate structure and consolidating
or closing branch offices in under-performing markets. During the 52-week period
ended December 30, 2001, the Company recorded a restructuring charge of
approximately $1.3 million, primarily related to the consolidation or closure of
35 branch offices, as well as severance charges related to the elimination of
various operational and senior level positions. The Company is endeavoring to
reduce potential future lease payments by subleasing the abandoned facilities or
negotiating discounted buyouts of the lease contracts. Consequently, the
Company's estimates may change based on its ability to effectively reduce such
future lease payments. Of the approximately $1.3 million the Company has
incurred in restructuring charges, approximately $0.8 million has been paid out
in the form of severance and benefits, lease payments and refinancing costs on
the Company's revolving credit facility and note purchase agreements. At


13


December 30, 2001, the remaining accrued estimated net lease payments and
accrued severance payments were approximately $0.5 million. Since December 30,
2001, the Company has reduced its staff by an additional 36 full-time equivalent
employees.

The Company has recorded a valuation allowance of approximately $24.6
million to offset the entire balance of the deferred tax asset as of December
30, 2001. The valuation allowance was recorded as a result of the losses
incurred by the Company and the Company's belief that it is more likely than not
that the Company will be unable to recover the net deferred tax assets.
Subsequent to December 30, 2001, certain tax law changes will result in the
Company obtaining a refund from carrybacks of net operating losses. See "Recent
Developments." Accordingly, the Company will reduce the valuation allowance
during the first quarter of fiscal 2002 as a result of these tax law changes.

Results of Continuing Operations

The following table sets forth, for the periods indicated, the percentage
relationship to service revenues of selected continuing operations items for the
Company on a consolidated basis:



Fiscal Year 52 Weeks Ended
----------------------------------------------
2001 2000 1999
---------------- --------------- -------------

Service revenues 100.0% 100.0% 100.0%
Direct cost of services 78.2 77.8 77.4
---------------- --------------- -------------
Gross profit 21.8 22.3 22.6
---------------- --------------- -------------
Operating expenses:
Selling, general and administrative expenses 18.9 18.3 18.6
Intangibles amortization 1.0 1.0 1.0
Loss on impairment of goodwill and intangibles -- 1.2 --
Restructuring charges 0.6 -- --
---------------- --------------- -------------
Total operating expenses 20.5 20.5 19.6
---------------- --------------- -------------
Income from operations 1.3% 1.8% 3.0%
---------------- --------------- -------------


Fiscal 2001 Compared to Fiscal 2000 from Continuing Operations

Service Revenues: Substantially all of the service revenues are based on the
time worked by temporary associates on customer assignments and from permanent
placement of personnel with customers. Service revenues decreased by
approximately $46.5 million, or 17.7%, to $216.4 million for the 52-week period
ended December 30, 2001, compared to $262.8 million for the 52-week period ended
December 31, 2000. The decrease was due primarily to reduced demand for
temporary services as a result of the broad downturn in the economy. The Company
also has seen a significant decrease in permanent placement revenues.

Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services, which includes wages and permanent placement commissions,
employer payroll taxes (FICA, unemployment and other general payroll taxes),
workers' compensation costs related to temporary associates and permanent
placement counselors, other temporary payroll benefits and other direct costs
related to staffing engagements. Gross profit margin for the 52-week period
ended December 30, 2001 was 21.8%, compared to 22.3% for the 52-week period
ended December 31, 2000. The margin decline from the comparable period of the
prior year was primarily a result of increased pricing competition for staffing
services coupled with a reduction in the higher margin permanent placement
business. The Company has renewed its workers' compensation insurance for fiscal
2002. As part of the renewal, the Company is required to pay higher premium
costs. The Company believes that some of the increase in costs will be passed
through as price increases to its customers. However, given the competitive
nature of the staffing industry, the Company is unsure whether it will be
successful in passing through all cost increases. Accordingly, the Company
believes that its gross margin could be negatively impacted in fiscal 2002.

Operating Expenses: Operating expenses include, among other things, staff
employee compensation, rent, recruitment and retention of temporary associates,
costs associated with opening new offices, depreciation, intangibles
amortization and advertising. Total operating expenses as a percentage of
service revenues were 20.5% for both the 52-week period ended December 30, 2001
and the 52-week period ended December 31, 2000.

14


Selling, general and administrative expenses, as a percentage of
service revenues, for the 52-week period ended December 30, 2001 were 18.9%,
compared to 18.3% for the 52-week period ended December 31, 2000. The increase
as a percentage of service revenues is due primarily to the Company's revenues
declining faster than the corresponding reduction in selling, general and
administrative expenses.

Restructuring charges for the 52-week period ended December 30, 2001
added approximately 0.6% in additional operating expenses. The restructuring
charges were the result of the closure or consolidation of unprofitable branch
offices and related costs, the Company's estimate of future lease costs to be
incurred in relation to those offices, severance charges related to the
elimination of various operational and senior level management positions and
certain legal costs related to refinancing of the Company's revolving credit
facility and senior note agreements. During the 52-week period ended December
30, 2001, excluding the remaining Inteliant offices to be disposed of, the
Company has reduced its staff by approximately 142, or 25.4%, full-time
equivalent employees and had closed or consolidated 35 offices. As of March 8,
2002, the Company has reduced its staff by an additional 36 full-time equivalent
employees.

Income from Operations: Income from operations for the 52-week period ended
December 30, 2001 was approximately $2.8 million, a decrease of approximately
$2.0 million, compared to $4.8 million for the 52-week period ended December 31,
2000. Operating margin was 1.3%, compared to 1.8% for the comparable period of
the prior year. The decrease in operating margin was due largely to the decrease
in gross profit.

Income Taxes: For the 52-week period ended December 30, 2001, the Company
recognized a tax provision of approximately $5.2 million. The income tax
provision was caused primarily by recognition of $5.2 million of deferred tax
asset valuation allowances. The valuation allowance was recorded given the
losses incurred and the uncertainties regarding future operating profitability
and taxable income.

Fiscal 2000 Compared to Fiscal 1999 from Continuing Operations

Service Revenues: Service revenues increased by $13.0 million, or 5.2%, to
$262.8 million for the 52-week period ended December 31, 2000, compared to
$249.8 million for the 52-week period ended January 2, 2000. Of the $13.0
million increase, approximately $5.6 million was attributable to revenues
generated by new offices (offset by office closures) and $7.4 million was
attributable to increased revenues from existing offices.

Gross Profit: Gross profit for the 52-week period ended December 31, 2000 was
$58.5 million, compared to $56.4 million for the 52-week period ended January 2,
2000, an increase of $2.1 million, or 3.7%. For the 52-week period ended
December 31, 2000, gross profit margin was 22.3%, compared to 22.6% for the
comparable period of the prior year. The decrease in gross profit margin was due
primarily to a reduction in the higher margin permanent placement business.

Operating Expenses: Total operating expenses, as a percentage of revenues,
increased to 20.5% for the 52-week period ended December 31, 2000 from 19.6% for
the 52-week period ended January 2, 2000. As discussed below, the increase is
due primarily to a loss on impairment of goodwill related to certain
intangibles.

During the 52-week period ended December 31, 2000, management
determined to eliminate certain specialty lines of business in order to
concentrate on core services provided by SOS in those markets. As a result of
the change in the Company's operational focus in these markets, the projected
cash flows were less than the carrying amount of the associated intangible
asset. Therefore, goodwill and other intangibles of approximately $3.1 million
relating to those specific acquisitions were determined to be impaired and were
written off.

Income from Operations: Income from operations decreased approximately $2.7
million, or 36.0%, to $4.8 million for the 52-week period ended December 31,
2000, compared to $7.5 million for the 52-week period ended January 2, 2000.
Operating margin was 1.8% for the fiscal year ended December 31, 2000, compared
to 3.0% for the fiscal year ended January 2, 2000. The decrease in operating
margin was primarily due to the increase in operating expenses coupled with
decrease in gross profit margin.

Income Taxes: The effective combined federal and state income tax rate on income
from continuing operations was 34.7% for the 52-week period ended December 31,
2000, compared to 27.0% for the 52-week period ended January 2, 2000. The
decrease in the effective tax rate was due primarily to an increase in income
tax credits earned through specific government-sponsored hiring incentives.

15


Liquidity and Capital Resources

For the 52-week period ended December 30, 2001, net cash provided by
operating activities was $21.1 million, compared to $17.5 million for the
52-week period ended December 31, 2000. The change in operating cash flow was
primarily a result of a net increase in cash provided from certain working
capital components, primarily accounts receivable and income tax receivable.

The Company's investing activities for the 52-week period ended
December 30, 2001 used approximately $6.2 million, compared to $7.5 million for
the 52-week period ended December 31, 2000. The Company's investing activities
used approximately $1.5 million to purchase property and equipment,
approximately $2.2 million in acquisition earnouts and approximately $2.4
million for notes receivable issued during the 52-week period ended December 30,
2001. By comparison, the Company used approximately $1.2 million to purchase a
12.5% equity interest in BioLynx, Inc. common stock, $2.9 million to purchase
property and equipment and approximately $3.3 million for acquisition earnouts
during the 52-week period ended December 31, 2000. Additionally, during the
52-week period ended December 31, 2000, the Company received $1.0 million in
cash relating to the sale of the IT consulting division. Also in conjunction
with the sale of the consulting division, the Company extended $1.0 million in
the form of a note receivable to the purchasers in that transaction.

The Company's financing activities for the 52-week period ended
December 30, 2001 used approximately $15.2 million, compared to $11.4 million
for the 52-week period ended December 31, 2000, primarily for payments, net of
borrowings, on the Company's debt instruments.

During fiscal 2001, the Company entered into a Third Amendment to
Amended and Restated Credit Agreement (the "Credit Amendment") with Wells Fargo
Bank Northwest, N.A. ("Wells Fargo") and Bank One, NA ("Bank One")
(collectively, the "Lenders") to extend the Company's line of credit, which
expired July 1, 2001. Pursuant to the Credit Amendment, the Company's line of
credit was reduced from $30.0 million to $18.0 million, $8.0 million of which is
available for borrowing in cash, with a maturity date of June 30, 2002, and
$10.0 million of which is available under letters of credit to be issued solely
as required by the Company's workers' compensation insurance providers, with a
maturity date of January 1, 2003. Also pursuant to the Credit Amendment, certain
financial covenants of the credit facility were modified. The Credit Amendment
provides for borrowings at the prime rate (4.75% as of December 30, 2001) plus
2.5 percentage points. Additionally, the credit facility provides for an
additional fee of $250,000 unless the Lenders are paid in full and their credit
commitment is terminated on or before June 15, 2002. As of December 30, 2001,
the Company had no outstanding borrowings under the credit facility. As of
December 30, 2001, the Company had letters of credit of $6.7 million outstanding
to secure its workers' compensation premium obligation. Subsequent to December
30, 2001, the Company issued an additional $3.2 million in letters of credit and
an additional $1.0 million cash deposit to secure its workers' compensation
insurance program.

On September 5, 2001, the Company entered into an Amendment No. 2 to
Note Purchase Agreement (the "Amendment"), dated as of July 30, 2001, with the
holders of its $5.0 million aggregate principal amount of Senior Notes, Series
A, due September 1, 2003 and the holders of its $30.0 million aggregate
principal amount of Senior Notes, Series B, due September 1, 2008 (collectively,
the "Noteholders"), whereby the Noteholders waived the Company's temporary
noncompliance with certain financial covenants under the Company's bank credit
facility and the existing note purchase agreements with the Noteholders during
the Company's fiscal quarter ended June 30, 2001.

Pursuant to the Amendment, the Series A Notes bear interest at the rate
of 8.72% per annum and any overdue payments bear interest at the greater of
10.72% and 2% over the prime rate of The First National Bank of Chicago, while
the Series B Notes bear interest at the rate of 8.95% per annum and any overdue
payments bear interest at the greater of 10.95% and 2% over the prime rate of
The First National Bank of Chicago. The change in the interest rate charged on
the senior notes is estimated to have an annual impact of approximately $0.6
million on the Company's financial operations.

In addition, as consideration for the Amendment, the Company and each
of its subsidiaries entered into a security agreement dated as of July 30, 2001
with State Street Bank and Trust Company, as collateral agent (the "Collateral
Agent"), on behalf of Wells Fargo Bank, National Association, as administration
agent under the Company's bank credit facility, the financial institutions that
from time to time are parties to the credit facility as lenders thereunder
(collectively, the "Lenders") and the Noteholders, pursuant to which the Company
offered as collateral security for the senior notes the pledge and grant by the
Company and each subsidiary of a security interest in and lien upon all of its


16


personal property assets including, without limitation, all accounts receivable,
intellectual property rights and shares of capital stock of the Company's
subsidiaries. Such security interests have a first priority security interest to
the extent such interests cover accounts receivable of the Company and each
subsidiary and, as to other items of collateral, have a priority as mutually
agreed by the Noteholders and the Lenders pursuant to an intercreditor agreement
among such parties and the Collateral Agent dated as of July 30, 2001. In
addition, all obligations of the Company under the credit facility and the note
purchase agreements are to be guaranteed by the subsidiaries.

The Amendment also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change in control, transfer of property or issuance of equity
securities of the Company. In addition, the Amendment provides that the Company
shall deliver certain financial statements within 30 days of the end of each
calendar month as well as an officer's certificate in connection with the
delivery of financial statements for the last month of each fiscal quarter of
the Company. Also as consideration for the Amendment and waiver by the
Noteholders, the Company paid an amendment fee to the Noteholders of $200,000 in
the aggregate, as well as fees and expenses of the Noteholders' special counsel.
The Company also is required to pay on June 15, 2002 a supplemental note fee of
$250,000, which amount will be waived if the Company has paid all amounts due
and outstanding under the note purchase agreements prior to such date. Also
pursuant to the Amendment, certain financial covenants of the Company were
modified.

Also in conjunction with the Amendment, the Company entered into a
Fourth Amendment to Amended and Restated Credit Agreement with the Lenders dated
as of September 4, 2001 in order to make conforming changes with respect to the
collateralization transaction described above.

The Company's revolving credit facility and note purchase agreements
contain certain restrictive covenants, including certain debt ratios and
restrictions on the sale of capital assets. As of December 30, 2001, the Company
was out of compliance with minimum EBITDA requirements under its note purchase
agreements with its Noteholders and its revolving credit agreement with its
Lenders. On April 15, 2002, the Company entered into a Fifth Amendment to
Amended and Restated Credit Agreement and Waiver (the "Fifth Credit Amendment")
with the Lenders to extend the Company's line of credit. Pursuant to the Fifth
Crecit Amendment, the Company's line of credit was reduced from $18.0 million to
$16.0 million, $6.0 million of which is available for borrowing in cash, reduced
as provided below, with a maturity date of September 1, 2003, and $10.0 million
of which is available under letters of credit to be issued solely as required by
the Company's workers' compensation insurance providers, with a maturity date of
January 1, 2004. The Fifth Credit Amendment provides for borrowings at the prime
rate (4.75% as of December 30, 2001) plus 3.0 percentage points through and
including June 30, 2002, after which time borrowings under the facility will be
charged an interest rate equal to the then current prime rate plus 3.5
percentage points. Additionally, the Fifth Credit Amendment provides for an
amendment fee of approximately $78,000, payable to the Lenders upon execution of
the Fifth Credit Amendment, plus a supplemental fee of $250,000 payable on
September 1, 2003, unless the Lenders are paid in full and their credit
commitment is terminated on or before such date. In addition, the Company paid
$313,000 of the outstanding borrowings under the revolving credit facility upon
execution of the Fifth Credit Amendment. The Company will pay an additional
$469,500 and $558,929 of the outstanding borrowings under the revolving credit
facility on September 15, 2002 and December 15, 2002, respectively. Such
payments will permanently reduce the line of credit available to the Company for
borrowing in cash to less than the $6.0 million stated above. The Fifth Credit
Amendment also waives any violations of financial covenants under the credit
facility that may have existed at December 30, 2001 and any such violations that
may exist as of March 31, 2002. In addition, certain financial covenants of the
Company have been modified. As of April 11, 2002, the Company had outstanding
borrowings under the revolving credit facility of approximately $7.3 million.

Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with the Noteholders, whereby the
Noteholders waived the Company's noncompliance with certain financial covenants
under the Company's bank credit facility and the existing note purchase
agreements with the Noteholders as of December 30, 2001 and any noncompliance of
such covenants that may exist as of March 31, 2002. The Noteholders also
consented to the Company entering into the Fifth Credit Amendment described
above. Pursuant to Amendment No. 3, the Series A Notes bear interest at the rate
of 9.22% per annum beginning as of April 1, 2002 through, but excluding, June
30, 2003, and at the rate of 9.72% per annum from June 30, 2003 until the Series
A Notes become due and payable. The Series B Notes bear interest at the rate of
9.45% per annum beginning as of April 1, 2002 through, but excluding, June 30,
2003, and at the rate of 9.95% per annum from June 30, 2003 until the Series B
Notes become due and payable.

Pursuant to Amendment No. 3, any overdue payments on the Series A Notes
bear interest at the greater of 2% over the interest rate currently in effect as
stated above or 2% over the prime rate of The First National Bank of Chicago.
The change in the interest rate charged on the senior notes is estimated to have
an annual impact of approximately $142,000 on the Company's financial
operations. In addition, the Company paid $687,000 of the principal amount of
the senior notes upon execution of Amendment No. 3. The Company will pay an
additional $1,030,500 and $1,227,600 of the principal amount of the senior notes
on September 15, 2002 and December 15, 2002, respectively.

17


Amendment No. 3 also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change of control, transfer of property or issuance of equity
securities of the Company. In addition, Amendment No. 3 provides that the
Company pay to the Lenders and the Noteholders any federal, state or local tax
refund or repayment, which amount shall be distributed pursuant to the Amended
and Restated Intercreditor Agreement dated as of April 15, 2002 among the
Collateral Agent, the Lenders and the Noteholders; however, if the Company
receives any refund arising from the 2002 Job Act relating to net operating loss
carryforwards, the Company will be able to retain for working capital purposes
the lesser of $2,000,000 or 50% of the refund. Any such prepayments paid to the
Lenders also will be treated as a permanent reduction in the line of credit
available to the Company for borrowing in cash under the revolving credit
facility.

Pursuant to Amendment No. 3, the Company shall deliver to the
Noteholders certain financial statements within 30 days of the end of each
calendar month certified by the senior financial officer of the Company. As
consideration for Amendment No. 3 and the waiver by the Noteholders, the Company
paid an amendment fee to the Noteholders of $145,475, as well as fees and
expenses of the Noteholders' special counsel. In addition, the Company paid to
each Noteholder accrued but unpaid interest on such holder's notes for the
period beginning March 1, 2002 through and including March 31, 2002. Also
pursuant to Amendment No. 3, the Company is required to pay on September 1, 2003
a supplemental note fee of $250,000, which amount will be waived if the Company
has paid all amounts due and outstanding under the note purchase agreements
prior to such date. Also, certain financial covenants of the Company were
modified. In the event the Company fails to comply with such covenants as
modified, Amendment No. 3 provides that the Noteholders may, at their discretion
and at the expense of the Company, retain a financial advisor to review, and
advise the Noteholders and the Company upon, the financial status of the
Company. The security agreement dated as of July 30, 2001 previously discussed
herein remains in place pursuant to Amendment No. 3.

The following tables provide information on future payments under the
Company's debt agreements and capital commitments, including maturities on
borrowings and future minimum lease payments under non-cancelable operating
leases (in thousands):



Payments due by period
-----------------------------------------------------------------------------
Contractual Obligations
Total Less than 1 year 1-3 years 4-5 years After 5 years

Long-Term Debt(1) $ 29,095 $5,668 $ 13,680 $ 8,571 $ 1,175
Operating Leases 4,844 2,620 2,003 221 --
------------------ ------------------- ------------------ ------------------- ------------------
Total Contractual Cash
Obligations $ 33,939 $ 8,288 $ 15,683 $ 8,792 $ 1,175
------------------ ------------------- ------------------ ------------------- ------------------

Amount of Commitment Expiration Period
-----------------------------------------------------------------------------
Other Commercial Total Amounts
Commitments Committed Less than 1 year 1-3 years 4-5 years After 5 years
------------------ ------------------- ------------------ ------------------- ------------------
Lines of Credit $ 8,000 $ 8,000 $ -- $ -- $ --
Letters of Credit 10,000 10,000 -- -- --
------------------ ------------------- ------------------ ------------------- ------------------
Total Commercial
Commitments $ 18,000 $ 18,000 $ -- $ -- $ --
------------------ ------------------- ------------------ ------------------- ------------------



On March 9, 2002, the Job Creation and Work Assistance Act of 2002 (the
"2002 Job Act") was signed into law, which includes certain provisions that the
Company believes will provide favorable tax treatment for the Company. Among
such provisions is the extension of the net operating loss carryback period from
two years to five years for net operating losses arising in tax years ending in
2001 and 2002. These provisions also allow companies to use the net operating
loss carrybacks and carryforwards to offset 100 percent of alternative minimum
taxable income. In accordance with SFAS No. 109, "Accounting for Income Taxes,"
the effect of the change in the law will be accounted for in the first quarter
of fiscal 2002. The Company is currently assessing the impact the new law will


18


have on the Company's financial position and results of operations. The Company
paid approximately $4.5 million and $2.8 million in federal income taxes for
fiscal 1997 and fiscal 1996, respectively.

Seasonality

The Company's business follows the seasonal trends of its customers'
business. Historically, the Company has experienced lower revenues in the first
quarter, with revenues accelerating during the second and third quarters and
then slowing again during the fourth quarter.

Impact of Inflation

The Company believes that over the past three years inflation has not
had a significant impact on the Company's results of operations.

Impact of Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets," effective for the Company's fiscal years ending after
December 30, 2001. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting.
Additionally, under the new rules, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged; unless the intangible assets
identified have an indefinite life, those assets will be amortized over their
useful life. Assets of the Company that have been separately identified include,
but are not limited to, trademarks and tradenames, non-competition agreements
and customer lists.

During fiscal 2001, the Company continued to amortize existing goodwill
and intangible assets. Under SFAS No. 142, the Company will discontinue
amortization of existing goodwill and other intangible assets with indefinite
lives in fiscal 2002. The Company anticipates that adoption of SFAS No. 142 will
result in an impairment of a significant portion of the existing goodwill and
other intangible assets with an indefinite life currently carried on the balance
sheet, as goodwill and intangible assets with indefinite lives will be subject
to assessment for impairment by applying a fair-value-based test rather than an
undiscounted cash flow approach currently used by the Company. As of December
30, 2001, the net book value of intangible assets carried on the balance sheet
was approximately $48.1 million, of which approximately $32.5 million was
attributable to goodwill. The Company estimates that it may be required to write
off in excess of $20.0 million of goodwill and intangibles during the first
quarter of fiscal 2002. However, the Company has not completed yet its analysis
of the total impact of adopting SFAS No. 142 and this initial estimate may
change. For the 52-week period ended December 30, 2001, amortization related to
goodwill was approximately $1.2 million.

In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
of Long-lived Assets." The new standard supercedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." The new standard also supercedes the provisions of Accounting Principles
Board No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The provisions of SFAS No. 144 are
effective for financial statements beginning after December 15, 2001 but allow
for earlier application. The Company currently is assessing the impact the
adoption of these provisions will have on the Company's financial position and
results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to interest rate changes primarily in relation
to its revolving credit facility and its senior secured notes. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. The
Company's senior debt placement bears interest at a fixed interest rate. For
fixed rate debt, interest rate changes generally affect the fair value of the
debt, but not the earnings or cash flows of the Company. Changes in the fair
market value of fixed rate debt generally will not have a significant impact on
the Company unless the Company is required to refinance such debt.

19


Revolving Credit Facility: The Company's revolving credit facility bears
interest at the prime rate plus 2.5%; at December 30, 2001, such prime rate was
4.75%. For the 52-week period ended December 30, 2001, the Company had no
advances outstanding under the revolving credit facility.

Senior Notes: For the 52-week period ended December 30, 2001, the Company's
outstanding borrowings on the senior notes were $29.1 million, with a weighted
average fixed interest rate of 8.92%. As stated above, any changes in the fair
value of the senior notes generally will not have a significant impact on the
Company unless the Company is required to refinance the senior notes. The fair
value of the Company's senior notes is estimated by discounting expected cash
flows at the prime rate, 4.75% at December 30, 2001, plus 2.5%. Using such
discount rate over the expected maturities of the senior notes, the Company
calculates that the estimated fair value of the obligations on the senior notes,
using a discount rate of 7.25% over the expected maturities of the obligations,
is approximately $30.3 million. If the discount rate were to increase by 10% to
8.0%, the estimated fair value of the obligation on the unsecured notes would be
approximately $29.8 million. If the discount rate were to decrease by 10% to
6.5%, the estimated fair value of the obligation on the unsecured notes would be
approximately $30.9 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Consolidated Financial Statements of the Company meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K, as listed below:



Page
----


Report of Independent Public Accountants.........................................................21
Consolidated Balance Sheets as of December 30, 2001 and December 31, 2000........................22
Consolidated Statements of Operations for the 52 weeks ended
December 30, 2001, December 31, 2000 and January 2, 2000....................................24
Consolidated Statements of Shareholders' Equity for the 52 weeks ended
December 30, 2001, December 31, 2000 and January 2, 2000....................................26
Consolidated Statements of Cash Flows for the 52 weeks ended
December 30, 2001, December 31, 2000 and January 2, 2000....................................27
Notes to Consolidated Financial Statements.......................................................29


Other schedules required under Regulation S-X are listed in Item 14 of
this Annual Report on Form 10-K.



20




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To SOS Staffing Services, Inc.:

We have audited the accompanying consolidated balance sheets of SOS Staffing
Services, Inc. (a Utah Corporation) and its subsidiaries as of December 30, 2001
and December 31, 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SOS Staffing
Services, Inc. and its subsidiaries as of December 30, 2001 and December 31,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 30, 2001 in conformity with accounting
principles generally accepted in the United States.





/s/ARTHUR ANDERSEN LLP
- ----------------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 8, 2002 (except with respect to Note 13, "Subsequent Events," as to
which the date is April 15, 2002.)



21




SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 30, 2001 and December 31, 2000




ASSETS
(in thousands)
December 30, December 31,
2001 2000
------------------ -----------------
CURRENT ASSETS

Cash and cash equivalents $ 879 $ 1,185
Accounts receivable, less allowances of
$2,267 and $2,916, respectively 21,995 44,488
Current portion of workers' compensation deposit 273 213
Prepaid expenses and other 853 1,032
Deferred income tax asset -- 5,852
Income tax receivable 367 8,088
------------------ -----------------
Total current assets 24,367 60,858
------------------ -----------------

PROPERTY AND EQUIPMENT, at cost
Computer equipment 6,082 3,935
Office equipment 3,808 4,009
Leasehold improvements and other 1,887 1,834
------------------ -----------------
11,777 9,778
Less accumulated depreciation and amortization (7,269) (5,456)
------------------ -----------------
Total property and equipment, net 4,508 4,322
------------------ -----------------

OTHER ASSETS
Intangible assets, less accumulated amortization
of $12,853 and $14,979, respectively 48,060 92,007
Deposits and other assets 1,808 4,201
------------------ -----------------
Total other assets 49,868 96,208
------------------ -----------------

$ 78,743 $ 161,388
================== =================


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


22





SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 30, 2001 and December 31, 2000


LIABILITIES AND SHAREHOLDERS' EQUITY
(in thousands, except per share data)

December 30, December 31,
2001 2000
----------------- -----------------
CURRENT LIABILITIES

Line of credit $ -- $ 9,000
Current portion of notes payable 5,668 8,273
Accounts payable 1,571 2,667
Accrued payroll costs 3,492 10,196
Current portion of workers' compensation reserve 4,484 4,689
Accrued liabilities 4,799 6,021
----------------- -----------------
Total current liabilities 20,014 40,846
----------------- -----------------

LONG-TERM LIABILITIES
Notes payable, less current portion 23,427 27,000
Workers' compensation reserve, less current portion 1,018 1,064
Deferred income tax liability -- 652
Deferred compensation liabilities 743 941
----------------- -----------------
Total long-term liabilities 25,188 29,657
----------------- -----------------

COMMITMENTS AND CONTINGENCIES
(Notes 1, 3, 5 and 6)

SHAREHOLDERS' EQUITY
Common stock $0.01 par value, 20,000 shares authorized,
12,691 shares issued and outstanding 127 127
Additional paid-in capital 91,693 91,693
Accumulated deficit (58,279) (935)
----------------- -----------------
Total shareholders' equity 33,541 90,885
----------------- -----------------

$ 78,743 $ 161,388
================= =================


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



23




SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended December 30, 2001,
December 31, 2000 and January 2, 2000

(in thousands, except per share data)



Fiscal Year (52/53 Weeks)
-------------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------

SERVICE REVENUES $ 216,358 $ 262,822 $ 249,803
DIRECT COST OF SERVICES 169,276 204,333 193,445
------------------ ------------------ -----------------
Gross Profit 47,082 58,489 56,358
------------------ ------------------ -----------------

OPERATING EXPENSES:
Selling, general and administrative 40,810 48,085 46,260
Intangibles amortization 2,153 2,547 2,613
Loss on impairment of goodwill and intangibles -- 3,102 --
Restructuring charges 1,334 -- --
------------------ ------------------ -----------------
Total operating expenses 44,297 53,734 48,873
------------------ ------------------ -----------------

INCOME FROM OPERATIONS 2,785 4,755 7,485
------------------ ------------------ -----------------

OTHER INCOME (EXPENSE):
Interest expense (3,040) (4,069) (4,101)
Interest income 153 181 88
Other, net 2 (622) (36)
------------------ ------------------ -----------------
Total, net (2,885) (4,510) (4,049)
------------------ ------------------ -----------------

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES
(100) 245 3,436

PROVISION FOR INCOME TAXES (5,200) (85) (928)
------------------ ------------------ -----------------

(LOSS) INCOME FROM CONTINUING OPERATIONS
(5,300) 160 2,508
------------------ ------------------ -----------------


(Continued on next page)

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


24



SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued) For the Fiscal Years Ended December 30, 2001,
December 31, 2000 and January 2, 2000

(in thousands, except per share data)




Fiscal Year (52/53 Weeks)
-------------------------------------------------------------
2001 2000 1999
------------------ ------------------ -----------------
DISCONTINUED OPERATIONS:

(Loss) income from discontinued operations (net
of income tax (benefit) provision of $0,
($439) and $2,305, respectively) $ (34,429) $ (1,407) $ 2,843
Loss from sale of discontinued operations (net of
income tax benefit of $0 and $11,225,
respectively) (17,615) (27,954) --
------------------ ------------------ -----------------
Total discontinued operations (52,044) (29,361) 2,843

NET (LOSS) INCOME $ (57,344) $ (29,201) $ 5,351
------------------ ------------------ -----------------


BASIC (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.42) $ 0.01 $ 0.20
(Loss) income from discontinued operations (4.10) (2.31) 0.22
------------------ ------------------ -----------------
Net (loss) income $ (4.52) $ (2.30) $ 0.42
------------------ ------------------ -----------------

DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.42) $ 0.01 $ 0.20
(Loss) income from discontinued operations (4.10) (2.31) 0.22
------------------ ------------------ -----------------
Net (loss) income $ (4.52) $ (2.30) $ 0.42
------------------ ------------------ -----------------

WEIGHTED AVERAGE COMMON SHARES:
Basic 12,691 12,691 12,691
Diluted 12,691 12,692 12,699



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



25




SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY For the Fiscal Years Ended December 30, 2001, December
31, 2000 and January 2, 2000

(in thousands)



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

BALANCE, January 3, 1999 12,689 $ 127 $ 91,564 $ 22,915 $ 114,606
Exercise of stock options 2 -- 22 -- 22
Tax benefit of disqualifying
dispositions of stock -- -- 107 -- 107
Net income -- -- -- 5,351 5,351
----------------------------------------------------------------------

BALANCE, January 2, 2000 12,691 127 91,693 28,266 120,086
Net loss -- -- -- (29,201) (29,201)
----------------------------------------------------------------------

BALANCE, December 31, 2000 12,691 127 91,693 ( 935) 90,885
Net loss -- -- -- (57,344) (57,344)
----------------------------------------------------------------------

BALANCE, December 30, 2001 12,691 $ 127 $ 91,693 $ (58,279) $ 33,541
----------------------------------------------------------------------


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

26




SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 30, 2001,
December 31, 2000 and January 2, 2000

(in thousands)


Fiscal Year (52/53 Weeks)
----------------------------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income $ (57,344) $ (29,201) $ 5,351
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 3,877 11,727 8,094
Deferred income taxes 5,424 (2,965) 179
Loss on disposition of assets 37 27 19
Loss on disposition of discontinued operations 51,711 39,179 --
Changes in operating assets and liabilities:
Accounts receivable, net 21,694 5,180 (5,720)
Workers' compensation deposit (60) 493 (138)
Prepaid expenses and other 132 (189) 81
Deposits and other assets (54) 308 (18)
Accounts payable (1,096) 146 (829)
Accrued payroll costs (6,779) 1,834 409
Workers' compensation reserve (250) 557 2,360
Accrued liabilities (3,737) (665) 3,255
Income taxes 7,497 (8,904) (105)
----------------- ------------------ -----------------
Net cash provided by operating activities 21,052 17,527 12,938
----------------- ------------------ -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equity securities -- (1,250) --
Cash paid for acquisitions of businesses -- -- (32)
Purchases of property and equipment (1,543) (2,918) (4,346)
Payments on acquisition earnouts (2,217) (3,358) (28,611)
Proceeds from sale of property and equipment -- 22 1,598
Proceeds from sale of the IT consulting division -- 1,000 --
Issuance of note receivable (2,421) (1,000) --
----------------- ------------------ -----------------
Net cash used in investing activities (6,181) (7,504) (31,391)
----------------- ------------------ -----------------


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




27



SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) For the Fiscal Years Ended December 30, 2001,
December 31, 2000 and January 2, 2000

(in thousands)



Fiscal Year (52/53 Weeks)
-------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of employee stock options $ -- $ -- $ 129
Proceeds from borrowings 26,992 13,288 22,000
Principal payments on borrowings (42,169) (24,703) (6,414)
------------------- ------------------- -----------------
Net cash (used in) provided by financing (15,177) (11,415) 15,715
activities
------------------- ------------------- -----------------

NET DECREASE IN CASH
AND CASH EQUIVALENTS (306) (1,392) (2,738)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,185 2,577 5,315
------------------- ------------------- -----------------

CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 879 $ 1,185 $ 2,577
------------------- ------------------- -----------------


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 3,297 $ 4,004 $ 3,908
Income taxes (7,721) 290 3,332




SUPPLEMENTAL NON CASH INVESTING AND FINANCING INFORMATION

During fiscal 2001, the Company exchanged its investment in BioLynx common stock
valued at approximately $1.3 million for a perpetual royalty free license for
certain BioLynx technology (see Note 2).



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



28




SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

SOS Staffing Services, Inc. ("SOS" or the "Company") is a leading
provider of staffing and consulting services primarily in the western United
States. As of December 30, 2001, SOS operated a network of 100 offices located
in 15 states. The Company provides a broad range of services including light
industrial, clerical, industrial, technical and other professional services.


2. Summary of Significant Accounting Policies

Fiscal Year - The Company's fiscal year ends on the Sunday closest to December
31, which results in a 52- or 53-week year. The fiscal year ended December 30,
2001 ("fiscal 2001"), the fiscal year ended December 31, 2000 ("fiscal 2000")
and the fiscal year ended January 2, 2000 ("fiscal 1999") each contained 52
weeks.

Principles of Consolidation - The consolidated financial statements include the
accounts of SOS Staffing Services, Inc. and its wholly owned subsidiaries, Devon
& Devon Personnel Services, Inc., ServCom Staff Management, Inc., SOS Collection
Services, Inc. and Inteliant Corporation ("Inteliant"). All significant
intercompany transactions have been eliminated in consolidation.

Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from those
estimates.

Revenue Recognition - Service revenues generated from employees on customer
assignments are recognized as income at the time service is provided, while
service revenues generated from permanent placement services are recognized at
the time the customer agrees to hire a candidate supplied by the Company.

Cash and Cash Equivalents - The Company considers highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents.
Cash and cash equivalents consist of various money market accounts and are
recorded at cost, which approximates market value.

Property and Equipment - Property and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements are amortized over the terms of the respective leases or
the estimated economic lives of the assets, whichever is shorter. The Company
capitalizes internal and external costs incurred in connection with developing
or obtaining internal use software in accordance with Statement of Position
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The depreciation and amortization periods are as
follows:

Computer equipment--------------------- 2 - 7 years
Office equipment----------------------- 3 - 7 years
Leasehold improvements and other------- 5 - 17 years

29


Upon retirement or other disposition of property and equipment, the
cost and related accumulated depreciation and amortization are removed from the
accounts. The resulting gain or loss is reflected in income. Major renewals and
improvements are capitalized while minor expenditures for maintenance and
repairs are charged to expense as incurred.

Deposits and Other Assets - The Company's deposits and other assets at December
30, 2001 and December 31, 2000 consisted primarily of the following (in
thousands):



2001 2000
--------------- ---------------

Investment in Biolynx, Inc. common stock $ -- $ 1,250
Notes receivable, less allowance of $500 -- 1,000
Restricted investments 743 941
Deposits and other 1,065 1,010
--------------- ---------------
$ 1,808 $ 4,201
--------------- ---------------



In April 2000, the Company purchased a 12.5% interest in a privately
held company, Biolynx, Inc., for approximately $1.3 million in cash. During the
52-week period ended December 30, 2001, as a result of a strategic shift in
market development by the management of BioLynx, the Company determined to
divest its investment in BioLynx. In exchange and as consideration for the
Company's common stock holdings, BioLynx agreed to a perpetual royalty-free
license for certain technology (including all proprietary software and related
intellectual property and all source and object codes utilized to develop the
product) used by the Company. Management has estimated the technology value to
approximate its investment in BioLynx. As such, the investment was reclassified
from other long-term assets to property, plant and equipment and is being
amortized over three years.

Notes receivable at December 30, 2001 consisted of a note receivable
from Bency & Associates, LLP for $0.5 million, net of allowance for notes
receivable of $0.5 million. Notes receivable at December 31, 2000, consisted of
notes receivable issued to HD for $1.0 million as part of a subordinated loan
agreement (see Note 3) and a note receivable to Bency and Associates for $0.5
million, net of allowance for notes receivable of $0.5 million.

Restricted investments are comprised of mutual fund securities held in
a "Rabbi Trust" for payment to the participants of the Company's deferred
compensation plan (see Note 9). The Company accounts for its restricted
investments as trading securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company determines the proper classification of
investments at the time of purchase and reassesses such designations at each
balance sheet date.

Intangible Assets - Intangible assets consist of the following amounts as of
December 30, 2001 and December 31, 2000 (in thousands):




2001 2000
-------------------- --------------------


Goodwill $ 37,119 $ 84,365
Trademarks and tradenames 18,046 19,260
Non-compete agreements 1,828 2,507
Other intangible assets 598 854
-------------------- --------------------
57,591 106,986
Less:
Accumulated amortization goodwill (4,639) (10,361)
Accumulated amortization trademarks and tradenames (2,613) (2,135)
Accumulated amortization non-compete agreements (1,685) (1,744)
Accumulated amortization other intangible assets (594) (739)
-------------------- --------------------
Net intangible assets $ 48,060 $ 92,007
-------------------- --------------------


Goodwill and trademarks and tradenames are amortized using the
straight-line method over 30 years; non-compete agreements and other intangible
assets are generally being amortized using the straight-line method over three
to six years. During fiscal 2001, the Company determined to dispose of all of


30


the assets related to its Inteliant operations (see Note 3). As such, the
Company determined that all of these intangible assets related to Inteliant are
impaired. See accounting for long-lived assets below.

Accounting for the Impairment of Long-Lived Assets - Long-lived assets,
including goodwill and other intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the book value of the
asset may not be recoverable. The Company evaluates, at each balance sheet date,
whether events or circumstances have occurred that indicate possible impairment.
The Company uses an estimate of the future undiscounted net cash flows of the
related asset over the remaining life in measuring whether the assets are
recoverable. When such estimate of the future undiscounted cash flows is less
than the carrying amount of the related asset, a potential impairment exists.

During fiscal 2001, the Company determined to dispose of all of the
assets related to its Inteliant operations (see Note 3). As such, intangible
assets relating to the Inteliant operations with a carrying value of
approximately $42.5 million have been impaired and the carrying value has been
reduced to zero. During fiscal 2000, executive management determined to abandon
certain specialty lines of business in certain markets, including the
specialized mortgage staffing business, and concentrate on developing more
traditional services supplied by the Company in those markets. New management
was put in place at these locations, recruiting was modified to find temporary
employees to compete in more traditional markets and the emphasis has been
changed to attract clients more in line with the core business of the Company.
As a result of the change in operational focus in these markets, the revised
projected cash flows were less than the carrying amount of the associated
intangible asset. Therefore, assets of approximately $3.1 million relating to
those specific acquisitions were determined to be impaired and were written-off.

Due to recent accounting pronouncements (see Note 12. "Recent
Accounting Pronouncements"), the Company estimates that it may be required to
write off in excess of $20.0 million of goodwill and intangibles during the
first quarter of fiscal 2002 related to SFAS No. 142 "Goodwill and Other
Intangibles" ("SFAS No. 142"). However, the Company has not completed yet its
analysis of the total impact of adopting SFAS No. 142 and this initial estimate
may change. For the 52-week period ended December 30, 2001, amortization related
to goodwill was approximately $1.2 million.

Workers' Compensation - For fiscal 2001 and fiscal 2000, the Company maintained
workers' compensation insurance with ACE USA ("ACE"), an insurer, with a
deductible of $300,000 per incident, and an aggregate cap of approximately $10.8
million, adjusted based on actual payroll. The Company also is required to
provide letters of credit to ACE to provide security for the Company's
performance under the insurance plan. As of December 30, 2001, letters of credit
provided to ACE were approximately $6.7 million. Subsequent to December 30,
2001, the Company was required to provide an additional $3.3 million in letters
of credit, as part of its workers' compensation insurance renewal for fiscal
2002. Under the terms of the ACE agreement, the Company is required to fund into
a deposit account an amount equal to the actual payments made by ACE during the
previous month as reimbursement to ACE for such deductibles. If claims payments
on any specific claim exceed the deductible amount of $300,000, the Company is
not required to reimburse the fund for those payments over and above the
deductible. Some states do not permit private insurance for workers'
compensation; where this is the case, the Company is covered by appropriate
state insurance funds.

The Company has established reserve amounts based upon information
provided ACE as to the status of claims plus development factors for incurred
but not yet reported claims and anticipated future changes in underlying case
reserves. Such reserve amounts are only estimates and there can be no assurance
that the Company's future workers' compensation obligations will not exceed the
amount of its reserves. However, management believes that the difference between
the amounts recorded for its estimated liability and the costs of settling the
actual claims will not be material to the results of operations.

Income Taxes - The Company records income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. A valuation allowance is
established when it is more likely than not that a deferred tax asset is not
realizable in the foreseeable future on a tax entity by entity basis.

31


Accounting for stock based compensation - The Company measures compensation cost
for employee stock options and similar equity instruments using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."

Income From Continuing Operations Per Common Share - Basic income (loss) from
continuing operations per common share ("Basic EPS") excludes dilution and is
computed by dividing income (loss) by the weighted-average number of common
shares outstanding during the year. Diluted income (loss) from continuing
operations per common share ("Diluted EPS") reflects the potential dilution that
could occur if stock options or other common stock equivalents were exercised or
converted into common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an antidilutive effect on
income (loss) from continuing operations per common share.

Following is a reconciliation of the numerator and denominator of Basic
EPS to the numerator and denominator of Diluted EPS for all years presented (in
thousands, except per share amounts):



(Loss) Income
from Continuing
Operations
(Numerator) Shares Per-Share
(Denominator) Amount
----------------- ------------------- --------------
Fiscal 2001

Basic EPS $ (5,300) 12,691 $ (0.42)
Effect of stock options --


----------------- -------------------
Diluted EPS $ (5,300) 12,691 $ (0.42)
================= ===================

Fiscal 2000
Basic EPS $ 160 12,691 $ 0.01
Effect of stock options 1


----------------- -------------------
Diluted EPS $ 160 12,692 $ 0.01
================= ===================

Fiscal 1999
Basic EPS $ 2,508 12,691 $ 0.20
Effect of stock options 8


----------------- -------------------
Diluted EPS $ 2,508 12,699 $ 0.20
================= ===================


At the end of fiscal 2001, there were outstanding options to purchase
1,179,000 shares of common stock that were not included in the computation of
diluted loss from operations per common share because of the Company's loss from
continuing operations. At the end of fiscal 2000 and fiscal 1999, there were
outstanding 824,000 and 931,000 shares of common stock, respectively, that were
not included in the computation of diluted income from operations per common
share because the options' exercise prices were greater than the average market
price of the common shares.

Concentrations of Credit Risk - The Company's financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of trade receivables. In the normal course of business, the Company
provides credit terms to its customers. The Company believes its portfolio of
accounts receivable is well diversified, and as a result, its concentrations of
credit risks are minimal. The Company performs ongoing credit evaluations of its
customers and maintains allowances for possible losses, but typically does not
require collateral.

Fair Value of Financial Instruments - The Company's financial instruments
consist primarily of debt obligations. The estimated fair value of the unsecured
notes, using a discount rate of 7.25% over the expected maturities of the
obligations, is approximately $30.3 million. The fair value of the Company's
long-term debt is estimated by discounting expected cash flows at the prime rate
(4.75% at December 30, 2001) plus 2.5%. At December 30, 2001 the carrying amount
of $29.1 million is reflected in the consolidated balance sheets.

32


3. Discontinued Operations

On December 29, 2000, Inteliant Corporation ("Inteliant") sold to
Herrick Douglass, Inc. ("HD") its consulting division and related tangible and
intangible assets. The consulting division sold to HD consisted of a full suite
of information technology consulting, e-business and telecommunication services,
which services were marketed to Fortune 1000, mid-tier and early stage
companies, government agencies and educational institutions. As part of this
transaction, the Company retained accounts receivable of approximately $9.0
million, of which approximately $7.6 million was collected during fiscal 2001
and the remaining $1.4 million was uncollectable and was written off as bad
debt. As part of the sale of the consulting division, the Company agreed to
extend a one-year subordinated loan to HD of up to a maximum of $3.5 million to
meet HD's operating needs. The promissory note from HD evidencing the loan bore
interest at 10% per annum on outstanding principal and was due and payable on or
before December 31, 2001. The note was amended in May 2001 to provide for an
accumulated interest payment on December 31, 2001, with the principal balance to
be paid in 36 monthly installments beginning in January 2002 at an annual
interest rate of 12%. As of December 30, 2001, the Company had advanced to HD
approximately $3.4 million. As of the date of this filing, HD has been
liquidated and the Company has been unable to collect against the note.
Accordingly, the Company has written off the entire note to reflect that the
Company will not receive the balance due on the note issued by HD. For fiscal
2000, the Company recorded an estimated loss on the disposition, net of tax, of
approximately $28 million. For fiscal 2001, an additional loss of approximately
$5.0 million was recorded as a result of the greater than expected write-off of
receivables and the reserve on the note. The Company does not expect to incur
any additional loss related to this discontinued operation.

In November 2001, the Company resolved to sell or abandon the assets of
its IT staffing business, which represented the remaining assets and business of
Inteliant. The Company currently is negotiating with various parties, including
former owners of some of the IT businesses, for the sale of these assets. The
Company believes that the dispositions of these assets will be completed by the
end of the second quarter of fiscal 2002. The Company recorded an estimated loss
on disposal of these businesses of approximately $12.5 million, including the
write-off of all of the remaining goodwill and intangible assets associated
therewith of approximately $10.0 million. Also included in the loss on disposal
of the Company's IT staffing business is an estimated $367,000 loss from
operations from December 31, 2001 through the anticipated disposition dates.
These projected losses represent management's best estimates based upon all
available information. However, estimates generally are subject to inherent
uncertainties and, accordingly, the ultimate loss may differ from estimates and
the difference could be significant.

Subsequent to December 30, 2001, the Company entered into an asset
purchase agreement with Abacab Software, Inc. ("Abacab"), pursuant to which the
Company sold certain assets of Inteliant's Northern California operations for
contingent payments not to exceed $600,000 in the aggregate over three years
following the closing date of the transaction based on the gross profit of the
business acquired by Abacab. Abacab also assumed liabilities of approximately
$40,000. The Company retained accounts receivable of approximately $1.1 million.
The Company originally acquired a portion of the assets sold in the transaction
from Abacab. The principal of Abacab was engaged by the Company as an
independent contractor and was managing the Company's Northern California
operations at the time of the closing of the transaction.

On December 5, 2001, the Company formalized a plan to sell its wholly
owned subsidiary, ServCom Staff Management, Inc., a professional employee
organization. On December 31, 2001, the Company sold substantially all of the
assets of this business to an unrelated entity. The Company retained accounts
receivable of approximately $480,000. The terms of the transaction were
immaterial to the financial results of the Company. The Company recorded a loss
on disposal as part of discontinued operations of approximately $107,000.

Subsequent to December 30, 2001, the Company settled a dispute with
NeoSoft, Inc. ("NeoSoft"), which had been acquired by Inteliant in July 1998.
Neosoft and its principal had alleged that the Company owed more than the final
earnout payment paid by the Company pursuant to the purchase agreement with
Neosoft. As a result of Neosoft's allegations, as of December 30, 2001 the
Company had accrued approximately $625,000 for defense costs and additional
earnout payments to settle the dispute. Pursuant to the terms of the settlement,
the Company paid NeoSoft $550,000 and transferred the NeoSoft operations back to
NeoSoft. In return, the Company retains all of the accounts receivable and
unbilled revenue of approximately $639,000; however, the Company will pay
NeoSoft 15% of the all accounts receivable collected as consideration for
NeoSoft's assistance in collecting the receivables. Additionally, NeoSoft will
assume approximately $53,000 in accrued paid time off liability and will assume
all operating leases. Furthermore, the parties will release all claims
including, without limitation, any claims arising under the original asset
purchase agreement and under the principal's original employment agreement.

33


Operating results of the discontinued operations for fiscal 2001,
fiscal 2000 and fiscal 1999 have been classified as discontinued operations in
the accompanying consolidated financial statements as follows (in thousands):



2001 2000 1999
----------------- ---------------- -----------------

Revenues $ 45,986 $ 108,738 $121,251
Cost of sales 38,441 82,061 91,804
----------------- ---------------- -----------------
Gross profit 7,545 26,677 29,447
Loss on impairment of goodwill and intangibles 32,526 -- --
Operating and other expenses 9,448 28,523 24,299
----------------- ---------------- -----------------
(Loss) income from discontinued operations (34,429) (1,846) 5,148
before income tax
Income tax benefit (provision) -- 439 (2,305)
----------------- ---------------- -----------------
(Loss) income from discontinued operations $ (34,429) $ (1,407) $ 2,843
================= ================ =================


The loss on disposal of discontinued operations for fiscal 2001
consisted primarily of the elimination of net assets of approximately $15.4
million including: (i) intangible assets, net of accumulated amortization, of
approximately $10.0 million; (ii) the write-off of the HD note receivable of
approximately $3.4 million; (iii) uncollectible accounts receivable retained in
the sale of the IT consulting division of approximately $1.4 million, which was
greater than originally estimated; and (iv) the write-off of net property and
equipment and other assets of approximately $0.6 million. Additional expenses of
approximately $2.2 million, primarily change of control bonuses, professional
and legal fees and other transaction-related charges (including an expected $0.4
million loss from operations from January 1, 2001 through the expected
disposition dates), were incurred as part of the transaction. The loss on
disposal for fiscal 2000 consisted primarily of the elimination of net assets of
approximately $37.8 million (including intangible assets net of accumulated
amortization of approximately $34.3 million, net property and equipment and
other assets of approximately $3.5 million), offset by proceeds of $1.0 million.
Additional expenses of approximately $2.4 million, primarily change of control
bonuses, professional and legal fees and other transaction related charges, were
incurred as part of the transaction. These amounts are included in the loss from
the sale of discontinued operations in the accompanying consolidated financial
statements. These losses represent management's best estimates based upon all
available information. However, estimates generally are subject to inherent
uncertainties and, accordingly, the ultimate loss may differ from estimates and
the difference could be significant.

4. Restructuring Charges

To align staff costs and branch office requirements with existing
revenue volume, the Company is streamlining its corporate structure and
consolidating or closing branch offices in under-performing markets. During the
52-week period ended December 30, 2001, the Company recorded a restructuring
charge of approximately $1.3 million primarily related to the consolidation or
closure of 35 branch offices, as well as severance charges related to the
elimination of various operational and senior level positions. The Company is
endeavoring to reduce potential future lease payments by subleasing the
abandoned facilities or negotiating discounted buyouts of the lease contracts.
Consequently, the Company's estimates may change based on its ability to
effectively reduce such future lease payments. At December 31, 2001, the
remaining accrued restructuring charges totaled approximately $0.6 million, and
are recorded in the balance sheet as an accrued liability. The activity
impacting the accrual for restructuring charges is summarized in the table below
(in thousands):



Balance at
Charges to December 30, 2001
Operations Charges Utilized
-------------------- -------------------- --------------------

Contractual lease obligations $ 589 $ (28) $ 561
Reductions in workforce 586 (586) --
Other costs 159 (159) --
-------------------- -------------------- --------------------
Total $ 1,334 $ (773) $ 561
==================== ==================== ====================


34


5. Credit Facilities and Notes Payable

During fiscal 2001, the Company entered into a Third Amendment to
Amended and Restated Credit Agreement (the "Credit Amendment") with Wells Fargo
Bank Northwest, N.A. ("Wells Fargo") and Bank One, NA ("Bank One")
(collectively, the "Lenders") to extend the Company's line of credit, which
expired July 1, 2001. Pursuant to the Credit Amendment, the Company's line of
credit was reduced from $30.0 million to $18.0 million, $8.0 million of which is
available for borrowing in cash, with a maturity date of June 30, 2002, and
$10.0 million of which is available under letters of credit to be issued solely
as required by the Company's workers' compensation insurance providers, with a
maturity date of January 1, 2003. Also pursuant to the Credit Amendment, certain
financial covenants of the credit facility were modified. The Credit Amendment
provides for borrowings at the prime rate (4.75% as of December 30, 2001) plus
2.5 percentage points. Additionally, the credit facility provides for an
additional fee of $250,000 unless the Lenders are paid in full and their credit
commitment is terminated on or before June 15, 2002. As of December 30, 2001,
the Company had no outstanding borrowings under the credit facility. As of
December 30, 2001, the Company had letters of credit of $6.7 million outstanding
to secure its workers' compensation premium obligation. Subsequent to December
30, 2001, the Company issued an additional $3.2 million in letters of credit and
an additional $1.0 million cash deposit to secure its workers' compensation
insurance program. As of March 8, 2002, the Company had outstanding borrowings
under the revolving credit facility of approximately $6.7 million.

The following table summarizes information regarding the Company's
outstanding senior secured notes (in thousands, except interest rates):



Beginning Outstanding
Note Amount Balance at Additional Payments on Balance at
Rate Default Rate 12/31/00 Borrowings Notes 12/30/01
---------- -------------------- ------------- -------------- --------------- -------------- ----------------

Series A Greater of 10.72%
Due 9/1/03 8.72%(1) or prime plus 2% $ 5,000 $ 5,000 $ -- $ (844) $ 4,156
Greater of 10.95%
Series B 8.95(1) or prime plus 2% 30,000 30,000 -- (5,061) 24,939
Due 9/1/08
------------- -------------- --------------- -------------- ----------------
$ 35,000 $ 35,000 $ -- $ (5,905) $ 29,095
============= ============== =============== ============== ================


(1) Pursuant to Amendment No. 2 to the Note Purchase Agreement (see below), the
interest rate on the series A senior notes was increased from 6.72% to
8.72% and the interest rate on the series B senior notes was increased from
6.95% to 8.95%. The change in the interest rate charged on the senior notes
is estimated to have an annual impact of approximately $0.6 million on the
Company's financial operations.

On September 5, 2001, the Company entered into Amendment No. 2 to Note
Purchase Agreement (the "Amendment"), dated as of July 30, 2001, with its
noteholders, whereby the noteholders waived the Company's temporary
noncompliance with certain financial covenants under the Company's bank credit
facility and the existing note purchase agreements with the noteholders during
the Company's fiscal quarter ended June 30, 2001.

As consideration for the Amendment, the Company and each of its
subsidiaries entered into a security agreement dated as of July 30, 2001,
whereby the Company offered as collateral security for the senior notes a
security interest in and lien upon all of its personal property assets
including, without limitation, all accounts receivable, intellectual property
rights and shares of capital stock of the Company's subsidiaries. Such security
interests have a first priority security interest to the extent such interests
cover accounts receivable of the Company and each subsidiary and, as to other
items of collateral, have a priority as mutually agreed by the Noteholders and
the Lenders pursuant to an intercreditor agreement among such parties and a
collateral agent dated as of July 30, 2001. In addition, all obligations of the
Company under the credit facility and the note purchase agreements are to be
guaranteed by the subsidiaries.

The Amendment also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change in control, transfer of property or issuance of equity
securities of the Company. In addition, the Amendment provides that the Company
shall deliver certain financial statements within 30 days of the end of each
calendar month as well as an officer's certificate in connection with the
delivery of financial statements for the last month of each fiscal quarter of
the Company. Also as consideration for the Amendment and waiver by the
Noteholders, the Company paid an amendment fee to the Noteholders of $200,000 in
the aggregate, as well as fees and expenses of the Noteholders' special counsel.
The Company also is required to pay on June 15, 2002 a supplemental note fee of


35


$250,000, which amount will be waived if the Company has paid all amounts due
and outstanding under the note purchase agreements prior to such date. Also
pursuant to the Amendment, certain financial covenants of the Company were
modified.

Also in conjunction with the Amendment, the Company entered into a
Fourth Amendment to Amended and Restated Credit Agreement with the Lenders dated
as of September 4, 2001 in order to make conforming changes with respect to the
collateralization transaction described above.

The Company's revolving credit facility and note purchase agreements
contain certain restrictive covenants, including certain debt ratios and
restrictions on the sale of capital assets. As of December 30, 2001, the Company
was out of compliance with minimum EBITDA requirements under its note purchase
agreements with its Noteholders and its revolving credit agreement with its
Lenders. However, as further discussed in Note 13. "Subsequent Events," the
Company has entered into an amended and restated credit agreement with its
lenders, pursuant to which the covenant violations are waived. The Company also
has amended its senior note purchase agreements with its noteholders, pursuant
to which the noteholders consented to the amended and restated credit agreement
and also waived any violations of financial covenants contained in the note
purchase agreements.

The maturities on borrowings are as follows (in thousands):

Fiscal Year Ending
2002 $ 5,668
2003 9,394
2004 4,286
2005 4,286
2006 4,286
Beyond 1,175
-------------
$ 29,095
=============


6. Commitments and Contingencies

Noncancelable Operating Leases - The Company leases office facilities under
noncancelable operating leases. Some of these leases have renewal options for
periods ranging from one to five years and contain provisions for escalation
based on increases in certain costs incurred by the landlord and on Consumer
Price Index adjustments. Management expects that, in the normal course of
business, leases that expire will be renewed or replaced by other leases. The
Company leases certain of these facilities from various related parties (See
Note 10).

Future minimum lease payments under non-cancelable operating leases are
as follows (in thousands):

Fiscal Year Ending
2002 $ 2,620
2003 1,374
2004 629
2005 221
-------------
$ 4,844
=============

Facility rental expense for continuing operations for fiscal 2001,
fiscal 2000 and fiscal 1999 totaled approximately $3.9 million, $4.0 million,
and $3.7 million, respectively.

Legal Matters - In the ordinary course of its business, the Company is
periodically threatened with or named as a defendant in various lawsuits or
administrative proceedings. The Company maintains insurance in such amounts and
with such coverage and deductibles as management believes to be reasonable and
prudent. The principal risks covered by insurance include workers' compensation,
personal injury, bodily injury, property damage, errors and omissions, fidelity
losses, employer practices liability and general liability.

On April 11, 2001, Royalty Carpet Mills, Inc. ("Royalty") filed a
complaint against Inteliant for breach of contract for services to be provided
by Inteliant and for professional negligence (the "Complaint") in the state of
California. The Complaint requests unspecified damages, consequential damages,
and attorneys' fees and costs. To date, Royalty has not quantified the precise
amount of damages it is seeking from Inteliant, but has informed Inteliant that
it will be seeking damages of approximately $1.9 million. Inteliant denies the


36


allegations set forth in the Complaint and is seeking to recover in excess of
$150,000 that Inteliant claims Royalty owes to Inteliant. The case is proceeding
with discovery, with the trial currently set to commence in August 2002.

Inteliant believes that it is insured against any potential liability
for the claims filed by Royalty under its general liability coverage and has
tendered defense of Royalty's lawsuit to its insurance carrier. While its
insurance carrier has reserved its right to assert certain policy exclusions
against Inteliant, which the insurance carrier contends exclude claims based
upon an (i) express or implied warranty or guarantee, (ii) breach of contract
with respect to any agreement to perform work for a specified fee, and (iii)
claims for bodily injury or property damage, Inteliant presently believes that
the claims asserted by Royalty against Inteliant are not only without merit, but
that any judgment that potentially might be entered against Inteliant is covered
in whole or in substantial part by its policy with the insurance carrier.

There is no other pending litigation that the Company currently
anticipates will have a material adverse effect on the Company's financial
condition or results of operations.

7. Income Taxes

The components of the provision for income taxes from continuing
operations for fiscal 2001, fiscal 2000 and fiscal 1999 are as follows (in
thousands):



2001 2000 1999
----------------- ---------------- -----------------
Current (benefit) provision:

Federal $ (234) $ 2,630 $ 615
State 10 420 134
----------------- ---------------- -----------------
(224) 3,050 749
----------------- ---------------- -----------------
Deferred (benefit) provision:
Federal 4,815 (2,557) 150
State 609 (408) 29
----------------- ---------------- -----------------
5,424 (2,965) 179
----------------- ---------------- -----------------

Total provision for income taxes $ 5,200 $ 85 $ 928
================= ================ =================


The following is a reconciliation between the statutory federal income
tax rate on income from continuing operations and the Company's effective income
tax rate on income from continuing operations which is derived by dividing the
provision for income taxes by income before provision for income taxes for
fiscal 2001, fiscal 2000 and fiscal 1999 (in thousands):



2001 2000 1999
----------------- ---------------- -----------------

Federal income tax at statutory rate (34) 83 1,168
State income taxes net of federal benefit (6) 8 148
Government sponsored hiring incentives (475) (728) (861)
Non-deductible meals and entertainment 45 68 69
Non-deductible intangible amortization 48 47 47
Increase in valuation allowance for deferred
tax assets 5,424 -- --
Other 198 607 357
----------------- ---------------- -----------------
5,200 85 928
================= ================ =================


The components of the deferred income tax assets and liabilities at
December 30, 2001 and December 31, 2000 are as follows (in thousands):



2001 2000
---------------- -----------------
Deferred income tax assets:

Intangible amortization $ 12,139 $ --
Depreciation 682 534
Workers' compensation reserves 2,133 2,068
Allowance for doubtful accounts 2,423 1,339
Government sponsored tax credits carryforward 2,048 1,600
Accrued liabilities 1,576 1,309



37





2001 2000
---------------- -----------------


Net operating loss carryforwards 4,299 900
---------------- -----------------
25,300 7,750

Less: Income tax valuation allowance (24,585) --
---------------- -----------------
715 7,750

Deferred income tax liabilities:
Intangible amortization -- (2,050)
Other (715) (500)
---------------- -----------------
(715) (2,550)
---------------- -----------------

Net deferred income tax asset $ -- $ 5,200
================ =================

Balance sheet classification:
Current asset $ -- $ 5,852
Long-term liability -- (652)
---------------- -----------------
$ -- $ 5,200
================ =================


The Company has provided a valuation allowance of approximately $24.6
million to offset the entire balance of the net deferred tax asset as of
December 30, 2001. The valuation allowance was recorded given the losses
incurred by the Company and the Company's belief that it is more likely than not
that the Company will be unable to recover the net deferred tax assets.

8. Stock-Based Compensation

Stock Incentive Plan - The Company established a stock incentive plan (the
"Plan") which allows for the issuance of a maximum of 1.8 million shares of
common stock to officers, directors, consultants and other key employees. The
Plan allows for the grant of incentive or nonqualified options, stock
appreciation rights, restricted shares of common stock or stock units and is
administered by the compensation committee of the Company's board of directors.
Incentive options and nonqualified options are granted at not less than 100% of
the fair market value of the underlying common stock on the date of grant. At
December 30, 2001 the Plan had approximately 733,000 options available to grant.

The Company's board of directors determines the number, type of award
and terms and conditions, including any vesting conditions. For fiscal 2001,
fiscal 2000 and fiscal 1999 only incentive and nonqualified options were granted
under the Plan. Generally, employee stock options partially vest at the date of
grant and on each of the next four or five anniversary dates thereafter. The
Plan also provides for an annual grant to non-employee directors of 1,000
options, which are immediately exercisable on the date of grant. Stock options
granted to employees expire no later than ten years from the date of grant and
stock options granted to directors expire no later than five years from the date
of grant.

A summary of the stock option activity is as follows (in thousands,
except per share data):



Weighted
Average
Exercise Price
Employees Directors Per Share
---------------- ----------------- ----------------

Outstanding at January 3, 1999 1,026 108 $ 12.29
Granted 434 24 5.40
Exercised (3) -- 7.82
Forfeited (224) (4) 12.60
---------------- ----------------- ----------------
Outstanding at January 2, 2000 1,233 128 10.08
Granted 276 10 3.30
Forfeited (556) (86) 9.63
---------------- ----------------- ----------------
Outstanding at December 31, 2000 953 52 8.42
Granted 439 55 1.16
Forfeited (288) (32) 7.10
---------------- ----------------- ----------------
Outstanding at December 30, 2001 1,104 75 $ 5.20
================ ================= ================

Exercisable at December 30, 2001 462 77 $ 7.49
================ ================= ================


38


The following is additional information with respect to the stock
options (shares in thousands):




Weighted-
Average
Outstanding as of Remaining Weighted-Average Exercisable At Weighted-Average
Exercise Price Range December 30, 2001 Contractual Exercise Price December 30, 2001 Exercise Price
Yearly Life
- --------------------- ------------------- ----------------- -------------------- ------------------- --------------------

$ 1.08 - $ 8.35 1,011 8.4 $ 3.05 405 $ 4.09
8.36 - 15.65 29 4.6 10.62 27 10.46
15.66 - 22.90 139 5.6 19.69 107 19.60
------------------- ----------------- -------------------- ------------------- --------------------
1,179 8.0 $ 5.20 539 $ 7.49
=================== ================= ==================== =================== ====================


Stock Price Assumptions - SOS Options: The fair value of each option grant has
been estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions used for grants in fiscal 2001, fiscal 2000 and
fiscal 1999, in calculating compensation cost: expected stock price volatility
of 80% for fiscal 2001, 73% for fiscal 2000, and 63% for fiscal 1999; an average
risk-free interest rate of 4.8% for fiscal 2001, 6.0% for fiscal 2000 and 6.4%
for fiscal 1999; and an expected life of five years for director options and
seven years for employee options for fiscal 2001, fiscal 2000 and fiscal 1999.
The weighted-average fair value of options granted was $0.77, $1.89, and $3.67
for grants made during fiscal 2001, fiscal 2000 and fiscal 1999, respectively.

Inteliant Stock Option Plan - During fiscal 2000, the Company had adopted the
Inteliant Corporation Stock Option Plan (the "Inteliant Plan") for the benefit
of Inteliant's employees, officers and directors. The Inteliant Plan,
administered by Inteliant's board of directors, allows for the grant of options
to purchase a maximum of 10,000,000 shares of Inteliant's common stock. The
number of options granted, the vesting schedule of such grants and other
conditions of each grant is established by Inteliant's board of directors. The
grants are issued at fair value as determined by independent valuation. As of
December 30, 2001 only non-qualified options have been granted.

A summary of the stock option activity for the Inteliant Plan is as
follows (in thousands, except per share data):

Weighted
Average
Exercise Price
Options Per Share
---------------- -----------------
Granted 4,052 $ 2.00
Forfeited (2,449) 2.00
---------------- -----------------
Outstanding at December 31, 2000 1,603 2.00
Granted -- 2.00
Forfeited (891) 2.00
---------------- -----------------
Outstanding at December 30, 2001 712 $ 2.00
================ =================

Exercisable at December 31, 2000 356 $ 2.00
================ =================

Pro forma Compensation Expense - The Company applies APB No. 25 and related
interpretations in accounting for its options issued under the Plan under which
no compensation cost has been recognized. Had compensation cost been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's income from continuing operations and earnings per share for fiscal
2001, fiscal 2000 and fiscal 1999 would approximate the pro forma amounts below
(in thousands, except per share data):

39





2001 2000 1999
----------------- ---------------- -----------------
(Loss) income from Continuing Operations-

As reported $ (5,300) $ 160 $ 2,508
Pro forma (6,923) (1,117) 1,050
Diluted EPS -
As reported $ (0.42) $ 0.01 $ 0.20
Pro forma (0.55) (0.09) 0.08


The Company has determined to sell or abandon the remaining operations
of Inteliant and, consequently, has reclassified all operations of Inteliant as
discontinued. As the operations of Inteliant have been or will be disposed of,
options issued to the employees of those operations will be canceled. Because
ongoing operations of Inteliant will not have an impact on income from
continuing operations for the Company, and because the Company anticipates the
cancellation of all outstanding options related to Inteliant, no option expense
has been considered for the Inteliant options in calculating income from
continuing operations. However, for fiscal 2001 and fiscal 2002, option expense
related to the Inteliant options was approximately $1.0 million and $1.2
million, respectively.

9. Employee Benefit Plans

The Company has a 401(k) defined contribution plan. Employee
contributions may be invested in several alternatives. Company contributions to
the plan, including matching contributions, may be made at the discretion of the
Company. The Company's contributions to the plan were approximately $0,
$348,000, and $440,000 for fiscal 2001, fiscal 2000 and fiscal 1999,
respectively.

The Company also has a deferred compensation plan for certain key
officers and employees that provide the opportunity to defer a portion of their
compensation. Amounts deferred are held in a "Rabbi Trust," which invests in
various mutual funds and/or the Company's common stock as directed by the
participants. The trust assets are recorded as a long-term asset in the
accompanying consolidated balance sheet because such amounts are subject to the
claims of creditors. The corresponding deferred compensation liability
represents amounts deferred by participants plus any earnings on the trust
assets. At December 30, 2001 and December 31, 2000, the deferred compensation
liabilities were approximately $743,000 and $941,000, respectively.

The Company also maintains an Employee Stock Purchase Plan whereby
employees may designate a portion of their salaries to be used to purchase
shares of the Company. Employees purchase shares at the average market price of
all shares bought for all employees participating during a designated period.
All shares are purchased through an independent broker off the open market. The
Company pays all brokerage and transactional fees related to the purchase. The
fees paid by the Company have not been and are not expected to be significant.

10. Related Party Transactions

The Company leases its corporate office building from the adult
children of certain significant shareholders of the Company under a ten-year
lease agreement through March 2005, with an option to renew for ten additional
years. Rental expense during fiscal 2001, fiscal 2000 and fiscal 1999 amounted
to approximately $86,000, $83,000 and $81,000, respectively. Future minimum
lease payments related to this lease will average approximately $89,000 each
fiscal year.

During fiscal 2001, the Company entered into an agreement to provide
payrolling services to Underground Staffing Connection, Inc. ("Underground
Staffing"), a business owned by one of the Company's staffing managers.
Underground Staffing provides staffing services to companies which have staffing
needs in high risk areas such as underground mining. For fiscal 2001, the
Company realized approximately $1.1 million in revenue from the agreement.
Additionally, the Company had accounts receivable of approximately $94,000 due
from Underground Staffing at December 30, 2001.

40


11.




Selected Quarterly Financial Data (Unaudited)

A summary of quarterly financial information for fiscal 2001 and fiscal
2000 is as follows (in thousands, except per share data):



First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- -------------- ---------------
Fiscal 2001:

Service revenues $ 52,720 $ 53,897 $ 58,165 $ 51,576
Gross profit 11,452 11,963 12,598 11,069
(Loss) income from continuing operations (324) 170 680 (5,826)
Loss from discontinued operations (510) (2,249) (33,058) (16,227)
Net loss (834) (2,078) (32,378) (22,054)

Basic and diluted (loss) income per common share:
(Loss) income from continuing operations $ (0.03) $ 0.01 $ 0.05 $ (0.46)
Loss from discontinued operations (0.04) (0.17) (2.60) (1.28)
--------------- --------------- -------------- ---------------
Net loss $ (0.07) $ (0.16) $ (2.55) $ (1.74)
=============== =============== ============== ===============


Fiscal 2000:
Service revenues $ 62,568 $ 66,865 $ 68,579 $ 64,810
Gross profit 14,173 14,873 15,422 14,021
Income (loss) from continuing operations(1) 72 727 1,123 (1,762)
(Loss) income from discontinued operations (353) (646) 367 (28,729)
Net (loss) income (281) 81 1,490 (30,491)

Basic and diluted (loss) income per common share:
Income (loss) from continuing operations $ 0.01 $ 0.06 $ 0.09 $ (0.14)
(Loss) income from discontinued operations (0.03) (0.05) 0.03 (2.26)
--------------- --------------- -------------- ---------------
Net (loss) income $ (0.02) $ 0.01 $ 0.12 $ (2.40)
=============== =============== ============== ===============


(1) Income (loss) from continuing operations includes a write off of
goodwill and intangibles of $3.1 million during the fourth quarter of
fiscal 2000.


12. Recent Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141, "Business Combinations," and SFAS No. 142, effective for
the Company's fiscal years ending after December 30, 2001. SFAS No. 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. Additionally, under the new rules, an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged;
unless the intangible assets identified have an indefinite life, those assets
will be amortized over their useful life. Assets of the Company that have been
separately identified include, but are not limited to, trademarks and
tradenames, non-competition agreements and customer lists.

During fiscal 2001, the Company continued to amortize existing goodwill
and intangible assets. Under SFAS No. 142, the Company will discontinue
amortization of existing goodwill and other intangible assets with indefinite
lives in fiscal 2002. The Company anticipates that adoption of SFAS No. 142 will
result in an impairment of a significant portion of the existing goodwill and
other intangible assets with an indefinite life currently carried on the balance
sheet, as goodwill and intangible assets with indefinite lives will be subject
to assessment for impairment by applying a fair-value-based test rather than an
undiscounted cash flow approach currently used by the Company. As of December
30, 2001, the net book value of intangible assets carried on the balance sheet


41


was approximately $48.1 million, of which approximately $32.0 million is was
attributable to goodwill. The Company estimates that it may be required to write
off in excess of $20.0 million of goodwill and intangibles during the first
quarter of fiscal 2002. However, the Company has not completed yet its analysis
of the total impact of adopting SFAS No. 142 and this initial estimate may
change. For the 52-week period ended December 30, 2001, amortization related to
goodwill was approximately $1.2 million.

In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
of Long-lived Assets." The new standard supercedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." The new standard also supercedes the provisions of Accounting Principles
Board No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The provisions of SFAS No. 144 are
effective for financial statements beginning after December 15, 2001 but allow
for earlier application. The Company currently is assessing the impact the
adoption of these provisions will have on the Company's financial position and
results of operations.

13. Subsequent Events

On April 15, 2002, the Company entered into a Fifth Amendment to
Amended and Restated Credit Agreement and Waiver (the "Fifth Credit Amendment")
with the Lenders to extend the Company's line of credit. Pursuant to the Fifth
Credit Amendment, the Company's line of credit was reduced from $18.0 million to
$16.0 million, $6.0 million of which is available for borrowing in cash, with a
maturity date of September 1, 2003, and $10.0 million of which is available
under letters of credit to be issued solely as required by the Company's
workers' compensation insurance providers, with a maturity date of January 1,
2004. The Fifth Credit Amendment provides for borrowings at the prime rate
(4.75% as of December 30, 2001) plus 3.0 percentage points through and including
June 30, 2002, after which time borrowings under the facility will be charged an
interest rate equal to the then current prime rate plus 3.5 percentage points.
Additionally, the Fifth Credit Amendment provides for an aamendment fee of
$78.000, payable to the Lenders upon execution of the Fifth Credit Amendment
plus a supplemental fee of $250,000 payable on September 1, 2003, unless the
Lenders are paid in full and their credit commitment is terminated on or before
such date. In addition, the Company paid $313,000 of the outstanding borrowings
under the revolving cerdit facility on Septemberup 15, 2002 and December 15,
2002, respectively. Sych payments will permanently reduce the line of credit
available to the Company for borrowing in cash to less than the $6.0 million
stated above. The Fifth Credit Amendment also waives any violations of financial
covenants under the credit facility that may have existed at December 30, 2001
and any such violations that may exist as of March 31, 2002. In addition,
certain financial covenants of the Company have been modified. As of April 11,
2002, the Company had outstanding borrowings under the revolving credit facility
of approximately $7.3 million.

Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with the Noteholders, whereby the
Noteholders waived the Company's noncompliance with certain financial covenants
under the Company's bank credit facility and the existing note purchase
agreements with the Noteholders as of December 30, 2001 and any noncompliance of
such covenants that may exist as of March 31, 2002. The Noteholders also
consented to the Company entering into the Fifth Credit Amendment described
above. Pursuant to Amendment No. 3, the Series A Notes bear interest at the rate
of 9.22% per annum beginning as of April 1, 2002 through, but excluding, June
30, 2003, and at the rate of 9.72% per annum from June 30, 2003 until the Series
A Notes become due and payable. The Series B Notes bear interest at the rate of
9.45% per annum beginning as of April 1, 2002 through, but excluding, June 30,
2003, and at the rate of 9.95% per annum from June 30, 2003 until the Series B
Notes become due and payable.

Pursuant to Amendment No. 3, any overdue payments on the Series A Notes
bear interest at the greater of 2% over the interest rate currently in effect as
stated above or 2% over the prime rate of The First National Bank of Chicago.
The change in the interest rate charged on the senior notes is estimated to have
an annual impact of approximately $142,000 on the Company's financial
operations. In addition, the Company paid $687,000 of the principal amount of
the senior notes upon execution of Amendment No. 3. The Company will pay an
additional $1,030,500 and $1,227,000 of the principal amount of the senior notes
on September 15, 2002 and December 15, 2002, respectively.

Amendment No. 3 also provides for optional or mandatory prepayments, as
the case may be, upon the occurrence of certain events including, but not
limited to, a change of control, transfer of property or issuance of equity
securities of the Company. In addition, Amendment No. 3 provides that the
Company pay to the Lenders and the Noteholders any federal, state or local tax
refund or repayment, which amount shall be distributed pursuant to the Amended
and Restated Intercreditor Agreement dated as of April 15, 2002 among the
Collateral Agent, the Lenders and the Noteholders; however, if the Company


42


receives any refund arising from the 2002 Job Act relating to net operating loss
carryforwards, the Company will be able to retain for working capital purposes
the lesser of $2,000,000 or 50% of the refund. Any such prepayments paid to the
Lenders also will be treated as a permanent reduction in the line of credit
available to the Company for borrowing in cash under the revolving credit
facility.

Pursuant to Amendment No. 3, the Company shall deliver to the
Noteholders certain financial statements within 30 days of the end of each
calendar month certified by the senior financial officer of the Company. As
consideration for Amendment No. 3 and the waiver by the Noteholders, the Company
paid an amendment fee to the Noteholders of $145,475, as well as fees and
expenses of the Noteholders' special counsel. In addition, the Company paid to
each Noteholder accrued but unpaid interest on such holder's notes for the
period beginning March 1, 2002 through and including March 31, 2002. Also
pursuant to Amendment No. 3, the Company is required to pay on September 1, 2003
a supplemental note fee of $250,000, which amount will be waived if the Company
has paid all amounts due and outstanding under the note purchase agreements
prior to such date. Also, certain financial covenants of the Company were
modified. In the event the Company fails to comply with such covenants as
modified, Amendment No. 3 provides that the Noteholders may, at their discretion
and at the expense of the Company, retain a financial advisor to review, and
advise the Noteholders and the Company upon, the financial status of the
Company. The security agreement dated as of July 30, 2001 previously discussed
herein remains in place pursuant to Amendment No. 3.





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-----------------------------------------------------------------------
None




43


PART III

The information required by this Part III is omitted from this Report
in that the Company will file with the Securities and Exchange Commission a
definitive proxy statement for the Annual Meeting of Shareholders of the Company
to be held on May 16, 2002 (the "Proxy Statement"), not later than 120 days
after December 30, 2001, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
specifically identified below which address the items set forth herein are
incorporated by reference.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors" and "Executive Officers" in the
Proxy Statement.


ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated by reference to
the sections entitled "Election of Directors-Director Compensation" and
"Executive Officers-Executive Compensation" in the Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated by reference to
the section entitled "Principal Holders of Voting Securities" in the Proxy
Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statements, Financial Statement Schedules and Exhibits:

1. Consolidated Financial Statements:
---------------------------------
The Consolidated Financial Statements of the Company and its
subsidiaries filed as a part of this Annual Report on Form 10-K are
listed in Item 8 of the Annual Report on Form 10-K, which listing
is hereby incorporated herein by reference.

2. Financial Statement Schedules
-----------------------------

The following financial consolidated statement schedules of SOS
Staffing Services, Inc. are included in Item 14(d) hereof:

o Report of independent public accountants on financial statement
schedule.

o Schedule II - Valuation and qualifying accounts.

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are not
applicable, and therefore have been omitted.


44


(b) Reports on Form 8-K

The Company's current report on Form 8-K filed on July 13, 2001. The
Company's current report on Form 8-K filed on October 5, 2001.

(c) Exhibits:




Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- ---------------- ------------------------------------------------------ -------------------- ----------------


3.1 Amended and Restated Articles of Incorporation of (1)
the Company

3.2 Amended and Restated Bylaws of the Company (1)


4.2 Amended and Restated Articles of Incorporation of (1)
the Company

4.3 Amended and Restated Bylaws of the Company (1)

10.1 SOS Staffing Services, Inc. Stock Incentive Plan (3)
dated May 4, 1995, as amended

10.2 Form of Employment Agreement entered into by the (1)
Company and each of Messrs. Richard J. Tripp, John
E. Schaffer, Thomas K. Sansom, and Brad L. Stewart.

10.3 Form of Consulting Agreement between the Company (2)
and Ms. JoAnn W. Wagner, effective as of July 1, 1995

10.4 Lease Agreement between the Company and Reed F. (1)
Reinhold, Rand F. Reinhold, Rena R. Qualls and Robb
F. Reinhold, dated April 1, 1995, covering the
Company's corporate office building

10.5 Credit Agreement dated as of July 11, 1996 by and (4)
among the Company, First Security Bank, N.A. and NBD
Bank, together with Security Agreement and Revolving
Credit Notes

10.6 Note Purchase Agreement dated September 1, 1999. (5)

10.7 Amended Credit Agreement dated July 27, 1998 by and (5)
among the Company, The First National Bank of
Chicago and First Security Bank, N.A., together with
Security Agreement and Revolving Credit Notes

10.8 First Amendment of Employment Agreement between the (6)
Company and JoAnn W. Wagner.




45





Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ---------------------------------------------------------------- ------------------- -----------------

10.9 First Amendment to Amended and Restated Credit Agreement dated (6)
June 3, 1999 by and among the Company and certain banks

10.10 Inteliant Stock Option Plan (7)

10.11 Asset Purchase Agreement dated as of December 29, 2000 by and (8)
between Inteliant Corporation, SOS Staffing Services, Inc. and
Herrick Douglas

10.12 Amendment to Note Purchase Agreement dated January 12, 2001 (8)
with effect as of December 22, 2000 between SOS Staffing
Services, Inc. and certain entities listed as Purchasers on
the signature pages thereto

10.13 Second Amendment to Amended and Restated Credit Agreement (8)
dated as of December 29, 2000 by and among SOS Staffing
Services, Inc., certain Lenders, First Security Bank, N.A., as
administrative agent, and Bank One, N.A., as documentation
agent

10.14 Third Amendment to Amended and Restated Credit Agreement dated (9)
as of June 29, 2001 by and among SOS Staffing Services, Inc.,
certain Lenders, First Security Bank, N.A., as administrative
agent, and Bank One, N.A., as documentation agent

10.15 Second Amendment to Note Purchase Agreement dated January 12, (10)
2001 with effect as of December 22, 2000 between SOS Staffing
Services, Inc. and certain entities listed as Purchasers on
the signature pages thereto

10.16 Fourth Amendment to Amended and Restated Credit Agreement (10)
dated as of September 4, 2001 by and among SOS Staffing
Services, Inc., certain Lenders, First Security Bank, N.A., as
administrative agent, and Bank One, N.A., as documentation
agent

10.17 Security Agreement dated as of July 30, 2001 among the Company (10)
and its subsidiaries, and the Collateral Agent for the benefit
of Wells Fargo Bank, National Association, as administration
agent under the Company's bank credit agreement, the financial
institutions which from time to time are parties to such bank
credit agreement as lenders thereunder, and the Noteholders

10.18 Trademark Collateral Security and Pledge Agreement dated as of (10)
July 30, 2001 by and between the Company and the Collateral
Agent for the benefit of Wells Fargo Bank, National
Association, as administration agent under the Company's bank
credit agreement, the financial institutions which from time
to time are parties to such bank credit agreement as lenders
thereunder, and the Noteholders




46





Exhibit Incorporated by Filed Herewith
No. Exhibit Reference
- --------------- ---------------------------------------------------------------- ------------------- -----------------

10.19 Stock Pledge Agreement dated as of July 30, 2001 by and (10)
between the Company and the Collateral Agent for the benefit
of Wells Fargo Bank, National Association, as administration
agent under the Company's bank credit agreement, the financial
institutions which from time to time are parties to such bank
credit agreement as lenders thereunder, and the Noteholders

10.20 Intercreditor Agreement dated as of July 30, 2001 among State (10)
Street Bank and Trust Company (10) Collateral Agent, Wells Fargo
Bank, National Association, as administrative agent under the
Company's bank credit agreement and the Noteholders, as
acknowledged by the Company and its subsidiaries, as guarantors

10.21 Fifth Amendment to Amended and Restated Credit Agreement and (11)
Waiver dated as of April 15, 2002, by and among SOS
Staffing Services, Inc., certain Lenders, Wells Fargo Bank,
National Associaiton, as administrative agent, and Bank One,
N.A., as documentation agent

21 Subsidiaries of the Company (11)

23.2 Consent of Independent Public Accountants (11)

99.1 Letter of the Company to SEC regarding Arthur Andersen LLP (11)
representations.



(1) Incorporated by reference to the exhibits to a Registration Statement
on Form S-1 filed by the Company on May 17, 1995, Registration No.
33-92268.

(2) Incorporated by reference to the exhibits to Amendment No. 1 to a
Registration Statement on Form S-1 filed on June 22, 1995, Registration
No. 33-92268.

(3) Incorporated by reference to the exhibits to the Company's Annual
Report of Form 10-K for the year ended December 31, 1995 filed by the
Company on March 29, 1996.

(4) Incorporated by reference to the exhibits to a Quarterly Report on Form
10-Q for the quarter ended September 26, 1996 filed by the Company on
November 14, 1996.

47


(5) Incorporated by reference to the exhibits to an Annual Report on Form
10-K for the year ended January 3, 1999 filed by the Company on April
2, 1999.

(6) Incorporated by reference to the exhibits to a Current Report on Form
8-K for the quarter ended July 4, 1999 filed by the Company on August
18, 1999.

(7) Incorporated by reference to the exhibits to an Annual Report on Form
10-KA for the year ended December 31, 2000 filed by the Company on
April 3, 2000.

(8) Incorporated by reference to the exhibits to a Current Report on From
8-K for the quarter ended December 31, 2000 filed by the Company on
January 12, 2001.

(9) Incorporated by reference to the exhibits to a Current Report on Form
8-K for the quarter ended September 30, 2001 filed by the Company on
July 13, 2001.

(10) Incorporated by reference to the exhibits to a Current Report on Form
8-K for the quarter ended December 31, 2001 filed by the Company on
October 5, 2001.

(11) Filed herewith and attached to this Report following page 52 hereof.

(d) Financial Statement Schedules:
-----------------------------
Schedule II




48




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE





To SOS Staffing Services:

We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included in
SOS Staffing Services, Inc. Form 10-K, and have issued our report thereon dated
February 8, 2002. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in Item 14(d) is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.




/s/ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 8, 2002














49




SOS STAFFING SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)



ALLOWANCE FOR DOUBTFUL ACCOUNTS

Balance at Charged to bad Deductions
beginning of debt expense (Write off of Balance at end
period Other bad debts) of period
---------------------------------------------------------------------------------

December 30, 2001------------- $ 2,916 $ 1,462 $ -- $ (2,111) $ 2,267
December 31, 2000------------- 1,606 2,618 -- (1,308) 2,916
January 2, 2000--------------- 762 2,385 -- (1,541) 1,606


ALLOWANCE FOR NOTES RECEIVABLE

Charged to
Balance at other
beginning of non-operating Balance at end
period expense Other Deductions of period
---------------------------------------------------------------------------------
December 30, 2001------------- $ 500 $ 3,415 $ -- $ (3,415) $ 500
December 31, 2000------------- -- 500 -- -- 500


RESERVES FOR COSTS OF DISCONTINUING OPERATIONS

Charged to
Balance at loss from
beginning of discontinued Balance at end
period operations Other Deductions of period
---------------------------------------------------------------------------------
December 30, 2001------------- $ 1,991 $ 1,779 $ -- $ (2,065) $ 1,705
December 31, 2000------------- -- 1,991 -- -- 1,991

RESERVES FOR RESTRUCTURING COSTS

Balance at
beginning of Charged to Balance at end
period operations Other Deductions of period
---------------------------------------------------------------------------------
December 30, 2001------------- $ -- $ 1,334 $ -- $ (773) $ 561





50




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.

SOS STAFFING SERVICES, INC.

Date: April 15, 2002 By: /s/ Kevin Hardy
-------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Name Title Date

/s/ JoAnn W. Wagner Chairman of the Board and April 15, 2002
- ------------------------ Chief Executive Officer
JoAnn W. Wagner (principal executive officer)


/s/ Kevin Hardy Senior Vice President
- ------------------------ and Chief Financial April 15, 2002
Kevin Hardy Officer
(principal accounting officer)

/s/ Thomas K. Sansom Director and April 15, 2002
- ------------------------ Senior Vice President
Thomas K. Sansom

/s/ Stanley R. deWaal Director April 15, 2002
- ------------------------
Stanley R. deWaal

/s/ Jack A. Henry Director April 15, 2002
- ------------------------
Jack A. Henry

/s/ R. Thayne Robson Director April 15, 2002
- ------------------------
R. Thayne Robson

/s/ Randolph K. Rolf Director April 15, 2002
- ------------------------
Randolph K. Rolf

/s/ Brad L. Stewart Director April 15, 2002
- ------------------------
Brad L. Stewart






51




SUBSIDIARY COMPANIES OF SOS STAFFING SERVICES, INC.

Name of Subsidiary State of Incorporation
------------------ ----------------------

Devon & Devon Personnel Services, Inc.------------ California
Inteliant Corporation----------------------------- Delaware
ServCom Staff Management, Inc.--------------------
Utah
SOS Collection Services, Inc.--------------------- Arizona




52




CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-96362 and 333-1422.





/s/ARTHUR ANDERSEN LLP
- ---------------------------
ARTHUR ANDERSEN LLP

Salt Lake City, Utah
April 15, 2002







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