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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 29, 2002.

[ ] 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
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 ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [ X ]

The aggregate market value of the Common Stock held by non-affiliates of the
registrant, on June 28, 2002, based upon the closing sales price of the Common
Stock of $0.75 per share on that date as reported on the NASDAQ/SmallCap Stock
Market, was approximately $5,421,718. 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 31, 2003, the registrant had outstanding 12,691,398 shares of Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 2003 Annual Meeting of
Shareholders to be held May 15, 2003 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
--------
SOS Staffing Services, Inc. ("SOS" or the "Company") is a provider of
staffing services throughout the western United States. As of December 29, 2002,
SOS operated a network of 85 offices located in 13 states. Services the Company
provides include industrial and light industrial, clerical, 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 and collections, 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.

During fiscal 2000, 2001 and 2002, the Company disposed of the
information technology consulting and staffing businesses of Inteliant
Corporation ("Inteliant"), a wholly owned subsidiary of the Company. The Company
also divested two other businesses determined to be nonessential to the
Company's core commercial staffing operations. See "Discontinued Operations" in
Part II, Item 7 of this Report for additional discussion on discontinued
operations.

Financial information concerning the Company is included in Part II,
Item 8 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 and TOPS Staffing 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); and Devon & Devon
(administrative staffing and permanent placement).

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

o Payrolling typically involves the transfer of a customer's
short-term seasonal or special project 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 placing SOS manager(s) at the customer's
place of business to manage the customer's entire temporary
staffing requirements.

o Other professional services SOS offers its customers include
skills assessments, drug testing and risk management services, as
follows:

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

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

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

Additionally, the Company seeks customers that are large multi-state
companies. 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 has 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 allows it to develop markets while reducing entry costs into those
markets. 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.

The Company currently provides services through a network of 75 offices
located in 13 states. The Company services major markets in Arizona, Colorado,
Hawaii, Idaho, Nevada and Utah. 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 offices in Alaska, California, Kansas,
Missouri, New Mexico, Texas and Wyoming.

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
business 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 enhance 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(R), Devon & Devon, Skill Staff, Industrial Specialists,
SOS Technical Services, Staffing Partners and TOPS Staffing Services(R). The
Company has registered or reserved the majority of these names in the
appropriate states.

Customers: SOS serves strong, small to middle market companies across a
variety of industries, including medical devices, pharmaceuticals, construction,
building supply, food distribution, automobile component manufacturing, energy,
distribution and procurement, hospitality, retail, logistics and light
manufacturing.

Management believes that significant opportunities exist to deliver
profitable commercial staffing services to small and mid-sized customers.
However, as the Company develops its corporate 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
revenue during fiscal 2002, and the Company's top ten customers accounted for
less than 15 percent of the Company's revenue during the same period.

Competition: The Company operates in highly competitive and fragmented
markets with limited barriers to entry. The Company competes in national,
regional and local markets with full service agencies and with specialized
temporary service agencies. Many competitors are smaller than the Company but


3



have an advantage over the Company in discrete geographic markets because of
their stronger local presence. Other competitors are more prominent and have
greater marketing and financial resources than the Company, which among other
things could enable them to attempt to maintain or increase their market share
by reducing prices. The Company expects the level of competition to remain high
in the future, and competitive pricing pressures may have an adverse effect on
the Company's operating margins.

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,
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 29, 2002, the Company had approximately 298 full-time
equivalent staff employees in its continuing operations. 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.

The Company's operating success is dependent on the performance and
productivity of its executive officers, senior management, and local managers
and field personnel. The Company's ability to attract and retain business is
significantly affected by local relationships and the quality of service
rendered. The loss of key personnel may cause a significant disruption to the
Company's business by limiting its ability to implement its strategic plan
and/or jeopardizing existing customer relationships.

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 prospective customers. 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 operations is its
ability to recruit and retain qualified temporary associates. The Company must
continually evaluate and upgrade its base of available qualified personnel to
keep pace with changing client needs and emerging technologies. Competition for
individuals with proven skills is intense and demand for these individuals is
expected to remain very strong for the immediate future. There can be no
assurance that qualified personnel will continue to be available to the Company
in sufficient numbers and on terms of employment acceptable to the Company.

In an effort to attract quality personnel, the Company's employees
regularly recruit from 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, technical 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 offers 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.

4


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.
For fiscal 2002 and fiscal 2001, the Company maintained a self-insured workers'
compensation policy through ACE USA ("ACE"), an insurer, with a deductible of
$300,000 per occurrence and an aggregate cap of $10.8 million, adjusted based on
actual payroll. In January 2003, the Company renewed its workers' compensation
policy with ACE for the first six months of fiscal 2003. As part of the renewal,
the Company was required to pay in advance $1.8 million in premium and
administrative costs for the six-month policy. In July 2003, the Company will be
required to pay an additional $660,000 to renew the policy through December
2003. The Company also may be required to post additional collateral.
Additionally, the aggregate cap was eliminated. The Company is required to pay
higher premium costs under the renewed policy; however, the rates cannot be
adjusted during the period from July 2003 through December 2003.

Under the policy, the Company is required to provide to ACE letters of
credit not to exceed $10.0 million plus restricted cash of $1.3 million as
collateral for future claims payments under the insurance plan. As of December
29, 2002, letters of credit provided as security were $9.9 million. In addition
to the letters of credit and restricted cash, the Company also has deposited,
and is required to maintain on deposit, with ACE an amount equal to eleven days
of claims expenses based on actual expenditures by ACE during the prior
three-month period. Under the terms of the agreement with ACE, the Company is
required to fund into an account, on a weekly basis, an amount equal to the
actual payments made by ACE on claims during the previous week as reimbursement
to ACE for such payments. 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.

Pursuant to the policy renewal in July 2003, the Company may be
required to post additional collateral in addition to any cash payments, as a
condition of such renewal. The Company believes it will have access to
sufficient letters of credit or other collateral required to meet such
requirements; however, there can be no assurance that the Company will be able
to post all of the collateral that might be required by ACE to continue the
policy through December 2003. In the event the policy is not renewed by ACE, the
Company would be required to seek workers' compensation coverage from other
carriers, including carriers of last resort which typically have higher
premiums. There can be no assurance that the Company will be able to find
substitute coverage on acceptable terms and at an acceptable price, if at all.
The Company believes that if the ACE policy is not renewed, the cost of any
substitute coverage would have a material adverse effect on the Company's
business and results from operations.

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. 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 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 declines 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 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 a focus on early
closure. For additional information, see Item 1, "Business - Factors That May
Affect Future Results."

Information Systems

The Company has a central management information system designed to
support Company-wide operations such as job skill matching, billing, accounting,
sales and management reports. The management information system also processes
payroll for both staff and temporary associates, receivables and order
fulfillment.

5


The Company's management information systems are essential for data
exchange and operational communications with the Company's branch offices. Any
interruption, impairment or loss of data integrity or malfunction of these
systems could severely hamper the Company's business.

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 are dependent upon a number of factors,
including the following: management's ability and resources to implement the
Company's strategic plan; the Company's ability to attract and retain skilled
employees needed to implement the Company's business plan and meet customer
needs; the successful hiring, training and retention of qualified field
management; 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; and the Company's efforts to develop
and maintain customer and employee relationships.

Future results also will be affected by other factors associated with
the operation of the Company's business including, but not limited to, the
following:

The Unanticipated Results of Pending or Future Litigation

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 deductible amounts 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. There can be no
assurance, however, that the Company's insurance will be sufficient to cover all
claims that may be asserted against it. Should judgments or settlements exceed
the Company's insurance coverage, such judgments and settlements could have a
material effect on the Company's results of operations, financial position and
cash flows. Additionally, there can be no assurance that the Company will be
able to obtain appropriate types of insurance in the future or that such
insurance will be available in terms favorable to the Company.

Economic Fluctuations

The general level of economic activity significantly affects demand for
temporary services. As economic activity slows, businesses may reduce their use

6



of temporary employees before undertaking layoffs of their full-time employees,
resulting in decreased demand for the Company's temporary associates. Further,
in an economic downturn, the Company may face pricing pressure from its
customers and increased competition from other staffing companies, which could
have a material adverse impact on the Company's business. Additionally, because
the Company currently derives a significant portion of its revenues from its
Utah and Colorado markets (approximately 60.9% in fiscal 2002), an economic
downturn in those markets would have a greater impact on the Company than if the
Company had a more widely dispersed revenue base.

Availability of Capital to Support Ongoing Operations

As of December 29, 2002, the Company had outstanding senior notes of
$23.3 million and amounts outstanding on the line of credit of $1.0 million. On
March 31, 2003, the Company entered into an Amendment No. 4 to Note Purchase
Agreement ("Amendment No. 4") with the holders of its $5.0 million aggregated
principal amount of Senior Notes, Series A, due April 30, 2004 (as amended) and
the holders of its $30.0 million aggregated principal amount of Senior Notes,
Series B, due September 1, 2008 (collectively, the "Noteholders"), whereby the
scheduled payments due to the Noteholders in fiscal 2003 have been modified. As
a result of Amendment No. 4, the Company has $1.4 million in scheduled payments
due during fiscal 2003 on the senior notes. The Company also has entered into a
Sixth Amendment to Amended and Restated Credit Agreement (the "Sixth Credit
Amendment") dated as of March 31, 2003 with Wells Fargo Bank Northwest, N.A. and
Bank One, N.A. (collectively, the "Lenders"), extending the expiration of the
revolving line of credit from September 1, 2003 to April 30, 2004. See Part II,
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."

As required by both the Lenders and the Noteholders, the Company has
retained a financial advisor to assist in refinancing, restructuring or
recapitalizing the Company. The Company is required, under the terms of its
amended credit facility and note purchase agreements, to have prepared an
offering memorandum for the recapitalization of the Company's senior notes and
lines of credit no later than April 30, 2003, and to have a firm commitment or
signed letter of intent regarding such recapitalization no later than July 31,
2003. Although the Company is aggressively pursuing alternate sources of
capital, there can be no assurance that such capital will be available or, if
available, will be extended on terms favorable to the Company and in amounts
adequate to fund continuing capital requirements of the Company. In the event
the Company does not have a firm commitment or signed letter of intent by such
date, the Company will be required to pay $250,000, to be distributed to the
Lenders and the Noteholders pursuant to the Amended and Restated Intercreditor
Agreement dated as of March 31, 2003 among State Street Bank and Trust Company,
as collateral agent, Wells Fargo Bank, National Association, as administrative
agent and as a lender, and the Noteholders (the "Amended Intercreditor
Agreement"). Additionally, the Company is required to pay on September 1, 2003 a
supplemental fee of $250,000, to each of the Lenders and the Noteholders, which
amount will be waived if the Company has paid all amounts due and outstanding
under its financing agreements prior to such date.

The Company's level of indebtedness will have several important effects
on its future operations, including, without limitation: (i) a portion of
Company's cash flow from operations will be dedicated to the payment of any
interest required with respect to outstanding indebtedness; (ii) any increase in
the Company's outstanding indebtedness may require the Company to redirect cash
from working capital obligations to service of its outstanding debt obligations;
and (iii) depending on the levels of its outstanding debt, the Company's ability
to obtain additional financing for working capital, capital expenditures,
workers' compensation insurance coverage, general corporate and other purposes
may be limited.

The Company's ability to make payments of principal and interest on its
indebtedness depends upon the Company's future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting the Company's operations, many of which are beyond
the Company's control. Any inability of the Company to satisfy its debt
obligations may have a material adverse effect on the Company.

The Company's credit facility contains strict financial covenants.
Among other things, these covenants require the Company to maintain certain
earnings and net worth levels and a certain ratio of earnings to fixed expenses.
Recently, the Company negotiated amendments to these covenants to ensure the
Company's continued compliance with their restrictions. There can be no
assurance that the Lenders would consent to such amendments on commercially
reasonable terms in the future if the Company once again required such relief.
In the event that the Company does not comply with the covenants and the Lenders
do not consent to such non-compliance, the Company would be in default of its
credit facility, which could subject the Company to penalty rates of interest
and accelerate the maturity of the outstanding balances. Moreover, provisions
within the Amended and Restated Intercreditor Agreement accelerate repayment of
the Company's indebtedness under the credit facility and the note purchase
agreements in the event the Company defaults under either the credit facility or
the note purchase agreements. Accordingly, in the event of such a default, the
Company could be required to seek additional sources of capital to satisfy the
Company's working capital needs. These additional sources of financing may not
be available on commercially reasonable terms or at all.

The Company requires significant working capital in order to operate
its business. While the Company's operating cash flow was positive in 2002, the
Company has historically experienced periods of negative cash flow from
operations and investment activities, especially during seasonal peaks in
revenue experienced in the second and third quarters of the year. The Company


7


pays its temporary associates weekly and sometimes daily and bills the Company's
customers on a weekly basis. As a result, the Company must maintain cash
reserves to pay its temporary personnel prior to receiving payment from its
customers. In addition, the Company is required to pledge amounts to secure
letters of credit that collateralize certain of the Company's workers'
compensation obligations, and these amounts may increase in future periods. Any
such increase in pledged amounts would decrease amounts available for working
capital purposes. As a result of these factors, if the Company's available cash
balances and borrowing base under its existing credit facilities do not grow
commensurate with the growth in the Company's working capital requirements, the
Company would have to explore alternative sources of financing to satisfy the
Company's liquidity needs, including the issuance of additional equity or debt
securities. Any such issuances could result in dilution to existing
shareholders.

Continued Listing of Common Stock

On April 22, 2002, Nasdaq notified the Company that it was not in
compliance with the $1.00 minimum bid price per share requirement for continued
listing on the Nasdaq National Market, the market on which the Company's common
stock was listed at the time. The Company was unable to achieve compliance with
such listing requirement during the grace period provided by Nasdaq and,
consequently, on August 12, 2002, the Company transferred to the SmallCap
Market. As a result of such transfer, the Company was granted an additional
grace period to regain compliance with the minimum bid price per share
requirement. In March 2003, Nasdaq amended its rules regarding compliance with
the minimum bid price requirement and extended the Company's grace period an
additional 90 days, or until July 20, 2003. If the Company's minimum bid price
per share closes at or above the $1.00 per share minimum required bid price for
at least 10 consecutive trading days, the Company will have regained compliance
with such requirement. If the Company has not met the minimum bid price and all
other listing requirements at the expiration of the grace period, the common
stock may be delisted from the SmallCap Market, subject to an appeals process,
in which event the Company's securities may be quoted in the over-the-counter
market. Delisting could make trading shares of the Company's common stock
difficult, potentially leading to a further decline in the stock price. In
addition, investors may find it difficult to sell the Company's common stock or
to obtain accurate quotations of the share price of the common stock. As of the
date of this Report, the Company's common stock has not met the $1.00 per share
minimum bid price requirement for continued listing on the SmallCap Market.

Valuation of Long-Lived Assets

As of December 29, 2002, the Company's consolidated balance sheet
reflected $17.3 million of goodwill and other intangible assets, a substantial
portion of total assets. As of the beginning of fiscal 2002, the Company adopted
the provisions of Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 prohibit
the amortization of goodwill and certain intangible assets that are deemed to
have indefinite lives and require that such assets be tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired, and written down to fair value. The valuation
process employed by the Company to determine fair value uses a combination of
present value and multiple of earnings valuation techniques. Such valuation
methods contain significant assumptions regarding future financial performance
of the Company as well as assumptions regarding the Company's performance with
respect to existing competitors. There can be no assurance that the Company will
be able to achieve such financial performance and, consequently, future
valuations may be significantly different from the Company's current
expectations. Such future valuations could have a significant adverse impact on
the financial results of the Company.

Employee-Related Risks and Expenses

The Company maintains a self-insured workers' compensation insurance
policy, with a deductible of $300,000 per incident and no aggregate cap. The
Company also is required to provide letters of credit not to exceed $10.0
million plus restricted cash of $1.3 million as collateral for future claims
payments under the insurance plan. The Company has established reserve amounts
based upon information provided by its insurance carrier 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.

8


As part of the renewal of its workers' compensation insurance for
fiscal 2003, the Company was required to pay in advance $1.8 million in premium
and administrative costs for a six-month policy. In July 2003, the Company will
be required to pay an additional $660,000 to renew the policy through December
2003. The Company also may be required to pay additional collateral. The Company
also is required to pay higher premium costs with the renewed policy. Although
the Company is confident that it will be able to continue its workers'
compensation policy throughout fiscal 2003, there can be no assurance that the
Company can meet all renewal requirements established by ACE, which may include
additional collateral requirements. If the Company cannot meet such
requirements, ACE will not be obligated to renew the coverage, and the Company
would need to obtain additional coverage elsewhere. Even if the Company is able
to meet all renewal requirements in July 2003, there can be no assurance that
the Company will be able to renew its coverage with ACE in January 2004 on
acceptable terms or at all. No assurance can be given that the Company would be
able to obtain replacement coverage at any time on acceptable terms and with
acceptable rates or that it would be able to obtain such replacement insurance
at all. A failure to obtain adequate workers' compensation insurance coverage
would have a material adverse impact on the Company's business and results of
operations.

The Company also pays federal and state unemployment taxes on behalf of
its temporary associates and its staff employees. These taxes generally increase
as a result of increased claims relating to the Company, increased levels of
unemployment generally and governmental regulation.

The Company believes that some of the increase in premium costs under
the renewed policy, and increased unemployment taxes the Company may be required
to pay 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 2003.

ITEM 2. PROPERTIES
----------
As of December 29, 2002, the Company provided services through 85
offices in 13 states. These offices are typically 750 to 2,000 square feet in
size, with some offices in larger or smaller markets varying in size from the
typical office. These offices generally are leased by the Company for terms of
one to three years. Some of these leases have renewal options for periods
ranging from one to five years and contain provisions for escalation of rent
payments based on increases in certain costs incurred by the landlord and on
Consumer Price Index adjustments. The Company believes that shorter initial
lease terms allow the Company to manage costs in developing markets while
providing needed flexibility to close offices without significant exit costs.
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 would be difficult.

During the 52-week period ended December 29, 2002, the Company closed
and/or consolidated 15 branch offices. As of March 31, 2003, the Company has
closed an additional 10 branch offices. The Company is endeavoring to reduce
potential future lease payments by subleasing these facilities or negotiating
discounted buyouts of the lease contracts. In addition, the Company also has
negotiated lease termination provisions at the time of the execution of certain
individual leases. These provisions typically provide for the payment of a
specified number of months' rent plus the landlord's unamortized tenant
improvements and lease commissions

The Company's executive and administrative offices are located in Salt
Lake City, Utah. The premises consist of approximately 15,600 square feet and
had been leased from the adult children of certain significant shareholders of
the Company. During the fourth quarter of fiscal 2002, the lease was amended to
provide for an expiration date of March 31, 2004, with options to renew for
three successive three-year periods. The Company believes that the terms of the
lease are at least as favorable as could be obtained from any unrelated third
party. In January 2003 this building was sold to an unrelated third party. The
terms of the Company's lease were not modified in that transaction. The Company
also leases, from an unrelated third party, approximately 6,800 square feet of
office space for use of its centralized information systems and support
personnel. Such lease terminates on January 31, 2004.

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.


9



The principal risks covered by insurance include workers' compensation, personal
injury, bodily injury, property damage, errors and omissions, fidelity and crime
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 in the state of California (the
"Complaint"). The Complaint requested unspecified damages, consequential
damages, and attorneys' fees and costs. Royalty sought damages of approximately
$1.9 million. Royalty subsequently raised its demand to $3.0 million. Inteliant
denied the allegations set forth in the Complaint and filed various
counterclaims against Royalty.

During the 52-week period ended December 29, 2002, the parties settled
the litigation related to the Complaint, which included the release of Inteliant
and the Company and their respective affiliates from all claims or potential
claims, whether known or unknown. Neither party admitted any fault or
wrongdoing. Under the terms of the settlement agreement, Inteliant paid Royalty
$500,000 and Inteliant's insurance carrier paid Royalty an additional $600,000,
for a total settlement of $1.1 million. Inteliant's insurance carrier also paid
Inteliant's defense costs, including attorneys' fees. Also in connection with
the settlement, Inteliant waived all coverage claims against its insurance
carrier.

There is no 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 29, 2002.

10


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 SmallCap Market tier of The Nasdaq Stock Market
under the symbol "SOSS". The stock table abbreviation is "SOS Stffg".

As of March 19, 2003, the Company had 124 stockholders of record. Based
upon shareholder mailings, the Company believes that there are in excess of
1,700 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
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

2002
First Quarter-------------------------- 1.410 0.720
Second Quarter------------------------- 1.130 0.550
Third Quarter-------------------------- 0.950 0.450
Fourth Quarter------------------------- 0.740 0.260

On March 31, 2003, the closing price of the Company's Common Stock, as
reported on the Nasdaq SmallCap Market, was $0.53.

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.


11



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 Weeks) Ended
--------------- -------------- --------------- --------------- ---------------
2002(1) 2001(1,2) 2000(1,2,3) 1999(1,2,3) 1998(1,2,3)
--------------- -------------- --------------- --------------- ---------------

Statement of Operations Data: (in thousands, except per share data)
Revenue $ 180,318 $ 214,403 $ 257,148 $ 239,648 $ 238,437
Gross profit 36,371 46,324 56,445 51,312 52,112
Selling, general and administrative 31,687 37,899 45,231 41,768 39,191
Loss on impairment of goodwill and
intangibles 13,867 -- 3,102 -- --
Depreciation and amortization 2,008 3,565 3,773 4,022 3,601
Other operating expenses 749 1,319 -- -- 550
(Loss) income from operations (11,940) 3,541 4,339 5,522 8,770
(Loss) income from continuing operations
(7,291) (4,543) 216 1,318 5,022
(Loss) income from discontinued
operations, net of tax (1,635) (52,801) (29,417) 4,033 4,836
Cumulative effect of accounting change
(16,083) -- -- -- --
Net (loss) income (25,009) (57,344) (29,201) 5,351 9,858


(Loss) income from continuing operation
per common share:
Basic $ (0.57) $ (0.36) $ 0.02 $ 0.10 $ 0.40
Diluted (0.57) (0.36) 0.02 0.10 0.39

Net (loss) income per common share:
Basic $ (1.97) $ (4.52) $ (2.30) $ 0.42 $ 0.78
Diluted (1.97) (4.52) (2.30) 0.42 0.77

Weighted average common shares:
Basic 12,691 12,691 12,691 12,691 12,675
Diluted 12,691 12,691 12,692 12,699 12,810

Balance Sheet Data:
Working capital $ 10,878 $ 4,353 $ 20,012 $ 37,969 $ 26,989
Total assets 43,253 78,743 161,388 200,624 182,909
Total debt 24,335 29,095 44,273 55,687 39,925
Shareholders' equity 8,532 33,541 90,885 120,086 114,606


(1) In fiscal 2002, the Company disposed of its Northern California Truex
operations. The related statement of operations data for these operations
is reflected as discontinued operations for all years presented.
(2) 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 the applicable years presented.
(3) 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 the applicable years presented.

12



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 in Part II, Item 8 of this Report. The Company's fiscal year
consists of a 52- or 53-week period ending on the Sunday closest to December 31.
Fiscal years 2000, 2001 and 2002 were all 52-week years.

The Company currently provides staffing services through a network of
75 offices located in 13 states. During fiscal 2000, 2001 and 2002, the Company
disposed of the information technology consulting and staffing businesses of
Inteliant. The Company also disposed of two other businesses determined to be
nonessential to the Company's core commercial staffing operations. See
"Discontinued Operations" in Part II, Item 7 of this Report for additional
discussion on discontinued operations.

Recent Developments

As of the beginning of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible
Assets." In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill and identifiable intangible assets that have indefinite
useful lives. The provisions of SFAS No. 142 prohibit the amortization of
goodwill and certain intangible assets that are deemed to have indefinite lives
and require that such assets be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired, and written down to fair value. Intangible assets that have finite
useful lives, such as non-compete agreements, will continue to be amortized over
their useful lives. During the 52-week periods ended December 30, 2001 and
December 31, 2000, the Company's amortization expense relating to goodwill and
indefinite-lived intangibles was $1.6 million and $1.7 million, respectively.
Pursuant to the conditions set forth in SFAS No. 142, the Company wrote off
$16.1 million as a cumulative effect of a change in accounting principle in the
first quarter of fiscal 2002. Additionally, during the fourth quarter of fiscal
2002, the Company performed its annual impairment test of goodwill and other
intangibles as required by SFAS No. 142. As a result of applying such
fair-value-based test, the Company recorded an additional charge of $13.9
million for the impairment of goodwill and certain trademarks and trade names.

On April 22, 2002, Nasdaq notified the Company that it was not in
compliance with the $1.00 minimum bid price per share requirement for continued
listing on the Nasdaq National Market, the market on which the Company's common
stock was listed at the time. The Company was unable to achieve compliance with
such listing requirement during the grace period provided by Nasdaq and,
consequently, on August 12, 2002, the Company transferred to the SmallCap
Market. As a result of such transfer, the Company was granted an additional
grace period to regain compliance with the minimum bid price per share
requirement. In March 2003, Nasdaq amended its rules regarding compliance with
the minimum bid price requirement and extended the Company's grace period an
additional 90 days, or until July 20, 2003. If the Company's minimum bid price
per share closes at or above the $1.00 per share minimum required bid price for
at least 10 consecutive trading days, the Company will have regained compliance
with such requirement. If the Company has not met the minimum bid price and all
other listing requirements at the expiration of the grace period, the common
stock may be delisted from the SmallCap Market, subject to an appeals process,
in which event the Company's securities may be quoted in the over-the-counter
market.

The Company has renewed its workers' compensation insurance policy with
ACE, USA ("ACE"), an insurance carrier, for fiscal 2003. As part of the renewal,
the Company was required to pay in advance $1.8 million in premium and
administrative costs for a six-month policy. In July 2003, the Company will be
required to pay an additional $660,000 to continue the policy through December
2003. Additionally, the Company may be required to post additional collateral in
order to renew the policy for the remainder of the fiscal year. The Company also
is required to pay higher premium costs under the renewed policy; however, the
rates cannot be adjusted from July through December 2003. See Part I, Item 1.
"Business - Risk Management."

On March 31, 2003, the Company entered into the Sixth Credit Amendment
with the Lenders to extend the Company's line of credit. Pursuant to the Sixth
Credit Amendment, the maturity date of the Company's line of credit was extended
to April 30, 2004. In addition, certain financial covenants under the Company's

13



credit facility have been modified. As provided in the Sixth Credit Amendment,
the Company will pay to the Lenders four equal payments of $156,500 in
successive months beginning in September 2003. Such payments will permanently
reduce the line of credit available to the Company in cash. However, any such
reductions in the aggregate commitment shall not apply if they would reduce the
cash available for borrowing below $2.5 million. As of March 31, 2003, the
Company had outstanding borrowings under the revolving credit facility of
approximately $2.5 million.

Also on March 31, 2003, the Company entered into Amendment No. 4 with
the Noteholders, whereby the Noteholders modified certain financial covenants
under the Company's existing note purchase agreements. Amendment No. 4 provides
that the Company will pay to the Noteholders four equal payments of $343,500 in
successive months beginning in September 2003, to be applied pro rata among the
holders of the Series A and Series B notes. Additionally, the maturity date of
the Series A notes was extended to April 30, 2004. As consideration for
Amendment No. 4, the Company will pay all fees and expenses of the Noteholders'
special counsel. In the event the Company does not have a firm commitment or
signed letter of intent by such date, the Company will be required to pay
$250,000, to be distributed pursuant to the Amended Intercreditor Agreement.

Amendment No. 4 and the Sixth Credit Amendment provide that the Company
shall 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
Intercreditor Agreement. However, if the Company receives any tax refund arising
from the Job Creation and Work Assistance Act of 2002 (the "2002 Job Act")
relating to net operating loss carrybacks, the Company will be able to retain
$3.8 million of such refund for working capital purposes and collateral
requirements arising under its credit facility and letters of credit. 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.

As required by both the credit facility and the note purchase
agreements, the Company has retained a financial advisor to assist in
refinancing, restructuring or recapitalizing the Company. Pursuant to Amendment
No. 4 and the Sixth Credit Amendment, the Company shall cause an offering
memorandum for the recapitalization of the Company's debt obligations to be
prepared and distributed no later than April 30, 2003. Additionally, the Company
shall use its best efforts to obtain a firm commitment or signed letter of
intent regarding such recapitalization prior to July 31, 2003.

The Company's financial situation presents risks to investors during
fiscal 2003. See "Liquidity and Capital Resources" within this Item 7 for
further information on these recent developments.

Critical Accounting Policies

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

o allowance for doubtful accounts receivable;

o reserves for workers' compensation costs;

o impairment of goodwill and intangibles; and

o reserves for leased facility obligations.

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 29, 2002, the
Company had recorded an allowance for doubtful accounts of $1.0 million, which
represents 6.4% of the Company's total outstanding accounts receivable. The
actual bad debts may exceed such allowance and the difference from estimates
could be significant.

The Company maintains workers' compensation insurance with ACE with a
deductible of $300,000 per occurrence and no aggregate cap. Under the terms of
the insurance policy with ACE, the Company also has deposited, and is required
to maintain on deposit, with ACE an amount equal to eleven days of claims
expenses based on actual expenditures by ACE during the prior three-month
period. The Company also is required to fund into an account, on a weekly basis,
an amount equal to the actual payments made by ACE on claims during the previous
week as reimbursement to ACE for such payments. 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.

14


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 29, 2002,
the workers' compensation reserve totaled $5.5 million. If the development
factors used by the Company were to increase by 10%, the Company's indicated
reserves would increase approximately $311,000 while a reduction in the
development factors of 10% would reduce the indicated reserves by approximately
$137,000. 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.

As of the beginning of fiscal 2002, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the
Company discontinued the amortization of goodwill and identifiable intangible
assets that have indefinite useful lives. Intangible assets that have finite
useful lives, such as non-compete agreements, will continue to be amortized over
their useful lives. The provisions of SFAS No. 142 prohibit the amortization of
goodwill and certain intangible assets that are deemed to have indefinite lives
and require that such assets be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired, and written down to fair value. The valuation process employed by
the Company to determine fair value uses a combination of present value and
multiple of earnings valuation techniques. Such valuation methods contain
significant assumptions regarding future financial performance of the Company as
well as assumptions regarding the Company's performance with respect to existing
competitors. There can be no assurance that the Company will be able to achieve
such financial performance and, consequently, future valuations may be
significantly different from the Company's current expectations. Such future
valuations could have a significant impact on the financial results of the
Company.

The Company leases office facilities under noncancelable operating
leases. With respect to offices the Company has vacated while the lease is still
in effect, the Company records its estimated liability in the period it leaves
the office space. In some instances, the Company has subleased the facilities
that currently are not used by the Company and has reduced the amount of such
liability carried on the Company's books by the estimated sublease payments
relating to such properties. However, if the sublessee defaults on its lease
obligations, the Company is liable for any outstanding lease payments. As of
December 29, 2002, the Company had reduced its lease liability for closed
offices by approximately $1.0 million as a result of estimated sublease income.
Although the Company does not anticipate that any of its sublesees will default
on their lease obligations, no assurance can be given that such a default will
not occur. Certain defaults could have a material impact on the Company's
results of financial operations.


Discontinued Operations

On December 29, 2000, 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 in fiscal 2001. As part of
the sale of the consulting division, the Company agreed to extend a one-year
subordinated loan in the form of a promissory note to HD of up to a maximum of
$3.5 million to meet HD's operating needs. As of December 30, 2001, the Company
had advanced to HD approximately $3.4 million. The Company was unable to collect
against the note. Accordingly, during fiscal 2001, the Company wrote 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, which 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. For fiscal 2001, an additional loss of approximately $5.0
million was recorded as a result of the writeoff of receivables and the reserve
on the note.

15


During the 52-week period ended December 29, 2002, the Company settled
an outstanding claim relating to the disposed IT consulting business. See Part
I, Item 3. "Legal Proceedings". In connection with the resolution of the matter,
the Company recorded an additional charge of $292,000 to discontinued operations
during the 13-week period ended June 30, 2002. Additionally, as part of the sale
of the IT consulting business to HD, the Company assigned certain lease
agreements to HD, with the respective landlords reserving their rights against
the Company in the event of default by HD. Subsequent to such sale, HD ceased
operations in some areas and defaulted on some of the assumed lease agreements.
The Company believes that its claims against HD are of no value, as HD is
believed to be insolvent. Consequently, during the 52-week period ended December
29, 2002, the Company recorded an additional $215,000 charge to discontinued
operations for accrued lease payments with respect to the properties abandoned
by HD.

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 and treated these actions as discontinued operations beginning in
fiscal 2001. Subsequently, during the 52-week period ended December 29, 2002,
the Company consummated the following transactions in relation to its
discontinued IT staffing businesses:

o On February 25, 2002, 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 $40,000. The Company
retained accounts receivable of $1.1 million, of which $109,000 was outstanding
as of December 29, 2002. The Company believes that the majority of the
outstanding accounts receivable are collectible. 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 consultant and was managing
the Company's northern California operations at the time of the closing of the
transaction.

o Effective March 11, 2002, the Company settled a dispute with NeoSoft,
Inc. ("NeoSoft"), whose assets had been acquired by Inteliant in July 1998.
During fiscal 2001, NeoSoft and its principal stockholder had alleged that the
Company owed more than the final earnout payment paid by the Company pursuant to
the purchase agreement with NeoSoft. Under the terms of the settlement, the
Company paid NeoSoft $550,000 and transferred the NeoSoft operations back to
NeoSoft. In return, the Company retained all of the accounts receivable and
unbilled revenue of $639,000. No further accounts receivable are outstanding. As
part of the settlement, the Company paid NeoSoft 15% of all accounts receivable
collected as consideration for NeoSoft's assistance in collecting such
receivables. Additionally, NeoSoft assumed $53,000 in accrued paid time off
liability and assumed all operating leases. Furthermore, the parties released
all claims including, without limitation, any claims arising under the original
asset purchase agreement and under the former principal stockholder's original
employment agreement. The former principal stockholder of NeoSoft was employed
by the Company at the time the dispute was settled and was managing the
Company's NeoSoft operations.

o Effective May 6, 2002, the Company sold certain assets related to the
Kansas City, Missouri and Denver, Colorado ("Central States") operations of
Inteliant for contingent payments not to exceed $1,000,000 in the aggregate over
three years following the closing date of the transaction, based on the gross
profit of the business acquired by the buyer. The buyer also assumed liabilities
of $40,000. Additionally, the Company retained accounts receivable of $500,000,
most of which has been collected as of December 29, 2002. The Company has fully
reserved for any outstanding balances it estimates will not be collected. The
buyer was employed by the Company as the manager of the Central States
operations at the time of the closing of the transaction.

In addition, during fiscal 2001, the Company formalized a plan to sell
its wholly owned subsidiary, ServCom Staff Management, Inc. ("ServCom"), a
professional employer 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 $480,000, of which $61,000 was
outstanding as of December 29, 2002. The Company anticipates that such remaining
accounts receivable will not be collectible and has fully reserved the
outstanding balance. The terms of the transaction were immaterial to the
financial results of the Company.

For fiscal 2001, the Company recorded a loss on the sale of the
Inteliant staffing business and ServCom of approximately $12.5 million, which
consisted primarily of the elimination of net assets of approximately $10.6
million, including: (i) intangible assets, net of accumulated amortization, of


16


approximately $10.0 million; and (ii) the write-off of net property and
equipment and other assets of approximately $0.6 million. Additional expenses of
approximately $1.9 million, primarily change of control bonuses, professional
and legal fees and other transaction-related charges, were incurred as part of
the transaction.

During the second quarter of fiscal 2002, due to declining revenues and
the continued economic downturn in the San Francisco, California region, the
Company determined to sell its Truex division, located in northern California.
The Company reclassified assets of its Truex operations, including trademarks
and trade names and an allocated portion of goodwill, as assets held for sale
and reduced the carrying amount of assets reclassified as held for sale to the
estimated fair value less selling costs. The Company estimated that the Truex
assets had no fair value and consequently recorded a charge of $40,000 for the
write-off of property and equipment. Additionally, the Company wrote off the
remaining value of intangible assets and trademarks and trade names associated
with Truex of $421,000 and wrote off related goodwill of $286,000. In August
2002, the Company entered into an agreement pursuant to which the Company
transferred the Truex business and trade name to an unrelated entity for
contingent payments not to exceed $300,000 in the aggregate over one year
following the closing date of the transaction, based on the gross profit of the
business acquired. Any contingent consideration will be recorded in discontinued
operations when received.

For the 52-week period ended December 29, 2002, the Company received
contingent payments of $25,000, in the aggregate, for its discontinued
operations.

Results of Continuing Operations

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


Fiscal Year 52 Weeks Ended
----------------------------------------------
2002 2001 2000
---------------- --------------- -------------

Revenues 100.0% 100.0% 100.0%
Direct cost of services 79.8 78.4 78.0
---------------- --------------- -------------
Gross profit 20.2 21.6 22.0
---------------- --------------- -------------
Operating expenses:
Selling, general and administrative expenses 17.6 17.7 17.6
Depreciation and amortization 1.1 1.7 1.5
Loss on impairment of goodwill and intangibles 7.7 -- 1.2
Restructuring charges 0.4 0.6 --
---------------- --------------- -------------
Total operating expenses 26.8 20.0 20.3
---------------- --------------- -------------
(Loss) income from operations (6.6)% 1.6% 1.7%
---------------- --------------- -------------



Fiscal 2002 Compared to Fiscal 2001 from Continuing Operations

Revenues: Revenues for the 52-week period ended December 29, 2002 were $180.3
million, a decrease of $34.1 million, or 15.9%, compared to revenues of $214.4
million for the 52-week period ended December 30, 2001. The decline in revenue
was attributable to the economic downturn, the closing of under-performing
offices over the past two years and a slowdown in construction labor
requirements within key operating areas.

Gross Profit: The Company defines gross profit as 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 and other temporary payroll benefits; costs related to
independent contractors utilized by the Company; and other direct costs related
to placement of temporary associates. Gross profit for the 52-week periods ended
December 29, 2002 and December 30, 2001 was $36.4 million and $46.3 million,
respectively, a decrease of $9.9 million, or 21.4%. For the 52-week periods
ended December 29, 2002 and December 30, 2001, gross profit margin was 20.2% and
21.6%, respectively. The margin decline was primarily the result of increased
pricing competition for staffing services, higher workers' compensation
insurance costs and a reduction in the higher margin permanent placement
business. As part of the Company's renewed workers' compensation insurance for
fiscal 2002, the Company was required to pay higher premium costs. Although some
of the increased costs have been passed through as price increases to its
customers, given the competitive nature of the staffing industry, the Company

17



has not been able to pass through all cost increases. In addition, the Company
anticipates that additional increases in workers' compensation rates and
unemployment tax rates in states where the Company is doing business will
continue to have a negative impact on gross profit through fiscal 2003.

Operating Expenses: Operating expenses include, among other things, staff
employee compensation, rent, depreciation, amortization of intangibles and
advertising. Total operating expenses as a percentage of revenues increased to
26.8% for the 52-week period ended December 29, 2002, compared to 20.0% for the
52-week period ended December 30, 2001. The increase was due primarily to the
impairment of goodwill and certain trademarks and trade names. The impairment
charge was partially offset due to cost savings realized as a result of the
Company's restructuring efforts.

Selling, general and administrative expenses ("SG&A"), as a percentage
of revenues, decreased slightly for the 52-week period ended December 29, 2002
to 17.6%, compared to 17.7% for the 52-week period ended December 30, 2001. The
decrease in SG&A as a percentage of revenues was due primarily to a cost
reduction plan implemented by the Company.

As previously discussed, the Company adopted SFAS No. 142 at the
beginning of fiscal 2002. During the fourth quarter of fiscal 2002, the Company
completed its required annual impairment test and, as a result, wrote off an
additional $13.9 million in related goodwill and other indefinite-lived
intangible assets. Additionally, the Company recognized $48,000 in depreciation
and amortization of identifiable assets with a finite life in fiscal 2002. For
the comparable 52-week period ended December 30, 2001, the Company recognized
$3.6 million in depreciation and amortization of goodwill, trademarks and trade
names and intangible assets.

Restructuring charges for the 52-week period ended December 29, 2002,
which added an additional 0.4% to operating expenses, related primarily to the
closure and consolidation of under-performing branch offices as well as
reductions in personnel. The Company is endeavoring to reduce potential future
lease payments by subleasing the closed facilities or negotiating discounted
buyouts of the lease contracts.

The Company has subleased some of the facilities for which it is
contractually obligated, and in such instances has reduced the amount of the
liability carried on the Company's books by the anticipated sublease payments
from such properties. However, if the sublessee defaults on its lease
obligations, the Company is liable for any remaining lease payments, which could
have a negative impact on the Company's future profitability. Currently, the
Company has entered into sublease agreements with respect to seven facilities,
which represents $1.0 million in sublease payments to the Company. The Company
currently does not anticipate that any of the current sublease holders will
default on their obligations; however, there can be no assurance that such a
default will not occur.

(Loss) Income from Operations: Loss from operations for the 52-week period ended
December 29, 2002 was ($11.9) million, compared to income from operations of
$3.5 million for the 52-week period ended December 30, 2001. Operating margin
was (6.6%), compared to 1.6% for the comparable period of the prior year. The
decrease in operating margin was due largely to the additional impairment of
goodwill and certain other indefinite-lived intangible assets and a decrease in
gross profit.

Interest Expense: Interest expense for the 52-week period ended December 29,
2002 was $3.3 million, compared to $3.0 million for the 52-week period ended
December 30, 2001, an increase of $300,000, or 10%. The increase in the interest
expense was due primarily to an increase in interest rates and additional debt
issuance costs associated with the Company's note purchase agreements and credit
facility.

Income Taxes: During the 52-week period ended December 29, 2002, the Company
received $4.5 million in income tax refunds. The Company expects that a portion
of its tax loss for fiscal 2002, generated as a result of the sale of its IT and
Truex operations, will be available for carryback against its 1997 tax year. As
a result, the Company anticipates receiving an additional $3.8 million in
federal and state income tax refunds in fiscal 2003 with respect to the 2002
fiscal year. The refunds are primarily a result of the Company's recognition,
during the first quarter of fiscal 2002, of a federal tax benefit of $7.9
million, due primarily to the enactment of the 2002 Job Act, which was signed
into law on March 9, 2002. The 2002 Job Act contains certain provisions that
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

18



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
was accounted for in the first quarter of fiscal 2002, the period in which the
law became effective.

As of December 29, 2002, the Company had recorded a tax valuation allowance for
its entire net deferred income tax assets of $24.2 million. The valuation
allowance was recorded given the cumulative 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.

Fiscal 2001 Compared to Fiscal 2000 from Continuing Operations

Revenues: Revenues decreased by $42.7 million, or 16.6%, to $214.4 million for
the 52-week period ended December 30, 2001, compared to $257.1 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 coupled with a reduction in revenue from closing under-performing
offices. The Company also has seen a significant decrease in permanent placement
revenues.

Gross Profit: Gross profit margin for the 52-week period ended December 30, 2001
was 21.6%, compared to 22.0% 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.

Operating Expenses: Total operating expenses as a percentage of revenues were
20.0% for the 52-week period ended December 30, 2001, compared to 20.3% for the
52-week period ended December 31, 2000. During the 52-week period ended December
31, 2000, the Company recorded an impairment charge on intangible assets of $3.1
million. The reduction in total operating expenses related to the loss on
impairment of goodwill and intangibles was partially offset by cost reductions
described below.

Selling, general and administrative expenses, as a percentage of
revenues, for the 52-week period ended December 30, 2001 were 17.7%, compared to
17.6% for the 52-week period ended December 31, 2000. The increase as a
percentage of revenues was 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 31, 2001
added 0.6%, or $1.3 million, 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 note purchase agreements. During the 52-week period ended December
30, 2001, excluding the remaining Inteliant offices to be disposed of, the
Company reduced its staff by approximately 142 full-time equivalent employees,
or 25.4%, and closed or consolidated 35 offices.

Income from Operations: Income from operations for the 52-week period ended
December 30, 2001 was $3.5 million, a decrease of $0.8 million, compared to $4.3
million for the 52-week period ended December 31, 2000. Operating margin was
1.6%, compared to 1.7% 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 $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.

Liquidity and Capital Resources

For the 52-week period ended December 29, 2002, net cash provided by
operating activities was $4.9 million, compared to net cash provided by
operating activities of $21.1 million for the 52-week period ended December 30,
2001. The change in operating cash flow was primarily a result of the net loss
of the Company coupled with a net decrease in cash provided from certain working
capital components, consisting primarily of collections on accounts receivable
(mainly attributable to the Company's discontinued operations) and collection of
income tax refunds.

19


In January 2003, the Company renewed its workers' compensation policy
for fiscal 2003. Under the terms of the renewed policy, the Company is required
to maintain $1.3 million in cash to collateralize future claims payments under
the policy. The cash amount is carried at fair value and is restricted as to
withdrawal. The restricted cash is held in the Company's name with a major
financial institution. Additionally, as part of the renewal, in January 2003 the
Company prepaid $1.8 million in premium and administrative costs for a six-month
policy. In July 2003, the Company will be required to pay an additional $660,000
to continue coverage through December 2003. Pursuant to the policy renewal in
July 2003, the Company also may be required to post additional collateral in
addition to any cash payments. However, there can be no assurance that the
Company will be able to post all of the collateral that might be required by ACE
to continue the policy through December 2003. In the event the policy is not
renewed by ACE, the Company would be required to seek workers' compensation
coverage from other carriers, including carriers of last resort which typically
have higher premium costs. The Company anticipates that increasing workers'
compensation costs will continue to have a negative impact on future operating
capital.

The Company's investing activities for the 52-week period ended
December 29, 2002 used $485,000, compared to $6.1 million for the 52-week period
ended December 30, 2001. All investing activities for the 52-week period ended
December 29, 2002 were used to purchase property and equipment. By comparison,
during the 52-week period ended December 30, 2001 the Company used $1.5 million
for purchases of property and equipment, $2.2 million for payments on
acquisition earnouts and $2.4 million for a working capital loan to the
purchaser of certain assets of the Company.

Net cash used by the Company's financing activities for the 52-week
period ended December 29, 2002 was $4.8 million, primarily due to payments to
the Noteholders and on the Company's credit facility. Net cash used in the
Company's financing activities for the comparable prior year period ended
December 30, 2001 was $15.2 million, attributable primarily to payments to the
Noteholders and to payments on the Company's revolving credit facility.

On April 15, 2002, the Company entered into a Fifth Amendment to the
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 was available for borrowing in cash with a
maturity date of September 1, 2003, and $10.0 million of which was available
under letters of credit to be issued solely as required by the Company's
workers' compensation insurance provider, with a maturity date of January 1,
2004. In addition, certain financial covenants of the Company were modified. The
Company paid the Lenders $78,000 upon execution of the Fifth Credit Amendment.
In addition, the Company paid an aggregate of $2.6 million of the outstanding
borrowings under the revolving credit facility. Such payments permanently
reduced the line of credit available to the Company for borrowing in cash to
less than the $6.0 million stated above.

As of December 29, 2002, the Company's borrowing limits under the line
of credit were $3.4 million and the Company had borrowing availability of $2.4
million. As of December 29, 2002, the Company was in compliance with all
covenants under the Fifth Credit Amendment.

Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with the Noteholders. The
Noteholders consented to the Company entering into the Fifth Credit Amendment
described above. During the 52-week period ended December 29, 2002, the Company
paid $5.8 million in scheduled and supplementary principal payments on its
senior notes. As consideration for their approval of Amendment No. 3, the
Company paid an amendment fee to the Noteholders of $145,475, as well as fees
and expenses of the Noteholders' special counsel. Additionally, as required by
both the credit facility and the note purchase agreements, the Company has
retained a financial advisor to assist in refinancing, restructuring or
recapitalizing the Company.

On March 31, 2003, the Company entered into the Sixth Credit Amendment
with the Lenders to extend the Company's line of credit. Pursuant to the Sixth
Credit Amendment, the maturity date of the Company's line of credit was extended
to April 30, 2004. In addition, certain financial covenants under the Company's
credit facility have been modified. As provided in the Sixth Credit Amendment,
the Company will pay to the Lenders four equal payments of $156,500 in

20



successive months beginning in September 2003. Such payments will permanently
reduce the line of credit available to the Company in cash. However, any such
reductions in the aggregate commitment shall not apply if they would reduce the
cash available for borrowing below $2.5 million. As of March 31, 2003, the
Company had outstanding borrowings under the revolving credit facility of
approximately $2.5 million.

Also on March 31, 2003, the Company entered into Amendment No. 4 with
the Noteholders, whereby the Noteholders modified certain financial covenants
under the Company's existing note purchase agreements. Amendment No. 4 provides
that the Company will pay to the Noteholders four equal payments of $343,500 in
successive months beginning in September 2003, to be applied pro rata among the
holders of the Series A and Series B notes. Additionally, the maturity date of
the Series A notes was extended to April 30, 2004. As consideration for
Amendment No. 4, the Company will pay all fees and expenses of the Noteholders'
special counsel.

Amendment No. 4 and the Sixth Credit Agreement provide that the Company
shall 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
Intercreditor Agreement. If the Company receives any tax refund arising from the
2002 Job Act relating to net operating loss carrybacks, the Company will be able
to retain $3.8 million of such refund for working capital purposes and
collateral requirements arising under its credit facility and letters of credit.
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. 4 and the Sixth Credit Amendment, the Company
shall cause an offering memorandum for the recapitalization of the Company's
debt obligations to be prepared and distributed no later than April 30, 2003.
Additionally, the Company is to use its best efforts to obtain a firm commitment
or signed letter of intent regarding such recapitalization prior to July 31,
2003. In the event the Company does not have a firm commitment or signed letter
of intent by such date, the Company will be required to pay $250,000, to be
distributed pursuant to the Amended Intercreditor Agreement.

The Company believes that these sources of funds plus cash reserves and
cash flow from operations will be sufficient to meet anticipated needs for
working capital, capital expenditures and debt service obligations, at least
through fiscal 2003. If the Company were to experience a significant downturn in
its business, additional capital would be required in order to continue
operations. Should this occur, the Company would be required to consider a
number of strategic alternatives, including the closure of certain locations or
the sale of certain or all of its assets. In the current economic environment,
management believes that any such sale would be at depressed prices that could
be significantly lower than the net book value of assets sold and may not be
sufficient to satisfy its liabilities.

For the period ended December 29, 2002, the Company continued under its
plan to streamline its corporate structure by consolidating or closing branch
offices in under-performing markets. During the 52-week period ended December
29, 2002, the Company recorded a restructuring charge of $749,000, primarily
related to a change in the estimate of future lease obligations and severance
costs associated with the elimination of a senior executive position as well as
other operational positions. The Company is endeavoring to reduce potential
future lease payments by subleasing abandoned facilities or negotiating
discounted buyouts of such lease contracts. At December 29, 2002, the remaining
accrued lease costs totaled $155,000. The Company's estimates may change based
on its ability to effectively reduce such future lease payments. Also as noted
in Part I, Item 3. "Legal Proceedings," the Company negotiated a settlement of
an outstanding claim against its subsidiary, Inteliant. As a result of the
negotiated settlement, Inteliant paid $500,000 to the plaintiff to settle the
claims, in addition to amounts paid by the Company's insurance carrier. The
Company accrued for the settlement during the 13-week period ended June 30,
2002.

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 $ 23,341 $ 1,374 $ 17,749 $ 4,218 $ --
Operating Leases 4,331 2,202 1,987 142 --
Lines of Credit 994 -- 994 -- --
Workers' Compensation 1,360 1,360 -- -- --
------------------- ------------------ ------------------ ------------------- -----------------
Total Contractual Cash
Obligations $ 30,026 $ 4,936 $ 20,730 $ 4,360 $ --
------------------- ------------------ ------------------ ------------------- -----------------

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


21


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.

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 2002 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, rather than at the date of an
entity's commitment to an exit plan. Additionally, this statement also
establishes that fair value is the objective for initial measurement of the
liability. The Company currently is assessing the impact the adoption of the
accounting provisions will have on the Company's financial position and results
of operations.

In December 2002 the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-- Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS No. 148 are effective
for financial statements for fiscal years ending after December 15, 2002 but
allow for earlier application. The Company does not plan to adopt the fair
valued based method of accounting and therefore the adoption of this standard
will not have an impact on the Company's financial position or results of
operations.

In November 2002 the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements, including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has adopted
the required disclosure provisions and currently is assessing the impact the
adoption of the remaining provisions will have on the Company's financial
position and results of operations.

In January 2003 the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which addresses the consolidation of business enterprises of variable interest
entities as defined therein and applies immediately to variable interest
entities created or obtained after January 31, 2003. The Company does not
anticipate that the impact of the adoption of these provisions will have a
material impact 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


22


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.

Revolving Credit Facility: The Company's revolving credit facility bears
interest at the prime rate plus 3.0%; at December 29, 2002, the prime rate was
4.75%. As of December 29, 2002, the Company had $994,000 of advances outstanding
under the revolving credit facility.

Senior Notes: For the 52-week period ended December 29, 2002, the Company's
outstanding borrowings on the senior notes were $23.3 million, with a weighted
average fixed interest rate of 9.42%. 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 $24.3 million at December 29, 2002 and is
estimated by discounting expected cash flows at 7.25% over the expected
maturities of the senior notes. If the discount rate were to increase by 10% to
8.0%, the estimated fair value of the obligation on the senior notes would be
$24.0 million. If the discount rate were to decrease by 10% to 6.5%, the
estimated fair value of the obligation on the senior notes would be $24.6
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

of this Annual Report on Form 10-K, as listed below:


Page

Independent Auditors' Report....................................................................................24
Consolidated Balance Sheets as of December 29, 2002 and December 30, 2001.......................................25
Consolidated Statements of Operations for the fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000.................................................27
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000.................................................29
Consolidated Statements of Cash Flows for the fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000.................................................30
Notes to Consolidated Financial Statements......................................................................32


Other schedules required under Regulation S-X are listed in Item 16 of
this Report.

23



INDEPENDENT AUDITORS' REPORT



The Board of Directors and Shareholders of SOS Staffing Services, Inc.:

We have audited the accompanying consolidated balance sheets of SOS Staffing
Services, Inc. (a Utah corporation) and subsidiaries as of December 29, 2002 and
December 30, 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 29, 2002. 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 of America. 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 subsidiaries as of December 29, 2002 and December 30, 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 29, 2002 in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" in the year ended December 29, 2002.





/s/ KPMG LLP
- -------------
KPMG LLP

Salt Lake City, Utah
February 19, 2003, except as to Notes 1 and 13, which are as of April 11, 2003


24



SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 29, 2002 and December 30, 2001


ASSETS
(in thousands)
December 29, December 30,
2002 2001
------------------ -----------------

CURRENT ASSETS
Cash and cash equivalents $ 495 $ 879
Accounts receivable, less allowances of
$1,031 and $2,267, respectively 15,130 21,995
Prepaid expenses and other 741 1,126
Income tax receivable 3,806 367
------------------ -----------------
Total current assets 20,172 24,367
------------------ -----------------

PROPERTY AND EQUIPMENT, at cost
Computer equipment 4,899 6,082
Office equipment 2,855 3,808
Leasehold improvements and other 1,351 1,887
------------------ -----------------
9,105 11,777
Less accumulated depreciation and amortization (6,182) (7,269)
------------------ -----------------
Total property and equipment, net 2,923 4,508
------------------ -----------------

OTHER ASSETS
Intangible assets, net of accumulated amortization
of $1,947 and $12,853, respectively 17,340 48,060
Restricted cash 1,333 --
Deposits and other assets 1,485 1,808
------------------ -----------------
Total other assets 20,158 49,868
------------------ -----------------

$ 43,253 $ 78,743
------------------ -----------------


(Continued on next page)

See accompanying notes to consolidated financial statements.


25





SOS STAFFING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
As of December 29, 2002 and December 30, 2001


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

December 29, December 30,
2002 2001
----------------- -----------------

CURRENT LIABILITIES
Current portion of workers' compensation reserve $ 3,713 $ 4,484
Current portion of notes payable 1,374 5,668
Accrued liabilities 1,775 4,799
Accrued payroll costs 1,766 3,492
Accounts payable 666 1,571
----------------- -----------------
Total current liabilities 9,294 20,014
----------------- -----------------

LONG-TERM LIABILITIES
Notes payable, less current portion 21,967 23,427
Workers' compensation reserve, less current portion 1,747 1,018
Line of credit 994 --
Deferred compensation and other long-term liabilities 719 743
----------------- -----------------
Total long-term liabilities 25,427 25,188
----------------- -----------------

COMMITMENTS AND CONTINGENCIES
(Notes 1, 3, 5, 6 and 13)

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 (83,288) (58,279)
----------------- -----------------
Total shareholders' equity 8,532 33,541
----------------- -----------------

$ 43,253 $ 78,743
----------------- -----------------


See accompanying notes to consolidated financial statements.

26






SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended December 29, 2002, December
30, 2001 and December 31, 2000

(in thousands, except per share data)

Fiscal Year (52 Weeks)
-------------------------------------------------------------
2002 2001 2000
------------------ ------------------ -----------------

REVENUE $ 180,318 $ 214,403 $ 257,148
DIRECT COST OF SERVICES 143,947 168,079 200,703
------------------ ------------------ -----------------
Gross Profit 36,371 46,324 56,445
------------------ ------------------ -----------------

OPERATING EXPENSES:
Selling, general and administrative 31,687 37,899 45,231
Depreciation and amortization 2,008 3,565 3,773
Loss on impairment of goodwill and intangibles 13,867 -- 3,102
Restructuring charges 749 1,319 --
------------------ ------------------ -----------------
Total operating expenses 48,311 42,783 52,106
------------------ ------------------ -----------------

(LOSS) INCOME FROM OPERATIONS (11,940) 3,541 4,339
------------------ ------------------ -----------------

OTHER INCOME (EXPENSE):
Interest expense (3,342) (3,040) (4,068)
Interest income 13 153 181
Other, net 51 3 (122)
------------------ ------------------ -----------------
Total, net (3,278) (2,884) (4,009)
------------------ ------------------ -----------------

(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME (15,218) 657 330
TAXES

BENEFIT (PROVISION) FOR INCOME TAXES 7,927 (5,200) (114)
------------------ ------------------ -----------------

(LOSS) INCOME FROM CONTINUING OPERATIONS (7,291) (4,543) 216
------------------ ------------------ -----------------


(Continued on next page)

See accompanying notes to consolidated financial statements.

27



SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued) For the Fiscal Years Ended December 29,
2002, December 30, 2001 and December 31, 2000

(in thousands, except per share data)


Fiscal Year (52 Weeks)
-------------------------------------------------------------
2002 2001 2000
------------------ ------------------ -----------------

LOSS FROM DISCONTINUED OPERATIONS (Note 3) $ (1,635) $ (52,801) $ (29,417)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (16,083) -- --
------------------ ------------------ -----------------

NET LOSS $ (25,009) $ (57,344) $ (29,201)
------------------ ------------------ -----------------


BASIC AND DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.57) $ (0.36) $ 0.02
Loss from discontinued operations (0.13) (4.16) (2.32)
Loss from cumulative effect of change in
accounting principle (1.27) -- --
------------------ ------------------ -----------------
Net loss $ (1.97) $ (4.52) $ (2.30)
------------------ ------------------ -----------------

DILUTED (LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations $ (0.57) $ (0.36) $ 0.02
Loss from discontinued operations (0.13) (4.16) (2.32)
Loss from cumulative effect of change in
accounting principle (1.27) -- --
------------------ ------------------ -----------------
Net loss $ (1.97) $ (4.52) $ (2.30)
------------------ ------------------ -----------------

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

See accompanying notes to consolidated financial statements.


28




SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY For the Fiscal Years Ended
December 29, 2002, December 30, 2001 and December 31,
2000

(in thousands)

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

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
Net loss -- -- -- (25,009) (25,009)
-------------------------------------------------------------------

BALANCE, December 29, 2002 12,691 $ 127 $ 91,693 $ (83,288) $ 8,532
-------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

29




SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended December 29, 2002, December
30, 2001 and December 31, 2000

(in thousands)
Fiscal Year (52 Weeks)
----------------------------------------------------------
2002 2001 2000
----------------- ------------------ -----------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (25,009) $ (57,344) $ (29,201)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Cumulative effect of change in accounting principle 16,083 -- --
Loss on impairment of intangibles 13,867 -- --
Depreciation and amortization 2,008 3,891 11,754
Deferred income taxes -- 5,424 (2,965)
Loss on disposition of discontinued operations 805 51,734 39,179
Changes in operating assets and liabilities:
Restricted cash (1,333) -- --
Accounts receivable, net 6,865 21,694 5,180
Prepaid expenses and other 385 72 304
Deposits and other assets 323 (54) 308
Accounts payable (905) (1,096) 146
Accrued payroll costs (1,726) (6,779) 1,834
Workers' compensation reserve (42) (250) 557
Accrued liabilities (3,024) (3,737) (665)
Income taxes (3,439) 7,497 (8,904)
----------------- ------------------ -----------------
Net cash provided by operating activities 4,861 21,052 17,527
----------------- ------------------ -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equity securities -- -- (1,250)
Purchases of property and equipment (485) (1,543) (2,918)
Payments on acquisition earnouts -- (2,217) (3,358)
Proceeds from sale of property and equipment -- -- 22
Proceeds from sale of the IT consulting division -- -- 1,000
Issuance of note receivable -- (2,421) (1,000)
----------------- ------------------ -----------------
Net cash used in investing activities (485) (6,181) (7,504)
----------------- ------------------ -----------------



(Continued on next page)

See accompanying notes to consolidated financial statements.


30





SOS STAFFING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) For the Fiscal Years Ended December 29,
2002, December 30, 2001 and December 31, 2000

(in thousands)

2002 2001 2000
------------------- ------------------- -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings $ 14,384 $ 26,992 $ 13,288
Principal payments on borrowings (19,144) (42,169) (24,703)
------------------- ------------------- -----------------
Net cash used in financing activities (4,760) (15,177) (11,415)
------------------- ------------------- -----------------

NET DECREASE IN CASH
AND CASH EQUIVALENTS (384) (306) (1,392)

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 879 1,185 2,577
------------------- ------------------- -----------------

CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 495 $ 879 $ 1,185
------------------- ------------------- -----------------


SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 3,804 $ 3,297 $ 4,004
Income taxes (4,487) (7,721) 290

See accompanying notes to consolidated financial statements.



SUPPLEMENTAL NON-CASH INVESTING AND FINANCING INFORMATION

During fiscal 2001, the Company exchanged an investment in common stock valued
at approximately $1.3 million for a perpetual royalty free license for certain
software technology used by the Company.

See accompanying notes to consolidated financial statements.

31



SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

SOS Staffing Services, Inc. ("SOS" or the "Company") is a provider of
staffing and consulting services primarily in the western United States. As of
December 29, 2002, SOS operated a network of 85 offices located in 13 states.
The Company provides a broad range of services including clerical, industrial
and light industrial, technical, specialty and other professional services.

The Company requires significant working capital in order to operate
its business. While the Company's cash flow from operations was positive in
2002, the Company has historically experienced periods of negative cash flow
from operating and investment activities, especially during seasonal peaks in
revenue experienced in the second and third quarters of the year. As required by
its lenders and holders of its senior notes, the Company has retained a
financial advisor to assist in refinancing, restructuring or recapitalizing the
Company. The Company is required, under the terms of its amended credit facility
and note purchase agreements, to have prepared an offering memorandum for the
recapitalization of the Company's senior notes and lines of credit no later than
April 30, 2003.

The Company's level of indebtedness will have several important
effects on its future operations, including, without limitation: (i) a portion
of Company's cash flow from operations will be dedicated to the payment of any
interest required with respect to outstanding indebtedness; (ii) any increases
in the Company's outstanding indebtedness may require the Company to redirect
cash from working capital obligations to service of its corporate debt
obligations; and (iii) depending on the levels of its outstanding debt, the
Company's ability to obtain additional financing for working capital, capital
expenditures, workers' compensation insurance coverage, general corporate and
other purposes may be limited.

The Company's ability to make payments of principal and interest on
its indebtedness depends upon the Company's future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting the Company's operations, many of which are beyond
the Company's control. Any inability of the Company to satisfy its debt
obligations may have a material adverse effect on the Company.

The Company's credit facility contains strict financial covenants.
Among other things, these covenants require the Company to maintain certain
earnings and a certain ratio of earnings to fixed expenses. Recently, the
Company negotiated amendments to these covenants to ensure the Company's
continued compliance with their restrictions. There can be no assurance that its
lenders would consent to such amendments on commercially reasonable terms in the
future if the Company once again required such relief. In the event that the
Company does not comply with the covenants and the lenders do not consent to
such non-compliance, the Company would be in default of its credit facility,
which could subject the Company to penalty rates of interest and accelerate the
maturity of the outstanding balances. Moreover, provisions within the Company's
Amended and Restated Intercreditor Agreement dated as of March 31, 2003 among
State Street Bank and Trust Company, as collateral agent, Wells Fargo Bank,
National Association, as administrative agent and as a lender and the
noteholders (the "Amended Intercreditor Agreement") accelerate repayment of the
Company's indebtedness under the credit facility and the note purchase
agreements in the event the Company defaults under either the credit facility or
the note purchase agreements. Accordingly, in the event of such a default, the
Company could be required to seek additional sources of capital to satisfy the
Company's working capital needs. These additional sources of financing may not
be available on commercially reasonable terms or at all.

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 29,
2002 ("fiscal 2002"), the fiscal year ended December 30, 2001 ("fiscal 2001")
and the fiscal year ended December 31, 2000 ("fiscal 2000") 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., Industrial Specialists, Inc., formerly known
as ServCom Staff Management, Inc., SOS Collection Services, Inc. and Inteliant
Corporation ("Inteliant"). All significant intercompany transactions have been
eliminated in consolidation.

32


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make 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 - Revenues generated from employees on customer assignments
are recognized as income at the time service is provided, while 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
depreciation and amortization periods are as follows:

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

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
29, 2002 and December 30, 2001 consisted primarily of the following (in
thousands):

2002 2001
--------------- ---------------
Restricted investments 629 743
Deposits and other 856 1,065
--------------- ---------------
$ 1,485 $ 1,808
--------------- ---------------


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 - As of the beginning of fiscal 2002, the Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The
provisions of SFAS No. 142 prohibit the amortization of goodwill and certain
intangible assets that are deemed to have indefinite lives and require that such
assets be tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset might be impaired, and written
down to fair value. In order to assess the fair value of its goodwill and
indefinite-lived intangible assets as of the adoption date, the Company
estimated the fair market value of its assets and liabilities using a
combination of present value and multiple of earnings valuation techniques.
Based upon the results of the valuation, the Company wrote off $8.0 million of
goodwill and $8.1 million in trademarks and trade names as a cumulative effect
of the change in accounting principle.

Additionally, during the fourth quarter of fiscal 2002 the Company
performed its annual impairment test of goodwill and other intangibles as
required by SFAS No. 142. As a result of applying such fair-value-based test,
the Company recorded an additional charge of $13.9 million, consisting of a
write down of goodwill of $9.5 million and a write down of trademarks and trade

33


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

names of $4.4 million. Also during the 52-week period ended December 29, 2002,
the Company disposed of all of the assets of its Truex operations and wrote off
goodwill of $286,000 and trademarks and trade names of $421,000 as part of
discontinued operations (see Note 3).

As of December 29, 2002 and December 30, 2001, intangible assets
consisted of the following:


2002 2001
-------------------- --------------------


Goodwill $ 14,724 $ 37,119
Trademarks and trade names 2,569 18,046
Other definite-lived intangible assets 1,994 2,426
-------------------- --------------------
19,287 57,591
Less:
Accumulated amortization goodwill -- (4,639)
Accumulated amortization trademarks and trade names -- (2,613)
Accumulated amortization other intangible assets (1,947) (2,279)
-------------------- --------------------
Net intangible assets $ 17,340 $ 48,060
-------------------- --------------------


Prior to the adoption of SFAS No. 142, goodwill and trademarks and
trade names were amortized using the straight-line method over 30 years and were
assessed for impairment based upon the future undiscounted net cash flows over
the remaining life. Other definite-lived intangible assets consisting of
non-compete agreements and other intangibles are amortized using the
straight-line method generally over three to six years.

The following table provides a reconciliation of reported income from
continuing operations for the 52-week periods ended December 29, 2002, December
30, 2001 and December 31, 2000 to the adjusted income from continuing
operations, excluding amortization expense relating to goodwill and trademarks
and trade names:


Fiscal Years Ended
----------------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
---------------------------------------------------

Reported (loss) income from continuing operations $ (7,291) $ (4,543) $ 216
Add back: goodwill amortization, net of income taxes -- 1,101 799
Add back: trademark and trade names amortization, net
of income taxes -- 490 323
---------------------------------------------------
Adjusted (loss) income from continuing operations $ (7,291) $ (2,952) $ 1,338
---------------------------------------------------

Basic and diluted (loss) income from continuing
operations per common share:
Reported (loss) income $ (0.57) $ (0.36) $ 0.02
Goodwill amortization net of income taxes -- 0.09 0.06
Trademark and trade names amortization, net of
income taxes -- 0.04 0.03
---------------------------------------------------
Adjusted (loss) income from continuing operations $ (0.57) $ (0.23) $ 0.11
---------------------------------------------------


Accounting for the Impairment of Long-Lived Assets - Long-lived tangible assets
and definite-lived intangible assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of an asset group and its
eventual disposition. Measurement of an impairment loss for such assets is based
on the fair value of the asset.

Workers' Compensation - For fiscal 2002 and fiscal 2001, the Company
maintained a self-insured workers' compensation policy through ACE USA ("ACE"),
an insurer, with a deductible of $300,000 per occurence and an aggregate cap of
$10.8 million, adjusted based on actual payroll. In January 2003, the Company
renewed its workers' compensation policy with ACE for the first six months of
fiscal 2003. As part of the renewal, the Company was required to pay in advance
$1.8 million in premium and administrative costs for a six-month policy. In July
2003, the Company will be required to pay an additional $660,000 to renew the
policy through December 2003. The Company also may be required to post

34


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


additional collateral. Additionally, the aggregate cap was eliminated. The
Company is required to pay higher premium costs under the renewed policy;
however, the rates cannot be adjusted during the period from July 2003 through
December 2003. Under the policy, the Company is required to provide to ACE
letters of credit not to exceed $10.0 million, plus restricted cash of $1.3
million as collateral for future claims payments under the insurance plan. As of
December 29, 2002, letters of credit provided as security were $9.9 million. In
addition to the Letters of Credit and restricted cash, the Company also has
deposited, and is required to maintain on deposit, with ACE an amount equal to
eleven days of claims expenses based on actual expenditures by ACE during the
prior three-month period. The Company also is required to fund into an account,
on a weekly basis, an amount equal to the actual payments made by ACE on claims
during the previous week as reimbursement to ACE for such payments. 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. 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.

Accrued Leases - The Company leases office facilities under noncancelable
operating leases. With respect to offices the Company has vacated while the
lease is still in effect, the Company records its estimated liability in the
period it leaves the office space. In some instances, the Company has subleased
the facilities that currently are not used by the Company and has reduced the
amount of such liability carried on the Company's books by the estimated
sublease payments relating to such properties. However, if any of the sublessees
defaults on its lease obligations, the Company is liable for any outstanding
lease payments.

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.

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." No
stock-based employee compensation cost is reflected in net loss, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant.

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 2002, fiscal 2001 and fiscal 2000
would approximate the pro forma amounts below (in thousands, except per share
data):


2002 2001 2000
----------------- ---------------- -----------------

(Loss) income from continuing operations-
As reported $ (7,291) $ (4,543) $ 216
Total fair-value-based option compensation
expense, net of income tax 1,159 1,623 1,355
----------------- ---------------- -----------------
Pro forma (8,450) (6,166) (1,139)
----------------- ---------------- -----------------
Basic and diluted EPS from continuing operations-
As reported $ (0.57) $ (0.36) $ 0.02
Pro forma (0.67) (0.49) (0.09)


35


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In determining the fair-value based option compensation expense in the
table above, the fair market value of each option was estimated on the date of
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:


2002 2001 2000
----------------- ---------------- -----------------

Risk free rate of return 3.9% 4.8% 6.0%
Expected dividend yield 0.0% 0.0% 0.0%
Volatility 93% 80% 73%
Expected life for director options 7 years 7 years 7 years
Expected life for employee options 5 years 5 years 5 years


The weighted-average fair value of options granted was $0.68, $0.77 and
$1.89 per share for grants made during fiscal 2002, fiscal 2001 and fiscal 2000,
respectively.

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.

At the end of fiscal 2002 and fiscal 2001, there were outstanding
options to purchase 1,471,000 and 1,179,000 shares of common stock,
respectively, 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, there were outstanding 824,000 shares of
common stock 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 $24.3 million. At December 29, 2002 the carrying amount of
long-term debt was $23.3 million.

Reclassifications - Certain reclassifications have been made to the prior years'
financial statements to conform to the current year presentation.

3. Discontinued Operations

During fiscal 2000, 2001 and 2002, the Company disposed of its
information technology ("IT") consulting and staffing businesses of Inteliant
Corporation ("Inteliant"). The Company also disposed of two other businesses
determined to be non-core to the overall commercial staffing operations.

IT Consulting

On December 29, 2000, 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 in fiscal 2001. As part of

36


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


the sale of the consulting division, the Company agreed to extend a one-year
subordinated loan in the form of a promissory note to HD of up to a maximum of
$3.5 million to meet HD's operating needs As of December 30, 2001, the Company
had advanced to HD approximately $3.4 million. The Company was unable to collect
against the note. Accordingly, during fiscal 2001, the Company wrote 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, which 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. For fiscal 2001, an additional loss of approximately $5.0
million was recorded as a result of the write-off of receivables and the reserve
on the note.

During the 52-week period ended December 29, 2002, the Company settled
an outstanding claim relating to the disposed IT consulting business (see Note
6, Commitments and Contingencies). In connection with the resolution of the
matter, the Company had recorded an additional charge of $292,000 to
discontinued operations during the second quarter of fiscal 2002. Additionally,
as part of the sale of the IT consulting business to HD, the Company assigned
certain lease agreements to HD, with the respective landlords reserving their
rights against the Company in the event of default by HD. Subsequent to such
sale, HD ceased operations in some areas and defaulted on some of the assumed
lease agreements. The Company believes that its claims against HD are of no
value, as HD is believed to be insolvent. Consequently, during the 52-week
period ended December 29, 2002, the Company recorded an additional $215,000
charge to discontinued operations for accrued lease payments with respect to the
properties abandoned by HD.

IT Staffing and ServCom

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 and treated these actions as discontinued operations beginning in
fiscal 2001. During the 52-week period ended December 29, 2002, the Company
consummated the following transactions in relation to its discontinued IT
staffing businesses:

o On February 25, 2002, 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 $40,000. The Company
retained accounts receivable of $1.1 million, of which $109,000 was outstanding
as of December 29, 2002. The Company believes that the majority of the
outstanding receivables are collectible. 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 consultant and was managing
the Company's northern California operations at the time of the closing of the
transaction.

o Effective March 11, 2002, the Company settled a dispute with NeoSoft, Inc.
("NeoSoft"), whose assets had been acquired by Inteliant in July 1998. During
fiscal 2001, NeoSoft and its principal stockholder had alleged that the Company
owed more than the final earnout payment paid by the Company pursuant to the
purchase agreement with NeoSoft. Under the terms of the settlement, the Company
paid NeoSoft $550,000 and transferred the NeoSoft operations back to NeoSoft. In
return, the Company retained all of the accounts receivable and unbilled revenue
of $639,000, none of which is outstanding. As part of the settlement, the
Company paid NeoSoft 15% of all accounts receivable collected as consideration
for NeoSoft's assistance in collecting the receivables. Additionally, NeoSoft
assumed $53,000 in accrued paid time off liability and assumed all operating
leases. Furthermore, the parties released all claims including, without
limitation, any claims arising under the original asset purchase agreement and
under the former principal stockholder's original employment agreement. The
former principal stockholder of NeoSoft was employed by the Company at the time
the dispute was settled and was managing the Company's NeoSoft operations.

o Effective May 6, 2002, the Company sold certain assets related to the Kansas
City, Missouri and Denver, Colorado ("Central States") operations of Inteliant
for contingent payments not to exceed $1,000,000 in the aggregate over three
years following the closing date of the transaction, based on the gross profit
of the business acquired by the buyer. The buyer also assumed liabilities of
$40,000. Additionally, the Company retained accounts receivable of $500,000,
most of which has been collected as of December 29, 2002. The Company has fully
reserved for any outstanding balances it estimates will not be collected. The


37


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

buyer was employed by the Company as the manager of the Central States
operations at the time of the closing of the transaction.

In addition, during fiscal 2001, the Company formalized a plan to sell
its wholly owned subsidiary, ServCom Staff Management, Inc., now known as
Industrial Specialists, Inc. ("ServCom"), a professional employer 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
$480,000, of which $61,000 was outstanding as of December 29, 2002. The Company
anticipates that the remaining accounts receivable will not be collectible and
has fully reserved the outstanding balance. The terms of the transaction were
immaterial to the financial results of the Company.

The Company recorded a loss on the sale of the Inteliant staffing
business and ServCom for fiscal 2001 of $12.5 million, which consisted primarily
of the elimination of net assets of approximately $10.6 million, including: (i)
intangible assets, net of accumulated amortization, of approximately $10.0
million; and (ii) the write off of net property and equipment and other assets
of approximately $0.6 million. Additional expenses of approximately $1.9
million, primarily change of control bonuses, professional and legal fees and
other transaction-related charges, were incurred as part of the transaction.

Truex

During the second quarter of fiscal 2002, due to declining revenues and
the continued economic downturn in the San Francisco, California region, the
Company determined to sell its Truex division, located in northern California.
The Company reclassified assets of its Truex operations, including trademarks
and trade names and an allocated portion of goodwill, as assets held for sale
and reduced the carrying amount of assets reclassified as held for sale to the
estimated fair value less selling costs. The Company estimated that the Truex
assets had no fair value and consequently recorded a charge of $40,000 for the
write-off of property and equipment. Additionally, the Company wrote off the
remaining value of intangible assets and trademarks and trade names associated
with Truex of $421,000 and wrote off related goodwill of $286,000. In August
2002, the Company entered into an agreement pursuant to which the Company
transferred the Truex business and trade name to an unrelated entity for
contingent payments not to exceed $300,000 in the aggregate over one year
following the closing date of the transaction, based on the gross profit of the
business acquired. Any contingent consideration will be recorded in discontinued
operations when received.

Operating results of the discontinued operations for the 52-week
periods ended December 29, 2002, December 30, 2001 and December 31, 2000 have
been classified as discontinued operations in the accompanying consolidated
financial statements as follows (in thousands):


52 Weeks ended
-------------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
---------------- --------------- ----------------

IT Consulting
Revenue $ -- $ -- $ 37,169
Direct cost of services -- -- 26,667
---------------- --------------- ----------------
Gross profit -- -- 10,502
Operating and other expenses -- -- 14,187
---------------- --------------- ----------------
Loss from discontinued operations before income taxes -- -- (3,685)
Income tax benefit -- -- 1,242
---------------- --------------- ----------------
---------------- --------------- ----------------
Loss from discontinued operations -- -- (2,443)
---------------- --------------- ----------------

Loss on disposal of discontinued operations (497) (5,055) (39,179)
Income tax benefit -- -- 11,225
---------------- --------------- ----------------
Net loss on disposal of discontinued operations (497) (5,055) (27,954)
---------------- --------------- ----------------


38


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



52 Weeks ended
-------------------------------------------------
December 29, December 30, December 31,
2002 2001 2000
---------------- --------------- ----------------

IT Staffing and ServCom
Revenue -- 45,986 71,554
Direct cost of services -- 38,441 55,394
---------------- --------------- ----------------
Gross profit -- 7,545 16,160
Operating and other expenses -- 9,448 14,321
Loss on impairment of goodwill and intangibles -- 32,526 --
---------------- --------------- ----------------
Income (loss) from discontinued operations before income
taxes -- (34,429) 1,839
Income tax provision -- -- (803)
---------------- --------------- ----------------
Income (loss) from discontinued operations -- (34,429) 1,036
---------------- --------------- ----------------

Loss on disposal of discontinued operations (162) (12,560) --
Income tax benefit -- -- --
---------------- --------------- ----------------
Net loss on disposal of discontinued operations (162) (12,560) --
---------------- --------------- ----------------

Truex
Revenue 377 1,955 5,674
Direct cost of services 237 1,197 3,629
---------------- --------------- ----------------
Gross profit 140 758 2,045
Operating and other expenses 408 1,515 2,127
Loss on impairment of goodwill and intangibles 707 -- --
---------------- --------------- ----------------
Loss from discontinued operations before income taxes (976) (757) (82)
Income tax benefit -- -- 26
---------------- --------------- ----------------
Loss from discontinued operations (976) (757) (56)
---------------- --------------- ----------------

Total loss from discontinued operations, net of income taxes $ (1,635) $ (52,801) $ (29,417)
---------------- --------------- ----------------


As of December 29, 2002, the Company had accrued approximately $680,000 for
additional costs to exit its discontinued operations, related primarily to
accrued lease costs, net of any anticipated sub-lease income, on unused
facilities for which the Company still has a contractual obligation. However,
if the sublessee defaults on its lease obligations, the Company is liable for
any lease payments outstanding.

39


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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
fiscal 2002, the Company recorded a restructuring charge of $749,000, primarily
related to the consolidation or closure of 15 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 29, 2002, the remaining accrued restructuring charges totaled $155,000
and are recorded in the accompanying balance sheet as an accrued liability. The
activity impacting the accrual for restructuring charges is summarized in the
table below (in thousands):



Contractual
lease Reductions in
obligations workforce Other costs Total
---------------- ----------------- ----------------- ----------------

Balance at December 31, 2000 $ -- $ -- $ -- $ --
Charges to operations 589 586 144 1,319
Charges utilized (28) (586) (144) (758)
---------------- ----------------- ----------------- ----------------
Balance at December 30, 2001 561 -- -- 561
Charges to operations 275 421 53 749
Charges utilized (681) (421) (53) (1,155)
---------------- ----------------- ----------------- ----------------
Balance at December 29, 2002 $ 155 -- -- $ 155
---------------- ----------------- ----------------- ----------------


5. Credit Facilities and Notes Payable

On April 15, 2002, the Company entered into a Fifth Amendment to the
Amended and Restated Credit Agreement and Waiver (the "Fifth Credit Amendment")
with its 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 was available for borrowing in cash with a
maturity date of September 1, 2003, and $10.0 million of which was available
under letters of credit to be issued solely as required by the Company's
workers' compensation insurance provider, with a maturity date of January 1,
2004. In addition, certain financial covenants of the Company were modified. The
Company paid its lenders $78,000 upon execution of the Fifth Credit Amendment.
In addition, the Company paid an aggregate of $2.6 million of the outstanding
borrowings under the revolving credit facility. Such payments permanently
reduced the line of credit available to the Company for borrowing in cash to
less than the $6.0 million stated above.

As of December 29, 2002, the Company's borrowing limits under the line
of credit were $3.4 million and the Company had borrowing availability of $2.4
million. As of December 29, 2002, the Company was in compliance with all
covenants under the Fifth Credit Amendment.

Also on April 15, 2002, the Company entered into an Amendment No. 3 to
Note Purchase Agreement ("Amendment No. 3") with its noteholders. The
noteholders consented to the Company entering into the Fifth Credit Amendment
described above. During the 52-week period ended December 29, 2002, the Company
paid $5.8 million in scheduled and supplementary principal payments on its
senior notes. As consideration for their approval of Amendment No. 3, the
Company paid an amendment fee to its noteholders of $145,475, as well as fees
and expenses of the noteholders' special counsel. Additionally, as required
under both the credit facility and the note purchase agreements, the Company has
retained a financial advisor to assist in refinancing, restructuring or
recapitalizing the Company.

As discussed in Note 13, the Company has amended both its line of
credit agreement and senior note agreements. Under the amended agreements,
certain financial covenants have been modified and the expiration on the line of
credit has been extended to April 30, 2004. Additionally, the scheduled payments
on the senior notes have been modified.

40


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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



Outstanding Outstanding
Note Amount Balance at Payments on Balance at
Rate Default Rate 12/30/01 Notes 12/29/02
---------- -------------------- ------------- ---------------- -------------- ---------------

Series A Greater of 10.72%
Due 4/30/04 8.72% or prime plus 2% $ 5,000 $ 4,156 $ (822) $ 3,334
Series B Greater of 10.95%
Due 9/1/08 8.95% or prime plus 2% 30,000 24,939 (4,932) 20,007
------------- ---------------- -------------- ---------------
$ 35,000 $ 29,095 $ (5,754) $ 23,341
------------- ---------------- -------------- ---------------


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

Fiscal Year Ending
2003 $ 1,374
2004 13,463
2005 4,286
2006 4,218
-------------
$ 23,341
-------------


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 of
rent payments 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).

The Company has subleased some of the facilities that are not used by
the Company for which the lease is still in effect and in some instances has
reduced the amount of the liability carried on the Company's books by the
anticipated sublease payments relating to such properties. In addition to the
$155,000 of accrued obligations discussed in Note 4, the Company has $680,000,
net of future lease obligations, accrued at December 29, 2002 for offices of
discontinued operations, which are included in accrued liabilities in the
accompanying consolidated balance sheets. However, if any of the sublessees
defaults on its lease obligations, the Company is liable for any outstanding
lease payments. The following table presents the Company's future lease
obligations and the expected sublease payments by year for its subleased
facilities (in thousands):

Fiscal Year Lease Expected sublease
Ending obligations payments
---------------- ----------------- --------------------
2003 $ 2,202 $ 608
2004 1,195 209
2005 598 128
2006 194 60
2007 130 10
Beyond 12 --
----------------- --------------------
$ 4,331 $ 1,015
----------------- --------------------

Facility rental expense for continuing operations for fiscal 2002,
fiscal 2001 and fiscal 2000 totaled $2.3 million, $3.4 million and $2.8 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
and crime 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 in the state of California (the
"Complaint"). The Complaint requested unspecified damages, consequential
damages, and attorneys' fees and costs. Royalty sought damages of $1.9 million.

41


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Royalty subsequently raised its demand to $3.0 million. Inteliant denied the
allegations set forth in the Complaint and filed various counterclaims against
Royalty.

During fiscal 2002, the parties settled the litigation related to the
Complaint, which included the release of Inteliant and the Company and their
respective affiliates from all claims or potential claims, whether known or
unknown. Neither party admitted any fault or wrongdoing. Under the terms of the
settlement agreement, Inteliant paid Royalty $500,000 and Inteliant's insurance
carrier paid Royalty an additional $600,000, for a total settlement of $1.1
million. Inteliant's insurance carrier also paid Inteliant's defense costs,
including attorneys' fees. Also in connection with the settlement, Inteliant
waived all coverage claims against its insurance carrier.

There is no 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 (benefit) provision for income taxes from
continuing operations for fiscal 2002, fiscal 2001 and fiscal 2000 are as
follows (in thousands):



2002 2001 2000
----------------- ---------------- -----------------

Current (benefit) provision:
Federal $ (6,581) $ (234) $ 2,655
State (1,346) 10 424
----------------- ---------------- -----------------
(7,927) (224) 3,079
----------------- ---------------- -----------------
Deferred (benefit) provision:
Federal -- 4,815 (2,557)
State -- 609 (408)
----------------- ---------------- -----------------
-- 5,424 (2,965)
----------------- ---------------- -----------------

Total (benefit) provision for income taxes $ (7,927) $ 5,200 $ 114
----------------- ---------------- -----------------


The following is a reconciliation between the statutory federal income
tax rate on income (loss) from continuing operations and the Company's effective
income tax on income (loss) from continuing operations for fiscal 2002, fiscal
2001 and fiscal 2000 (in thousands):



2002 2001 2000
----------------- ---------------- -----------------

Federal income tax at statutory rate $ (5,326) $ 223 $ 112
State income taxes net of federal effect (874) 6 10
Government sponsored hiring incentives -- (475) (728)
Non-deductible meals and entertainment 41 29 60
Non-deductible intangible amortization 362 32 43
Change in valuation allowance for deferred tax
assets (2,385) 5,424 --
Other 34 (39) 617
----------------- ---------------- -----------------
$ (7,927) $ 5,200 $ 114
----------------- ---------------- -----------------



42


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The components of the deferred income tax assets and liabilities at
December 29, 2002 and December 31, 2000 are as follows (in thousands):



2002 2001
---------------- -----------------

Deferred income tax assets:
Intangible amortization $ 8,497 $ 9,395
Depreciation 593 682
Workers' compensation reserves 2,171 2,133
Allowance for doubtful accounts 600 2,423
Government sponsored tax credits carryforward 2,048 2,048
Accrued liabilities 738 1,576
Net operating loss carryforwards 10,689 4,299
---------------- -----------------
25,336 22,556

Deferred income tax liabilities:
Loss on disposal of asset (395) --
Other (715) (715)
---------------- -----------------
(1,110) (715)

Less: Income tax valuation allowance (24,226) (21,841)
---------------- -----------------

Net deferred income tax asset $ -- $ --
---------------- -----------------


As of December 29, 2002, the Company has federal net operating loss
carryforwards of $26.3 million, which expire in fiscal 2022, and federal
employment tax credits of $1.7 million that do not expire. Additionally, the
Company has $300,000 of alternative minimum tax credit carryforwards.

Management has concluded that it is more likely than not that the
Company will not have sufficient taxable income within the carryback and
carryforward period permitted by current law to allow for the realization of
certain carryforwards and other tax attributes generating the net deferred tax
asset. Therefore, a valuation allowance of $24.2 million and $21.8 million as of
December 29, 2002 and December 30, 2001, respectively, has been provided against
the net deferred tax asset.

8. Stock-Based Compensation

Stock Incentive Plan - The Company has a stock incentive plan (the "Plan") that
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 29, 2002
the Plan had approximately 329,000 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 2002,
fiscal 2001 and fiscal 2000 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 non-employee directors expire no later than five years
from the date of grant. Subsequent to December 29, 2002, the Company has issued
an additional 361,500 incentive and non-qualified options.

43


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 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
Granted 428 54 1.00
Forfeited (170) (20) 5.84
---------------- -----------------
Outstanding at December 29, 2002 1,362 109 $ 3.74
---------------- -----------------

Exercisable at December 29, 2002 648 92 $ 5.63
---------------- -----------------


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 29, 2002 Contractual Exercise Price December 29, 2002 Exercise Price
Yearly Life
- --------------------- ------------------- ----------------- -------------------- ------------------- --------------------

$ 0.70 - $ 8.38 $ 1,343 7.8 $ 2.38 622 $ 3.30

8.39 - 15.65 23 4.3 10.44 22 10.34

15.66 - 22.90 105 5.0 19.72 96 19.66

------------------- ----------------- -------------------- ------------------- --------------------
1,471 7.5 $ 3.74 740 $ 5.63
------------------- ----------------- -------------------- ------------------- --------------------


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 made no contributions to the plan for fiscal years 2002 and
2001 and contributed $348,000 for fiscal 2000. However, the Company used
forfeitures of non-vested terminated employees to make matching contributions in
2002 and 2001.

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 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 29, 2002 and December 30, 2001,
the deferred compensation liabilities were $629,000 and $743,000, 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 on 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.
Subsequent to the balance sheet date, the Company eliminated its Employee Stock
Purchase Plan.

44


SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Related Party Transactions

The Company leased its corporate office building from the adult
children of certain significant shareholders of the Company. During the fourth
quarter of fiscal 2002, the lease was amended to expire in March 2004, with
options to renew for three successive three-year periods. As consideration for
the amendment, the Company agreed to pay all real and personal property taxes
levied on the facilities. Rental expense during fiscal 2002, fiscal 2001 and
fiscal 2000 was $117,000, $86,000 and $83,000, respectively. Future minimum
lease payments related to this lease will average $93,000 each fiscal year. In
January 2003, the premises were sold to an unrelated third party. The terms of
the Company's amended lease were not affected by the sale transaction.

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 branch managers.
Underground Staffing provides staffing services to companies that have staffing
needs in high risk areas such as underground mining. In fiscal 2002 and 2001,
the Company realized $349,000 and $1.1 million, respectively, in revenue from
the agreement. Amounts receivable due from Underground Staffing at December 29,
2002 were immaterial.

The Company provides temporary help services to Wagner Farms, an entity
owned by JoAnn W. Wagner, the Company's Chief Executive Officer and director.
The Company provides such services on the same terms and conditions and at
similar pricing as it would to unrelated third parties. During fiscal 2002, the
Company received revenue of $29,018 from Wagner Farms.

During fiscal 2002, the Company purchased internet services and
computer programming and consulting from Aros.net. Kent Lewin, an employee of
the Company and the Company's Chief Information Officer, is president of
Aros.net and owns 34% of the entity. During fiscal 2002, the Company paid
Aros.net approximately $38,000 for internet services and $6,000 for consulting
and programming services. The Company believes that the terms of such services
are as least as favorable as the terms that could have been obtained from an
unaffiliated third party in a transaction negotiated at arm's length.

11. Selected Quarterly Financial Data (Unaudited)

A summary of quarterly financial information for fiscal 2002 and fiscal
2001 is as follows (in thousands, except per share data):



First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- -------------- ---------------

Fiscal 2002:
Revenue $ 41,939 $ 46,288 $ 48,849 $ 43,242
Gross profit 8,157 9,238 9,973 9,003
Income (loss) from continuing operations 6,492 (212) 708 (14,279)
(Loss) income from discontinued operations (416) (1,221) (81) 83
Cumulative effect of change in accounting
principle (16,083) -- -- --
Net (loss) income (10,008) (1,433) 627 (14,195)

Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.51 $ (0.02) $ 0.06 $ (1.13)
(Loss) income from discontinued operations
(0.03) (0.09) (0.01) 0.01
Cumulative effects of change in accounting
principle (1.27) -- -- --
--------------- --------------- -------------- ---------------
Net loss $ (0.79) $ (0.11) $ (0.05) $ (1.12)
--------------- --------------- -------------- ---------------


Fiscal 2001:
Revenue $ 52,001 $ 53,329 $ 57,785 $ 51,288
Gross profit 11,174 11,718 12,454 10,978
(Loss) income from continuing operations (169) 268 762 (5,404)
Loss from discontinued operations (665) (2,346) (33,140) (16,650)
Net loss (834) (2,078) (32,378) (22,054)

Basic and diluted (loss) income per common share:
(Loss) income from continuing operations $ (0.01) $ 0.02 $ 0.06 $ (0.43)
Loss from discontinued operations (0.06) (0.18) (2.61) (1.31)
--------------- --------------- -------------- ---------------
Net loss $ (0.07) $ (0.16) $ (2.55) $ (1.74)
--------------- --------------- -------------- ---------------


45

SOS STAFFING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Recent Accounting Pronouncements

In June 2002 the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, rather than at the date of an
entity's commitment to an exit plan. Additionally, this statement also
establishes that fair value is the objective for initial measurement of the
liability. The Company currently is assessing the impact the adoption of the
accounting provisions will have on the Company's financial position and results
of operations.

Additionally, in December 2002 the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS No. 148 are effective
for financial statements for fiscal years ending after December 15, 2002 but
allow for earlier application. The Company does not plan to adopt the fair
valued based method of accounting and therefore the adoption of this standard
will not have an impact on the Company's financial position or results of
operations. See Note 2 for the disclosures regarding stock-based compensation.

In November 2002 the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires recognition of an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has adopted
the required disclosure provisions and currently is assessing the impact the
adoption of the remaining provisions will have on the Company's financial
position and results of operations.

In January 2003 the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
which addresses the consolidation of business enterprises of variable interest
entities as defined therein and applies immediately to variable interest
entities created or obtained after January 31, 2003. The Company does not
anticipate that the impact the adoption of these provisions will have a material
impact on the Company's financial position and results of operations.

13. Subsequent Events

On March 31, 2003, the Company entered into the Sixth Credit Amendment
with the lenders to extend the Company's line of credit. Pursuant to the Sixth
Credit Amendment, the maturity date of the Company's line of credit was extended
to April 30, 2004. In addition, certain financial covenants under the Company's
credit facility have been modified. As provided in the Sixth Credit Amendment,
the Company will pay to the lenders four equal payments of $156,500 in
successive months beginning in September 2003. Such payments will permanently
reduce the line of credit available to the Company in cash. However, any such
reductions in the aggregate commitment shall not apply if they would reduce the
cash available for borrowing below $2.5 million. As of March 31, 2003, the
Company had outstanding borrowings under the revolving credit facility of
approximately $2.5 million.

Also on March 31, 2003, the Company entered into Amendment No. 4 with
the noteholders, whereby the noteholders modified certain financial covenants
under the Company's existing note purchase agreements. Amendment No. 4 provides
that the Company will pay to the noteholders four equal payments of $343,500 in
successive months beginning in September 2003, to be applied pro rata among the
holders of the Series A and Series B notes. Additionally, the maturity date of
the Series A notes was extended to April 30, 2004. As consideration for
Amendment No. 4, the Company will pay all fees and expenses of the Noteholders'
special counsel.

Amendment No. 4 and the Sixth Credit Agreement provide that the Company
shall 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
Intercreditor Agreement. However, if the Company receives any tax refund arising
from the Job Creation and Work Assistance Act of 2002 (the "2002 Job Act")
relating to net operating loss carrybacks, the Company will be able to retain


46


$3.8 million of such refund for working capital purposes and collateral
requirements arising under its credit facility and letters of credit. 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. 4 and the Sixth Credit Amendment, the Company
shall cause an offering memorandum for the recapitalization of the Company's
debt obligations to be prepared and distributed no later than April 30, 2003.
Additionally, the Company is to use its best efforts to obtain a firm commitment
or signed letter of intent regarding such recapitalization prior to July 31,
2003. In the event the Company does not have a firm commitment or signed letter
of intent by such date, the Company will be required to pay $250,000, to be
distributed pursuant to the Amended and Restated Intercreditor Agreement dated
March 31, 2003 among State Street Bank and Trust, as collateral agent, Wells
Fargo Bank, National Association, as administrative agent and as a lender, and
the noteholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
-----------------------------------------------------------------------
In June 2002, the Company dismissed its former independent auditors,
Arthur Andersen LLP, and engaged KPMG LLP. Additional information regarding this
change in auditors is contained in the Company's report on Form 8-K dated June
7, 2002 and in the Company's definitive proxy statement for the annual meeting
of shareholders to be held May 15, 2003, under the caption "Selection of
Auditor."


47


PART III

Certain 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 15, 2003 (the "Proxy Statement"), not later than 120
days after December 29, 2002, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
specifically identified below that 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 AND
RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------
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.


ITEM 14. CONTROLS AND PROCEDURES
-----------------------
The Company maintains a system of disclosure controls and procedures
that is designed to ensure that information required to be disclosed by the
Company in this Form 10-K and in other reports required to be filed under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
for such filings. Management of the Company, under the direction of the
Company's Chief Executive Officer and Chief Financial Officer, have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
within 90 days prior to the date of this Report. Based on that review and
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are effective in providing
them with material information relating to the Company as required to be
disclosed in the Company's periodic filings under the Securities and Exchange
Act of 1934, as amended.

There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Audit Committee Report" in the Proxy Statement.

48



PART IV

ITEM 16. 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 Independent Auditors' Report 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.


(b) Reports on Form 8-K:

The Company's current report on Form 8-K dated June 7, 2002. The
Company's current report on Form 8-K dated October 22, 2002.

(c) Exhibits:

49





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

10.3 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

10.4 Amended Lease Agreement between the Company and Reed (12)
F. Reinhold, Rand F. Reinhold, Rena R. Qualls and
Robb F. Reinhold, dated

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


50







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


51





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, as 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
Association, as administrative agent, and Bank One, N.A., as
documentation agent

10.22 Amendment No. 3 to Note Purchase Agreement dated as of April (11)
15, 2002 between SOS Staffing Services, Inc. and certain
entities listed as Purchasers on the signature pages thereto

10.23 Amended and Restated Intercreditor Agreement dated as of April (11)
15, 2002 among State Street Bank and Trust Company, as
Collateral Agent, Wells Fargo Bank, National Association, as
administration agent under the Company's bank credit
agreement, and the noteholders, as acknowledged by the Company
and its subsidiaries, as guarantors

10.24 First Amendment to Amended and Restated Intercreditor (12)
Agreement dated as of March 31, 2003 among State Street Bank
and Trust Company, as Collateral Agent, Wells Fargo Bank,
National Association, as administration agent under the
Company's bank credit agreement, and the noteholders, as
acknowledged by the Company and its subsidiaries, as guarantors

10.25 Sixth Amendment to Amended and Restated Credit Agreement dated (12)
as of March 31, 2003, by and among SOS Staffing Services,
Inc., certain lenders, Wells Fargo Bank, National Association,
as administrative agent, and Bank One, N.A., as documentation
agent

10.26 Amendment No. 4 to Note Purchase Agreement dated as of March (12)
31, 2003 between SOS Staffing Services, Inc. and certain
entities listed as Purchasers on the signature pages thereto

21 Subsidiaries of the Company (12)

23.2 Consent of Independent Auditors (12)



52


(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 Annual Report on 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 the Quarterly Report on
Form 10-Q for the quarter ended September 26, 1996 filed by the Company
on November 14, 1996.

(5) Incorporated by reference to the exhibits to the 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 the Annual Report on Form
10-K/A 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) Incorporated by reference to the exhibits to the Annual Report on Form
10-K for the year ended December 30, 2001 filed by the Company on April
15, 2002.

(12) Filed herewith and attached to this Report following page 62 hereof.

(d) Financial Statement Schedules:

Schedule II


53


INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE





The Board of Directors and Shareholders of SOS Staffing Services, Inc.:

Under date of February 19, 2003, except as to Notes 1 and 13, which are as of
April 11, 2003, we reported on the consolidated balance sheets of SOS Staffing
Services, Inc. and subsidiaries as of December 29, 2002 and December 30, 2001
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended December 29,
2002, which are included in the SOS Staffing Services, Inc.'s Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in this Form 10-K. The consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statement schedule based
on our audits.

In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," in the year ended December 29, 2002.


/s/ KPMG LLP
- ------------------------
KPMG LLP
Salt Lake City, Utah
February 19, 2003


54





SOS STAFFING SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Balance at Charged to bad
beginning of debt expense Balance at
period Deductions end of period
---------------------------------------------------------------

December 29, 2002------------- $ 2,267 $ 960 $ (2,196) $ 1,031
December 30, 2001------------- 2,916 1,462 (2,111) 2,267
December 31, 2000------------- 1,606 2,618 (1,308) 2,916


ALLOWANCE FOR NOTES RECEIVABLE



Charged to
Balance at other
beginning of non-operating Balance at
period expense Deductions end of period
---------------------------------------------------------------

December 29, 2002------------- $ 500 $ -- $ -- $ 500
December 30, 2001------------- 500 3,415 (3,415) $ 500
December 31, 2000------------- -- 500 -- 500


RESERVES FOR COSTS OF DISCONTINUED OPERATIONS



Charged to
Balance at loss from
beginning of discontinued Balance at
period operations Deductions end of period
---------------------------------------------------------------

December 29, 2002------------- $ 1,705 $ 1,635 $ (2,660) $ 680
December 30, 2001------------- 1,991 1,794 (2,080) 1,705
December 31, 2000------------- -- 1,991 -- 1,991


RESERVES FOR RESTRUCTURING COSTS



Balance at
beginning of Charged to Balance at
period operations Deductions end of period
---------------------------------------------------------------

December 29, 2002------------- $ 561 $ 749 $ (1,155) $ 155
December 30, 2001------------- -- 1,319 (758) 561



55


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 14, 2003 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 14, 2003
------------------
JoAnn W. Wagner Chief Executive Officer
(principal executive officer)

/s/ Kevin Hardy Senior Vice President and Chief April 14, 2003
- --------------- Financial Officer
Kevin Hardy (principal accounting officer)


/s/ Stanley R. deWaal Director April 14, 2003
- ---------------------
Stanley R. deWaal

/s/ Jack A. Henry Director April 14, 2003
----------------
Jack A. Henry

/s/ Randolph K. Rolf Director April 14, 2003
- --------------------
Randolph K. Rolf

/s/ Thomas K. Sansom Director April 14, 2003
- --------------------
Thomas K. Sansom

/s/ Brad L. Stewart Director April 14, 2003
- -------------------
Brad L. Stewart


56


Certification


I, JoAnn W. Wagner, certify that:

1. I have reviewed this annual report on Form 10-K of SOS Staffing Services,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Dated: April 14, 2003 /s/ JoAnn W. Wagner
---------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer


57



Certification


I, Kevin Hardy, certify that:

1. I have reviewed this annual report on Form 10-K of SOS Staffing Services,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



Dated: April 14, 2003 /s/Kevin Hardy
----------------------------
Kevin Hardy
Senior Vice President and
Chief Financial Officer

58



Certification
(Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, JoAnn W. Wagner, chief executive officer of SOS Staffing Services, Inc.
(the "Company"), do hereby certify as follows:

1. The annual report on Form 10-K of the Company for the period ended December
29, 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The information contained in such Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

IN WITNESS WHEREOF, I have executed this Certification this 14th day of April,
2003.

/s/ JoAnn W. Wagner
---------------------------
JoAnn W. Wagner
Chairman, President and
Chief Executive Officer


59


Certification
(Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

I, Kevin Hardy, chief financial officer of SOS Staffing Services, Inc. (the
"Company"), do hereby certify as follows:

1. The annual report on Form 10-K of the Company for the period ended December
29, 2002 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

2. The information contained in such Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

IN WITNESS WHEREOF, I have executed this Certification this 14th day of April,
2003.


/s/ Kevin Hardy
----------------------------------------------
Kevin Hardy
Senior Vice President and Chief Financial
Officer


60





SUBSIDIARY COMPANIES OF SOS STAFFING SERVICES, INC.

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

Devon & Devon Personnel Services, Inc.--------------------------------------- California
Inteliant Corporation-------------------------------------------------------- Delaware
Industrial Specialists, Inc., formerly known as ServCom Staff Management, Inc.
Utah
SOS Collection Services, Inc.------------------------------------------------ Arizona







INDEPENDENT AUDITORS' CONSENT


We consent to the incorporation by reference in registration statements (Nos.
33-963262 and 333-1422) on form S-8 of our reports dated February 19, 2003,
except as to Notes 1 and 13, which are as of April 11, 2003 with respect to the
consolidated balance sheets of SOS Staffing Services, Inc. as of December 29,
2002 and December 30, 2001, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the years in the
three-year period ended December 29, 2002 and the related consolidated financial
statement schedule, which reports appear in the annual report on Form 10-K of
SOS Staffing Services, Inc. for the year ended December 29, 2002.

As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," in the year ended December 29, 2002.


/s/ KPMG LLP
- ------------------------
KPMG LLP

Salt Lake City, Utah
April 11, 2003

61