##### 



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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Form 10-Q



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|  |  | (Mark One)                                             
|- |  | -------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|  |  | SECURITIES EXCHANGE ACT OF 1934                        

For the quarterly period ending June 29, 2003

OR

|  |  |                                                     
|- |  | ----------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|  |  | THE SECURITIES EXCHANGE ACT OF 1934                 

For the transition period
fromto

Commission file number 001-13956

VENTURI PARTNERS, INC.

(Exact name of Registrant as specified in its charter)

|                                                                        |  |                                                               |  |                                                   
|----------------------------------------------------------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 7363
(Primary Standard
Industrial Classification
Code number) |  | 56-1930691
(I.R.S. employer
identification number)

Five LakePointe Plaza
2709 Water Ridge Parkway, 2nd Floor
Charlotte, North Carolina 28217
(Address, including zip code, of
Registrants principal executive offices)



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(704) 442-5100




(Registrants telephone
number, including area code)


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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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [  ] No [ X ]

As of
August 4, 2003, 47,821,637 shares (before reverse stock split) of the registrants Common Stock,
$.01 par value, were outstanding.





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VENTURI PARTNERS, INC.
TABLE OF CONTENTS

|              |                                                                                       |  |    |                                                                     |  |     
|------------- | ------------------------------------------------------------------------------------- |  | -- | ------------------------------------------------------------------- |  | ----
|              |                                                                                       |  |    |                                                                     |  | Page
|PART I  -     | FINANCIAL INFORMATION                                                                 |  |   
|Item 1.       | Financial Statements (unaudited)                                                      |  |   
|              |                                                                                       |  |    | Unaudited Consolidated Statements of Operations                     |  | 3   
|              |                                                                                       |  |    | Unaudited Consolidated Balance Sheets                               |  | 4   
|              |                                                                                       |  |    | Unaudited Consolidated Statements of Shareholders Equity (Deficit) |  | 5   
|              |                                                                                       |  |    | Unaudited Consolidated Statements of Cash Flows                     |  | 6   
|              |                                                                                       |  |    | Notes to Unaudited Consolidated Financial Statements                |  | 7   
|Item 2.       | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  | 17
|Item 3.       | Quantitative and Qualitative Disclosures
About Market Risk                            |  | 28
|Item 4.       | Controls and Procedures                                                               |  | 28
|PART II
 -    | OTHER INFORMATION                                                                     |  |   
|Item 2.       | Changes in Securities and Use of Proceeds                                             |  | 29
|Item 6.       | Exhibits and Reports on Form 8-K                                                      |  | 29
|Signatures    |                                                                                       |  |    | 30                                                                 
|Exhibit Index |                                                                                       |  |    | 31                                                                 

2



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##### 



Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands, except per share data)

|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |         |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | - | ------------------ | ------ | ---------------- | - | -------- | ------ | -------- | - | ------- | ------ |  | - | -------- | ------- | -
|                                                                                          |                                                                          |   | Three Months Ended |        | Six Months Ended
|                                                                                          |                                                                          |   | June 29,           |        | June 30,         |   | June 29, |        | June 30,
|                                                                                          |                                                                          |   | 2003               |        | 2002             |   | 2003     |        | 2002    
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |         
|Revenues                                                                                  |                                                                          | $ | 122,509            |        |                  | $ | 141,732  |        |          | $ | 243,225 |        |  | $ | 283,785  |        
|Direct costs of services                                                                  |                                                                          |   | 95,871             |        |                  |   | 108,383  |        |          |   | 191,512 |        |  |   | 216,675  |        
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Gross profit                                                                              |                                                                          |   | 26,638             |        |                  |   | 33,349   |        |          |   | 51,713  |        |  |   | 67,110   |        
|Operating expenses:                                                                       |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|                                                                                          | Selling, general and administrative                                      |   |                    | 24,125 |                  |   |          | 29,275 |          |   |         | 49,495 |  |   |          | 59,438  |  
|                                                                                          | Depreciation and amortization                                            |   |                    | 1,341  |                  |   |          | 1,718  |          |   |         | 2,753  |  |   |          | 3,558   |  
|                                                                                          | Restructuring and rationalization charges                                |   |                    | 2,016  |                  |   |          | 668    |          |   |         | 2,115  |  |   |          | 925     |  
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Operating income (loss)                                                                   |                                                                          |   | (844               | )      |                  |   | 1,688    |        |          |   | (2,650  | )      |  |   | 3,189    |        
|Interest expense                                                                          |                                                                          |   | 744                |        |                  |   | 4,409    |        |          |   | 5,136   |        |  |   | 8,697    |        
|Gain (loss) on financial restructuring, net                                               |                                                                          |   | 84,634             |        |                  |   | (680     | )      |          |   | 83,132  |        |  |   | (686     | )      
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Income (loss) before income taxes and cumulative
effect of change in accounting principle |                                                                          |   | 83,046             |        |                  |   | (3,401   | )      |          |   | 75,346  |        |  |   | (6,194   | )      
|Provision (benefit) for income taxes                                                      |                                                                          |   |                   |        |                  |   | (680     | )      |          |   |        |        |  |   | 3,662    |        
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Income (loss) before cumulative effect of change in
accounting principle                  |                                                                          |   | 83,046             |        |                  |   | (2,721   | )      |          |   | 75,346  |        |  |   | (9,856   | )      
|Cumulative effect of change in accounting principle,
net of taxes                         |                                                                          |   |                   |        |                  |   |         |        |          |   |        |        |  |   | (242,497 | )      
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Net income (loss)                                                                         |                                                                          | $ | 83,046             |        |                  | $ | (2,721   | )      |          | $ | 75,346  |        |  | $ | (252,353 | )      
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|Basic and diluted earnings per common share:                                              |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|                                                                                          | Income (loss) before cumulative effect of change in
accounting principle |   | $                  | 15.61  |                  |   | $        | (2.55  | )        |   | $       | 23.57  |  |   | $        | (9.23   | )
|                                                                                          | Cumulative effect of change in accounting principle                      |   |                    |       |                  |   |          |       |          |   |         |       |  |   |          | (226.92 | )
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        
|                                                                                          | Net income (loss)                                                        |   | $                  | 15.61  |                  |   | $        | (2.55  | )        |   | $       | 23.57  |  |   | $        | (236.15 | )
|                                                                                          |                                                                          |   |                    |        |                  |   |          |        |          |   |         |        |  |   |          |        

The accompanying notes are an integral part of these statements.

3



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Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
June 29, 2003 and December 29, 2002
(in thousands, except per share data)

|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |          |         |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------- | ---------------------------------------------------- | -------- | -------- | ------- | ------------ | -------- | ------- | ------- | -
|                                               |                                                                                                                                      |                                                                                   |                                                      |          | June 29, |         | December 29,
|                                               |                                                                                                                                      |                                                                                   |                                                      |          | 2003     |         | 2002        
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |             
|Assets                                         |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|Current Assets:                                |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               | Cash and cash equivalents                                                                                                            |                                                                                   | $                                                    | 4,175    |          |         | $            | 22,623   |        
|                                               | Accounts receivable, net of allowance for doubtful accounts of
$3,199 and $2,956 in 2003 and 2002, respectively                      |                                                                                   |                                                      | 68,478   |          |         |              | 76,178   |        
|                                               | Prepaid expenses and other current assets                                                                                            |                                                                                   |                                                      | 4,517    |          |         |              | 3,940    |        
|                                               | Recoverable income taxes                                                                                                             |                                                                                   |                                                      | 150      |          |         |              | 25,476   |        
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |          |        
|                                               |                                                                                                                                      |                                                                                   | Total current assets                                 |          |          | 77,320  |              |          |         | 128,217 |  
|Property and equipment, net                    |                                                                                                                                      |                                                                                   | 11,132                                               |          |          |         | 13,240       |         
|Goodwill                                       |                                                                                                                                      |                                                                                   | 103,532                                              |          |          |         | 103,532      |         
|Other assets                                   |                                                                                                                                      |                                                                                   | 1,444                                                |          |          |         | 2,417        |         
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               |                                                                                                                                      |                                                                                   | Total assets                                         |          | $        | 193,428 |              |          | $       | 247,406 |  
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|Liabilities and Shareholders Equity (Deficit) |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|Current liabilities:                           |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               | Current portion of long-term debt                                                                                                    |                                                                                   | $                                                    |         |          |         | $            | 38,633   |        
|                                               | Accounts payable                                                                                                                     |                                                                                   |                                                      | 7,918    |          |         |              | 9,887    |        
|                                               | Accrued wages, benefits and other                                                                                                    |                                                                                   |                                                      | 62,918   |          |         |              | 62,203   |        
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               |                                                                                                                                      |                                                                                   | Total current liabilities                            |          |          | 70,836  |              |          |         | 110,723 |  
|                                               | Long-term debt -                                                                                                                     |                                                                                   |                                                      |          |          |         |              |          |        
|                                               |                                                                                                                                      | Convertible subordinated notes                                                    |                                                      |          | 5,339    |         |              |          | 115,000 |        
|                                               |                                                                                                                                      | Revolving credit facility (including $7,239 of deferred gain on
debt forgiveness) |                                                      |          | 60,954   |         |              |          | 65,015  |        
|                                               | Other long-term liabilities                                                                                                          |                                                                                   |                                                      | 9,721    |          |         |              | 9,016    |        
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               |                                                                                                                                      |                                                                                   | Total liabilities                                    |          |          | 146,850 |              |          |         | 299,754 |  
|Commitments and contingencies                  |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|Shareholders equity (deficit):                |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               | Preferred stock, $.01 par value; shares authorized 5,000; 1,044 and
no shares issued and outstanding in 2003 and 2002, respectively  |                                                                                   |                                                      | 10       |          |         |              |         |        
|                                               | Common stock, $.01 par value; shares authorized 95,000; 2,160 and
1,323 shares issued and outstanding in 2003 and 2002, respectively |                                                                                   |                                                      | 22       |          |         |              | 13       |        
|                                               | Additional paid-in capital                                                                                                           |                                                                                   |                                                      | 339,283  |          |         |              | 315,722  |        
|                                               | Retained earnings (accumulated deficit)                                                                                              |                                                                                   |                                                      | (249,198 | )        |         |              | (324,544 | )      
|                                               | Less common stock held in treasury at cost -
247 shares at June 29, 2003 and December 29, 2002                                       |                                                                                   |                                                      | (43,539  | )        |         |              | (43,539  | )      
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               |                                                                                                                                      |                                                                                   | Total shareholders equity (deficit)                 |          |          | 46,578  |              |          |         | (52,348 | )
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         
|                                               |                                                                                                                                      |                                                                                   | Total liabilities and shareholders equity (deficit) |          | $        | 193,428 |              |          | $       | 247,406 |  
|                                               |                                                                                                                                      |                                                                                   |                                                      |          |          |         |              |         

The accompanying notes are an integral part of these balance sheets.

4



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Venturi Partners, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity (Deficit)
For the Period Ended June 29, 2003
(in thousands)

|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |       |  |            |         |          |  |          |          |        |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | --------------- | ----- | ------------ |  | ------- | -- | ------------ |  | ------- | ------- | -------- |  | -------- | ---- | ----- |  | ---------- | ------- | -------- |  | -------- | -------- | ------ |  | - | ------- | - |  | - | ------- | -
|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |       |  |            |         |          |  | Retained |          | Common |  |   |         |  
|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |       |  | Additional |         | Earnings |  | Stock    |          |        |  |  
|                                                |  | Preferred Stock |       | Common Stock |  | Paid-In |    | (Accumulated |  | Held in |         |          |  |         
|                                                |  | Shares          |       | Amount       |  | Shares  |    | Amount       |  | Capital |         | Deficit) |  | Treasury |      | Total
|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |      
|Balance,
December 29, 2002                      |  |                 |      |              |  | $       |   |              |  |         | 33,065  |          |  | $        | 331  |       |  | $          | 315,404 |          |  | $        | (324,544 | )      |  | $ | (43,539 | ) |  | $ | (52,348 | )
|Non-cash
exchange of stock to
5.75% noteholders |  |                 | 1,044 |              |  |         | 10 |              |  |         | 20,940  |          |  |          | 209  |       |  |            | 21,823  |          |  |          |         |        |  |   |        |   |  |   | 22,042  |  
|Issuance of common stock
purchase warrants      |  |                 |      |              |  |         |   |              |  |         |        |          |  |          |     |       |  |            | 1,538   |          |  |          |         |        |  |   |        |   |  |   | 1,538   |  
|1-for-25 reverse stock split                    |  |                 |      |              |  |         |   |              |  |         | (51,845 | )        |  |          | (518 | )     |  |            | 518     |          |  |          |         |        |  |   |        |   |  |   |        |  
|Net income                                      |  |                 |      |              |  |         |   |              |  |         |        |          |  |          |     |       |  |            |        |          |  |          | 75,346   |        |  |   |        |   |  |   | 75,346  |  
|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |       |  |            |         |          |  |          |          |        |  |   |         |   |  |   |         |  
|Balance, June 29, 2003                          |  |                 | 1,044 |              |  | $       | 10 |              |  |         | 2,160   |          |  | $        | 22   |       |  | $          | 339,283 |          |  | $        | (249,198 | )      |  | $ | (43,539 | ) |  | $ | 46,578  |  
|                                                |  |                 |       |              |  |         |    |              |  |         |         |          |  |          |      |       |  |            |         |          |  |          |          |        |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these statements.

5



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##### 



Venturi Partners, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Periods Ended June 29, 2003 and June 30, 2002
(in thousands)

|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |          |        |         |         |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------ | ----------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | -------- | ------- | -------- | ------ | ------- | ------- | -
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       | June 29, |         | June 30,
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       | 2003     |         | 2002    
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|Cash flows from operating activities:                |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     | Net income (loss)                                                                        |              | $                                                                                               | 75,346                                              |       |          | $       | (252,353 | )     
|                                                     | Adjustments to reconcile net income (loss) to net cash provided
by operating activities: |              |                                                                                                 |                                                     |       |          |         |          |       
|                                                     |                                                                                          |              | Depreciation and amortization                                                                   |                                                     |       | 2,753    |         |          |        | 3,558   |        
|                                                     |                                                                                          |              | Amortization of deferred gain on financial restructuring, net                                   |                                                     |       | (824     | )       |          |        |        |        
|                                                     |                                                                                          |              | Gain (loss) on financial restructuring, net                                                     |                                                     |       | (83,132  | )       |          |        | 686     |        
|                                                     |                                                                                          |              | Cumulative effect of change in accounting principle, net of deferred tax
benefit of $42,198     |                                                     |       |         |         |          |        | 242,497 |        
|                                                     |                                                                                          |              | Deferred income taxes on income before cumulative effect of change in
accounting principle, net |                                                     |       |         |         |          |        | 4,458   |        
|                                                     |                                                                                          |              | Income tax refunds received                                                                     |                                                     |       | 25,118   |         |          |        | 19,217  |        
|                                                     |                                                                                          |              | Changes in assets and liabilities:                                                              |                                                     |       |          |         |          |        |         |        
|                                                     |                                                                                          |              |                                                                                                 | Accounts receivable                                 |       |          | 7,700   |          |        |         | 966     |  
|                                                     |                                                                                          |              |                                                                                                 | Accounts payable and accrued liabilities            |       |          | (2,279  | )        |        |         | 1,868   |  
|                                                     |                                                                                          |              |                                                                                                 | Other, net                                          |       |          | 2       |          |        |         | 197     |  
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     |                                                                                          |              |                                                                                                 | Net cash provided by operating activities           |       |          | 24,684  |          |        |         | 21,094  |  
|Cash flows from investing activities:                |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     | Purchase of property and equipment, net                                                  |              |                                                                                                 | (505                                                | )     |          |         | (824     | )     
|                                                     | Proceeds from sale of business                                                           |              |                                                                                                 |                                                    |       |          |         | 3,825    |       
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     |                                                                                          |              |                                                                                                 | Net cash provided by (used in) investing activities |       |          | (505    | )        |        |         | 3,001   |  
|Cash flows from financing activities:                |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     | Repayments under credit facility                                                         |              |                                                                                                 | (41,985                                             | )     |          |         | (19,300  | )     
|                                                     | Borrowings under credit facility                                                         |              |                                                                                                 | 3,000                                               |       |          |         | 5,000    |       
|                                                     | Credit facility amendment fees paid                                                      |              |                                                                                                 | (1,680                                              | )     |          |         | (1,657   | )     
|                                                     | Repayments of other debt, net                                                            |              |                                                                                                 | (648                                                | )     |          |         | (472     | )     
|                                                     | Restructuring payment to bondholders                                                     |              |                                                                                                 | (1,314                                              | )     |          |         |         |       
|                                                     | Proceeds from employee stock purchase plan                                               |              |                                                                                                 |                                                    |       |          |         | 57       |       
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |          |       
|                                                     |                                                                                          |              |                                                                                                 | Net cash used in financing activities               |       |          | (42,627 | )        |        |         | (16,372 | )
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|Net increase (decrease) in cash and cash equivalents |                                                                                          |              | (18,448                                                                                         | )                                                   |       |          | 7,723   |         
|Cash and cash equivalents at beginning of period     |                                                                                          |              | 22,623                                                                                          |                                                     |       |          | 17,557  |         
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|Cash and cash equivalents at end of period           |                                                                                          | $            | 4,175                                                                                           |                                                     |       | $        | 25,280  |         
|                                                     |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|Supplemental cash flow information:                  |                                                                                          |              |                                                                                                 |                                                     |       |          |         |         
|                                                     | Cash payments during the period for                                                     |              |                                                                                                 |                                                     |       |          |         |          |       
|                                                     |                                                                                          | Interest     |                                                                                                 | $                                                   | 8,343 |          |         | $        | 6,834  |        
|                                                     |                                                                                          | Income taxes |                                                                                                 |                                                     |      |          |         |          | 22,833 |        

The accompanying notes are an integral part of these statements.

6



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##### 



VENTURI PARTNERS, INC.
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share data)



|(1) |  | General
|--- |  | -------

The unaudited consolidated financial statements included herein have been
prepared in accordance with the instructions to Form 10-Q and do not include
all the information and footnotes required by generally accepted accounting
principles; however, they do include all adjustments of a normal recurring
nature that, in the opinion of management, are necessary to present fairly the
results of operations of the Company for the interim periods presented. These
interim financial statements should be read in conjunction with the Companys
audited consolidated financial statements and related notes included in the
Companys Annual Report on Form 10-K for the year ended December 29, 2002. The
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.

Certain amounts in prior periods have been reclassified to conform to the
2003 presentation, including reclassifying professional fees paid in connection
with the financial restructuring from restructuring and rationalization charges
to gain (loss) on financial restructuring, net.



|(2) |  | Name Change and Reverse Stock Split
|--- |  | -----------------------------------

On
August 5, 2003, the Company amended and restated
its charter as contemplated in its recently completed financial restructuring.
See Note 3, Comprehensive Financial Restructuring. Among other provisions,
the charter amendment changed the Companys corporate name to Venturi Partners,
Inc., and effected a 1-for-25 reverse split of the Companys common stock. The
par value remained at $0.01 per share. Shareholders equity has been restated
by reclassifying the reduction in par value arising from the reverse stock
split from common stock to additional paid-in capital. All
references in the accompanying consolidated financial statements to the number
of common shares, except for authorized, and per share amounts have been
restated to reflect the reverse stock split.



|(3) |  | Comprehensive Financial Restructuring
|--- |  | -------------------------------------

On April 14, 2003, the Company completed a comprehensive financial
restructuring with its senior lenders and the holders of approximately $109,661
of its outstanding 5.75% Convertible Subordinated Notes due 2004 (the 5.75%
Notes) in which it issued shares of the Companys Common Stock and Series B
Preferred Stock to the participating noteholders in exchange for their 5.75%
Notes (the Exchange Transaction). In the Exchange Transaction, which was
privately negotiated, the Company exchanged newly issued equity with the
participating noteholders and issued the following consideration for each $1 in
principal amount of notes exchanged:



| |  |  | $28.75 in cash (not in thousands);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 7.6382 shares (190.9560 shares before reverse split) of newly
issued shares of the Companys Common Stock; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | 9.5242 shares of Series B Preferred Stock of the Company,
each share of which is convertible into 4 shares (100 shares before
reverse split) of Common Stock upon any amendment to the Companys
charter increasing the authorized number of shares of Common Stock
or effecting a reverse split of outstanding shares of Common Stock
that increases the number of authorized but unissued shares. The
holders of Series B Preferred Stock vote on all matters with the
Common Stock as if converted, have a liquidation preference of $.01
per share, and otherwise have no greater rights or privileges than
the Common Stock. With the reverse stock split

7



---



##### 





| |  |  | complete, the
Company intends to convert all of the Series B Preferred Stock into
Common Stock in accordance with its terms.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------

In connection with the Exchange Transaction, the Company entered into an
agreement with each of the former noteholders participating in the exchange to
provide them with registration rights with respect to the shares of Common
Stock issued in the exchange or acquired upon conversion of the Series B
Preferred Stock.

As a result of the Exchange Transaction, the participating noteholders in
the aggregate were issued 837,617 shares of Common Stock (20,940,425 shares
before reverse split) and 1,044,433 shares of Series B Preferred Stock, which
together represent approximately 82% of the Companys outstanding Common Stock
(assuming for this purpose that all shares of the Series B Preferred Stock
issued to the participating noteholders have been converted). The existing
shareholders retained ownership of their outstanding 1,075,248 shares of Common
Stock (26,881,212 shares before reverse split), which represent approximately
18% of the outstanding Common Stock (on the same, as-converted, basis). In
connection with this ownership change, the Company also reconstituted its Board
of Directors to provide for a seven-person Board and the designation of two
representatives of the new major shareholders to serve as new Board members,
together with the Companys Chief Executive Officer, one incumbent independent
Board member who was designated by the Company with the consent of the
participating noteholders and three other independent Board members, two of
whom are incumbents who were designated by the participating noteholders.

In order to permit the closing of the Exchange Transaction contemplated in
the financial restructuring and to provide for the terms on which the existing
senior lenders would continue to finance the Companys working capital needs,
the Company and its existing senior lenders also executed definitive loan
agreements for the Credit Facility, which provided for certain amendments and
maturity date extensions to the revolving credit facility and eliminated the
Equity Appreciation Right (the EAR) held by the senior lenders (the Senior
Debt Restructuring). The Senior Debt Restructuring provided for the
forgiveness of indebtedness in the amount of $10,300. As a result of the
Exchange Transaction and the Senior Debt Restructuring, the Company used
substantially all of its cash on hand, after payment of transaction expenses,
to repay approximately $37,985 of its outstanding credit facility and
eliminated an additional $119,961 of its outstanding indebtedness, which will
result in substantial reductions in the Companys interest expense in future
periods. No provision or benefit for income taxes was recorded in the
second quarter of 2003 since the gain from financial restructuring
will not be subject to income tax and the Company has incurred
operating losses which can be carried forward to offset future
taxable income.

The Credit Facility provides for a $70,700 revolving line of credit due
May 1, 2004 and is subject to certain maturity date extensions,
assuming the Company is in compliance with its covenants, in six-month
increments up through May 1, 2005. Availability of borrowings under the Credit
Facility is subject to a borrowing base calculated as specified percentages of
the Companys eligible accounts receivable (as defined) in the aggregate. The
Credit Facility contains covenants, including financial covenants
that require monthly maintenance of cumulative EBITDA levels (as defined in the
amended agreement) and an interest and subordinated indebtedness coverage
ratio. The Credit Facility also contains restrictions on the payment of cash
dividends on the Companys capital stock and places additional limitations on
share repurchases, acquisitions and capital expenditures. Finally, in lieu of
the EAR included as part of the revolving credit facility that was in effect in
2002, the Company has issued common stock purchase warrants to the lenders
under the Credit Facility entitling them to purchase a total of 768,997 shares
of Common Stock (19,224,916 shares before reverse split), or 10% of the
outstanding Common Stock on a fully diluted basis. These warrants are
exercisable in whole or part over a 10-year period and the exercise price
thereunder is $7.8025 per share ($0.3121 per share before reverse split), which
was based on a stated equity valuation for the Company of $60,000. The
exercise price for these warrants exceeded the estimated fair value of the
underlying equity at the issuance date. Interest rates payable under the
Credit Facility were set at prime plus 325 basis points through June 2003, with
increases during each six-month period through May 1, 2005. The Companys
interest rate is currently set at prime plus 375 basis points through December
2003.

In connection with the financial restructuring the Company agreed to seek
shareholder approval at the

8



---



##### 



2003 Annual Meeting of Shareholders to amend and
restate its certificate of incorporation, and on July 24, 2003, the
shareholders approved each of the proposed amendments. In addition to the name
change and reverse stock split described in Note 2 above, the amendments to the
certificate of incorporation included the following:



| |  |  | elimination of provisions that separate the Board of
Directors into three classes and that prohibit action by consent of
shareholders without a meeting;                                                                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an election by the Company not to be governed by Section 203
of the Delaware General Corporation Law, which restricts the ability
of the Company to engage, directly or indirectly, in a business
combination transaction with a holder of 15% or more of its voting
stock;                               
|
| |  |  | addition of provisions requiring a supermajority vote of the
Board of Directors or shareholders to adopt changes to the
certificate of incorporation or bylaws; and                                                                                                                                       
|
| |  |  | addition of a provision to protect minority shareholders in
connection with certain transactions with a shareholder (a
Significant Holder) that beneficially owns 20% or more of the
shares of the Companys capital stock that are entitled to vote on
matters submitted to a vote of the shareholders.

In connection with the financial restructuring, the Company amended and
restated the shareholder rights agreement that governs the terms of preferred
share purchase rights that currently accompany the Common Stock. The
amendments included, among other things, exemptions preventing the following
from triggering separation of the rights from the Common Stock: (i) beneficial
ownership of capital stock by the participating noteholders acquired in the
financial restructuring; (ii) beneficial ownership by any Significant Holder of
capital stock of the Issuer acquired in accordance with the amended and
restated certificate of incorporation; and (iii) beneficial ownership by any
third party of capital stock of the Company acquired in a transfer from a
Significant Holder pursuant to a transaction that complies with the amended and
restated certificates of incorporation. In addition, the shareholder rights
plan was amended to include a tag-along right for the benefit of any holder
(including certain holders of more than 2% acting together as a group) of 5% or
more of the voting stock of the Company pursuant to which such holder (or
group) will be entitled to participate pro rata, for the same amount and form
of consideration and otherwise on substantially the same terms and conditions,
in any transfer by any Significant Holders of capital stock of the Company of
20% or more of the voting stock of the Company.

In connection with the Companys financial restructuring, the Company
terminated its 1995 Stock Option Plan. Additionally, a number of the Companys
employees, including each of the Companys executive officers at the end of
2002 and all but one of the Companys Board of Directors, irrevocably cancelled
any and all rights that they had to exercise any and all stock options that
were previously granted and agreed that all such options would be forfeited to
the Company. These directors and employees held in the aggregate 87,601 of the
stock options (2,190,030 stock options before reverse split) that were
outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a
result of these voluntary forfeitures, only 16,683 stock options (417,080
options before reverse split) remained outstanding under the 1995 Stock Option
Plan, and these options have a weighted average exercise price of $232.33 per
share ($9.29 per share before reverse split). Although the 1995 Stock Option
Plan has been terminated and no future issuances thereunder will be made, these
remaining outstanding stock options will continue to be exercisable in
accordance with their terms.

The Companys Board of Directors adopted the 2003 Equity Incentive Plan
(the 2003 Equity Plan) simultaneously with the completion of the Companys
financial restructuring. The 2003 Equity Plan authorizes grants of stock
options, stock appreciation rights (or SARs), restricted stock, deferred
stock awards and performance awards (and dividend equivalent rights relating to
options, SARs, deferred stock and performance awards), in the case of stock or
option awards, for up to 794,835 shares (19,870,873 shares before reverse
split), or 10.3%, of the Companys fully diluted Common Stock. Awards under the
2003 Equity Plan are to be made to key employees, directors and consultants as
selected by the Board of Directors or the

9



---



##### 



Compensation Committee. The duration
of any option or SAR granted under the 2003 Equity Plan will not exceed ten
years. Awards will generally vest monthly on a pro rata basis at an
annual rate of 25% unless
either the Board of Directors or Compensation Committee approves or a
participants employment agreement provides otherwise. Following a termination
of employment, vested options and/or SARs must be exercised within 3 months (12
months in the case of death or disability), except that options and SARs
terminate immediately upon a termination for cause as defined in the relevant
participants employment agreement, or as determined in the discretion of the
Board of Directors or the Compensation Committee if no employment agreement
exists. Any non-vested option, SARs or other awards issued under the 2003
Equity Plan will be forfeited upon any termination. The Board of Directors and
Compensation Committee retain the discretion to extend the post-employment
exercise period of an option or SAR and to accelerate vesting of awards under
the 2003 Equity Plan.

At the time of the restructuring, the Board of Directors approved the
granting of stock options for 503,400 shares (12,585,000 shares before reverse
split), representing 6.5% of the Companys fully diluted Common Stock, to
certain executive officers. Of these initial grants, 348,000 options
(8,700,000 options before reverse split) have an exercise price of $7.8025 per
share ($0.3121 per share before reverse split), and the other 155,400 options
(3,885,000 options before reverse split) have an exercise price of $11.7025 per
share ($0.4681 per share before reverse split). The initial stock option
grants to these officers vest monthly at an annual rate of 25%, and each will
have 12 months following the termination of his employment (other than for
cause) to exercise vested stock options held as of the termination date. The
exercise price of a portion of these options is based on an aggregate stated
equity value of the Company of $60,000, and for the remaining options the
exercise price is based on an aggregate stated equity value of $90,000. The
exercise price for these stock options exceeded the estimated fair value of the
underlying equity at the issuance date. Following these initial grants,
291,435 shares (7,285,873 shares before reverse split), or 3.8%, of the
Companys fully diluted Common Stock remained authorized for issuance under the
2003 Equity Plan and are reserved for future grants. The majority of
the options granted at the time of the restructuring will be subject
to variable accounting because they were granted within six months
after the date the options under the 1995 Stock Option Plan were
cancelled. This may result in non-cash compensation
expense in future periods to the extent the fair value of the stock
price exceeds the option exercise price.

Accounting for Financial Restructuring Transactions

The Company recorded the issuance of its equity securities in exchange for
outstanding 5.75% Notes at the fair value of the newly issued equity
securities, with the excess of the debt carrying value over the fair value of
equity securities recorded as a gain. The forgiveness of $10,300 in Senior
Debt will reduce future interest expense over the term of the amended Credit
Facility, and the $1,110 of fees paid to the senior lenders will be reflected
as a reduction in the principal balances outstanding as required under
accounting for troubled debt restructuring. The Company engaged an independent
valuation firm to assist in the determination of fair value of the warrants issued in connection
with the Senior Debt Restructuring and recorded this amount as additional
shareholders equity with a corresponding reduction in the outstanding Senior
Debt, with such amount recognized as a component of interest expense over the
term of the Senior Debt. The net gain on financial restructuring is not
classified as an extraordinary item in accordance with the recently issued SFAS
No. 145.

Managements Plans for Liquidity and Debt Compliance

The Company experienced declining revenue and significant operating losses
in 2001 and 2002, and weak economic conditions have continued in the first half of 2003. In response to the declining
operating performance, the Company undertook several initiatives beginning in
2001, including the following:



| |  |  | Execution of the Exchange Transaction and the Senior Debt
Restructuring discussed above, which resulted in the Company
repaying approximately $37,985 of its outstanding credit facility
and eliminating an additional $119,961 of its outstanding
indebtedness, which will result in a substantial reduction in
prospective annual interest expense;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---



##### 





| |  |  | Filing for and receiving substantial income tax refunds by
carrying back current period tax losses to recover income taxes
previously paid, with a substantial portion of such refunds used to
reduce outstanding indebtedness;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Restructuring and rationalization actions, including the
reduction of approximately 12% of its permanent workforce in the
first half of 2003 (17.5% for the year 2002) and ongoing
rationalization of office space; and        
|
| |  |  | Reduction in accounts receivable with resulting cash flow
used to reduce outstanding indebtedness.                                                                                                                             

The Companys ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement (as defined) and a monthly interest and subordinated indebtedness
coverage ratio. The amended Credit Facility defines consolidated EBITDA as
consolidated net income before interest expense, income taxes, depreciation and amortization, non-cash impairment charges,
restructuring and rationalization charges, professional fees relating to the
debt restructuring and non-cash compensation expense for the stock options, if
any. These covenants require the Company to generate EBITDA, as defined,
measured on a cumulative monthly basis in the aggregate amount of $5,946 from
April through December 2003. For the period through June 29,
2003, the Company has exceeded the level of earnings required in the
bank covenant. Based on the Companys
fiscal 2003 and 2004 projections, which reflect declining demand for the
Companys services, offset by reductions in costs associated with the reduced
revenues and resulting from personnel and office space rationalization,
management believes the Company will be able to maintain compliance with the
financial covenants for the remaining initial term of the Credit Facility. The
Company also believes that the operating trends in the first half of 2003
support the key assumptions in its 2003 and 2004 operating plans. However,
there can be no assurance that the economy or the Company will perform as
expected or that further economic declines will not adversely impact the
Companys ability to comply with the financial covenants. In addition, the
interest coverage ratio adjusts from an interest coverage ratio to an interest
and subordinated indebtedness coverage ratio on May 31, 2004, and there can be
no assurance that the Company will be able to satisfy this enhanced financial
covenant if the revolving credit facility is extended beyond its current term.
If the Company does violate future covenants, it would seek waivers and
amendments from its lenders, but can give no assurance that any such waivers
and amendments would be available at all or on acceptable terms. If the
Company were unable to obtain a waiver of future covenant violations, the
lenders would be entitled to require immediate repayment of all amounts
outstanding under the Credit Facility. An acceleration of outstanding amounts
under the Credit Facility would also cause a default under, and permit
acceleration of, the Companys remaining 5.75% Notes. In the event of one or
more such defaults, the Companys ongoing viability would be seriously
threatened, and it would be forced to evaluate a number of strategic
alternatives, including a further debt restructuring or other reorganization,
the closure of certain operating locations or the sale of certain or all of its
assets in order to continue to fund its operations. In the current economic
environment, management believes that any such sale of assets 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 the Companys liabilities.



|(4) |  | Stock Options
|--- |  | -------------

The Company has adopted Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.
The Company plans to continue using the intrinsic-value method of accounting
for stock-based awards granted to employees and, accordingly, does not
currently recognize compensation expense for its stock-based awards to
employees in the Consolidated Statements of Operations.

The following disclosures are presented to reflect the Companys pro forma
net income (loss) for the periods ended June 29, 2003 and June 30, 2002 as if
the fair value method of accounting had been used. In

11



---



##### 



preparing these
disclosures, the Company has determined the value of all stock options granted
under the 1995 Stock Option Plan, which has been terminated, and the Companys
newly adopted 2003 Equity Plan using the Black-Scholes model and based on the
following weighted average assumptions used for grants:

|                        |  |               |      |               |  |  |      |  
|----------------------- |  | ------------- | ---- | ------------- |  |  | ---- | -
|                        |  | Period Ended  |      | Period Ended 
|                        |  | June 29, 2003 |      | June 30, 2002
|                        |  |               |      |              
|Risk-free interest rate |  |               | 3.0  | %             |  |  | 3.9  | %
|Expected dividend yield |  |               | 0.0  | %             |  |  | 0.0  | %
|Expected life           |  |               | 5    |               |  |  | 4    |  
|Expected volatility     |  |               | 83.9 | %             |  |  | 69.7 | %

The fair value of the stock options granted under the 2003 Equity Plan in
the first half of 2003 was approximately $1,274, and no options were granted
under the 1995 Stock Option Plan in the first half of 2003 as the plan was
terminated. The fair value of the stock options granted under the 1995 Stock
Option Plan and the Stock Purchase Plan issuances in the first half of 2002 was
approximately $20. Had compensation expense been determined consistent with
the fair value method, utilizing the assumptions set forth above and the
straight-line amortization method over the vesting period, the Companys net
income (loss) would have been reduced to the following pro forma amounts:

|                                        |  |                    |        |                  |  |          |        |          |  |   |        |  |  |   |          |  
|--------------------------------------- |  | ------------------ | ------ | ---------------- |  | -------- | ------ | -------- |  | - | ------ |  |  | - | -------- | -
|                                        |  | Three Months Ended |        | Six Months Ended
|                                        |  |                    |        |                 
|                                        |  | June 29,           |        | June 30,         |  | June 29, |        | June 30,
|                                        |  | 2003               |        | 2002             |  | 2003     |        | 2002    
|                                        |  |                    |        |                  |  |          |        |         
|Net income (loss), as reported          |  | $                  | 83,046 |                  |  | $        | (2,721 | )        |  | $ | 75,346 |  |  | $ | (252,353 | )
|Earnings per diluted share, as reported |  |                    | 15.61  |                  |  |          | (2.55  | )        |  |   | 23.57  |  |  |   | (236.15  | )
|Pro forma net income (loss)             |  |                    | 82,913 |                  |  |          | (3,112 | )        |  |   | 75,079 |  |  |   | (253,135 | )
|Pro forma earnings per diluted share    |  | $                  | 15.59  |                  |  | $        | (2.91  | )        |  | $ | 23.48  |  |  | $ | (236.88  | )



|(5) |  | Restructuring and
Rationalization Charges
|--- |  | -----------------------------------------

The
Company incurred additional restructuring and rationalization charges
of $2,016 and $2,115 for the three month and six month periods ended
June 29, 2003, respectively, relating principally to lease
abandonment costs on closed facilities. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations.



|(6) |  | Goodwill and Other Intangible Assets
|--- |  | ------------------------------------

Effective at the beginning of 2002, the Company adopted SFAS 142. The
provisions of SFAS 142 prohibit the amortization of goodwill and
indefinite-lived intangible assets and require that goodwill and
indefinite-lived intangibles assets be tested at least annually for impairment.
In the second quarter of 2002, the Company completed its initial valuation as
of the adoption date, December 31, 2001, and in the fourth quarter of 2002
completed its annual test for impairment. In order to assess the fair value of
its goodwill, the Company engaged an independent valuation firm to assist in
determining the fair value. The fair value of each of the Companys two
reporting units was calculated as of December 31, 2001 and December 29, 2002,
on an enterprise value basis using the market multiple approach and discounted
cash flow approach. Under the market multiple approach, market ratios and
performance fundamentals relating to similar public companies stock prices or
enterprise values were applied to the reporting units to determine their
enterprise value. Under the discounted cash flow (DCF) approach, the
indicated enterprise value was determined using the present value of the
projected future cash flows to be generated considering appropriate discount
rates. The discount rates used in the calculation reflected all associated
risks of realizing the projected future cash flows. Certain of the valuation
assumptions were based on managements expectations for future performance of
the Technology Services and Staffing Services reporting units. These
assumptions include expected time frame of technology spending and broader
economic recoveries as well as future growth rates in the Technology Services
and Staffing Services businesses. A relatively high discount rate of 17% was
utilized in the discounted cash flow valuation approach due principally to the
inherent uncertainties associated with these assumptions.

Based upon the results of the initial valuation, which was completed in
the second quarter of 2002, the

12



---



##### 



Company recorded a goodwill impairment charge
of $284,695 ($242,497 net of an income tax benefit of $42,198) as a cumulative
effect of the change in accounting principle.

In the fourth quarter of 2002, the Company performed its annual impairment
test and recorded an impairment charge of $89,935 for goodwill associated with
its Technology Services operations. The Company experienced lower than
expected operating profits and cash flows in 2002 for the Technology Services
reporting unit. As a result of this trend and the overall industry
expectations, the projected operating profits and cash flows for Technology
Services operations were reduced for the next five years resulting in a
reduction in the fair value of the Companys goodwill. These projections
reflect expectation of further declines in corporate information technology
spending levels through 2003 with recovery beginning in 2004. The decrease in
fair value resulted in the recognition of the $89,935 impairment
loss. The Companys impairment assessment as of
December 29, 2002 and related impairment provision for the
Technology Services division reflected the decline in the business
and outlook as of that date and contemplated the completion of the
financial restructuring originally agreed upon in November 2002. As
the financial restructuring was completed as planned in April 2003
and the business environment in which we operate has not changed
significantly from December 29, 2002, the Company presently does
not expect an updated formal impairment analysis will be performed
until the annual test required in the fourth quarter.

A reconciliation of goodwill for the periods ended June 29, 2003 and
December 29, 2002 is as follows:

|                           |                                                     |   |            |          |          |   |         |         |   |   |         |          |  
|-------------------------- | --------------------------------------------------- | - | ---------- | -------- | -------- | - | ------- | ------- | - | - | ------- | -------- | -
|                           |                                                     |   | Technology |          | Staffing |   |         |         |  
|                           |                                                     |   | Services   |          | Services |   | Total  
|                           |                                                     |   |            |          |          |   |        
|Balance, December 30, 2001 |                                                     | $ | 376,538    |          |          | $ | 101,624 |         |   | $ | 478,162 |         
|                           | Impairment loss resulting from SFAS 142 adoption    |   |            | (245,373 | )        |   |         | (39,322 | ) |   |         | (284,695 | )
|                           | Impairment loss resulting from SFAS 142 annual test |   |            | (89,935  | )        |   |         |        |   |   |         | (89,935  | )
|                           |                                                     |   |            |          |          |   |         |         |   |   |         |         
|Balance, December 29, 2002 |                                                     |   | 41,230     |          |          |   | 62,302  |         |   |   | 103,532 |         
|                           | 2003 activity                                       |   |            |         |          |   |         |        |   |   |         |         |  
|                           |                                                     |   |            |          |          |   |         |         |   |   |         |         
|Balance, June 29, 2003     |                                                     | $ | 41,230     |          |          | $ | 62,302  |         |   | $ | 103,532 |         
|                           |                                                     |   |            |          |          |   |         |         |   |   |         |         

The following table sets forth a reconciliation of intangible assets
subject to amortization, which are included in other assets on the Consolidated
Balance Sheets, by intangible asset class as of June 29, 2003 and December 29,
2002:

|                       |                                                 |   |               |     |                   |   |      |      |        |   |              |    |             |   |       |       |  |   |        |        |   |   |     |     | 
|---------------------- | ----------------------------------------------- | - | ------------- | --- | ----------------- | - | ---- | ---- | ------ | - | ------------ | -- | ----------- | - | ----- | ----- |  | - | ------ | ------ | - | - | --- | --- | 
|                       |                                                 |   | June 29, 2003 |     | December 29, 2002
|                       |                                                 |   |               |     |                  
|                       |                                                 |   | Gross         |     |                   |   |      |      |        |   |              |    | Gross       |   |       |       |  |   |        |        |  
|                       |                                                 |   | Carrying      |     | Accumulated       |   |      |      |        |   | Carrying     |    | Accumulated |   |       |       | 
|                       |                                                 |   | Amount        |     | Amortization      |   | Net  |      | Amount |   | Amortization |    | Net        
|                       |                                                 |   |               |     |                   |   |      |      |        |   |              |    |            
|Non-compete agreements |                                                 | $ | 617           |     |                   | $ | (565 | )    |        | $ | 52           |    |             | $ | 2,413 |       |  | $ | (2,223 | )      |   | $ | 190 |    
|Trade names            |                                                 |   | 29            |     |                   |   | (19  | )    |        |   | 10           |    |             |   | 29    |       |  |   | (17    | )      |   |   | 12  |    
|                       |                                                 |   |               |     |                   |   |      |      |        |   |              |    |             |   |       |       |  |   |        |        |   |   |     |    
|                       | Total intangible assets
subject to amortization |   | $             | 646 |                   |   | $    | (584 | )      |   | $            | 62 |             |   | $     | 2,442 |  |   | $      | (2,240 | ) |   | $   | 202 | 
|                       |                                                 |   |               |     |                   |   |      |      |        |   |              |    |             |   |       |       |  |   |        |        |   |   |     |    

Non-compete agreements are amortized over a period of five years and trade
names are amortized over a period of 10 years. Amortization expense for the
six months ended June 29, 2003 and June 30, 2002 was $140 and $250,
respectively.

13



---



##### 





|(7) |  | Long-term Debt
|--- |  | --------------

Long-term debt consisted of the following at June 29, 2003 and December
29, 2002:

|                                              |  |          |        |              |  |   |         | 
|--------------------------------------------- |  | -------- | ------ | ------------ |  | - | ------- | 
|                                              |  | June 29, |        | December 29,
|                                              |  | 2003     |        | 2002        
|                                              |  |          |        |             
|5.75% Notes due July 2004                     |  | $        | 5,339  |              |  | $ | 115,000 | 
|Revolving credit facility                     |  |          | 53,715 |              |  |   | 103,000 | 
|Deferred gain on financial restructuring, net |  |          | 7,239  |              |  |   |        | 
|Other                                         |  |          |       |              |  |   | 648     | 
|                                              |  |          |        |              |  |   |         | 
|                                              |  |          | 66,293 |              |  |   | 218,648 | 
|Less current portion                          |  |          |       |              |  |   | 38,633  | 
|                                              |  |          |        |              |  |   |         | 
|                                              |  | $        | 66,293 |              |  | $ | 180,015 | 
|                                              |  |          |        |              |  |   |         | 

The
remaining 5.75% Notes not exchanged are due July 2004. Interest on the 5.75% Notes
is payable semi-annually. The 5.75% Notes are convertible into Common Stock of
the Company at any time before maturity at an initial conversion price of
$445.31 per share. Beginning in July 2000, the Company was permitted to redeem
the 5.75% Notes initially at 103.29% and at decreasing prices thereafter to
100% at maturity, in each case together with accrued interest. The 5.75% Notes
are subordinated to all present and future senior indebtedness of the Company
(as defined), including indebtedness under the Companys Credit Facility.

As a result of the recent completion of the Companys financial
restructuring and the execution of amendments and maturity date extensions, the
Credit Facility provides for a $70,700 revolving line of credit due May 1, 2004
and is subject to certain maturity date extensions through May 1, 2005. The
Company believes it will satisfy the requirements for extension beyond June
2004; therefore, the outstanding balance under the Credit Facility, which was
$53,715 at June 29, 2003, was classified as long-term in the consolidated
balance sheet.

The deferred gain on financial restructuring, net is comprised of the
$10,300 senior debt forgiven, offset by certain fees paid and common stock
purchase warrants issued to the senior lenders. See Note 3, Comprehensive
Financial Restructuring. The Company accounted for this transaction in
accordance with Statement of Financial Accounting Standards No. 15 (SFAS 15),
Accounting by Debtors and Creditors for Troubled Debt Restructurings, which
requires the deferred gain on financial restructuring, net to be amortized,
reducing future interest expense, over the term of the amended Credit Facility.
For the quarter ended June 29, 2003, interest expense was $744, which is net
of amortization of deferred gain on financial restructuring of $824. Interest
rates payable under the revolving credit facility are currently set at prime
plus 375 basis points through December 31, 2003.

Four former noteholders, now significant shareholders, also are senior
lenders under the Credit Facility.

14



---



##### 





|(8) |  | Earnings Per Share
|--- |  | ------------------

The following table reconciles net income (loss) and weighted average
shares outstanding to the amounts used to calculate basic and diluted earnings
per share for each of the periods ended June 29, 2003 and June 30, 2002:

|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |          |  
|-------------------------------------------------- | -------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | --------- | ------ | -------- |  | --------- | ------ |  |  | --------- | -------- | -
|                                                   |                                                                                  |  | Three Months Ended |        | Six Months Ended
|                                                   |                                                                                  |  | June 29,           |        | June 30,         |  | June 29,  |        | June 30,
|                                                   |                                                                                  |  | 2003               |        | 2002             |  | 2003      |        | 2002    
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |         
|Basic and diluted earnings per share:              |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |         
|                                                   | Income
(loss) before cumulative effect of
change in accounting
principle         |  | $                  | 83,046 |                  |  | $         | (2,721 | )        |  | $         | 75,346 |  |  | $         | (9,856   | )
|                                                   | Add: Interest expense on 5.75% Notes, net of tax                                 |  |                    |       |                  |  |           |       |          |  |           |       |  |  |           |         |  
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |          |  
|                                                   | Diluted
income (loss) before cumulative effect of
change in accounting
principle |  |                    | 83,046 |                  |  |           | (2,721 | )        |  |           | 75,346 |  |  |           | (9,856   | )
|                                                   | Cumulative effect of change in accounting principle                              |  |                    |       |                  |  |           |       |          |  |           |       |  |  |           | (242,497 | )
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |          |  
|                                                   | Diluted net income (loss)                                                        |  | $                  | 83,046 |                  |  | $         | (2,721 | )        |  | $         | 75,346 |  |  | $         | (252,353 | )
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |         
|Weighted average common shares outstanding         |                                                                                  |  | 5,319,005          |        |                  |  | 1,069,110 |        |          |  | 3,197,127 |        |  |  | 1,068,625 |         
|                                                   | Add: Dilutive employee stock options                                             |  |                    |       |                  |  |           |       |          |  |           |       |  |  |           |         |  
|                                                   | Add: Assumed conversion of 5.75% Notes                                           |  |                    |       |                  |  |           |       |          |  |           |       |  |  |           |         |  
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |          |  
|Diluted weighted average common shares outstanding |                                                                                  |  | 5,319,005          |        |                  |  | 1,069,110 |        |          |  | 3,197,127 |        |  |  | 1,068,625 |         
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |         
|Basic and diluted earnings per share:              |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |         
|                                                   | Income
(loss) before cumulative effect of
change in accounting
principle         |  | $                  | 15.61  |                  |  | $         | (2.55  | )        |  | $         | 23.57  |  |  | $         | (9.23    | )
|                                                   | Cumulative effect of change in accounting principle                              |  |                    |       |                  |  |           |       |          |  |           |       |  |  |           | (226.92  | )
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |          |  
|                                                   | Net income (loss)                                                                |  | $                  | 15.61  |                  |  | $         | (2.55  | )        |  | $         | 23.57  |  |  | $         | (236.15  | )
|                                                   |                                                                                  |  |                    |        |                  |  |           |        |          |  |           |        |  |  |           |         

Net income (loss) per common share is based on the weighted average number
of common and common equivalent shares (including the assumed conversion of the
Companys preferred shares) outstanding in each period. The gain
on financial restructuring, net of $84,634 and $83,132 for the three
months and six months ended June 29, 2003, respectively, had a
$15.91 and $26.00 per share impact, respectively.

Stock options to
purchase 526,083 and 167,812 shares of Common Stock were outstanding
under the 2003 Equity Plan and the 1995 Stock Option Plan during the quarters ended June
29, 2003 and June 30, 2002, respectively, but were excluded from the
computation of earnings per diluted share because their effect was
antidilutive. The conversion of the 5.75% Notes into 11,989 common shares was
also excluded from the computation of earnings per diluted share because their
effect was not material.



|(9) |  | Segment Information:
|--- |  | --------------------

The Company is organized in two segments: Technology Services and
Staffing Services. Technology Services provides technical staffing, training
and information technology consulting services and technology tools for human
capital management. Staffing Services provides temporary staffing services,
placement of full-time employees and on-site management of temporary employees.
The Company evaluates segment performance based on income from operations
before unallocated corporate expenses, restructuring and rationalization
charges, amortization of intangible assets, interest and income taxes. Because
of the Companys substantial goodwill, management does not consider total
assets by segment an important management tool and, accordingly, the Company
does not report this information separately. The table below presents segment
information for Technology Services and Staffing Services for the periods ended
June 29, 2003 and June 30, 2002:

15



---



##### 



|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |         |         | 
|----------------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ------ | ------------------ | ------- | ---------------- | ------ | -------- | ------- | -------- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                          |                     |                                            |        | Three Months Ended |         | Six Months Ended
|                                                                                          |                     |                                            |        | June 29,           |         | June 30,         |        | June 29, |         | June 30,
|                                                                                          |                     |                                            |        | 2003               |         | 2002             |        | 2003     |         | 2002    
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |         
|Total revenues                                                                            |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          | Technology Services |                                            | $      | 59,829             |         |                  | $      | 77,632   |         |          | $      | 120,388 |         |   | $      | 159,940 |        
|                                                                                          | Staffing Services   |                                            |        | 62,680             |         |                  |        | 64,100   |         |          |        | 122,837 |         |   |        | 123,845 |        
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          |                     | Total revenues                             |        |                    | 122,509 |                  |        |          | 141,732 |          |        |         | 243,225 |   |        |         | 283,785 | 
|Gross profit                                                                              |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          | Technology Services |                                            |        | 14,189             |         |                  |        | 18,975   |         |          |        | 27,575  |         |   |        | 39,503  |        
|                                                                                          | Staffing Services   |                                            |        | 12,449             |         |                  |        | 14,374   |         |          |        | 24,138  |         |   |        | 27,607  |        
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          |                     | Total gross profit                         |        |                    | 26,638  |                  |        |          | 33,349  |          |        |         | 51,713  |   |        |         | 67,110  | 
|Operating income                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          | Technology Services |                                            |        | 2,548              |         |                  |        | 3,734    |         |          |        | 3,780   |         |   |        | 7,810   |        
|                                                                                          | Staffing Services   |                                            |        | 2,186              |         |                  |        | 2,694    |         |          |        | 3,214   |         |   |        | 4,533   |        
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        
|                                                                                          |                     | Total segment operating income, as defined |        |                    | 4,734   |                  |        |          | 6,428   |          |        |         | 6,994   |   |        |         | 12,343  | 
|Unallocated corporate expenses                                                            |                     |                                            | 3,510  |                    |         |                  | 3,949  |          |         |          | 7,389  |         |         |   | 7,979  |        
|Restructuring and rationalization charges                                                 |                     |                                            | 2,016  |                    |         |                  | 668    |          |         |          | 2,115  |         |         |   | 925    |        
|Amortization of intangible assets                                                         |                     |                                            | 52     |                    |         |                  | 123    |          |         |          | 140    |         |         |   | 250    |        
|Interest expense                                                                          |                     |                                            | 744    |                    |         |                  | 4,409  |          |         |          | 5,136  |         |         |   | 8,697  |        
|Gain (loss) on financial restructuring, net                                               |                     |                                            | 84,634 |                    |         |                  | (680   | )        |         |          | 83,132 |         |         |   | (686   | )      
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |         |        
|Income (loss) before income taxes and cumulative
effect of change in accounting principle |                     | $                                          | 83,046 |                    |         | $                | (3,401 | )        |         | $        | 75,346 |         |         | $ | (6,194 | )      
|                                                                                          |                     |                                            |        |                    |         |                  |        |          |         |          |        |         |         |   |        |        

The following table sets forth identifiable assets by segment at June 29,
2003 and December 29, 2002:

|                         |                     |                                |   |          |        |              |   |        |        | 
|------------------------ | ------------------- | ------------------------------ | - | -------- | ------ | ------------ | - | ------ | ------ | 
|                         |                     |                                |   | June 29, |        | December 29,
|                         |                     |                                |   | 2003     |        | 2002        
|                         |                     |                                |   |          |        |             
|Accounts receivable, net |                     |                                |   |          |        |              |   |       
|                         | Technology Services |                                | $ | 43,472   |        |              | $ | 46,318 |       
|                         | Staffing Services   |                                |   | 25,006   |        |              |   | 29,860 |       
|                         |                     |                                |   |          |        |              |   |       
|                         |                     | Total accounts receivable, net |   | $        | 68,478 |              |   | $      | 76,178 | 
|                         |                     |                                |   |          |        |              |   |       

16



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##### 



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

INTRODUCTION

The following discussion and analysis should be read in conjunction with
the Companys unaudited consolidated financial statements and related notes
appearing elsewhere in this report. The Companys fiscal year ends on the
Sunday nearest to December 31.

FORWARD-LOOKING INFORMATION

In addition to historical information, this report, including
Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains certain statements that are forward-looking statements
regarding events and financial trends that may affect the Companys future
operating results or financial position. These statements may be identified by
words such as estimate, forecast, plan, intend, believe, should,
expect, anticipate, or variations or negatives thereof, or by similar or
comparable words or phrases. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those expected in such statements. These risks and uncertainties include, but
are not limited to, the following:



| |  |  | changes in levels of unemployment and other economic conditions in
the United States, or in particular regions or industries;                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | continuing weakness or further reductions in corporate information
technology spending levels;                                                                                                                                                            
|
| |  |  | the ability of the Company to maintain existing client
relationships and attract new clients in the context of changing
economic or competitive conditions;                                                                                               
|
| |  |  | the impact of competitive pressures, including any change in the
demand for the Companys services, or the Companys ability to maintain
or improve its operating margins;                                                                                
|
| |  |  | an Internal Revenue Service audit of the Companys income tax
returns and the risk that assessments for additional taxes, penalties
and interest could be levied against the Company;                                                                     
|
| |  |  | the entry of new competitors into the marketplace or expansion by
existing competitors;                                                                                                                                                                   
|
| |  |  | the Companys success in attracting, training and retaining
qualified management personnel and other staff employees;                                                                                                                                     
|
| |  |  | reductions in the supply of qualified candidates for temporary
employment or the Companys ability to attract qualified candidates;                                                                                                                       
|
| |  |  | the possibility of the Company incurring liability for the
activities of its temporary employees or for events impacting its
temporary employees on clients premises;                                                                                    
|
| |  |  | the risk in an uncertain economic environment of increased
incidences of employment disputes, employment litigation and workers
compensation claims;                                                                                                     
|
| |  |  | the risk that further cost cutting or restructuring activities
undertaken by the Company could cause an adverse impact on certain of
the Companys operations;                                                                                            
|
| |  |  | economic declines that affect the Companys liquidity or ability to
comply with its loan covenants;                                                                                                                                                       
|
| |  |  | the risks of defaults under the Companys credit agreements or the
demand by any holder of the Companys remaining outstanding 5.75% Notes
for repayment following the occurrence of a repurchase event under the
indenture applicable to the 5.75% Notes;
|
| |  |  | adverse changes in credit and capital markets conditions that may
affect the Companys ability to obtain financing or refinancing on
favorable terms;                                                                                                     
|
| |  |  | adverse changes to managements periodic estimates of future cash
flows that may affect managements assessment of its ability to fully
recover its goodwill;                                                                                             
|
| |  |  | whether governments will impose additional regulations or licensing
requirements on staffing services businesses in particular or on
employer/employee relationships in general; and                                                                      
|
| |  |  | other matters discussed in this report and the Companys SEC
filings.                                                                                                                                                                                     

Because long-term contracts are not a significant part of the Companys
business, future results cannot be

17



---



##### 



reliably predicted by considering past
trends or extrapolating past results. The Company undertakes no obligation to
update information contained in this report.

OVERVIEW

The Company is organized into two Divisions: the Technology Services
Division (Technology Services), which provides information technology
staffing and consulting services in a range of computer-related disciplines and
technology tools for human capital management, and the Staffing Services
Division (Staffing Services), which provides a variety of temporary office,
clerical, accounting and finance, light technical and light industrial staffing
services. Approximately 49% of the Companys second quarter 2003 revenues came
from Technology Services and 51% came from Staffing Services.

The Technology Services business is affected by the timing of holidays and
seasonal vacation patterns, generally resulting in lower revenues and gross
margins in the fourth quarter of each year. The Staffing Services business is
subject to the seasonal impact of summer and holiday employment trends.
Typically, the Staffing Services business is stronger in the second half of
each calendar year than in the first half.

RESULTS OF OPERATIONS

Quarter Ended June 29, 2003 Versus Quarter Ended June 30, 2002

Revenues.Total revenues decreased 13.6% to $122.5 million in the second
quarter of 2003 from $141.7 million in the second quarter of 2002 due to the
weak economic environment, including a continued decline in corporate
technology spending. Technology Services revenues decreased 22.9% primarily as
the result of the continuing industry-wide slowdown in customer demand for
technology staffing services. Technology Services billable consultants on
assignment declined from approximately 1,970 at year-end 2002 to approximately
1,800 at the end of the second quarter. Staffing Services revenues decreased
2.2%, to $62.7 million, in the second quarter of 2003 primarily due to declines
in the retail component of the Companys temporary staffing business and
permanent placement revenues, offset by growth in the Companys
vendor-on-premise (VOP) business. Permanent placement revenues were 2.3% of
Staffing Services revenues in the second quarter of 2003, down from 4.0% in the
second quarter of 2002, while the retail component of temporary staffing also
declined to 60.6% of Staffing Services revenues in the second quarter of 2003,
down from 63.7% in the second quarter of 2002. VOP revenues totaled 37.0% of
Staffing Services revenues in the second quarter of 2003, up from 32.3% in the
second quarter of 2002. The Company does not expect any significant
improvements in demand for its services before 2004 in light of ongoing
economic and geopolitical uncertainties. In addition, there can be no
assurance that Technology Services revenues will increase as the broader
economy strengthens or these other uncertainties subside.

Direct Costs of Services and Gross Profit.Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, decreased
11.5% to $95.9 million in the second quarter of 2003 on the lower revenues.
Gross profit decreased 20.1% to $26.6 million on the lower revenues. Gross
profit as a percentage of revenue also decreased to 21.7% in the second quarter
of 2003 from 23.5% in the second quarter of 2002, primarily as the result of
the continued softening in the higher margin sectors of the staffing and
consulting businesses, the significant decline in permanent placement services,
continuing downward bill rate pressure imposed by many of the Companys larger
customers and higher payroll taxes.

Operating Expenses.Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense,
decreased 17.8% to $25.5 million in the second quarter of 2003 from $31.0
million in the second quarter of 2002. The decrease was primarily due to the
Companys aggressive cost reduction program, including its workforce reduction
and office consolidation initiatives. Approximately 8.0% of the Companys
permanent workforce was eliminated during the second quarter of 2003. Also,
variable or incentive compensation declined due to lower revenues and operating
margins. As a percentage of revenues, selling, general and administrative
expenses decreased to 19.7% in the second quarter

18



---



##### 



of 2003 from 20.7% in the
second quarter of 2002. In addition, depreciation and amortization expense
decreased to 1.1% of revenues in the second quarter of 2003 from 1.2% in the
second quarter of 2002.

Restructuring and Rationalization Charges.Beginning in 2001, the Company
implemented a plan to restructure and rationalize certain operations. As a result, the Company
recorded charges totaling $2.0 million and $0.7 million in the second quarters
of 2003 and 2002, respectively. These charges were comprised of the following
components (in thousands):

|                                                |  |                    |       |          |  |   |     | 
|----------------------------------------------- |  | ------------------ | ----- | -------- |  | - | --- | 
|                                                |  | Three Months Ended
|                                                |  | June 29,           |       | June 30,
|                                                |  | 2003               |       | 2002    
|                                                |  |                    |       |         
|Employee severance                              |  | $                  | 229   |          |  | $ | 665 | 
|Lease abandonment and termination costs         |  |                    | 1,608 |          |  |   | 3   | 
|Property
abandonment charges                    |  |                    | 130   |          |  |   |    | 
|Other                                           |  |                    | 49    |          |  |   |    | 
|                                                |  |                    |       |          |  |   |     | 
|Total restructuring and rationalization charges |  | $                  | 2,016 |          |  | $ | 668 | 
|                                                |  |                    |       |          |  |   |     | 

Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the quarter ended June 29, 2003 (in thousands):

|                                    |  |           |      |       |  |       |       |       |  |   |     |   |  |   |       |  
|----------------------------------- |  | --------- | ---- | ----- |  | ----- | ----- | ----- |  | - | --- | - |  | - | ----- | -
|                                    |  | Employee  |      | Lease |  |       |       |       |  |   |     |  
|                                    |  | Severance |      | Costs |  | Other |       | Total
|                                    |  |           |      |       |  |       |       |      
|Accrued liability at March 30, 2003 |  | $         | 367  |       |  | $     | 4,420 |       |  | $ | 46  |   |  | $ | 4,833 |  
|Charges                             |  |           | 229  |       |  |       | 1,608 |       |  |   | 49  |   |  |   | 1,886 |  
|Cash payments                       |  |           | (289 | )     |  |       | (340  | )     |  |   | (64 | ) |  |   | (693  | )
|                                    |  |           |      |       |  |       |       |       |  |   |     |   |  |   |       |  
|Accrued liability at June 29, 2003  |  | $         | 307  |       |  | $     | 5,688 |       |  | $ | 31  |   |  | $ | 6,026 |  
|                                    |  |           |      |       |  |       |       |       |  |   |     |   |  |   |       |  

Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 8.0% of the Companys permanent workforce, or 70 employees,
was eliminated during the quarter. Lease abandonment and termination costs
related primarily to office closures, branch consolidations and leased space
reductions.

Of the remaining accrued liability at June 29, 2003, the Company expects
to pay approximately $2.3 million over the next twelve months and the balance,
primarily lease payments, over the following seven years.

Interest Expense.Interest expense decreased 83.1% to $0.7 million in the
second quarter of 2003 from $4.4 million in the second quarter of 2002
primarily as a result of the comprehensive financial restructuring completed in
April 2003 and the accounting treatment required by Generally Accepted
Accounting Principles that requires the deferred gain on financial
restructuring, net, to be amortized into interest over the term of the
facility. For the quarter ended June 29, 2003, interest expense was $744,
which is net of amortization of deferred gain on financial restructuring of
$824. The average interest rate on borrowings was 7.6% in the second quarter
of 2003, down 30 basis points from the second quarter of 2002. See  
Liquidity and Capital Resources.

Gain on Financial Restructuring.The Company recorded a gain of $84.6
million in the second quarter of 2003 as a result of the conversion of $109.7
million of subordinated notes to equity. The gain on financial restructuring
is net of professional fees incurred in connection with the financial
restructuring of $1.5 million in the second quarter of 2003. Fees incurred in
the second quarter of 2002 totaled $0.7 million and were previously classified
in restructuring and rationalization charges. These fees have been
reclassified for all periods presented. See   Liquidity and Capital Resources
 Financial Restructuring.

19



---



##### 



Provision (Benefit) for Income Taxes. No provision or benefit for income
taxes was recorded in the second quarter of 2003 since the gain from the
financial restructuring will not be subject to income tax and the Company has
incurred operating losses which can be carried forward to offset future taxable
income. Because of the changes in ownership of the Company that occurred in
connection with the financial restructuring on April 14, 2003, the utilization
of net operating losses generated prior to that date will not be available to
offset future taxable income. The Company has deferred tax assets relating to
NOL carryforwards and deductible temporary differences which are fully reserved
through a valuation allowance to the extent they are not offset by deferred tax
liabilities. The effective tax benefit rate of 20% in the second quarter of
2002 was lower than the U.S. federal statutory rate of 35% primarily due to the
impact of non-deductible expenses and the provision of valuation allowances
against deferred income tax assets.

RESULTS OF OPERATIONS

Six Months Ended June 29, 2003 Versus Six Months Ended June 30, 2002

Revenues.Total revenues decreased 14.3% to $243.2 million in the first
half of 2003 from $283.8 million in the first half of 2002 due to the weak
economic environment, including a continued decline in corporate technology
spending. Technology Services revenues decreased 24.7% primarily as the result
of the continuing industry-wide slowdown in customer demand for technology
staffing services. Technology Services billable consultants on assignment
declined from approximately 1,970 at year-end 2002 to approximately 1,800 at
the end of the second quarter. Staffing Services revenues decreased 0.8%, to
$122.8 million, in the first half of 2003 primarily due to declines in the
retail component of the Companys temporary staffing business and permanent
placement revenues, offset by growth in the Companys VOP business. Permanent
placement revenues were 2.2% of Staffing Services revenues
in the first half of 2003, down from 3.7% in the first half of 2002, while the
retail component of temporary staffing also declined to 60.6% of Staffing
Services revenues in the first half of 2003, down from 64.4% in the first half
of 2002. VOP revenues totaled 37.2% of Staffing Services revenues in the first
half of 2003, up from 31.9% in the first half of 2002. The Company does not
expect any significant improvements in demand for its services before 2004 in
light of ongoing economic and geopolitical uncertainties. In addition, there
can be no assurance that Technology Services revenues will increase as the
broader economy strengthens or these other uncertainties subside.

Direct Costs of Services and Gross Profit.Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, decreased
11.6% to $191.5 million in the first half of 2003 on the lower revenues. Gross
profit decreased 22.9% to $51.7 million on the lower revenues. Gross profit as
a percentage of revenue also decreased to 21.3% in the first half of 2003 from
23.6% in the first half of 2002, primarily as the result of the continued
softening in the higher margin sectors of the staffing and consulting
businesses, the significant decline in permanent placement services, continuing
downward bill rate pressure imposed by many of the Companys larger customers
and higher payroll taxes.

Operating Expenses.Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense,
decreased 17.1% to $52.2 million in the first half of 2003 from $63.0 million
in the first half of 2002. The decrease was primarily due to the Companys
aggressive cost reduction program, including its workforce reduction and office
consolidation initiatives. Approximately 12.0% of the Companys permanent
workforce was eliminated during the first half of 2003. Also, variable or
incentive compensation declined due to lower revenues and operating margins.
As a percentage of revenues, selling, general and administrative expenses
decreased to 20.3% in the first half of 2003 from 20.9% in the first half of
2002. In addition, depreciation and amortization expense decreased to 1.1% of
revenues in the first half of 2003 from 1.3% in the first half of 2002.

Restructuring and Rationalization Charges.Beginning in 2001, the Company
implemented a plan to restructure and rationalize certain operations. As a
result, the Company recorded charges totaling $2.1 million

20



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##### 



and $0.9 million in
the first half of 2003 and 2002, respectively. These charges were comprised of
the following components (in thousands):

|                                                |  |                  |       |          |  |   |     |  
|----------------------------------------------- |  | ---------------- | ----- | -------- |  | - | --- | -
|                                                |  | Six Months Ended
|                                                |  | June 29,         |       | June 30,
|                                                |  | 2003             |       | 2002    
|                                                |  |                  |       |         
|Employee severance                              |  | $                | 314   |          |  | $ | 851 |  
|Lease abandonment and termination costs         |  |                  | 1,622 |          |  |   | 90  |  
|Property abandonment charges                    |  |                  | 130   |          |  |   | (16 | )
|Other                                           |  |                  | 49    |          |  |   |    |  
|                                                |  |                  |       |          |  |   |     |  
|Total restructuring and rationalization charges |  | $                | 2,115 |          |  | $ | 925 |  
|                                                |  |                  |       |          |  |   |     |  

Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the six months ended June 29, 2003 (in thousands):

|                                       |  |           |      |       |  |       |       |       |  |   |      |   |  |   |        |  
|-------------------------------------- |  | --------- | ---- | ----- |  | ----- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                       |  | Employee  |      | Lease |  |       |       |       |  |   |      |  
|                                       |  | Severance |      | Costs |  | Other |       | Total
|                                       |  |           |      |       |  |       |       |      
|Accrued liability at December 29, 2002 |  | $         | 559  |       |  | $     | 4,658 |       |  | $ | 84   |   |  | $ | 5,301  |  
|Charges                                |  |           | 314  |       |  |       | 1,622 |       |  |   | 49   |   |  |   | 1,985  |  
|Cash payments                          |  |           | (566 | )     |  |       | (592  | )     |  |   | (102 | ) |  |   | (1,260 | )
|                                       |  |           |      |       |  |       |       |       |  |   |      |   |  |   |        |  
|Accrued liability at June 29, 2003     |  | $         | 307  |       |  | $     | 5,688 |       |  | $ | 31   |   |  | $ | 6,026  |  
|                                       |  |           |      |       |  |       |       |       |  |   |      |   |  |   |        |  

Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 12.0% of the Companys permanent workforce, or 110
employees, was eliminated during the first half 2003. Lease abandonment and
termination costs related primarily to office closures, branch consolidations
and leased space reductions.

Of the remaining accrued liability at June 29, 2003, the Company expects
to pay approximately $2.3 million over the next twelve months and the balance,
primarily lease payments, over the following seven years.

Interest Expense.Interest expense decreased 40.9% to $5.1 million in the
first half of 2003 from $8.7 million in the first half of 2002 primarily as a
result of the comprehensive financial restructuring completed in April 2003 and
the accounting treatment required by Generally Accepted Accounting Principles
that requires the deferred gain on financial restructuring, net, to be
amortized into interest over the term of the facility. For the six months
ended June 29, 2003, interest expense was $5,136, which is net of amortization
of deferred gain on financial restructuring of $824. The average interest rate
on borrowings was 7.4% in the first half of 2003, down 20 basis points from the
first half of 2002. See   Liquidity and Capital Resources.

Gain on Financial Restructuring.The Company recorded a gain of $83.1
million in the first half of 2003 as a result of the conversion of $109.7
million of subordinated notes to equity. The gain on financial restructuring
is net of professional fees incurred in connection with the financial
restructuring of $3.0 million in the first half of 2003. Fees incurred in the
first half of 2002 totaled $0.7 million and were previously classified in
restructuring and rationalization charges. These fees have been reclassified
for all periods presented. See   Liquidity and Capital Resources  Financial
Restructuring.

21



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##### 



Provision (Benefit) for Income Taxes.No provision or benefit for income
taxes was recorded in the first half of 2003 since the gain from the financial
restructuring will not be subject to income tax and the Company has incurred
operating losses which can be carried forward to offset future taxable income.
Because of the changes in ownership of the Company that occurred in connection
with the financial restructuring on April 14, 2003, the utilization of net
operating losses generated prior to that date will not be available to offset
future taxable income. The Company has deferred tax assets relating to NOL
carryforwards and deductible temporary differences which are fully reserved
through a valuation allowance to the extent they are not offset by deferred
tax liabilities. The income tax provision recorded for the six months ended June 30, 2002
reflects an income tax benefit of $1.2 million related to its operating losses,
computed at an effective rate of approximately 20%. This benefit was offset by
the charge of approximately $5.2 million related to the adoption of SFAS 142.

LIQUIDITY AND CAPITAL RESOURCES

The Company has experienced declines in revenues over the last two years
as the result of ongoing weak economic conditions and does not expect any
significant improvements in demand for its services before 2004. In light of
these revenue declines, the Company has focused on reducing expenses generally,
limiting capital expenditures to only the highest priority projects and
managing its accounts receivable very closely. As a result of the reduced need
for working capital and these priorities, the Companys cash needs have been
reduced substantially from prior years.

The Companys primary sources of cash during the past year were cash from
operations and income tax refunds. As a result of the completion of the
Companys financial restructuring and the execution of amendments and maturity
date extensions to the revolving credit facility (as amended, the Credit
Facility) in connection therewith, the Companys sources of cash in 2003 also
include available borrowings under the Credit Facility. The Companys
principal uses of cash are to repay debt, fund working capital and meet its
diminished requirements for capital expenditures. The Company believes, subject
to the conditions and contingencies described above in Forward-Looking
Information, that cash flow from operations and borrowings under the Credit
Facility will be adequate to meet its debt repayment objectives and its
diminished needs for working capital and capital expenditures.

For the six months ended June 29, 2003, cash provided by operating
activities was $24.7 million compared with $21.1 million in the first half of
2002, primarily as a result of income tax refunds received each year. In the
aggregate, days sales outstanding decreased to 47 days at June 29, 2003 from
48 days at December 29, 2002. Cash used in investing activities was $0.5
million in the first half of 2003 compared to cash provided by investing
activities of $3.0 million during the first half of 2002 due primarily to the
cash proceeds received from the sale of a business in the prior year. Cash
used for investing activities related primarily to the Companys capital
spending. Capital spending in the first half of 2003 was $0.5 million, down
slightly from $0.8 million in the first half of 2002. Cash used for financing
activities was $42.6 million in the first half of 2003, up from $16.4 million
in the first half of 2002 as the company used substantially all of its cash on
hand to pay down the Credit Facility in connection with the financial
restructuring.

The
Company has accrued restructuring and rationalization charges of $6.0
million at June 29, 2003 and expects to pay approximately $2.3 million over the
next twelve months and the balance, primarily lease payments, over
the following seven years. In addition, the Company has
$1.1 million of accrued professional fees related to the
financial restructuring at June 29, 2003 which it expects to pay out over the next six
months.

The Company is subject to periodic review by federal, state and local
taxing authorities in the ordinary course of business and as is customary for
tax returns claiming significant income tax refunds has been advised by the
Internal Revenue Service that the Service is reviewing the Companys 2002, 2001
and 2000 federal income tax returns to determine whether to perform an income
tax audit for any or all of those tax years. If any of the Companys income
tax returns are audited, certain tax positions taken by the Company could be
challenged and adjustments proposed that could result in assessments for
additional taxes payable, together with penalties and interest. The Company
believes that its tax positions comply with applicable tax laws and the Company
would vigorously defend these positions if challenged. Although the Company
believes that it has adequately accrued for any foreseeable payments resulting
from tax examinations, there can be no assurance that any such additional
taxes, penalties or interest payable would not have a material effect on the
Companys

22



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##### 



liquidity or financial condition.

Financial Restructuring

On April 14, 2003, the Company completed a comprehensive financial
restructuring with its senior lenders and the holders of approximately $109.7
million of its outstanding 5.75% Convertible Subordinated Notes due 2004 in
which it issued shares of the Companys Common Stock and Series B Preferred
Stock to the participating noteholders in exchange for their 5.75% Notes (the
Exchange Transaction). In the Exchange Transaction, which was privately
negotiated, the Company exchanged newly issued equity with the participating
noteholders and issued the following consideration for each $1,000 in principal
amount of notes exchanged:



| |  |  | $28.75 in cash;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 7.6382 shares (190.9560 shares before reverse split) of newly
issued shares of the Companys Common Stock; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | 9.5242 shares of Series B Preferred Stock of the Company,
each share of which is convertible
into 4 shares (100 shares before reverse split) of Common Stock upon
any amendment to the Companys charter increasing the authorized
number of shares of Common Stock or effecting a reverse split of
outstanding shares of Common Stock that increases the number of
authorized but unissued shares. The holders of Series B Preferred
Stock vote on all matters with the Common Stock as if converted, have
a liquidation preference of $.01 per share, and otherwise have no
greater rights or privileges than the Common Stock. With the reverse
stock split complete, the Company intends to convert all of the Series
B Preferred Stock into Common Stock in accordance with its terms.

In connection with the Exchange Transaction, the Company entered into an
agreement with each of the former noteholders participating in the exchange to
provide them with registration rights with respect to the shares of Common
Stock issued in the exchange or acquired upon conversion of the Series B
Preferred Stock.

As a result of the Exchange Transaction, the participating noteholders in
the aggregate were issued 837,617 shares of Common Stock (20,940,425 shares
before reverse split) and 1,044,433 shares of Series B Preferred Stock, which
together represent approximately 82% of the Companys outstanding Common Stock
(assuming for this purpose that all shares of the Series B Preferred Stock
issued to the participating noteholders have been converted). The existing
shareholders retained ownership of their outstanding 1,075,248 shares of Common
Stock (26,881,212 shares before reverse split), which represent approximately
18% of the outstanding Common Stock (on the same, as-converted, basis). In
connection with this ownership change, the Company also reconstituted its Board
of Directors to provide for a seven-person Board and the designation of two
representatives of the new major shareholders to serve as new Board members,
together with the Companys Chief Executive Officer, one incumbent independent
Board member who was designated by the Company with the consent of the
participating noteholders and three other independent Board members, two of
whom are incumbents, who were designated by the participating noteholders.

In order to permit the closing of the Exchange Transaction contemplated in
the financial restructuring and to provide for the terms on which the existing
senior lenders would continue to finance the Companys working capital needs,
the Company and its existing senior lenders also executed definitive loan
agreements for the Credit Facility, which provided for certain amendments and
maturity date extensions to the revolving credit facility and eliminated the
Equity Appreciation Right (the EAR) held by the senior lenders (the Senior
Debt Restructuring). The Senior Debt Restructuring provided for the
forgiveness of indebtedness in the amount of $10.3 million. As a result of the
Exchange Transaction and the Senior Debt Restructuring, the Company used
substantially all of its cash on hand, after payment of transaction expenses,
to repay approximately $38.0 million of its outstanding credit facility and
eliminated an additional $120.0 million of its outstanding

23



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##### 



indebtedness, which
will result in substantial reductions in the Companys interest expense in
future periods. No provision or benefit for income taxes was recorded
in the second quarter of 2003 since the gain from financial
restructuring will not be subject to income tax and the Company has
incurred operating losses which can be carried forward to offset
future taxable income.

The Credit Facility provides for a $70.7 million revolving line of credit
due May 1, 2004 and is subject to certain maturity date
extensions, assuming the Company is in compliance with its covenants, in six-month
increments up through May 1, 2005. Availability of borrowings under the Credit
Facility is subject to a borrowing base calculated as specified percentages of
the Companys eligible accounts receivable (as defined) in the aggregate. The
Credit Facility contains covenants, including financial covenants
that require monthly maintenance of cumulative EBITDA levels (as defined in the
amended agreement) and an interest and subordinated indebtedness coverage
ratio. The Credit Facility also contains restrictions on the payment of cash
dividends on the Companys capital stock and places additional limitations on
share repurchases, acquisitions and capital expenditures. Finally, in lieu of
the EAR included as part of the revolving credit facility that was in effect in
2002, the Company has issued common stock purchase warrants to the lenders
under the Credit Facility entitling them to purchase a total of 768,997 shares
of Common Stock (19,224,916 shares before reverse split), or 10% of the
outstanding Common Stock on a fully diluted basis. These warrants are
exercisable in whole or part over a 10-year period and the exercise price
thereunder is $7.8025 per share ($0.3121 per share before reverse split), which
was based on a stated equity valuation for the Company of $60.0 million. The
exercise price for these warrants exceeded the estimated fair value of the
underlying equity at the issuance date. Interest rates payable under the
Credit Facility were set at prime plus 325 basis points through June 2003 with
increases during each six-month period through May 1, 2005. The Companys
interest rate is currently set at prime plus 375 basis points through December
2003.

In connection with the financial restructuring the Company agreed to seek
shareholder approval at the 2003 Annual Meeting of Shareholders to amend and
restate its certificate of incorporation, and on July 24, 2003, the
shareholders approved each of the proposed amendments. The amendments to the
certificate of incorporation include the following:



| |  |  | a reverse stock split of the Companys Common Stock at a
one-for-twenty-five ratio, which was completed on August 5, 2003;                                                                                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | elimination of provisions that separate the Board of
Directors into three classes and that prohibit action by consent of
shareholders without a meeting;                                                                                                                                                  
|
| |  |  | an election by the Company not to be governed by Section 203
of the Delaware General Corporation Law, which restricts the ability
of the Company to engage, directly or indirectly, in a business
combination transaction with a holder of 15% or more of its voting
stock;                               
|
| |  |  | addition of provisions requiring a supermajority vote of the
Board of Directors or shareholders to adopt changes to the
certificate of incorporation or bylaws; and                                                                                                                                       
|
| |  |  | addition of a provision to protect minority shareholders in
connection with certain transactions with a shareholder (a
Significant Holder) that beneficially owns 20% or more of the
shares of the Companys capital stock that are entitled to vote on
matters submitted to a vote of the shareholders.

The
Company has filed a restated certificate of incorporation that
effects each of these amendments.

In addition, in connection with the financial restructuring, the Board of
Directors amended and restated the Companys bylaws. The amended and restated
bylaws provide, among other things, that, as long as there are Significant
Holders, the Significant Holders shall be entitled to designate, in the
aggregate, two members (such designees, being Significant Holder Designees)
of the Board of Directors, the size of which is initially set at seven members,
and to designate two observers entitled to attend all meetings of the Board of
Directors and its committees. Furthermore, the amended and restated bylaws
provide that, subject to applicable law, for so long as there are any
Significant Holders, a committee

24



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##### 



comprised of the two Significant Holder
Designees and one independent director who is not also a Significant Holder
Designee shall be responsible for designating between one (1) and four (4)
independent nominees for election to the Board of Directors, with the number
within such range depending on the amount of voting stock beneficially owned by
the Significant Holders.

As a result of the financial restructuring, three former noteholders, two
of which are affiliates of one another, are Significant Holders within the
meaning of the amended and restated bylaws. These three former noteholders are
also senior lenders under the Credit Facility. Also as a result of the
financial restructuring, these three former noteholders collectively
beneficially own common and Series B preferred stock of the Company having
approximately 45% of the voting power of the Companys capital stock in the
aggregate, excluding any shares of Common Stock under warrants issued to them
as senior lenders in connection with the amendment and restatement of the
Credit Facility. Accordingly, these three former noteholders have the power to
designate either directly, or through a committee including Significant Holder
Designees, an aggregate of six nominees for election to the board of directors
(at least four of whom must qualify as independent directors under applicable
exchange rules and listing standards) and two board observers.

In connection with the financial restructuring, the Company amended and
restated the shareholder rights agreement that governs the terms of preferred
share purchase rights that currently accompany the Common Stock. The
amendments included, among other things, exemptions preventing the following
from triggering separation of the rights from the Common Stock: (i) beneficial
ownership of capital stock by the participating noteholders acquired in the
financial restructuring; (ii) beneficial ownership by any Significant Holder of
capital stock of the Issuer acquired in accordance with the amended and
restated certificate of incorporation; and (iii) beneficial ownership by any
third party of capital stock of the Company acquired in a transfer from a
Significant Holder pursuant to a transaction that complies with the amended and
restated certificates of incorporation. In addition, the shareholder rights plan was amended to include a tag-along right for
the benefit of any holder (including certain holders of more than 2% acting
together as a group) of 5% or more of the voting stock of the Company pursuant
to which such holder (or group) will be entitled to participate pro rata, for
the same amount and form of consideration and otherwise on substantially the
same terms and conditions, in any transfer by any Significant Holders of
capital stock of the Company of 20% or more of the voting stock of the Company.

In connection with the Companys financial restructuring, the Company
terminated its 1995 Stock Option Plan. Additionally, a number of the Companys
employees, including each of the Companys executive officers at the end of
2002 and all but one of the Companys Board of Directors have irrevocably
cancelled any and all rights that they had to exercise any and all stock
options that were previously granted and agreed that all such options would be
forfeited to the Company. These directors and employees held in the aggregate
87,601 of the stock options (2,190,030 stock options before reverse split) that
were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As
a result of these voluntary forfeitures, 16,683 stock options (417,080 options
before reverse split) remained outstanding under the 1995 Stock Option Plan and
these options have a weighted average exercise price of $232.33 per share
($9.29 per share before reverse split). Although the 1995 Stock Option Plan
has been terminated and no future issuances thereunder will be made, these
remaining outstanding stock options will continue to be exercisable in
accordance with their terms.

The Companys Board of Directors adopted the 2003 Equity Incentive Plan
(the 2003 Equity Plan) simultaneously with the completion of the Companys
financial restructuring. The 2003 Equity Plan authorizes grants of stock
options, stock appreciation rights (or SARs), restricted stock, deferred
stock awards and performance awards (and dividend equivalent rights relating to
options, SARs, deferred stock and performance awards), in the case of stock or
option awards, for up to 794,835 shares (19,870,873 shares before reverse
split), or 10.3%, of the Companys fully diluted Common Stock. Awards under
the 2003 Equity Plan are to be made to key employees, directors and consultants
as selected by the Board of Directors or the Compensation Committee. The
duration of any option or SAR granted under the 2003 Equity Plan will not
exceed ten years. Awards will generally vest monthly on a pro rata
basis at an annual rate of 25% unless either the

25



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##### 



Board of Directors or Compensation Committee approves
or a participants employment agreement provides otherwise. Following a
termination of employment, vested options and/or SARs must be exercised within
3 months (12 months in the case of death or disability), except that options
and SARs terminate immediately upon a termination for cause as defined in the
relevant participants employment agreement, or as determined in the discretion
of the Board of Directors or the Compensation Committee if no employment
agreement exists. Any non-vested option, SARs or other awards issued under the
2003 Equity Plan will be forfeited upon any termination. The Board of
Directors and Compensation Committee retain the discretion to extend the
post-employment exercise period of an option or SAR and to accelerate vesting
of awards under the 2003 Equity Plan.

In connection with the financial restructuring, four executive officers,
including the Companys chief executive officer and chief financial officer,
entered into new employment agreements with the Company. These employment
agreements replaced the existing employment agreements with these executive
officers. Each of these new employment agreements provides for an annual base
salary approximately equal to the current base salary, the right to earn annual
bonuses ranging from a maximum of 60% of annual salary to 100% of annual salary
(for the chief executive officer) and, subject to shareholder approval of the
2003 Equity Plan (which was obtained on July 24, 2003), options under that plan
as described below. Each of these executive officers had previously
surrendered all options awarded to them under existing option plans. Each
employment agreement is for an initial term of two years, with automatic
one-year extensions thereafter unless either party provides written notice of
termination at least three months prior to any scheduled expiration date. Each
employment agreement provides severance equal to one years salary (two years
salary for the chief financial officer) and a pro-rated portion of any earned
bonus following termination of employment by the Company without cause. In
addition, certain of these executive officers, other than the chief financial
officer, would be entitled to additional severance of up to one years salary
if in the first year following the financial restructuring the Company is
acquired at a price per share below a specified threshold.

At the time of the restructuring, the Board of Directors approved the
granting of stock options for 503,400 shares (12,585,000 shares before reverse
split), representing 6.5% of the Companys fully diluted Common Stock, to
certain executive officers. Of these initial grants, 348,000 options
(8,700,000 options before reverse split) have an exercise price of $7.8025 per
share ($0.3121 per share before reverse split), and the other
155,400 options (3,885,000 options before reverse split) have an exercise
price of $11.7025 per share ($0.4681 per share before reverse split). The
initial stock option grants to these officers vest monthly at an annual rate of
25% and each will have 12 months following the termination of his employment
(other than for cause) to exercise vested stock options held as of the
termination date. The exercise price of a portion of these options is based on
an aggregate stated equity value of the Company of $60.0 million, and for the
remaining options the exercise price is based on an aggregate stated equity
value of $90.0 million. The exercise price for these stock options exceeded
the estimated fair value of the underlying equity at the issuance date.
Following these initial grants, 291,435 shares (7,285,873 shares
before reverse split), or 3.8%, of the Companys fully diluted Common Stock
remained authorized for issuance under the 2003 Equity Plan and are reserved
for future grants. The majority of the options granted at the time of
the restructuring will be subject to variable accounting because they
were granted within six months after the date the options under the
1995 Stock Option Plan were cancelled. This may
result in non-cash compensation expense in future periods to the
extent the fair value of the stock price exceeds the option exercise
price.

Accounting for Financial Restructuring Transactions

The Company recorded the issuance of its equity securities in exchange for
outstanding 5.75% Notes at the fair value of the newly issued equity
securities, with the excess of the debt carrying value over the fair value of
equity securities recorded as a gain. The forgiveness of $10.3 million in
Senior Debt will reduce future interest expense over the term of the amended
Credit Facility and the $1.1 million of fees paid to the senior lenders will be
reflected as a reduction in the principal balances outstanding as required
under accounting for troubled debt restructuring. The Company engaged an
independent valuation firm to assist in the determination of fair value of the warrants issued
in connection with the Senior Debt Restructuring and recorded this amount as
additional shareholders equity with a corresponding reduction in the
outstanding Senior Debt, with such

26



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##### 



amount recognized as a component of interest
expense over the term of the Senior Debt. The net gain on financial
restructuring is not classified as an extraordinary item in accordance with the
recently issued SFAS No. 145.

Managements Plans for Liquidity and Debt Compliance

The Company experienced declining revenue and significant operating losses
in 2001 and 2002, and weak economic conditions have continued in the first half of 2003. In response to the declining
operating performance, the Company undertook several initiatives beginning in
2001 including the following:



| |  |  | Execution of the Exchange Transaction and the Senior Debt
Restructuring discussed above, which resulted in the Company
repaying approximately $38.0 million of its outstanding credit
facility and eliminating an additional $120.0 million of its
outstanding indebtedness, which will result in a substantial
reduction in prospective annual interest expense;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Filing for and receiving substantial income tax refunds by
carrying back current period tax losses to recover income taxes
previously paid, with a substantial portion of such refunds used to
reduce outstanding indebtedness;                                                                                                                                  
|
| |  |  | Restructuring and rationalization actions, including the
reduction of approximately 12% of its permanent workforce in the
first half of 2003 (17.5% for the year 2002) and ongoing
rationalization of office space; and                                                                                                                                          
|
| |  |  | Reduction in accounts receivable with resulting cash flow
used to reduce outstanding indebtedness.                                                                                                                                                                                                                                                               

The Companys ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement (as defined) and a monthly interest and subordinated indebtedness
coverage ratio. The amended Credit Facility defines consolidated EBITDA as
consolidated net income before interest expense, income taxes, depreciation and
amortization, non-cash impairment charges, restructuring and rationalization
charges, professional fees relating to the debt restructuring and non-cash
compensation expense for stock options, if any. These covenants require the
Company to generate EBITDA, as defined, measured on a cumulative monthly basis
in the aggregate amount of $5.9 million from April through December 2003.
For the period through June 29, 2003, the Company has exceeded
the level of earnings required in the bank covenant. Based on the Companys
fiscal 2003 and 2004 projections, which
reflect declining demand for the Companys services, offset by reductions in
costs associated with the reduced revenues and resulting from personnel and
office space rationalization, management believes the Company will be able to
maintain compliance with the financial covenants for the remaining initial term
of the Credit Facility. The Company also believes that the operating trends in
the first half of 2003 support the key assumptions in its 2003 and 2004
operating plans. However, there can be no assurance that the economy or the
Company will perform as expected or that further economic declines will not
adversely impact the Companys ability to comply with the financial covenants.
In addition, the interest coverage ratio adjusts from an interest coverage
ratio to an interest and subordinated indebtedness coverage ratio on May 31,
2004, and there can be no assurance that the Company will be able to satisfy
this enhanced financial covenant if the revolving credit facility is extended
beyond its current term. If the Company does violate future covenants, it
would seek waivers and amendments from its lenders, but can give no assurance
that any such waivers and amendments would be available at all or on acceptable
terms. If the Company were unable to obtain a waiver of future covenant
violations, the lenders would be entitled to require immediate repayment of all
amounts outstanding under the Credit Facility. An acceleration of outstanding
amounts under the Credit Facility would also cause a default under, and permit
acceleration of, the Companys remaining 5.75% Convertible Subordinated Notes.
In the event of one or more such defaults, the Companys ongoing viability
would be seriously threatened, and it would be forced to evaluate a number of
strategic alternatives, including a further debt restructuring or other
reorganization, the closure of certain operating locations or the sale of
certain or all of its assets in order to continue to fund its operations. In
the

27



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current economic environment, management believes that any such sale of
assets 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 the
Companys liabilities.

The Companys Common Stock has traded since November 2002 on the Over the
Counter Bulletin Board (the OTC Bulletin Board) following notification by the
New York Stock Exchange (the NYSE) of its intent to seek the removal of the
Common Stock from the NYSE list. Following an unsuccessful appeal of the
NYSEs decision pursuant to NYSE rules, the Common Stock was delisted by the
NYSE in February 2003. The restructuring agreement for the Companys recently
completed financial restructuring contemplates that the Company will use its
best efforts to procure a new stock exchange listing for the shares of Common
Stock issued in the restructuring (or to be issued upon the conversion of the
Series B Preferred Stock), but in the meantime the Company expects that the
Common Stock will continue to trade on the OTC Bulletin Board under the symbol
VPTR.

As a result of the financial restructuring recently completed by the
Company, the aggregate outstanding principal amount of the 5.75% Notes was
reduced to approximately $5.3 million. As of April 14, 2003, the Company
believes it is in compliance with the indenture related to the 5.75% Notes.
Failure to maintain or effect the listing of the Common Stock on a national
securities exchange or an established automated over-the-counter trading market
in the United States would constitute a repurchase event under the 5.75% Notes
and entitle each remaining noteholder to demand repayment of its Notes in full.
In the event that the Company is unable to repay any noteholder who makes such
a demand following a repurchase event and is also unable to obtain waivers of
such repurchase event from each affected noteholder, events of default could
occur under the 5.75% Notes and the Credit Facility and the noteholders could
demand repayment of their respective debt obligations in full. Additionally,
in the event that the noteholders accelerated the payment of the debt
obligations evidenced by the remaining outstanding Notes, the Credit Facility
lenders could demand repayment of the Credit Facility in full.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting
for Costs Associated with Exit or Disposal Activities, which nullifies
Emerging Issues Task Force Issue No. 94-3 (Issue 94-3), Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entitys commitment to an exit plan. The Company adopted
SFAS 146 as of December 30, 2002. The adoption of
SFAS 146 did not have a material effect on the financial
statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Companys outstanding debt under the Credit Facility at June 29, 2003,
was $53.7 million. Interest on borrowings under the Credit Facility is based
on the prime rate plus a variable margin. Based on the outstanding balance at
June 29, 2003, a change of 1% in the interest rate would cause a change in
interest expense of approximately $0.5 million on an annual basis.

ITEM 4. Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (disclosure controls). This evaluation
was performed under the supervision and with the participation of management,

28



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including the Companys Chief Executive Officer and Chief Financial Officer.
Based on this evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective to provide reasonable assurance that information required to be
disclosed in the Companys reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms.

There has been no change in the Companys internal control over financial
reporting during the most recently completed fiscal quarter that has materially
affected, or is reasonable like to materially affect, its internal control over
financial reporting.

PART II - OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds



|(a) |  | The Company completed a financial restructuring on April 14,
2003, the details of which were reported in Part II, Item 2 of the
Companys report on Form 10-Q for the period ended March 30, 2003,
as well as Part I, Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and
Capital Resources  Financial Restructuring.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits - The exhibits filed with or incorporated by reference
into this Form 10-Q are set forth in the Exhibit Index, which
immediately precedes the exhibits to this report.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                           
|   
|    |  | The Company submitted the following reports on Form 8-K during the second
quarter:                                                                                             



| | (i)   |  | March 31, 2003, announcing that the Company received a
term sheet from its current senior lenders to amend, and extend
the maturity date of, its existing revolving credit facility.                                            
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | April 15, 2003, announcing the completion of a
comprehensive financial restructuring with its senior lenders and
the holders of approximately $109.7 million of the outstanding 5
3/4 % Subordinated Convertible Notes due 2004.
|
| | (iii) |  | April 25, 2003, announcing change in control in
connection with the comprehensive financial restructuring.                                                                                                                      
|
| | (iv)  |  | May 14, 2003, announcing the Companys financial
results for the quarter ended March 30, 2003.                                                                                                                                  

29



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                      |  |                                       |  | 
|--------------------- |  | ------------------------------------- |  | 
|                      |  | VENTURI PARTNERS, INC.               
|                      |  | (Registrant)                          |  | 
|                      |  |                                       |  | 
|Date: August 13, 2003 |  | By: /s/ Larry L. Enterline            |  | 
|                      |  |                                       |  | 
|                      |  | Larry L. Enterline                    |  | 
|                      |  | Chief Executive Officer               |  | 
|                      |  |                                       |  | 
|Date: August 13, 2003 |  | By: /s/ James C. Hunt                 |  | 
|                      |  |                                       |  | 
|                      |  | James C. Hunt                         |  | 
|                      |  | President and Chief Financial Officer |  | 

30



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##### 



EXHIBIT INDEX

|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ------------------------------------
|        |  |                                                                                                                               |  | Filed or Furnished |         |                 
|        |  |                                                                                                                               |  | Herewith(*), or    |         |                 
|        |  |                                                                                                                               |  | Incorporated by    |         |                 
|        |  |                                                                                                                               |  | Reference from     |         |                 
|Exhibit |  |                                                                                                                               |  | Previous Exhibit   |         | Company Reg. No.
|Number  |  | Description                                                                                                                   |  | Number             |         | or Report       
|        |  |                                                                                                                               |  |                    |         |                 
|3.1     |  | Restated Certificate of
Incorporation of the
Company                                                                          |  |                    | 99.2    |                  |  | 8-K filed 8/5/03                    
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|3.2     |  | Certificate of
Designation, Preferences
and Rights of Series A
Junior Participating
Preferred Stock                           |  |                    | 99.6    |                  |  | 8-K filed 4/25/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|3.3     |  | Certificate of
Designation for Series B
Convertible Participating
Preferred Stock                                             |  |                    | 99.3    |                  |  | 8-K filed 4/25/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|3.4     |  | Amended and Restated
Bylaws of the Company                                                                                    |  |                    | 99.7    |                  |  | 8-K filed 4/25/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|4.0     |  | Specimen Stock Certificate                                                                                                    |  |                    | *       |                  |  |                                     
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|4.1     |  | Amended and Restated
Rights Agreement between
the Company and Wachovia
Bank, N.A. (as Successor
Trustee) dated April 14,
2003 |  |                    | 1       |                  |  | 8-A12B/A filed
4/16/03              
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|4.2     |  | Indenture between the
Company and HSBC Bank
USA, as Successor Trustee                                                         |  |                    | 4.2     |                  |  | 333-31863                           
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|4.3     |  | Form of Note Certificate
for 5-3/4% Convertible
Subordinated Notes                                                            |  |                    | 4.3     |                  |  | 333-31863                           
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.1    |  | 1995 Equity Participation
Plan, as amended                                                                                    |  |                    | 10.1    |                  |  | 333-31863                           
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.2#   |  | Director and Officer
Indemnification Agreement
of James V. Napier                                                             |  |                    | 10.3    |                  |  | 10-K for year ended
12/31/95        
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.3    |  | Supplemental Retirement
Plan for Edward P.
Drudge, Jr.                                                                        |  |                    | 10.7    |                  |  | 10K for year ended
1/2/00           
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.4    |  | Amended and Restated
Non-Qualified
Profit-Sharing Plan                                                                        |  |                    | 10.16   |                  |  | 10-K for year ended
12/29/96        
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.5    |  | Board of Directors
Deferred Compensation
Plan                                                                                 |  |                    | 10.12   |                  |  | 10-K for year ended
12/28/97        
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.6    |  | Restructuring Agreement
dated March 14, 2003                                                                                  |  |                    | 99.2    |                  |  | 8-K filed 3/17/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.7    |  | Participation Agreement
dated March 14, 2003                                                                                  |  |                    | 99.2    |                  |  | 8-K filed 3/17/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.8    |  | Registration Rights
Agreement dated April 14,
2003                                                                            |  |                    | 99.4    |                  |  | 8-K filed 4/25/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.9    |  | 2003 Equity Incentive
Plan                                                                                                    |  |                    | Annex C |                  |  | Definitive
Schedule14A filed 6/24/03
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     
|10.10   |  | Employment Agreement
dated April 14, 2003
between the Company and
Larry L. Enterline                                          |  |                    | 99.10   |                  |  | 8-K filed 4/25/03                   
|        |  |                                                                                                                               |  |                    |         |                  |  |                                     

31



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##### 



|        |  |                                                                                            |  |                    |       |                  |  |                  
|------- |  | ------------------------------------------------------------------------------------------ |  | ------------------ | ----- | ---------------- |  | -----------------
|        |  |                                                                                            |  | Filed or Furnished |       |                 
|        |  |                                                                                            |  | Herewith(*), or    |       |                 
|        |  |                                                                                            |  | Incorporated by    |       |                 
|        |  |                                                                                            |  | Reference from     |       |                 
|Exhibit |  |                                                                                            |  | Previous Exhibit   |       | Company Reg. No.
|Number  |  | Description                                                                                |  | Number             |       | or Report       
|        |  |                                                                                            |  |                    |       |                 
|10.11   |  | Employment Agreement
dated April 14, 2003
between the Company and
James C. Hunt            |  |                    | 99.11 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                            |  |                    |       |                  |  |                  
|10.12   |  | Employment Agreement
dated April 14, 2003
between the Company and
Michael H. Barker        |  |                    | 99.12 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                            |  |                    |       |                  |  |                  
|10.13   |  | Employment Agreement
dated April 14, 2003
between the Company and
Kenneth R. Bramlett, Jr. |  |                    | 99.13 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                            |  |                    |       |                  |  |                  
|10.14   |  | Restructure Agreement
dated April 14, 2003                                                 |  |                    | 99.14 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                            |  |                    |       |                  |  |                  
|10.15   |  | Second Amended and
Restated Credit Agreement                                               |  |                    | 99.15 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                            |  |                    |       |                  |  |                  
|31.1    |  | Section 302 Certification
of Larry L. Enterline,
Chief Executive Officer
of the Company    |  |                    | *     |                  |  |                  
|        |  |                                                                                            |  |                    |       |                  |  |                  
|31.2    |  | Section 302 Certification
of James C. Hunt, Chief
Financial Officer of the
Company         |  |                    | *     |                  |  |                  
|        |  |                                                                                            |  |                    |       |                  |  |                  
|32.1    |  | Section 906 Certification
of Larry L. Enterline,
Chief Executive Officer
of the Company    |  |                    | *     |                  |  |                  
|        |  |                                                                                            |  |                    |       |                  |  |                  
|32.2    |  | Section 906 Certification
of James C. Hunt, Chief
Financial Officer of the
Company         |  |                    | *     |                  |  |                  

# This Exhibit is substantially identical to Director and Officer
Indemnification Agreements (i) of the same date between the Company and William Simione, Jr.;
(ii) dated April 17, 1998 between the Company and each of James C. Hunt and Ken
R. Bramlett, Jr.; (iii) dated August 9, 1999 between the Company and Janice
L. Scites; and (iv) dated April 14, 2003 between the Company and
Victor E. Mandel.

32