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.


<PAGE>

                                     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.

                                       2
<PAGE>

         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
<PAGE>


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
<PAGE>

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
<PAGE>

         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

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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
<PAGE>

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
<PAGE>

         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
<PAGE>


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
<PAGE>

                                     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
<PAGE>


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.
<TABLE>
<CAPTION>
                                                                   Fiscal Year (52 Weeks) Ended
                                           --------------- -------------- --------------- --------------- ---------------
                                               2002(1)         2001(1,2)     2000(1,2,3)     1999(1,2,3)     1998(1,2,3)
                                           --------------- -------------- --------------- --------------- ---------------
<S>                                          <C>             <C>           <C>              <C>             <C>
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
</TABLE>

(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
<PAGE>


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
<PAGE>


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
<PAGE>

         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
<PAGE>

         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
<PAGE>

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:
<TABLE>
<CAPTION>
                                                                          Fiscal Year 52 Weeks Ended
                                                                 ----------------------------------------------
                                                                      2002             2001           2000
                                                                 ---------------- --------------- -------------
<S>                                                                     <C>               <C>          <C>
   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%
                                                                 ---------------- --------------- -------------
</TABLE>


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
<PAGE>


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
<PAGE>


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
<PAGE>

         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
<PAGE>


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):
<TABLE>
<CAPTION>
                                                                           Payments due by period
                                                 ---------------------------------------------------------------------------
  Contractual Obligations
                                        Total         Less than 1 year       1-3 years          4-5 years        After 5 years
<S>                            <C>                  <C>               <C>                <C>                  <C>
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                 --                --                   --
                             ------------------- ------------------ ------------------ ------------------- -----------------
</TABLE>

                                       21
<PAGE>

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
<PAGE>

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:
<TABLE>
<CAPTION>
                                                                                                              Page
<S>                                                                                                            <C>
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
</TABLE>

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

                                       23
<PAGE>


                          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
<PAGE>
<TABLE>
<CAPTION>
                           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
                                                                   ------------------       -----------------
<S>                                                                   <C>                      <C>
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
                                                                   ------------------       -----------------
</TABLE>

(Continued on next page)

          See accompanying notes to consolidated financial statements.


                                       25
<PAGE>

<TABLE>
<CAPTION>

                           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
                                                                     -----------------        -----------------
<S>                                                                   <C>                       <C>
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
                                                                     -----------------        -----------------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       26

<PAGE>

<TABLE>
<CAPTION>

                           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
                                                        ------------------    ------------------    -----------------
<S>                                                         <C>                    <C>                 <C>
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
                                                        ------------------    ------------------    -----------------
</TABLE>

(Continued on next page)

          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
<TABLE>
<CAPTION>
                           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
                                                        ------------------    ------------------    -----------------
<S>                                                          <C>                   <C>                  <C>
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
</TABLE>
          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

<TABLE>
<CAPTION>
                           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
                                         -------------------------------------------------------------------
<S>                                            <C>     <C>         <C>           <C>            <C>
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
                                         -------------------------------------------------------------------
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       29
<PAGE>
<TABLE>
<CAPTION>

                           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
                                                               -----------------   ------------------   -----------------
<S>                                                               <C>                 <C>                   <C>
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)
                                                               -----------------   ------------------   -----------------
</TABLE>


 (Continued on next page)

          See accompanying notes to consolidated financial statements.


                                       30
<PAGE>

<TABLE>
<CAPTION>

                           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
                                                                -------------------   -------------------   -----------------
<S>                                                                <C>                   <C>                   <C>
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
</TABLE>
          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
<PAGE>


                           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
<PAGE>

                           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
<PAGE>

                           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:
<TABLE>
<CAPTION>
                                                                             2002                 2001
                                                                    -------------------- --------------------

<S>                                                                    <C>                  <C>
    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
                                                                    -------------------- --------------------
</TABLE>

         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:
<TABLE>
<CAPTION>
                                                                         Fiscal Years Ended
                                                         ----------------------------------------------------
                                                           December 29,     December 30,     December 31,
                                                               2002             2001             2000
                                                         ---------------------------------------------------
<S>                                                          <C>              <C>             <C>
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
                                                         ---------------------------------------------------
</TABLE>

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
<PAGE>

                           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):
<TABLE>
<CAPTION>
                                                                2002             2001              2000
                                                        ----------------- ---------------- -----------------
<S>                                                         <C>             <C>              <C>
     (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)
</TABLE>

                                       35
<PAGE>

                           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:
<TABLE>
<CAPTION>
                                                              2002             2001              2000
                                                        ----------------- ---------------- -----------------
<S>                                                           <C>              <C>               <C>
     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
</TABLE>

         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
<PAGE>

                           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
<PAGE>

                           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):
<TABLE>
<CAPTION>
                                                                                  52 Weeks ended
                                                                 -------------------------------------------------
                                                                  December 29,     December 30,    December 31,
                                                                      2002             2001            2000
                                                                 ---------------- --------------- ----------------
<S>                                                                <C>              <C>             <C>
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)
                                                                 ---------------- --------------- ----------------
</TABLE>

                                       38
<PAGE>

                           SOS STAFFING SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                  52 Weeks ended
                                                                 -------------------------------------------------
                                                                  December 29,     December 30,    December 31,
                                                                      2002             2001            2000
                                                                 ---------------- --------------- ----------------
<S>                                                               <C>                   <C>              <C>
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)
                                                                 ---------------- --------------- ----------------
</TABLE>

  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
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                          Contractual
                                             lease        Reductions in
                                          obligations       workforce        Other costs          Total
                                      ---------------- ----------------- ----------------- ----------------
<S>                                      <C>              <C>               <C>               <C>
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
                                      ---------------- ----------------- ----------------- ----------------
</TABLE>

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
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                                                  Outstanding                    Outstanding
                                                  Note Amount     Balance at      Payments on     Balance at
                    Rate        Default Rate                       12/30/01          Notes         12/29/02
                  ---------- -------------------- ------------- ---------------- -------------- ---------------
<S>                <C>       <C>                    <C>          <C>              <C>            <C>
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
                                                  ------------- ---------------- -------------- ---------------
</TABLE>

         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
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                                            2002             2001              2000
                                                      ----------------- ---------------- -----------------
<S>                                                     <C>               <C>              <C>
     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
                                                      ----------------- ---------------- -----------------
</TABLE>

         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):
<TABLE>
<CAPTION>

                                                            2002             2001              2000
                                                      ----------------- ---------------- -----------------
<S>                                                     <C>               <C>              <C>
     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
                                                      ----------------- ---------------- -----------------
</TABLE>


                                       42
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                                                 2002              2001
                                                            ---------------- -----------------
<S>                                                             <C>              <C>
     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                              $      --        $      --
                                                            ---------------- -----------------
</TABLE>

         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
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                                                                         Weighted
                                                                                          Average
                                                                                      Exercise Price
                                                      Employees        Directors         Per Share
                                                   ---------------- -----------------
<S>                                                       <C>                <C>          <C>
     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
                                                   ---------------- -----------------
</TABLE>

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

                                             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
--------------------- ------------------- ----------------- -------------------- ------------------- --------------------
<S>                    <C>                           <C>         <C>                         <C>           <C>
 $  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
                      ------------------- ----------------- -------------------- ------------------- --------------------
</TABLE>

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
<PAGE>

                           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):
<TABLE>
<CAPTION>

                                                      First Quarter   Second Quarter  Third Quarter  Fourth Quarter
                                                      --------------- --------------- -------------- ---------------
<S>                                                     <C>             <C>             <C>           <C>
    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)
                                                      --------------- --------------- -------------- ---------------
</TABLE>

                                       45
<PAGE>
                           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
<PAGE>

$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
<PAGE>

                                    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
<PAGE>


                                     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
<PAGE>

<TABLE>
<CAPTION>

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

<S>              <C>                                                            <C>         <C>
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
</TABLE>

                                       50
<PAGE>



<TABLE>
<CAPTION>

   Exhibit                                                                        Incorporated by     Filed Herewith
     No.                                    Exhibit                                  Reference
--------------- ---------------------------------------------------------------- ------------------- -----------------
<S>              <C>                                                                    <C>         <C>
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
</TABLE>

                                       51
<PAGE>

<TABLE>
<CAPTION>

   Exhibit                                                                        Incorporated by     Filed Herewith
     No.                                    Exhibit                                  Reference
--------------- ---------------------------------------------------------------- ------------------- -----------------
<S>              <C>                                                                    <C>         <C>
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)
</TABLE>


                                       52
<PAGE>

(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
<PAGE>

                          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
<PAGE>

<TABLE>
<CAPTION>

                                                          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
                                 ---------------------------------------------------------------
<S>                                  <C>             <C>             <C>             <C>
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
</TABLE>

ALLOWANCE FOR NOTES RECEIVABLE
<TABLE>
<CAPTION>

                                                   Charged to
                                   Balance at         other
                                  beginning of    non-operating                    Balance at
                                     period          expense       Deductions    end of period
                                 ---------------------------------------------------------------
<S>                                  <C>             <C>             <C>             <C>
December 29, 2002-------------       $     500       $      --       $      --       $     500
December 30, 2001-------------             500           3,415          (3,415)      $     500
December 31, 2000-------------              --             500              --             500
</TABLE>

RESERVES FOR COSTS OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>

                                                   Charged to
                                   Balance at       loss from
                                  beginning of    discontinued                     Balance at
                                     period        operations      Deductions    end of period
                                 ---------------------------------------------------------------
<S>                                  <C>             <C>             <C>             <C>
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
</TABLE>

RESERVES FOR RESTRUCTURING COSTS
<TABLE>
<CAPTION>

                                   Balance at
                                  beginning of     Charged to                      Balance at
                                     period        operations      Deductions    end of period
                                 ---------------------------------------------------------------
<S>                                  <C>             <C>             <C>             <C>
December 29, 2002-------------       $     561     $      749      $    (1,155)    $       155
December 30, 2001-------------              --          1,319             (758)            561
</TABLE>


                                       55
<PAGE>

                                   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.
<TABLE>
<CAPTION>

Name                                  Title                                         Date
----                                  -----                                         ----

<S>                                   <C>                                           <C>
/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
</TABLE>

                                       56
<PAGE>

                                  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
<PAGE>


                                  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
<PAGE>


                                  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
<PAGE>

                                  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
<PAGE>

<TABLE>
<CAPTION>

               SUBSIDIARY COMPANIES OF SOS STAFFING SERVICES, INC.

                               Name of Subsidiary                                  State of Incorporation
                               ------------------                                  ----------------------
<S>                                                                                <C>
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
</TABLE>



<PAGE>


                          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