##### 



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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




Form 10-Q





|                                               |  |                                                        
|---------------------------------------------- |  | -------------------------------------------------------
|(Mark One)                                    
|[X]                                            |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|                                               |  | SECURITIES EXCHANGE ACT OF 1934                        
|For the quarterly period ending March 30, 2003
|                                              
|OR                                            
|                                              
|[   ]                                          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF   
|                                               |  | THE SECURITIES EXCHANGE ACT OF 1934                    

For the transition period from _______________ to _____________

Commission file number 001-13956

PERSONNEL GROUP OF AMERICA, INC.

(Exact name of Registrant as specified in its charter)

|                                                               |  |                                                          |  |                                        
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 7363                                                     |  | 56-1930691                             
|(State or other jurisdiction of
incorporation or organization) |  | (Primary Standard
Industrial
Classification Code
number) |  | (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 May 11, 2003, 47,821,637 shares of the registrants Common Stock,
$.01 par value, were outstanding.





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PERSONNEL GROUP OF AMERICA, INC.

TABLE OF CONTENTS

PART I  FINANCIAL INFORMATION

|                            |                                                                                       |                                                      |    |     
|--------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------- | -- | ----
|                            |                                                                                       |                                                      |    | Page
|                            |                                                                                       |                                                      |    |     
|Item 1.                     | Financial Statements (unaudited)                                                      |                                                      |   
|                            |                                                                                       | Unaudited Consolidated Statements of Operations      |    | 3   
|                            |                                                                                       | Unaudited Consolidated Balance Sheets                |    | 4   
|                            |                                                                                       | Unaudited Consolidated Statements of Cash Flows      |    | 5   
|                            |                                                                                       | Notes to Unaudited Consolidated Financial Statements |    | 6   
|Item 2.                     | Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                      | 16
|Item 3.                     | Quantitative and Qualitative Disclosures
About Market Risk                            |                                                      | 25
|Item 4.                     | Controls and Procedures                                                               |                                                      | 26
|PART II  OTHER INFORMATION |                                                                                       |                                                     
|Item 2.                     | Changes in Securities and Use of Proceeds                                             |                                                      | 26
|Item 6.                     | Exhibits and Reports on Form 8-K                                                      |                                                      | 27
|Signatures                  |                                                                                       |                                                      |    | 28  
|Certifications              |                                                                                       |                                                      |    | 29  
|Exhibit Index               |                                                                                       |                                                      |    | 31  

2



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##### 



Personnel Group of America, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations


For the Periods Ended March 30, 2003 and March 31, 2002


(in thousands, except per share data)


|                                                                                 |                                                                 |   |                    |        |           |   |          |        |  
|-------------------------------------------------------------------------------- | --------------------------------------------------------------- | - | ------------------ | ------ | --------- | - | -------- | ------ | -
|                                                                                 |                                                                 |   | Three months ended
|                                                                                 |                                                                 |   |                   
|                                                                                 |                                                                 |   | March 30,          |        | March 31,
|                                                                                 |                                                                 |   | 2003               |        | 2002     
|                                                                                 |                                                                 |   |                    |        |          
|Revenues                                                                         |                                                                 | $ | 120,715            |        |           | $ | 142,053  |       
|Direct costs of services                                                         |                                                                 |   | 95,640             |        |           |   | 108,292  |       
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Gross profit                                                                     |                                                                 |   | 25,075             |        |           |   | 33,761   |       
|Operating expenses:                                                              |                                                                 |   |                    |        |           |   |          |       
|                                                                                 | Selling, general and administrative                             |   |                    | 25,371 |           |   |          | 30,161 |  
|                                                                                 | Depreciation and amortization                                   |   |                    | 1,412  |           |   |          | 1,841  |  
|                                                                                 | Restructuring and rationalization charges                       |   |                    | 1,600  |           |   |          | 263    |  
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Operating income (loss)                                                          |                                                                 |   | (3,308             | )      |           |   | 1,496    |       
|Interest expense                                                                 |                                                                 |   | 4,392              |        |           |   | 4,288    |       
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Loss before income taxes and cumulative effect of
change in accounting principle |                                                                 |   | (7,700             | )      |           |   | (2,792   | )     
|Provision for income taxes                                                       |                                                                 |   |                   |        |           |   | 4,342    |       
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Loss before cumulative effect of change in accounting principle                  |                                                                 |   | (7,700             | )      |           |   | (7,134   | )     
|Cumulative effect of change in accounting principle, net of
taxes                |                                                                 |   |                   |        |           |   | (242,497 | )     
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Net loss                                                                         |                                                                 | $ | (7,700             | )      |           | $ | (249,631 | )     
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|Basic and diluted earnings per common share:                                     |                                                                 |   |                    |        |           |   |          |       
|                                                                                 | Loss before cumulative effect of change in accounting principle |   | $                  | (0.29  | )         |   | $        | (0.27  | )
|                                                                                 | Cumulative effect of change in accounting principle             |   |                    |       |           |   |          | (9.08  | )
|                                                                                 |                                                                 |   |                    |        |           |   |          |       
|                                                                                 | Net loss                                                        |   | $                  | (0.29  | )         |   | $        | (9.35  | )
|                                                                                 |                                                                 |   |                    |        |           |   |          |       

The accompanying notes are an integral part of these statements.

3



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##### 



Personnel Group of America, Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets  March 30, 2003 and December 29, 2002


(in thousands, except per share data)


|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |         |         |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | -------- | -------------- | ------- | ------------ | -------- | ------- | ------- | ------- | -------- | ------- | ------- | -
|                                               |                                                                                                                 |                                                      |                                                      |          | March 30, 2003 |         |             
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         | December 29,
|                                               |                                                                                                                 |                                                      |                                                      |          | Pro Forma      |         | Historical   |          | 2002   
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |        
|Assets                                         |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|Current Assets:                                |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|                                               | Cash and cash equivalents                                                                                       |                                                      | $                                                    | 1,390    |                |         | $            | 21,338   |         |         | $       | 22,623   |        
|                                               | Accounts receivable, net of allowance for doubtful
accounts of
$3,044 and $2,956 in 2003 and 2002, respectively |                                                      |                                                      | 68,505   |                |         |              | 68,505   |         |         |         | 76,178   |        
|                                               | Prepaid expenses and other current assets                                                                       |                                                      |                                                      | 4,214    |                |         |              | 4,214    |         |         |         | 3,940    |        
|                                               | Recoverable income taxes                                                                                        |                                                      |                                                      | 24,757   |                |         |              | 24,757   |         |         |         | 25,476   |        
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total current assets                                 |          |                | 98,866  |              |          |         | 118,814 |         |          |         | 128,217 |  
|Property and equipment, net                    |                                                                                                                 |                                                      | 12,345                                               |          |                |         | 12,345       |          |         |         | 13,240  |         
|Goodwill                                       |                                                                                                                 |                                                      | 103,532                                              |          |                |         | 103,532      |          |         |         | 103,532 |         
|Other assets                                   |                                                                                                                 |                                                      | 1,219                                                |          |                |         | 1,882        |          |         |         | 2,417   |         
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total assets                                         |          | $              | 215,962 |              |          | $       | 236,573 |         |          | $       | 247,406 |  
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|Liabilities and Shareholders Equity (Deficit) |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|Current liabilities:                           |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|                                               | Current portion of long-term debt                                                                               |                                                      | $                                                    | 24,596   |                |         | $            | 38,281   |         |         | $       | 38,633   |        
|                                               | Accounts payable                                                                                                |                                                      |                                                      | 8,151    |                |         |              | 8,151    |         |         |         | 9,887    |        
|                                               | Accrued wages, benefits and other                                                                               |                                                      |                                                      | 58,524   |                |         |              | 61,200   |         |         |         | 62,203   |        
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total current liabilities                            |          |                | 91,271  |              |          |         | 107,632 |         |          |         | 110,723 |  
|                                               | Long-term debt -                                                                                                |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 | Convertible, subordinated notes                      |                                                      |          | 5,339          |         |              |          | 115,000 |         |         |          | 115,000 |        
|                                               |                                                                                                                 | Revolving credit facility                            |                                                      |          | 63,905         |         |              |          | 65,015  |         |         |          | 65,015  |        
|                                               | Other long-term liabilities                                                                                     |                                                      |                                                      | 8,535    |                |         |              | 8,974    |         |         |         | 9,016    |        
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total liabilities                                    |          |                | 169,050 |              |          |         | 296,621 |         |          |         | 299,754 |  
|Commitments and contingencies                  |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|Shareholders equity (deficit):                |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |         
|                                               | Preferred stock, $.01 par value; shares authorized 5,000;
no shares issued and outstanding                      |                                                      |                                                      | 10       |                |         |              |         |         |         |         |         |        
|                                               | Common stock, $.01 par value; shares authorized 95,000;
33,065 shares issued and outstanding                    |                                                      |                                                      | 540      |                |         |              | 331      |         |         |         | 331      |        
|                                               | Additional paid-in capital                                                                                      |                                                      |                                                      | 337,227  |                |         |              | 315,404  |         |         |         | 315,404  |        
|                                               | Retained earnings (accumulated deficit)                                                                         |                                                      |                                                      | (247,326 | )              |         |              | (332,244 | )       |         |         | (324,544 | )      
|                                               | Less common stock held in treasury at cost -                                                                    |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 | 6,184 shares at March 30, 2003 and December 29, 2002 |                                                      |          | (43,539        | )       |              |          | (43,539 | )       |         |          | (43,539 | )      
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total shareholders equity (deficit)                 |          |                | 46,912  |              |          |         | (60,048 | )       |          |         | (52,348 | )
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        
|                                               |                                                                                                                 |                                                      | Total liabilities and shareholders equity (deficit) |          | $              | 215,962 |              |          | $       | 236,573 |         |          | $       | 247,406 |  
|                                               |                                                                                                                 |                                                      |                                                      |          |                |         |              |          |         |         |         |          |        

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

4



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Personnel Group of America, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows


For the Periods Ended March 30, 2003 and March 31, 2002


(in thousands)


|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |        |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | --------- | ------- | -------- | ------ | -
|                                                 |                                                                                               |                                                     |        | Three months ended
|                                                 |                                                                                               |                                                     |        |                   
|                                                 |                                                                                               |                                                     |        | March 30,          |        | March 31,
|                                                 |                                                                                               |                                                     |        | 2003               |        | 2002     
|                                                 |                                                                                               |                                                     |        |                    |        |          
|Cash flows from operating activities:            |                                                                                               |                                                     |        |                    |        |           |         |         
|                                                 | Net loss                                                                                      |                                                     | $      | (7,700             | )      |           | $       | (249,631 | )     
|                                                 | Adjustments to reconcile loss to net cash provided
by (used in) operating activities:         |                                                     |        |                    |        |           |         |          |       
|                                                 | Depreciation and amortization                                                                 |                                                     |        | 1,412              |        |           |         | 1,841    |       
|                                                 | Cumulative effect of change in accounting principle, net of deferred
tax benefit of $42,198   |                                                     |        |                   |        |           |         | 242,497  |       
|                                                 | Deferred income taxes on loss before cumulative effect of
change in accounting principle, net |                                                     |        |                   |        |           |         | 4,418    |       
|                                                 | Changes in assets and liabilities:                                                            |                                                     |        |                    |        |           |         |          |       
|                                                 |                                                                                               | Accounts receivable                                 |        |                    | 7,673  |           |         |          | (1,930 | )
|                                                 |                                                                                               | Recoverable income taxes                            |        |                    | 719    |           |         |          |       |  
|                                                 |                                                                                               | Accounts payable and accrued liabilities            |        |                    | (2,727 | )         |         |          | (931   | )
|                                                 |                                                                                               | Other, net                                          |        |                    | 690    |           |         |          | 237    |  
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       
|                                                 |                                                                                               | Net cash provided by (used in) operating activities |        |                    | 67     |           |         |          | (3,499 | )
|Cash flows from investing activities:            |                                                                                               |                                                     |        |                    |        |           |         |         
|                                                 | Proceeds from sale of business                                                                |                                                     |        |                   |        |           |         | 1,825    |       
|                                                 | Purchase of property and equipment, net                                                       |                                                     |        | (430               | )      |           |         | (307     | )     
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       
|                                                 |                                                                                               | Net cash provided by (used in) investing activities |        |                    | (430   | )         |         |          | 1,518  |  
|Cash flows from financing activities:            |                                                                                               |                                                     |        |                    |        |           |         |         
|                                                 | Repayments under credit facility                                                              |                                                     |        |                   |        |           |         | (13,000  | )     
|                                                 | Borrowings under credit facility                                                              |                                                     |        |                   |        |           |         | 5,000    |       
|                                                 | Credit facility fees                                                                          |                                                     |        | (570               | )      |           |         | (1,657   | )     
|                                                 | Repayments of other debt, net                                                                 |                                                     |        | (352               | )      |           |         | (248     | )     
|                                                 | Proceeds from employee stock purchase plan                                                    |                                                     |        |                   |        |           |         | 34       |       
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       
|                                                 |                                                                                               | Net cash used in financing activities               |        |                    | (922   | )         |         |          | (9,871 | )
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       
|Net decrease in cash and cash equivalents        |                                                                                               |                                                     | (1,285 | )                  |        |           | (11,852 | )       
|Cash and cash equivalents at beginning of period |                                                                                               |                                                     | 22,623 |                    |        |           | 17,557  |         
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       
|Cash and cash equivalents at end of period       |                                                                                               | $                                                   | 21,338 |                    |        | $         | 5,705   |         
|                                                 |                                                                                               |                                                     |        |                    |        |           |         |          |       

The accompanying notes are an integral part of these statements.

5



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PERSONNEL GROUP OF AMERICA, INC.

Notes to Unaudited Consolidated Financial Statements


(Dollars in thousands, except per share data)


(1) Subsequent Event  Comprehensive Financial Restructuring

On April 14, 2003, Personnel Group of America, Inc. and its subsidiaries
(collectively, 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);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 190.9560 shares 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 100 shares of Common Stock and, at
the Companys election, will automatically convert into shares 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 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.

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 20,940,425 shares of Common Stock 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 26,881,212 shares of Common Stock, 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 further
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, including $24,300 of recoverable income
taxes included on the March 30, 2003 balance sheet (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. The Company does not anticipate that any material income
tax liability will arise as a result of the forgiveness of debt in these
financial restructuring transactions due to sufficient current period tax
losses and net operating loss carryforwards available to offset any taxable
income on the debt forgiveness.

6



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The Credit Facility provides for a $70,700 revolving line of credit due
May 1, 2004 and is subject to certain maturity date extensions 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, and the Company had
approximately $8,000 of availability thereunder as of the closing date. The
Credit Facility contains customary covenants, including financial covenants
that require monthly maintenance of cumulative monthly EBITDA levels (as
defined in the amended agreement) commencing with April 2003 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 19,224,916 shares of Common Stock, 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 $0.3121 per share (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 are set at prime plus 325 basis points through June 2003 with
increases during each six-month period through May 1, 2005.

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. The proposed 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;                                                                                                                                                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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.

Certain of the largest noteholders that participated in the exchange (which
together hold approximately 45% of the outstanding voting power of our capital
stock) have agreed to vote their shares of Common Stock and Series B Preferred
Stock in favor of these proposals. The Company has agreed that pending
shareholder approval of the amended and restated certificate of incorporation
it will comply with the proposed provision to protect minority shareholders
described above.

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 include, 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 Issuer 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.

7



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##### 



In connection with the Companys financial restructuring, the Company has
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 to such employees and agreed that all such
options would be forfeited to the Company. These directors and employees held in the aggregate 2,190,030 of the stock
options that were outstanding under the 1995 Stock Option Plan as of December
29, 2002. As a result of these voluntary forfeitures, only 545,445 stock
options remain outstanding under the 1995 Stock Option Plan and these options
have a weighted average exercise price of $9.23 per share. 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 19,870,873 shares, 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
25% on each anniversary date of grant 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.

Subject to stockholder approval of the 2003 Equity Plan at the Companys
2003 Annual Meeting, the Board of Directors has approved the granting of stock
options for 12,585,000 shares, representing 6.5% of the Companys fully diluted
Common Stock, to certain executive officers. Of these initial grants,
8,700,000 options have an exercise price of $0.3121 per share, and the other
3,885,000 options in these initial grants have an exercise price of $0.4681 per
share. 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, options
for 7,285,873 shares, or 3.8%, of the Companys fully diluted Common Stock
remain authorized for issuance under the 2003 Equity Plan and are reserved for
future grants. For any grants within six months after the date any existing
options are cancelled, the Company will be required to apply variable
accounting to such new options and this accounting treatment may result in
non-cash compensation expense in future periods.

Pro Forma Financial Information

Because of the significance of the financial restructuring transactions
discussed above on the Companys financial position, the Company has included
certain pro forma financial information to highlight the impact of such
transactions. The following pro forma consolidated financial data as of March
30, 2003 has been derived from the application of pro forma adjustments to the
Companys historical consolidated financial statements. The pro forma data is
presented for illustrative purposes only and is not necessarily indicative of
the financial position that would have actually been reported had the financial
restructuring transactions occurred as of March 30, 2003, nor is it indicative
of the Companys future financial position.

The pro forma condensed consolidated balance sheet as of March 30, 2003
gives effect to the Exchange Transaction and the Senior Debt Restructuring as
if each had occurred on the date of the consolidated balance sheet.

8



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##### 



Pro Forma Consolidated Balance Sheet

March 30, 2003


(in thousands)


|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |       |        |         | 
|---------------------------------------------- | --------------------------- | ------------------------------- | ---------------------------------------------------- | ----- | ---------- | ------- | ----------- | --------- | --------- | -------- | ------- | ----- | ------ | ------- | 
|                                               |                             |                                 |                                                      |       |            |         |             |           | Pro Forma |          |         |       |       
|                                               |                             |                                 |                                                      |       | Historical |         | Adjustments |           | Pro Forma
|                                               |                             |                                 |                                                      |       |            |         |             |           |          
|Assets                                         |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Cash and cash equivalents                      |                             | $                               | 21,338                                               |       |            | $       | (14,795     | )(1)      |           | $        | 1,390   |      
|                                               |                             |                                 |                                                      |       |            |         | (3,153      | )(2)      |           |          |         |      
|                                               |                             |                                 |                                                      |       |            |         | (2,000      | )(4)      |           |          |         |      
|Other
current assets                           |                             |                                 | 72,719                                               |       |            |         |             |           |           |          | 72,719  |      
|Recoverable income taxes                       |                             |                                 | 24,757                                               |       |            |         |             |           |           |          | 24,757  |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total current assets                                 |       |            | 118,814 |             |           |           | (19,948  | )       |       |        | 98,866  | 
|Noncurrent assets                              |                             |                                 | 117,759                                              |       |            |         | (663        | )(3)      |           |          | 117,096 |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total assets                                         |       | $          | 236,573 |             |           | $         | (20,611  | )       |       | $      | 215,962 | 
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Liabilities and Shareholders Equity (Deficit) |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Current portion of long-term debt              |                             | $                               | 38,281                                               |       |            | $       | (13,685     | )(1)      |           | $        | 24,596  |      
|Other current liabilities                      |                             |                                 | 69,351                                               |       |            |         | (1,100      | )(4)      |           |          | 66,675  |      
|                                               |                             |                                 |                                                      |       |            |         | (1,576      | )(2)      |           |          |         |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total current liabilities                            |       |            | 107,632 |             |           |           | (16,361  | )       |       |        | 91,271  | 
|                                               | Long-term debt -           
|                                               |                             | Convertible, subordinated notes |                                                      |       | 115,000    |         |             |           | (109,661  | )(2)     |         |       | 5,339  |        
|                                               |                             | Revolving credit facility       |                                                      |       | 65,015     |         |             |           | (1,110    | )(1)     |         |       | 63,905 |        
|                                               | Other long-term liabilities |                                 |                                                      | 8,974 |            |         |             | (439      | )(1)      |          |         | 8,535 |       
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total liabilities                                    |       |            | 296,621 |             |           |           | (127,571 | )       |       |        | 169,050 | 
|Total shareholders equity (deficit)           |                             |                                 | (60,048                                              | )     |            |         | 106,960     | (1,2,3,4) |           |          | 46,912  |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total liabilities and shareholders equity (deficit) |       | $          | 236,573 |             |           | $         | (20,611  | )       |       | $      | 215,962 | 
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      



| | (1) | Adjustments to reflect cash paid to existing senior lenders, which
includes $13,685 of principal debt repayments and $1,110 of fees paid in
connection with the completion of the Credit Facility, as amended, and
cancellation of equity appreciation rights resulting in a reduction in
accrued liabilities of $439.                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) | Adjustments to reflect payments of $3,153, including $1,576 that had
been accrued in the Companys historical balance sheet at March 30,
2003, to participating holders of the 5.75% Notes and exchange of
$109,661 of such notes for newly issued shares of the Companys Common
and Series B Preferred Stock. The equity issued in exchange for the
5.75% Notes is recorded at estimated fair value.
|
| | (3) | Adjustments to reflect the write-off of deferred debt issuance costs
of $663 associated with the 5.75% Notes exchanged for equity.                                                                                                                                                                                                                                                                    
|
| | (4) | Adjustment to record payment of $2,000 of estimated professional fees
incurred in connection with the comprehensive financial restructuring,
including $1,100 which had been accrued in the Companys historical
balance sheet at March 30, 2003.                                                                                                                                                     

Accounting for Financial Restructuring Transactions

The Company will record 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 will determine and record the
fair value, if any, of the warrants issued in connection with the Senior Debt
Restructuring 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
Company will complete the determination of fair value and the accounting
adjustments required as a result of the Exchange Transaction and the Senior
Debt Restructuring in the second quarter of fiscal 2003. The net gain from
debt restructuring will not be classified as an extraordinary item in
accordance with the recently issued SFAS No. 145.

9



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##### 



Managements Plans for Liquidity and Debt Compliance

The Company experienced declining revenue and significant operating losses
in 2001 and 2002 as well as the first quarter 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 has resulted in the Company
using substantially all of its cash on hand, including $24,300 of
recoverable income taxes included on the March 30, 2003 balance
sheet (after payment of
transaction expenses), to repay approximately $37,985 of its
outstanding credit facility and elimination of an additional $119,961
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 4.4% in the first quarter of 2003 (17.5%
for the year 2002) of the permanent workforce and rationalization of
office space;                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Reduction in accounts receivable with resulting cash flow used to reduce outstanding indebtedness; and                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Plans for further office space rationalization to reduce operating costs and improve efficiency in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                     

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) commencing with April 2003 and an 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 $5,946 from April
through December 2003; this compares to $12,157 of EBITDA, as defined, actually
reported for April through December 2002. 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 quarter 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.

(2) 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

10



---



##### 



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.

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
loss for the quarters ended March 30, 2003 and March 31, 2002 as if the fair
value method of accounting had been used. In preparing
these disclosures, the Company has determined the value of all stock options
granted under the 1995 Stock Option Plan using the Black-Scholes model, and based on the following weighted average assumptions
used for grants:

|                        |  |           |      |  
|----------------------- |  | --------- | ---- | -
|                        |  | Quarter  
|                        |  | Ended    
|                        |  |          
|                        |  | March 31,
|                        |  | 2002     
|                        |  |          
|Risk-free
interest rate |  |           | 3.5  | %
|Expected dividend yield |  |           | 0.0  | %
|Expected life           |  |           | 4.1  | %
|Expected volatility     |  |           | 69.8 | %

The fair value of the stock options granted under the 1995 Stock Option
Plan and the Stock Purchase Plan issuances in the first quarter of
2002 was approximately $10. No options were granted under the 1995
Stock Option Plan in the first quarter of 2003 and therefore, no
assumptions or fair values are reported. 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 loss would have been increased to the following pro forma
amounts:

|                                        |  |                |        |           |  |   |          |  
|--------------------------------------- |  | -------------- | ------ | --------- |  | - | -------- | -
|                                        |  | Quarters Ended
|                                        |  |               
|                                        |  | March 30,      |        | March 31,
|                                        |  | 2003           |        | 2002     
|                                        |  |                |        |          
|Net loss, as reported                   |  | $              | (7,700 | )         |  | $ | (249,631 | )
|Earnings per diluted share, as reported |  |                | (0.29  | )         |  |   | (9.35    | )
|Pro
forma net loss                      |  | $              | (7,783 | )         |  | $ | (250,019 | )
|Pro forma earnings per diluted share    |  |                | (0.29  | )         |  |   | (9.36    | )

(3) 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

11



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##### 



cash flows. Certain of
the valuation assumptions were based on managements expectations for
future performance of the IT Services and Commercial Staffing reporting units.
These assumptions include expected time frame of technology spending and
broader economic recoveries as well as future growth rates in the IT Services
and Commercial Staffing 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 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 IT Services operations. The Company experienced lower than expected
operating profits and cash flows in 2002 for the IT Services reporting unit.
As a result of this trend and the overall industry expectations, the projected
operating profits and cash flows for IT 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. No additional impairment was identified for the
goodwill associated with the Companys Commercial Staffing reporting unit.

A reconciliation of goodwill for the periods ended March 30, 2003 and
December 29, 2002 is as follows:

|                           |                                                     |   |             |          |          |   |            |         |   |   |         |          |  
|-------------------------- | --------------------------------------------------- | - | ----------- | -------- | -------- | - | ---------- | ------- | - | - | ------- | -------- | -
|                           |                                                     |   |             |          |          |   | Commercial |         |   |   |        
|                           |                                                     |   | IT Services |          | Staffing |   | 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, March 30, 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 March 30, 2003 and December 29,
2002:

|                       |                                                 |   |                |       |                   |   |        |        |        |   |              |     |             |   |       |       |  |   |        |        |   |   |     |     | 
|---------------------- | ----------------------------------------------- | - | -------------- | ----- | ----------------- | - | ------ | ------ | ------ | - | ------------ | --- | ----------- | - | ----- | ----- |  | - | ------ | ------ | - | - | --- | --- | 
|                       |                                                 |   | March 30, 2003 |       | December 29, 2002
|                       |                                                 |   |                |       |                  
|                       |                                                 |   | Gross          |       |                   |   |        |        |        |   |              |     | Gross       |   |       |       |  |   |        |        |  
|                       |                                                 |   | Carrying       |       | Accumulated       |   |        |        |        |   | Carrying     |     | Accumulated |   |       |       | 
|                       |                                                 |   | Amount         |       | Amortization      |   | Net    |        | Amount |   | Amortization |     | Net        
|                       |                                                 |   |                |       |                   |   |        |        |        |   |              |     |            
|Non-Compete agreements |                                                 | $ | 1,367          |       |                   | $ | (1,263 | )      |        | $ | 104          |     |             | $ | 2,413 |       |  | $ | (2,223 | )      |   | $ | 190 |    
|Trade names            |                                                 |   | 29             |       |                   |   | (18    | )      |        |   | 11           |     |             |   | 29    |       |  |   | (17    | )      |   |   | 12  |    
|                       |                                                 |   |                |       |                   |   |        |        |        |   |              |     |             |   |       |       |  |   |        |        |   |   |     |    
|                       | Total intangible assets subject
to amortization |   | $              | 1,396 |                   |   | $      | (1,281 | )      |   | $            | 115 |             |   | $     | 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
quarters ended March 30, 2003 and March 31, 2002 was $88 and $127,
respectively.

12



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##### 



(4) Long-term Debt

Long-term debt consisted of the following at March 30, 2003 and December
29, 2002:

|                                                   |  |           |         |              |  |   |         | 
|-------------------------------------------------- |  | --------- | ------- | ------------ |  | - | ------- | 
|                                                   |  | March 30, |         | December 29,
|                                                   |  | 2003      |         | 2002        
|                                                   |  |           |         |             
|5.75% Convertible Subordinated Notes due July 2004 |  | $         | 115,000 |              |  | $ | 115,000 | 
|Revolving credit facility                          |  |           | 103,000 |              |  |   | 103,000 | 
|Other                                              |  |           | 296     |              |  |   | 648     | 
|                                                   |  |           |         |              |  |   |         | 
|                                                   |  |           | 218,296 |              |  |   | 218,648 | 
|Less current portion                               |  |           | 38,281  |              |  |   | 38,633  | 
|                                                   |  |           |         |              |  |   |         | 
|                                                   |  | $         | 180,015 |              |  | $ | 180,015 | 
|                                                   |  |           |         |              |  |   |         | 

The Companys 5.75% Notes 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
$17.81 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 further amendments and maturity date
extensions to the Credit Facility, $65,015 of the $103,000 outstanding at March
30, 2003 was classified as long-term in the consolidated balance sheet.
Interest rates payable under revolving credit facility were set at prime plus
300 basis points through March 30, 2003.

Subsequent to the quarter-end, the Company completed a comprehensive
financial restructuring. See Note 1, Subsequent Event  Comprehensive
Financial Restructuring.

13



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##### 



(5) Earnings Per Share

The following table reconciles net loss and weighted average shares
outstanding to the amounts used to calculate basic and diluted earnings per
share for each of the quarters ended March 30, 2003 and March 31, 2002:

|                                                   |                                                                         |  |            |        |           |  |            |          |  
|-------------------------------------------------- | ----------------------------------------------------------------------- |  | ---------- | ------ | --------- |  | ---------- | -------- | -
|                                                   |                                                                         |  | March 30,  |        | March 31,
|                                                   |                                                                         |  | 2003       |        | 2002     
|                                                   |                                                                         |  |            |        |          
|Basic and diluted earnings per share:              |                                                                         |  |            |        |           |  |            |         
|                                                   | Loss before cumulative effect of change in accounting principle         |  | $          | (7,700 | )         |  | $          | (7,134   | )
|                                                   | Add: Interest expense on 5.75% Notes, net of tax                        |  |            |       |           |  |            |         |  
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|                                                   | Diluted loss before cumulative effect of change in accounting principle |  |            | (7,700 | )         |  |            |         |  
|                                                   | Cumulative effect of change in accounting principle                     |  |            |       |           |  |            | (242,497 | )
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|                                                   | Diluted net loss                                                        |  | $          | (7,700 | )         |  | $          | (249,631 | )
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|Weighted average common shares outstanding         |                                                                         |  | 26,881,212 |        |           |  | 26,703,505 |         
|                                                   | Add: Dilutive employee stock options                                    |  |            |       |           |  |            |         |  
|                                                   | Add: Assumed conversion of 5.75% Notes                                  |  |            |       |           |  |            |         |  
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|Diluted weighted average common shares outstanding |                                                                         |  | 26,881,212 |        |           |  | 26,703,505 |         
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|Basic and diluted earnings per share:              |                                                                         |  |            |        |           |  |            |         
|                                                   | Loss before cumulative effect of change in accounting principle         |  | $          | (0.29  | )         |  | $          | (0.27    | )
|                                                   | Cumulative effect of change in accounting principle                     |  |            |       |           |  |            | (9.08    | )
|                                                   |                                                                         |  |            |        |           |  |            |          |  
|                                                   | Net loss                                                                |  | $          | (0.29  | )         |  | $          | (9.35    | )
|                                                   |                                                                         |  |            |        |           |  |            |          |  

Stock options to purchase 2,679,240 and 4,284,821 shares of Common Stock
were outstanding under the 1995 Stock Option Plan during the quarters ended
March 30, 2003 and March 31, 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 6,456,140 common shares
was also excluded from the computation of earnings per diluted share because
their effect was antidilutive.

14



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##### 



(6) Segment Information:

The Company is organized in two segments: IT Services and Commercial
Staffing. IT Services provides technical staffing, training and information
technology consulting services and technology tools for human capital
management. Commercial Staffing 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, 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 IT Services and Commercial
Staffing for the quarters ended March 30, 2003 and March 31, 2002:

|                                                                                 |                     |                                            |        |           |         |           |        |        |         | 
|-------------------------------------------------------------------------------- | ------------------- | ------------------------------------------ | ------ | --------- | ------- | --------- | ------ | ------ | ------- | 
|                                                                                 |                     |                                            |        | March 30, |         | March 31,
|                                                                                 |                     |                                            |        | 2003      |         | 2002     
|                                                                                 |                     |                                            |        |           |         |          
|Total revenues                                                                   |                     |                                            |        |           |         |           |        |       
|                                                                                 | IT Services         |                                            | $      | 60,559    |         |           | $      | 82,308 |        
|                                                                                 | Commercial Staffing |                                            |        | 60,156    |         |           |        | 59,745 |        
|                                                                                 |                     |                                            |        |           |         |           |        |        |        
|                                                                                 |                     | Total revenues                             |        |           | 120,715 |           |        |        | 142,053 | 
|Gross profit                                                                     |                     |                                            |        |           |         |           |        |       
|                                                                                 | IT Services         |                                            |        | 13,386    |         |           |        | 20,527 |        
|                                                                                 | Commercial Staffing |                                            |        | 11,689    |         |           |        | 13,234 |        
|                                                                                 |                     |                                            |        |           |         |           |        |        |        
|                                                                                 |                     | Total gross profit                         |        |           | 25,075  |           |        |        | 33,761  | 
|Operating income                                                                 |                     |                                            |        |           |         |           |        |       
|                                                                                 | IT Services         |                                            |        | 1,232     |         |           |        | 4,076  |        
|                                                                                 | Commercial Staffing |                                            |        | 1,028     |         |           |        | 1,839  |        
|                                                                                 |                     |                                            |        |           |         |           |        |        |        
|                                                                                 |                     | Total segment operating income, as defined |        |           | 2,260   |           |        |        | 5,915   | 
|Unallocated corporate expenses                                                   |                     |                                            | 3,880  |           |         |           | 4,029  |       
|Restructuring and rationalization charges                                        |                     |                                            | 1,600  |           |         |           | 263    |       
|Amortization of intangible assets                                                |                     |                                            | 88     |           |         |           | 127    |       
|Interest expense                                                                 |                     |                                            | 4,392  |           |         |           | 4,288  |       
|                                                                                 |                     |                                            |        |           |         |           |        |        |        
|Loss before income taxes and cumulative effect of change
in accounting principle |                     | $                                          | (7,700 | )         |         | $         | (2,792 | )     
|                                                                                 |                     |                                            |        |           |         |           |        |        |        

The following table sets forth identifiable assets by segment at March 30,
2003 and December 29, 2002:

|                         |                     |                                |   |           |        |              |   |        |        | 
|------------------------ | ------------------- | ------------------------------ | - | --------- | ------ | ------------ | - | ------ | ------ | 
|                         |                     |                                |   | March 30, |        | December 29,
|                         |                     |                                |   | 2003      |        | 2002        
|                         |                     |                                |   |           |        |             
|Accounts receivable, net |                     |                                |   |           |        |              |   |       
|                         | IT Services         |                                | $ | 43,773    |        |              | $ | 46,318 |       
|                         | Commercial Staffing |                                |   | 24,732    |        |              |   | 29,860 |       
|                         |                     |                                |   |           |        |              |   |        |       
|                         |                     | Total accounts receivable, net |   | $         | 68,505 |              |   | $      | 76,178 | 
|                         |                     |                                |   |           |        |              |   |        |       

15



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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 reliably predicted by

16



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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 Information Technology
Services Division (IT 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 Commercial Staffing
Services Division (Commercial Staffing), which provides a variety of
temporary office, clerical, accounting and finance, light technical and light
industrial staffing services. Approximately 50% of the Companys first quarter
2003 revenues came from IT Services and 50% came from Commercial Staffing.

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

RESULTS OF OPERATIONS

Quarter Ended March 30, 2003 Versus Quarter Ended March 31, 2002

Revenues.Total revenues decreased 15.0% to $120.7 million in the first
quarter of 2003 from $142.1 million in the first quarter of 2002 due to the
weak economic environment, including a continued decline in corporate
technology spending. IT Services revenues decreased 26.4% primarily as the
result of the continuing industry-wide slowdown in customer demand for IT
staffing services. IT Services billable consultants on assignment declined
from approximately 1,970 at year-end 2002 to approximately 1,830 at the end of
the first quarter. Commercial Staffing revenues increased 0.7% to $60.2
million in the first quarter of 2003 primarily due to growth in the Companys
vendor-on-premise (VOP) business, offset by declines in permanent placement
revenues and the retail component of the Companys temporary staffing business.
Permanent placement revenues were 2.0% of Commercial Staffing revenues in the
first quarter of 2003, down from 3.3% in the first quarter of 2002, while the
retail component of temporary staffing also declined to 60.6% of Commercial
Staffing revenues in the first quarter of 2003, down from 65.3% in the first
quarter of 2002. VOP revenues totaled 37.4% of Commercial Staffing revenues in
the first quarter of 2003, up from 31.4% in the first quarter of 2002. The Company does not expect any
significant improvements in demand for its services before the second half of
2003 in light of ongoing economic and geopolitical uncertainties. In addition,
there can be no assurance that IT 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
11.7% to $95.6 million in the first quarter of 2003 on the lower revenues.
Gross profit decreased 25.7% to $25.1 million on the lower revenues. Gross
profit as a percentage of revenue also decreased to 20.8% in the first quarter
of 2003 from 23.8% in the first quarter of 2002. These decreases primarily
were 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 16.3% to $26.8 million in the first quarter of 2003 from $32.0
million in the first 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 4.4% of the Companys
permanent workforce was eliminated during the first 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 21.0% in the first quarter of 2003 from 21.2% in the
first quarter of 2002. In addition, depreciation and amortization expense
decreased to 1.2% of revenues in the first quarter of 2003 from 1.3% in the
first 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 $1.6 million and $0.3 million in
the first

17



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quarters of 2003 and 2002, respectively. These charges were
comprised of the following components (in thousands):

|                                                |  |                |       |           |  |   |     |  
|----------------------------------------------- |  | -------------- | ----- | --------- |  | - | --- | -
|                                                |  | Quarter Ending
|                                                |  |               
|                                                |  | March 30,      |       | March 31,
|                                                |  | 2003           |       | 2002     
|                                                |  |                |       |          
|Employee severance                              |  | $              | 85    |           |  | $ | 186 |  
|Lease abandonment and termination costs         |  |                | 13    |           |  |   | 87  |  
|Professional services charges                   |  |                | 1,502 |           |  |   | 6   |  
|Property abandonment charges                    |  |                |      |           |  |   | (16 | )
|                                                |  |                |       |           |  |   |     |  
|Total restructuring and rationalization charges |  | $              | 1,600 |           |  | $ | 263 |  
|                                                |  |                |       |           |  |   |     |  

Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the quarter ended March 30, 2003 (in thousands):

|                                       |  |           |      |       |  |              |       |       |  |       |        |   |  |   |     |   |  |   |        |  
|-------------------------------------- |  | --------- | ---- | ----- |  | ------------ | ----- | ----- |  | ----- | ------ | - |  | - | --- | - |  | - | ------ | -
|                                       |  | Employee  |      | Lease |  | Professional |       |       |  |       |        |   |  |  
|                                       |  | Severance |      | Costs |  | Services     |       | Other |  | Total
|                                       |  |           |      |       |  |              |       |       |  |      
|Accrued liability at December 29, 2002 |  | $         | 559  |       |  | $            | 4,658 |       |  | $     | 1,046  |   |  | $ | 84  |   |  | $ | 6,347  |  
|2003 charges                           |  |           | 85   |       |  |              | 13    |       |  |       | 1,502  |   |  |   |    |   |  |   | 1,600  |  
|Cash payments                          |  |           | (277 | )     |  |              | (251  | )     |  |       | (1,445 | ) |  |   | (38 | ) |  |   | (2,011 | )
|                                       |  |           |      |       |  |              |       |       |  |       |        |   |  |   |     |   |  |   |        |  
|Accrued liability at March 30, 2003    |  | $         | 367  |       |  | $            | 4,420 |       |  | $     | 1,103  |   |  | $ | 46  |   |  | $ | 5,936  |  
|                                       |  |           |      |       |  |              |       |       |  |       |        |   |  |   |     |   |  |   |        |  

Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 4.4% of the Companys permanent workforce, or 40 employees,
was eliminated during the quarter. Lease abandonment and termination costs
related primarily to office closures, branch consolidations and leased space
reductions. Professional services charges consisted primarily of advisory,
legal and accounting services incurred in connection with the financial
restructuring.

Of the remaining accrued liability at March 30, 2003, the Company expects
to pay approximately $3.0 million over the next twelve months and the balance,
primarily lease payments, over the following seven years.

The Company expects to continue consolidating operations in other
geographic markets in which it currently operates multiple branches and to
downsize in selected other existing locations, which will result in additional
restructuring and rationalization charges in 2003; however, the amount of such
additional charges is not currently determinable. The Company also incurred
substantial professional services charges and lending fees in connection with
its financial restructuring in the second quarter of 2003. See Liquidity and
Capital Resources, Financial Restructuring.

Interest Expense.Interest expense increased 2.4% to $4.4 million in the
first quarter of 2003 from $4.3 million in the first quarter of
2002 under the Companys revolving credit facility (the
Credit Facility). The average interest rate on borrowings was 7.3% in the
first quarter of 2003, down 30 basis points from the first quarter of 2002.
With the recent completion of its financial restructuring, the Company expects
a substantial reduction in its interest expense for future periods. See  
Liquidity and Capital Resources.

Provision (Benefit) for Income Taxes.No benefit for income taxes was
recorded in the first quarter of 2003 since the realization of such tax
benefits in the future is not reasonably assured. The income tax provision
recorded for the quarter ended March 31, 2002 reflects an income tax benefit of
$0.9 million related to its operating losses, offset by a charge of
approximately $5.2 million related to the adoption of SFAS 142. This charge
provided a valuation allowance against certain deferred tax assets, but had no
effect on the Companys cash flows.

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 the second half of
2003. In light of these revenue declines, the Company has focused on reducing
expenses generally, limiting capital expenditures to only the

18



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##### 



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 prior year were cash from
operations and income tax refunds. As a result of the recent completion of the
Companys financial restructuring and the execution of further 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 quarter ended March 30, 2003, cash provided by operating
activities was $0.1 million compared with cash used in operating activities of
$3.5 million in the first quarter of 2002 primarily due to a more favorable
impact of the reduction in accounts receivable. The Company had $21.3 million
of cash on hand as of March 30, 2003. In the aggregate, days sales
outstanding decreased to 48 days at March 30, 2003 from 49 days at December 29,
2002. Cash used in investing activities was $0.4 million in the first quarter
of 2003 compared to cash provided by investing activities of $1.5 million
during the first quarter 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 quarter of 2003 was $0.4 million, up slightly from $0.3
million in the first quarter of 2002. Cash used for financing activities was
$0.9 million in the first quarter of 2003, down from $9.9 million in the first
quarter of 2002. The Company maintained its cash on hand throughout the first
quarter of 2003 in anticipation of the financial restructuring.

Congress passed new federal tax legislation in 2002 that allowed the
Company to carry back federal net operating losses for five years,
substantially increasing the Companys ability to recover income taxes
previously paid. As of March 30, 2003, the Company had recorded an additional
$24.8 million of recoverable income taxes and it received $24.3 million of
these recoverable taxes in refunds subsequent to quarter-end.

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 2001 and
2000 federal income tax returns to determine whether to perform an income tax
audit for one or both 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 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;                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 190.9560 shares 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 100 shares of Common Stock and, at
the Companys election, will automatically convert into shares of
Common Stock upon

19



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##### 





| |  |  | 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 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.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 20,940,425 shares of Common Stock 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 26,881,212 shares of Common Stock, 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 further
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, including $24.3 million of recoverable
income taxes included on the March 30, 2003 balance sheet (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
indebtedness, which will result in substantial reductions in the Companys
interest expense in future periods. The Company does not anticipate that any
material income tax liability will arise as a result of the forgiveness of debt
in these financial restructuring transactions due to sufficient current period
tax losses and net operating loss carryforwards available to offset any taxable
income on the debt forgiveness.

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 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, and
the Company had approximately $8.0 million of availability thereunder as of the
closing date. The Credit Facility contains customary covenants, including
financial covenants that require monthly maintenance of cumulative monthly
EBITDA levels (as defined in the amended agreement) commencing with April 2003
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 19,224,916 shares of Common
Stock, 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 $0.3121 per share (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 are set at prime plus 325 basis points
through June 2003 with increases during each six-month period through May 1,
2005.

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. The proposed amendments to the
certificate of incorporation include the following:

20



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##### 





| |  |  | a reverse stock split of the Companys Common Stock at a
one-for-twenty-five ratio;                                                                                                                                                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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.

Certain of the largest noteholders that participated in the exchange (which
together hold approximately 45% of the outstanding voting power of our capital
stock) have agreed to vote their shares of Common Stock and Series B Preferred
Stock in favor of these proposals. The Company has agreed that pending
shareholder approval of the amended and restated certificate of incorporation
it will comply with the proposed provision to protect minority shareholders
described above.

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 (defined as the beneficial owners of shares of capital stock of the
Company representing 20% or more of the votes entitled to be cast by holders of
outstanding shares of voting capital stock), 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 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 include, 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 Issuer 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

21



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##### 



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 has
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 to such persons and agreed that all such options
would be forfeited to the Company. These directors and employees held in the
aggregate 2,190,030 of the stock options that were outstanding under the 1995
Stock Option Plan as of December 29, 2002. As a result of these voluntary
forfeitures, only 545,445 stock options remain outstanding under the 1995 Stock
Option Plan and these options have a weighted average exercise price of $9.23
per share. 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 19,870,873 shares, 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
25% on each anniversary date of grant 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.

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, 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.

Subject to shareholder approval of the 2003 Equity Plan at the Companys
2003 Annual Meeting, the Board of Directors has approved the granting of stock
options for 12,585,000 shares, representing 6.5% of the Companys fully diluted
Common Stock, to certain executive officers. Of these initial grants,
8,700,000 options have an exercise price of $0.3121 per share, and the other
3,885,000 options in these initial grants have an exercise price of $0.4681 per
share. 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,
options for 7,285,873 shares, or 3.8%, of the Companys fully diluted Common
Stock remain authorized for issuance under the 2003 Equity Plan and are
reserved for future grants. For any grants

22



---



##### 



within six months after the date
any existing options are cancelled, the Company will be required to apply
variable accounting to such new options and this accounting treatment may
result in non-cash compensation expense in future periods.

Pro Forma Financial Information

Because of the significance of the financial restructuring transactions
discussed above on the Companys financial position, the Company has included
certain pro forma financial information to highlight the impact of such
transactions. The following pro forma consolidated financial data as of March
30, 2003 has been derived from the application of pro forma adjustments to the
Companys historical consolidated financial statements. The pro forma data is
presented for illustrative purposes only and is not necessarily indicative of
the financial position that would have actually been reported had the financial
restructuring transactions occurred as of March 30, 2003, nor is it indicative
of the Companys future financial position.

The pro forma condensed consolidated balance sheet as of March 30, 2003
gives effect to the Exchange Transaction and the Senior Debt Restructuring as
if each had occurred on the date of the consolidated balance sheet.

Pro Forma Consolidated Balance Sheet
March 30, 2003
(in thousands)

|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |       |        |         | 
|---------------------------------------------- | --------------------------- | ------------------------------- | ---------------------------------------------------- | ----- | ---------- | ------- | ----------- | --------- | --------- | -------- | ------- | ----- | ------ | ------- | 
|                                               |                             |                                 |                                                      |       |            |         |             |           | Pro Forma |          |         |       |       
|                                               |                             |                                 |                                                      |       | Historical |         | Adjustments |           | Pro Forma
|                                               |                             |                                 |                                                      |       |            |         |             |           |          
|Assets                                         |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Cash and cash equivalents                      |                             | $                               | 21,338                                               |       |            | $       | (14,795     | )(1)      |           | $        | 1,390   |      
|                                               |                             |                                 |                                                      |       |            |         | (3,153      | )(2)      |           |          |         |      
|                                               |                             |                                 |                                                      |       |            |         | (2,000      | )(4)      |           |          |         |      
|Other current assets                           |                             |                                 | 72,719                                               |       |            |         |             |           |           |          | 72,719  |      
|Recoverable income taxes                       |                             |                                 | 24,757                                               |       |            |         |             |           |           |          | 24,757  |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total current assets                                 |       |            | 118,814 |             |           |           | (19,948  | )       |       |        | 98,866  | 
|Noncurrent assets                              |                             |                                 | 117,759                                              |       |            |         | (663        | )(3)      |           |          | 117,096 |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total assets                                         |       | $          | 236,573 |             |           | $         | (20,611  | )       |       | $      | 215,962 | 
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Liabilities and Shareholders Equity (Deficit) |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|Current portion of long-term debt              |                             | $                               | 38,281                                               |       |            | $       | (13,685     | )(1)      |           | $        | 24,596  |      
|Other current liabilities                      |                             |                                 | 69,351                                               |       |            |         | (1,100      | )(4)      |           |          | 66,675  |      
|                                               |                             |                                 |                                                      |       |            |         | (1,576      | )(2)      |           |          |         |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total current liabilities                            |       |            | 107,632 |             |           |           | (16,361  | )       |       |        | 91,271  | 
|                                               | Long-term debt -            |                                 |                                                      |       |            |         |             |           |           |          |         |       |       
|                                               |                             | Convertible, subordinated notes |                                                      |       | 115,000    |         |             |           | (109,661  | )(2)     |         |       | 5,339  |        
|                                               |                             | Revolving credit facility       |                                                      |       | 65,015     |         |             |           | (1,110    | )(1)     |         |       | 63,905 |        
|                                               | Other long-term liabilities |                                 |                                                      | 8,974 |            |         |             | (439      | )(1)      |          |         | 8,535 |       
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total liabilities                                    |       |            | 296,621 |             |           |           | (127,571 | )       |       |        | 169,050 | 
|Total shareholders equity (deficit)           |                             |                                 | (60,048                                              | )     |            |         | 106,960     | (1,2,3,4) |           |          | 46,912  |      
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      
|                                               |                             |                                 | Total liabilities and shareholders equity (deficit) |       | $          | 236,573 |             |           | $         | (20,611  | )       |       | $      | 215,962 | 
|                                               |                             |                                 |                                                      |       |            |         |             |           |           |          |         |      



---

|(1) |  | Adjustments to reflect cash paid to existing senior lenders, which
includes $13,685 of principal debt repayments and $1,110 of fees paid in
connection with the completion of the Credit Facility, as amended, and
cancellation of equity appreciation rights resulting in a reduction in
accrued liabilities of $439.                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Adjustments to reflect payments of $3,153, including $1,576 that had
been accrued in the Companys historical balance sheet at March 30,
2003, to participating holders of the 5.75% Notes and exchange of
$109,661 of such notes for newly issued shares of the Companys Common
and Series B Preferred Stock. The equity issued in exchange for the
5.75% Notes is recorded at estimated fair value.

23



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##### 



|(3) |  | Adjustments to reflect the write-off of deferred debt issuance costs
of $663 associated with the 5.75% Notes exchanged for equity.                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Adjustment to record payment of $2,000 of estimated professional fees
incurred in connection with the comprehensive financial restructuring,
including $1,100 which had been accrued in the Companys historical
balance sheet at March 30, 2003.

Accounting for Financial Restructuring Transactions

Upon consummation of the Exchange Transaction, the Company will record 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 will determine and record the fair value, if
any, of the warrants issued in connection with the Senior Debt Restructuring 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 Company will complete the
determination of fair value and the accounting adjustments required as a result
of the Exchange Transaction and the Senior Debt Restructuring in the second
quarter of fiscal 2003. The net gain from debt restructuring will not be
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 as well as the first quarter 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 has resulted in the Company
using substantially all of its cash on hand, including $24.3 million
of recoverable income taxes included on the March 30, 2003
balance sheet (after payment of
transaction expenses), to repay approximately $38.0 million of its
outstanding credit facility and elimination of 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 4.4% in the first quarter of 2003 (17.5%
for the year 2002) of the permanent workforce and rationalization of
office space;                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Reduction in accounts receivable with resulting cash flow used to reduce outstanding indebtedness; and                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Plans for further office space rationalization to reduce operating costs and improve efficiency in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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) commencing with April 2003 and an 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; this compares to $12.2 million of EBITDA, as
defined, actually reported for April through December 2002. 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 quarter 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

24



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##### 



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 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.

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 provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect that adoption of this
statement will have a material impact on the Companys results of operations,
financial position or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Companys outstanding debt under the Credit Facility at March 30,
2003, was $103.0 million. Interest on borrowings under the Credit Facility is
based on the prime rate plus a variable margin. Based on the outstanding
balance at March 30, 2003, a change of 1% in the interest rate would cause a
change in interest expense of approximately $1.0 million on an annual basis.
Interest on the Companys credit facility following the financial restructuring
is also based on the prime rate plus a variable margin.

25



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ITEM 4. Controls and Procedures

Within the 90 days prior to the date of 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), and its
internal controls and procedures for financial reporting (internal controls).
Disclosure controls mean those controls and other procedures that are designed
for the purpose of ensuring that information required to be disclosed in the
Companys reports filed under the Securities Exchange Act of 1934, such as this
quarterly report, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. Internal controls are
procedures designed for the purpose of providing reasonable assurance that the
Companys transactions are properly authorized, its assets are safeguarded
against unauthorized or improper use and its transactions are properly recorded
and reported, all to permit the preparation of the Companys financial
statements in conformity with generally accepted accounting principles. This
evaluation was performed under the supervision and with the participation of
management, including the Companys Chief Executive Officer and Chief Financial
Officer.

Subsequent to the date of this evaluation, the Company has made no
significant changes to its internal controls or in other factors that could
significantly affect its internal controls.

PART II  OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds

(a)  In connection with the financial restructuring completed on April 14,
2003, 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 include, 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 Issuer 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.
A Significant Holder is a shareholder 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.

(b)  In connection with the financial restructuring completed on April 14,
2003, the Company established its Series B Preferred Stock. Each share of
Series B Preferred Stock will be convertible into 100 shares of Common Stock
and, at the election of the Company, will automatically convert into shares 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 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. In
the financial restructuring, the Company issued an aggregate of 20,940,425
shares of Common Stock 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 of these shares of the Series B Preferred
Stock have been converted).

(c)  In the financial restructuring completed on April 14, 2003, the
Company issued an aggregate of 20,940,425 shares of Common Stock and 1,044,433
shares of Series B Preferred Stock to holders of $109,961,000 aggregate face
amount of its 5.75% Convertible Subordinated Notes due 2004 (the 5.75% Notes)
in exchange for their 5.75% Notes. In this exchange transaction, which was
privately negotiated, the Company exchanged the following consideration for
each $1,000 in principal amount of the 5.75% Notes exchanged:

26



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##### 





| |  |  | $28.75 in cash;                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 190.9560 shares of Common Stock of the Company; and                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | 9.5242 shares of Series B Preferred Stock of the Company, which
will be convertible into 100 shares of Common Stock and, at the
election of the Company, will automatically convert into shares 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.

In addition, in the financial restructuring the Company issued common stock
purchase warrants to the lenders under its Credit Facility entitling them to
purchase a total of 19,224,916 shares of Common Stock, 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 $0.3121 per share (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.

The issuances of the foregoing securities were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof and Rule 506 thereunder.

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 first
quarter:                                                                                              



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | (i)      February 19, 2003, announcing
financial results for the quarter and fiscal year ended December 29,
2002
|
| | (ii)     March 17, 2003, announcing execution of definitive
restructuring agreement                             

27



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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.

|                   |  |                                  |  |                                      
|------------------ |  | -------------------------------- |  | -------------------------------------
|                   |  | PERSONNEL GROUP OF AMERICA, INC.
|                   |  | (Registrant)                    
|                   |  |                                  |  |                                      
|Date: May 14, 2003 |  | By:                              |  | /s/ Larry L. Enterline               
|                   |  |                                  |  |                                      
|                   |  |                                  |  | Larry L. Enterline                   
|                   |  |                                  |  | Chief Executive Officer              
|                   |  |                                  |  |                                      
|Date: May 14, 2003 |  | By:                              |  | /s/ James C. Hunt                    
|                   |  |                                  |  |                                      
|                   |  |                                  |  | James C. Hunt                        
|                   |  |                                  |  | President and Chief Financial Officer

28



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##### 



CERTIFICATIONS

I, Larry L. Enterline, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Personnel Group
of America, Inc. (the registrant);

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

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

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

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

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

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

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

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

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

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

|                   |  |                       
|------------------ |  | ----------------------
|Date: May 14, 2003 |  | /s/ Larry L. Enterline
|                   |  |                       
|                   |  | Larry L. Enterline    

29



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##### 



CERTIFICATIONS

I, James C. Hunt, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Personnel Group
of America, Inc. (the registrant);

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

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

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

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

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

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

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

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

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

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

|                   |  |                  
|------------------ |  | -----------------
|Date: May 14, 2003 |  | /s/ James C. Hunt
|                   |  |                  
|                   |  | James C. Hunt    

30



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##### 



EXHIBIT INDEX

|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---- | ---------------- |  | -----------------
|        |  |                                                                                                                               |  | Filed            |      |                 
|        |  |                                                                                                                               |  | 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, as
amended                                                              |  |                  | 3.1  |                  |  | 333-31863        
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|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                                                                                                    |  |                  | 4.0  |                  |  | 33-95228         
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|4.1     |  | Amended and Restated Rights Agreement between the
Company and Wachovia
Bank, N.A. (as Successor Trustee) dated April 14, 2003 |  |                  | 99.5 |                  |  | 8-K filed 4/25/03
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|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    |  | Restructuring Agreement dated
March 14, 2003                                                                                  |  |                  | 99.2 |                  |  | 8-K filed 3/17/03
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|10.2    |  | Participating Agreement dated
March 14, 2003                                                                                  |  |                  | 99.2 |                  |  | 8-K filed 3/17/03
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|99.1    |  | Section 906 Certification of Larry
L. Enterline, Chief Executive
Officer of the Company                                       |  |                  | *    |                  |  |                  
|        |  |                                                                                                                               |  |                  |      |                  |  |                  
|99.2    |  | Section 906 Certification of James
C. Hunt, Chief Financial Officer
of the Company                                            |  |                  | *    |                  |  |                  

31