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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

(Mark One)

|ý | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|- | ------------------------------------------------------------------------------------

for the fiscal year ended December 31, 2001

or

|o | 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: 0-23940

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ALTERNATIVE RESOURCES CORPORATION(Exact name of registrant as specified in its charter)

|Delaware                                                       |  | 38-2791069                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (IRS Employer Identification No.)
|600 Hart Road, Suite 300
Barrington, Illinois                  |  | 60010                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

Registrant's telephone number, including area code:(847) 381-6701

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

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

Common
Stock, $.01 Par Value
(Title of Class)

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. o

The
registrant estimates that the aggregate market value of the registrant's common stock held by non-affiliates of Alternative Resources Corporation as of March 22, 2002 (based
upon an estimate that 93.21% of the shares are so owned by non-affiliates and upon the closing price for the common stock on the OTC BB) on that date was approximately $9,736,000. Determination of
stock ownership by non-affiliates was made solely for the purpose of responding to these requirements and registrant is not bound by this determination for any other purpose.

As
of March 22, 2002, 17,702,819 shares of the registrant's common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2002 (Part III).

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PART I

ITEM 1. BUSINESS.

OVERVIEW

Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of information technology management and staffing services. The Company has
developed a significant, high quality business in the IT staffing industry with an emphasis on Help Desk, Desktop Support, Technology Deployment Service, and Field Service offerings. The Company also
has a consulting practice that supports those service offerings. The Company operates through 38 field offices with over 80 personnel in field sales, supported by 55 recruiters and its unique
organization of over 50 client support managers. The Company serves Fortune 1000 and mid-sized clients throughout the United States and Canada.

MAJOR DEVELOPMENTS IN 2001

The Company's 2001 operating results were significantly impacted by two principal factors. First was the significantly reduced IT spending on temporary and
outsourced workers. Temporary staffing, as reported by the Bureau of Labor Statistics, has experienced the sharpest deceleration in history. Second, was the complete evolution of the Company's
business model from a branch model to a functional model. As discussed in the 2000 Form 10-K, the Company reorganized its field structure from a branch-based model to a model
organized by the functional areas of sales, recruiting and service delivery. The new model was announced in late 1999 and implementation began in January 2000. The new model is designed to
sell, recruit for and deliver the Company's services much more effectively and efficiently. As part of this process, administrative functions that were previously attended to in the branch structure
have now been centralized where they can be processed in a more efficient manner. In addition, with this new model many of the field sales and delivery functions will require less office space than
required under the old model. During 2001 this model became fully functional. As a result,
the Company was able to generate increased operating income and earnings before interest, income taxes, depreciation and amortization (EBITDA) despite the sharp reduction in revenue. In connection
with the new model, the Company incurred restructuring and other charges of $1.7 million in 2000, most of which related to a write-off of excess fixed assets related to the
downsizing of office space and severance costs associated with the elimination of certain positions. These charges are more fully explained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the "Notes to Consolidated Financial Statements," included in this Form 10-K. No additional charges were taken in 2001.

The
two primary objectives of reorganizing the Company's field structure were to become more effective in providing its services and to reduce costs. Under the former model, the sales,
recruiting and service delivery functions were managed to meet the needs and priorities of each particular metropolitan market with very little consideration given to business opportunities in other
markets. Now, the sales, recruiting and service delivery organizations are managed functionally without regard to the geographic barriers.

The
functional organization allows for a more focused management effort on each respective function. This has facilitated the Company's goal of achieving excellence in each function.
Sales are now managed on a regional basis allowing the Company to reach markets that were previously ignored.

The
recruiting function, which had previously operated from three regional centers in Chicago, Philadelphia and Denver, supplemented by a network of recruiters operating in various
markets, has evolved into a total virtual recruiting organization. Through the use of technology, the Company has been able to achieve greater efficiencies in recruiting and has developed a recruiting
model that is totally variable in terms of cost structure.

2

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The
reorganization has also benefited the Company's service delivery function. Under the old model, the branch staff was responsible for various administrative functions like order
processing, and credit and invoice processing. These functions have been removed from the field responsibility and centralized at the Company's corporate headquarters. This has allowed the employees
responsible for service delivery to focus on their primary responsibility, which is assigning and managing the Company's technical consultants at client sites. The centralization of administrative
functions has also provided the Company with more efficient and accurate processing that is associated with economies of scale.

While
these changes are significant, it is important to note that the Company's services and its approach to selling, recruiting and service delivery have remained relatively intact. The
primary change has been how the functions are managed. Instead of all three functions being managed at a local level under the direction of a branch manager, they are now managed regionally with
greater focus on their functional objectives. The increased focus is made possible through the removal of administrative duties and through a management structure that now places a
vice-president over each function.

The
Company's second objective in reorganizing its field structure was to reduce costs. The Company believes that the competitive nature of its industry requires that services be
delivered in the most cost effective manner. By changing to a functional model the Company was able to reduce its real estate requirements and increase management's span of control by centralizing all
of the administrative functions. These actions have resulted in the Company reducing its operating costs by $23.9 million in 2001 as compared to the year 2000.

ARC SERVICE OFFERINGS

During the past six years, ARC has evolved from a pure IT staffing company into a solutions-based provider of IT services. The Company's IT staffing and solutions
services are now sold under the names ARC Staffing Management Solutions and ARC Technology Management Solutions, respectively. ARC's service offerings are designed to provide its clients with
flexibility and expertise to address their IT execution needs whether for managed delivery of a help desk, data center or network administration; developing applications to support business processes;
deploying technology across an enterprise; or providing qualified, motivated technical consultants for short or long-term engagements.

ARC
Staffing Management Solutions, offered since the Company's inception in 1988, enables clients to adapt their organizations to changing business or technology needs without adding to
fixed costs or making long-term commitments to staff. Client staffing needs are fulfilled in several ways:



ARC
Technology Management Solutions provides management and delivery of infrastructure development and maintenance expertise, offering managed solutions and best practice methodologies.
ARC Technology Management Solutions assists clients in integrating the resources, processes and systems for the design, deployment, operation and support of the clients key IT assets. Technology
Management Services are delivered through the following service offerings:



3

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ARC SALES APPROACH

The Company has developed a customized approach to the project assignment process that it believes results in a high degree of client and technical consultant
satisfaction and repeat business from clients. The Company believes a superior project assignment entails developing a comprehensive understanding of clients' needs, matching identified needs with
requisite skills on a timely basis, and monitoring performance throughout the project. However, the Company believes that the professional and interpersonal skills required to interact with clients
and interpret and communicate their needs differ greatly from those required to manage the recruitment and project assignment of technical consultants. Under the ARC approach, project responsibilities
are shared between account managers, recruiters and client staffing managers.

Account
managers focus principally on building and fostering relationships with clients, understanding the client's organization and assessing the client's needs, and proposing tailored
staffing solutions. Recruiters focus principally on recruiting and establishing relationships with technical personnel, assessing their technical and interpersonal skills, and selecting appropriate
technical personnel for a project. Client staffing managers assist in the selection of appropriate technical personnel for a project as well as monitoring and motivating technical consultants on a
project. This separation of responsibilities allows account managers, recruiters, and client staffing managers to meet the needs of their respective constituencies while working together to enhance
the prospects of a superior project assignment.

Historically,
the Company categorized the market into three different tiers: Business Partners, which includes the Company's large national accounts, Select Accounts, which consists of
accounts with the potential for more than $1 million in annual revenue, and the General Market,which represents hundreds of companies outside
the Fortune 1000. The Company's sales approach has evolved into being more focused on the Business Partners and Select Accounts. These accounts provide the greatest
opportunity for the Company and allow the Company to build on its customer relationships and take advantage of its quality of service delivery.

The
Company maintains a Technology Management support staff which is primarily located at its headquarters in Barrington, Illinois to assist account managers in selling and delivering
ARC Technology Management Solutions.

RECRUITING OF TECHNICAL PERSONNEL

As the leading edge of technology continues to outpace the availability of leading edge skills, the recruitment and retention of technical personnel represents an
expanding challenge. To recruit qualified technical personnel, the Company places newspaper advertisements, maintains a presence at local technical colleges and obtains referrals from its technical
employees and clients. The Company has also expanded its use of the internet as a recruiting tool.

Prospective
technical consultants are required to complete an extensive questionnaire regarding skill levels, experience, education and availability, and to provide references.
Recruiters maintain an active database of qualified technical personnel along with their related skill levels and availability. This database along with major job boards is the primary tools used to
match qualified technical skills to client requests.

Client
staffing managers oversee technical personnel once they are assigned to a client. The responsibilities include answering employment-related questions, addressing unique client
requirements such as training, drug testing, etc. and handling any travel needs that are associated with the project. In

4

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order to retain a qualified workforce, the Company devotes considerable time and resources towards serving the needs of its technical consultants. All technical consultants receive a competitive
hourly wage determined by the Company and may be eligible to participate in the Company's 401(k) plan, employee stock purchase plan and earn bonuses based on referrals of technical personnel. The
Company also provides technical consultants access to computer based training programs. Technical consultants may also receive a benefits package that allows them to select from a variety of benefit
options, including comprehensive group medical insurance, vision and dental insurance, long-term disability insurance and group life insurance.

The
Company's recruiting efforts were strengthened in 2001 by two key developments: the enhancement of the Company's recruiting software and the development of a
just-in-time recruiting methodology.

The
Company implemented LINX, an enterprise front office management application. LINX supports the full transaction cycle of our staffing business encompassing prospecting, order entry,
recruiting and fulfillment. The application tracks existing clients, resources and partners as well as past and prospective clients, resources and partners. It is used extensively by sales, recruiting
and delivery personnel. LINX is tightly integrated into our back office applications as data flows directly to the Company's Peoplesoft Enterprise Software.

The
Company also implemented a just-in-time methodology for having technical resources immediately available for anticipated demand. Through the development and
maintenance of multiple hot lists the Company has resources available for deployment on 24 hours notice based on anticipated customer requirements.

OPERATIONS

The Company operates through a network of 38 field offices utilized primarily to accommodate the field sales organization as well as to interview potential
candidates. The majority of the Company's recruiting personnel operate from home offices creating a virtual network. The Company's principal executive offices are located in Barrington, Illinois.

CLIENTS

During 2001, the Company provided technical staffing solutions to a wide variety of entities including computer services companies, systems integrators,
telecommunications companies, banking and financial service entities, manufacturers, distributors, health care providers and utilities. The Company's computer services and systems integrator clients
often subcontract ARC's services to their own customers. In 2001, the Company's largest clients, IBM and Hewlett Packard, accounted for approximately 20% and 17%, respectively, of the Company's total
revenue. The Company's remaining clients consist of Fortune 1000 companies and mid-sized organizations with sizable and complex IT operations. The IT requirements of these organizations
often provide opportunities for major projects that extend for multiple years or generate additional projects.

ARC
will typically provide discounts on staffing services to its largest clients in exchange for the opportunity to sell more volume and the opportunity to sell its higher margin, value
added services, such as its Technology Management Solutions.

The
vast majority of the traditional Staffing Management Solutions business is invoiced on an hourly basis. Technology Management Solutions business is invoiced on an hourly basis, fixed
fee basis, or a per incident charge. In all cases, invoicing is not processed until the services are rendered.

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COMPETITION

The IT services industry is highly competitive and fragmented and has low barriers to entry. The Company competes for potential clients with providers of
outsourcing services, systems integrators, computer systems consultants, other providers of technical staffing services and, to a lesser extent, temporary personnel agencies. The Company competes for
technical personnel with private and public companies, other providers of technical staffing services, systems integrators, providers of outsourcing services, computer systems consultants, clients and
temporary personnel agencies.

The
Company believes that the principal competitive factors in obtaining and retaining clients are accurate assessment of clients' requirements, timely assignment of technical
consultants with appropriate skills, and the price of services. The Company is dependent upon its ability to continue to attract and retain technical personnel who possess the technical skills and
experience necessary to meet the IT servicing requirements of its clients. The principal competitive factors in attracting qualified technical personnel are schedule flexibility, the availability of
training, competitive benefits and compensation, as well as the availability, quality and variety of projects. The Company believes that many of the technical personnel included in its databases may
also be pursuing other employment opportunities. Therefore, the Company believes that responsiveness to the needs of technical personnel is an important factor in the Company's ability to fill
projects.

SEASONALITY

The Company's quarterly results are affected by employment taxes. In general, the first two quarters of the year carry a significant portion of payroll tax
expense. As employees reach annual payroll limits, usually in the third and fourth quarters, the Company's payroll tax expense is reduced. See "Quarterly Financial Information," included elsewhere
herein.

EMPLOYEES

At December 31, 2001, the Company employed approximately 320 staff employees and approximately 1,900 technical employees.

FORWARD-LOOKING STATEMENTS

The Company makes forward-looking statements from time to time and desires to take advantage of the "safe harbor," which is afforded such statements under the
Private Securities Litigation Reform Act of 1995, when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from
those in the forward-looking statements. The statements contained in this Form 10-K, including those under "Management's Discussion and Analysis of Financial Condition and Results
of Operations," statements contained in future filings with the Securities and Exchange Commission and publicly disseminated press releases, and statements which may be made from
time-to-time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of
the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the
forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such
results or developments will, in fact, occur. There can be no assurance any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in
such forward-looking statement.

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In
addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the Company referred to above are also subject to the following risks and
uncertainties:



EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

|Name               |  | Age |  | Position                                                               
|------------------ |  | --- |  | -----------------------------------------------------------------------
|Raymond R. Hipp    |  | 59  |  | Chairman of the Board, President and Chief Executive Officer           
|Miner Smith        |  | 47  |  | President and General ManagerIT Staffing Business                     
|Victor Fricas      |  | 51  |  | President and General ManagerIT Solution Business                     
|Steven Purcell     |  | 51  |  | Senior Vice President, Chief Financial Officer, Secretary and Treasurer
|Sharon A. McKinney |  | 55  |  | Senior Vice PresidentHuman Resources                                  

Mr. Raymond
R. Hipp has been Chairman of the Board, President and Chief Executive Officer of the Company since July 1998. Previously he was Chief Executive Officer of ITI
Marketing Services, a provider of telemarketing services, from August 1996 until May 1998 when the company was sold. He was a self-employed management consultant from
September 1994 to August 1996. Mr. Hipp was President of Comdisco Disaster Recovery Services, a provider of business continuity services for the information technology industry,
from 1980 through August 1994. Mr. Hipp previously held executive and
management positions with International Business Machines Corporation. He currently serves on the Board of Directors of Gardner Denver Inc.

Mr. Miner
Smith joined the Company as the President of Field Operations for ARC, responsible for all staffing sales and operations in July 2001. In February 2002,
Mr. Smith was appointed President and General ManagerIT Staffing Business. From 1982 until July 2001, Mr. Smith was with the TAC Worldwide Companies, the largest
privately held staffing company in the US, where he was an Area Vice President responsible for TAC's EDP Contract Services Business Unit. Previous to that, Mr. Smith held a variety of positions
with TAC in sales and management.

Mr. Victor
Fricas joined the Company in November 1999 as Vice President, Field Operations with responsibility for delivery in the solutions and staffing business. In April,
Mr. Fricas received additional responsibility for delivery in the consulting business and also became the Company's Chief Information Officer in November 2000 and was promoted to Senior
Vice President. In February 2002, Mr. Fricas was appointed to the position of President and General ManagerIT Solution Business having

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responsibility for the Company's solutions business. Prior to joining ARC, Mr. Fricas held executive, operational and information technology management positions with Comdisco from 1987 to
1999, and Illinois Tool Works from 1970 to 1987.

Mr. Steven
Purcell joined the Company in August 1998 as Senior Vice President, Chief Financial Officer, Secretary and Treasurer. In May 1999, Mr. Purcell was
elected to the Board of Directors. Prior to that he was Chief Financial Officer for American Business Information, a provider of business and consumer data and data processing services. From 1991 to
1996 he served as Vice PresidentFinance, Chief Financial Officer and Treasurer, of Micro Warehouse, a direct marketer of hardware, software and accessories. From 1985 to 1991, he worked
for Electrocomponents, PLC, a London-based distributor of electrical products, serving as Chief Executive Officer for its Misco, Inc. subsidiary and, prior to that, as Vice
PresidentFinance for Electrocomponents, Inc., the U.S. holding company.

Ms. Sharon
A. McKinney was named Senior Vice President of Human Resources in January 1999. Ms. McKinney reports to ARC's chief executive officer and is responsible
for the human resources function within corporate headquarters and across the entire field organization. She brings to this position 18 years of domestic and international business and human
resources management experience. Ms. McKinney joined ARC from GE Capital Fleet Services where she held the position of Senior Vice President, Global Human Resources from 1997 to
January 1999. Previously, Ms. McKinney spent 1988 to 1997 with Square D Company, which today is known as Groupe Schneider, a French company. Following a series of increasingly
responsible human resources positions, Ms. McKinney spent her last three years at Groupe Schneider as Director of Human Resources based in Paris, France.

ITEM 2. PROPERTIES.

The Company's principal executive office is currently located in approximately 42,000 square feet of office space in Barrington, Illinois, pursuant to a lease
agreement that expires in October 2009. The Company leases office space in major markets across the United States and Canada for all of its sales offices.

ITEM 3. LEGAL PROCEEDINGS.

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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PART II

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

ARC's common stock has been traded on the OTC Bulletin Board under the symbol "ALRC.OB" since June 20, 2001. Prior to that date, the Company's common stock
was traded on the NASDAQ National Market, but was delisted for failure to satisfy the minimum bid price requirement for continued listing. No cash dividends have been paid on the common stock since
the initial trading in 1994, except as noted below.

In
conjunction with the refinancing of the Company's revolving line of credit on January 31, 2002, the Company's Board of Directors redeemed all of the rights issued under its
stockholders rights plan. The
Company paid a redemption payment of $0.01 per right to stockholders on February 8, 2002 at a total cost of approximately $172,000.

As
of March 22, 2002 ARC had 209 stockholders of record and 17,702,819 outstanding shares of common stock.The following table
shows the reported high and low sale prices of the common stock for the periods indicated, during the years ended December 31, 2001 and 2000:

2001

2000High

Low

High

LowFirst Quarter

$
1.44

$
0.31

$
5.88

$
2.13Second Quarter


1.25


0.30


3.50


1.00Third Quarter


0.75


0.32


2.47


0.56Fourth Quarter


0.61


0.30


1.00


0.22


During
2001, the Company issued an aggregate of approximately 296,000 unregistered shares of common stock pursuant to its employees stock purchase plan. The shares were issued at prices
ranging from $0.40 to $0.55 per share for aggregate consideration of $157,000.

On
January 31, 2002, the Company entered into a Securities Purchase Agreement with Wynnchurch Capital Partners, a private equity investor, pursuant to which the Company sold to
Wynnchurch
$10.0 million principal amount of 15.0% Senior Subordinated Convertible Notes due January 31, 2009. These notes are convertible into common stock of the Company at a conversion price of
$2.50 per share. At the Company's election, one-half of the interest may be deferred during the first four years subject to certain conditions. In conjunction with the sale of these notes,
the Company issued 10,000,000 warrants to purchase shares of the Company's common stock at $0.55 per share and an additional 1,000,000 warrants to purchase its common stock at $0.73 per share, the
latter of which are not exercisable for one year and expire on the occurrence of certain events. The sale was exempt from registration under the Securities Act of 1933 by virtue of Section 4(2)
exemption under the Act for sales not involving a public offering.

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ITEM 6. SELECTED FINANCIAL DATA.

|                                                                     |                                                   | Year ended December 31,
|-------------------------------------------------------------------- | ------------------------------------------------- | -----------------------
|
|
|SELECTED OPERATING DATA:                                             |                                                   |                        
|Revenue                                                              |                                                   | $                      
|Cost of services                                                     |                                                   |                        
|                                                                     |                                                   |                        
|                                                                     | Gross profit                                      |                        
|Selling, general and administrative                                  |                                                   |                        
|Restructuring and other charges                                      |                                                   |                        
|                                                                     |                                                   |                        
|                                                                     | Operating expenses                                |                        
|                                                                     |                                                   |                        
|                                                                     | Income (loss) from operations                     |                        
|Other income (expense), net                                          |                                                   |                        
|                                                                     |                                                   |                        
|                                                                     | Income (loss) before income tax expense (benefit) |                        
|Income tax expense (benefit)                                         |                                                   |                        
|                                                                     |                                                   |                        
|                                                                     | Net income (loss)                                 |                        
|                                                                     |                                                   |                        
|Basic and diluted earnings (loss) per share                          |                                                   | $                      
|                                                                     |                                                   |                        
|Shares used in computing basic and diluted earnings (loss) per share |                                                   |                        
|                                                                     |                                                   |                        
|SELECTED BALANCE SHEET DATA:                                         |                                                   |                        
|Total assets                                                         |                                                   | $                      
|Long-term debt                                                       |                                                   |                        
|Stockholders' equity                                                 |                                                   |                        

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

Alternative Resources Corporation ("ARC" or the "Company") is a leading provider of information technology management and staffing solutions. The Company serves
Fortune 1000 and mid-sized clients from a network of offices located throughout the United States and Canada.

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The
Company's 2001 operating results were significantly impacted by two principal factors. First was the significantly reduced IT spending on temporary and outsourced workers. Temporary
staffing, as reported by the Bureau of Labor Statistics, has experienced the sharpest deceleration in history. Second, was the complete evolution of the Company's business model from a branch model to
a functional model. As discussed in the 2000 Form 10-K, the Company reorganized its field structure from a branch-based model to a model organized by the functional areas of sales,
recruiting and service delivery. The new model was announced in late 1999 and implementation began in January 2000. The new model is designed to sell, recruit for and deliver the Company's
services much more effectively and efficiently. As part of this process, administrative functions that were previously attended to in the branch structure have now been centralized where they can be
processed in a more efficient manner. In addition, with this new model many of the field sales and delivery functions will require less office space than required under the old model. During 2001 this
model became fully functional. As a result, the Company was able to generate increased operating income and earnings before interest, income taxes, depreciation and amortization (EBITDA) despite the
sharp reduction in revenue. In connection with the new model, the Company incurred restructuring and other charges of $1.7 million in 2000, most of which related to a write-off of
excess fixed assets related to the downsizing of office space and severance costs associated with the elimination of certain positions. These actions have resulted in the Company reducing its
operating costs by $23.9 million in 2001 as compared to the year 2000.

The
Company also reviewed its intangibles during the 4th quarter of 2000 and recorded an impairment charge of $34.9 million related to goodwill. A more detailed explanation is
described below in the "Impairment of Goodwill2000."

The
Company had no similar charges in 2001.

RESTRUCTURING AND OTHER CHARGES2000

The Company recorded a $36.6 million charge during the fourth quarter of 2000, which consisted of the following components (in millions):

Impairment of goodwill

$
34.9Impairment of assets and other charges


1.2Restructuring charge


0.5$
36.6


The
2000 restructuring and other charges impacted the Company's 2000 statement of operations by decreasing income before income taxes by $36.6 million, decreasing net income by
$37.3 million and decreasing earnings per share by $2.37.

Impairment of Goodwill2000

During the fourth quarter of 2000, the Company reviewed its remaining intangible assets relating to the 1997 acquisition of CGI Systems, Inc. ("CGI") for
any impairment based on a trend of declining operating margins. After giving effect to purchase price adjustments, escrow refunds, acquisition costs, amortization and the write-down of
goodwill in 1998, the remaining unamortized goodwill balance as of September 30, 2000 was $37.7 million, which consisted of goodwill allocated to the following three components of CGI's
acquired business (in millions):

National Technical Service ("NTS")

$
2.8Programming Services


18.2Consulting


16.7$
37.7


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The
Company allocated goodwill separately to each component of the acquired business due to each component having a different operating cash flow and business strategy. Thus, the Company
performed a recoverability analysis for each component of the business for purposes of impairment. The recoverability analysis compared the projected future undiscounted cash flows over the estimated
useful life for each component versus the carrying net book value of the goodwill allocated to each component. This analysis supported a goodwill valuation of zero for the Programming Services and
Consulting components of the acquired business, which resulted in a write off of impaired goodwill totaling $34.9 million. The recoverability analysis for the NTS component of the business
resulted in a positive future undiscounted cash flow in excess of the unamortized balance of goodwill allocated to the NTS business; as such, there was no impairment to the $2.8 million
goodwill allocated to NTS.

Impairment of Assets and Other Charges2000

The $1.2 million impairment of assets and other charges relates primarily to write-downs of fixed asset values due to the re-engineering of the
Company's field operations. The charge includes a write-down of office furniture, leasehold improvements and computers to their estimated fair value as a result of the reduction in staff
and office space.

Restructuring Charge2000

The restructuring charge of $0.5 million represents the severance costs associated with the restructuring of the Company's sales, recruiting, delivery and
administrative support models. A total of 29 positions were eliminated, with 20 of them being administrative positions. At December 31, 2000, the remaining accrued severance costs on the
balance sheet was $0.3 million, all of which was paid out during 2001. The Company's savings resulting from the restructuring relating to selling, general and administrative expenses totaled
approximately $8.0 million for the year ended December 31, 2000.

RESTRUCTURING AND OTHER CHARGES1999

The Company recorded a $5.2 million charge during the fourth quarter of 1999, which consisted of the following components (in millions):

Restructuring charge

$
4.1Impairment of assets and other charges


1.1$
5.2


The
1999 restructuring and other charges impacted the Company's 1999 statement of operations by decreasing income before income taxes by $5.2 million, decreasing net income by
$3.1 million and decreasing earnings per share by $0.20.

Restructuring Charge1999

The 1999 restructuring charge, which totaled $4.1 million, represented real estate and severance costs associated with re-engineering the
Company's sales, recruiting and delivery models. This action was a natural extension of the restructuring announced in 1998, which was designed to optimize the existing branch field model, and entails
a comprehensive shift to a model organized along the functional lines of sales, recruiting and delivery. The new model is more efficient in terms of meeting the demands of the Company's clients at a
lower cost.

A
majority of the $4.1 million restructuring charge related to lease costs associated with vacating offices as the Company downsized its office space requirements. Through a
combination of adopting a more virtual office model and eliminating administrative functions that had been performed in the field offices, the Company relocated from most of its existing leased office
space to smaller office space that

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required 60% less square footage than what is currently used. The net impact lowered the Company's annual fixed occupancy costs by approximately $1.8 million without a loss in geographic
coverage or functionality of workspace. Of the $4.1 million restructuring charge, $3.5 million represents the present value of ongoing lease obligations for vacated offices net of
anticipated sublease income as well as estimated broker commissions and leasehold improvement costs necessary to sublease vacated offices. Management moved the majority of its office locations into
smaller space by the end of the first quarter of 2000 with the remainder of the office locations moved in the second quarter of 2000.

The
remaining $0.6 million of the $4.1 million restructuring charge related to severance costs associated with automating and centralizing field administrative processes as
part of the re-engineering exercise. A total of 88 positions were eliminated, 49 employees left in the fourth quarter of 1999 and the remainder left in the first quarter of 2000.

Impairment of Assets and Other Charges1999

Approximately $0.8 million of the $1.1 million impairment of assets and other charges relates to write-downs of fixed asset values, primarily due to
the re-engineering of the Company's field operations. The reduction in staff and office space has created excess office furniture, leasehold improvements and computers, which were written
down to their estimated fair value.

RESULTS OF OPERATIONS

The following table sets forth the percentage of revenue represented by certain line items of ARC's consolidated statements of operations for the periods
indicated:

2001

2000

1999Revenue

100.0
%
100.0
%
100.0
%Cost of services

70.3

70.4

69.0Gross profit

29.7

29.6

31.0Selling, general and administrative

29.4

31.8

28.2Restructuring and other charges



14.0

1.6Operating expenses

29.4

45.8

29.8Income (loss) from operations

0.3

(16.2
)
1.2Other expense, net

(1.8
)
(2.1
)
(1.1
)Income (loss) before income tax expense (benefit)

(1.5
)
(18.3
)
0.1Income tax expense (benefit)



(1.7
)
0.2Net loss

(1.5
)%
(16.6
)%
(0.1
)%


FISCAL 2001 COMPARED TO FISCAL 2000

Revenue.Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions.
Revenue decreased $60.1 million or 23.0% from $261.8 million in 2000 to $201.7 million in 2001, primarily from the slowdown in IT spending experienced industry-wide.
ARC Technology Management Solutions revenue decreased by $14.8 million or 18.9% from $78.2 million in 2000 to $63.4 million in 2001. The Company's traditional staffing business
decreased by $45.3 million or 24.7% from $183.6 million in 2000 to $138.3 million in 2001.

13

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Gross profit.Gross profit decreased by $17.6 million or 22.7% from $77.5 million in 2000 to
$59.9 million in 2001. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit increased by 0.1% from 29.6% in 2000 to 29.7% in 2001.

Selling, general and administrative expenses.Selling, general and administrative expenses consist of salaries and benefits,
sales costs, recruiting, retention and training costs and management and administrative costs. Selling, general and administrative expenses decreased by $23.9 million or 28.7% from
$83.3 million in 2000 to $59.4 million in 2001. The selling, general and administrative expense decrease was attributable to the restructuring actions begun in 1999, which is reflected
in reduced office space and lower headcount. The Company took further restructuring actions in late 2000, which is reflected in the 2000 restructuring and other charges. The impact of these actions
was fully realized during 2001 resulting in a decrease of selling, general and administrative expenses of $23.9 million. As a percentage of revenues, selling, general and administrative
expenses decreased by 2.4% from 31.8% in 2000 to 29.4% in 2001.

Restructuring and other charges.The Company did not incur any restructuring charges during 2001. As such, the restructuring
and other charges decreased by $36.6 million or 100.0% from $36.6 million in 2000 to $0.0 in 2001.

Income (loss) from operations.Income (loss) from operations increased by $42.9 million from a loss of
$42.4 million in 2000 to income of $0.5 million in 2001. Included in the 2000 loss was the restructuring charge of $36.6 million, as previously discussed. Excluding the
restructuring charge, the loss was $5.8 million. The increase in 2001 is primarily attributable to the approximate $23.9 million in savings realized in selling, general and
administrative expenses as a result of the restructuring actions.

FISCAL 2000 COMPARED TO FISCAL 1999

Revenue.Revenues consist of fees earned from ARC Staffing Management Solutions and ARC Technology Management Solutions.
Revenue decreased $67.8 million or 20.6% from $329.6 million in 1999 to $261.8 million in 2000, primarily from the restructuring of the Company from a branch organization to a
functionally organized business model. This change in business model resulted in significant disruption to the business and increased the turnover in both the staff and technical
consultants. Also contributing to the decrease in revenue was an overall slowdown in IT spending as companies chose to ensure a return on the IT investments made in preparation for the year 2000. ARC
Technology Management Solutions revenue decreased by $25.8 million or 24.8% from $104.0 million in 1999 to $78.2 million in 2000. The Company's traditional staffing
business decreased by $42.0 million or 18.7% from $225.6 million in 1999 to $183.6 million in 2000.

Gross profit.Gross profit decreased by $24.7 million or 24.1% from $102.1 million in 1999 to
$77.5 million in 2000. The decrease was primarily attributable to the reduction in revenue. As a percentage of revenues, gross profit decreased by 1.4% from 31.0% in 1999 to 29.6% in 2000 due
to a significant decrease in utilization of technical resources on a major project with one customer coupled with lower overall utilization of technical resources caused by reduced business volumes.
The major project situation was identified in late 1999 and rectified in early 2000, restoring margins for the customer to closer to historical levels.

Selling, general and administrative expenses.Selling, general and administrative expenses consist of salaries and benefits,
sales costs, recruiting, retention and training costs and management and administrative costs. Selling, general and administrative expenses decreased by $9.7 million or 10.4% from
$93.0 million in 1999 to $83.3 million in 2000. The selling, general and administrative expense decrease was attributable to the restructuring actions taken in 1999, which is reflected
in reduced office space and lower headcount. The Company took further restructuring actions in late 2000, which is reflected in the 2000 restructuring and other charges. In the latter part of 2000,
the Company reduced

14

---

headcount by 95 people, which realigned the field operations and eliminated certain redundant corporate staff. As a percentage of revenues, selling, general and administrative expenses increased by
3.6% from 28.2% in 1999 to 31.8% in 2000, primarily as a result of the decline in revenues.

Restructuring and other charges.Restructuring and other charges increased by $31.4 million or 600.6% from
$5.2 million in 1999 to $36.6 million in 2000. As a percentage of revenues, restructuring and other charges increased by 12.4% from 1.6% in 1999 to 14.0% in 2000. The increases were
primarily due to the write-off of various impaired assets in 2000 related to the 1997 acquisition of CGI.

Income (loss) from operations.Income (loss) from operations decreased by $46.3 million from income of
$3.9 million in 1999 to a loss of $42.4 million in 2000. Included in the 2000 loss was the restructuring charge of $36.6 million, as previously discussed. Excluding the
restructuring charge, the loss was $5.8 million. The loss was primarily attributable to the reduction in revenue caused by the Company's elimination of the branch model as well as the overall
slowdown in IT spending.

LIQUIDITY AND CAPITAL RESOURCES

On January 31, 2002, the Company replaced its existing bank line with a $30.0 million senior secured revolving credit facility with Fleet Capital, a
subsidiary of the FleetBoston Financial Corporation and $10.0 million principal amount of Senior Subordinated Convertible Notes sold to Wynnchurch Capital Partners, a private equity investor.
The $30.0 million dollar revolver is secured by the assets of the Company, principally consisting of accounts receivable. The agreement has a three-year term and bears interest at
LIBOR plus 325 basis points or the bank's base rate plus 100 basis points. As of February 28, 2002, the applicable rate is 5.75% which represents the bank's base rate plus 100 basis points.

The
Senior Subordinated Convertible Notes bear interest at 15% and are due January 31, 2009. These notes are convertible into common stock anytime after January 31, 2002 at a
conversion price of $2.50 per share. At the Company's election, one-half of the interest may be deferred during the first four years, subject to certain conditions. In conjunction with the
sale of these notes, the Company issued 10,000,000 warrants to purchase shares of the Company's common stock at $0.55 per share, which are exercisable at anytime, and an additional 1,000,000 warrants
to purchase its common stock at $0.73 per share, the latter of which are not exercisable for one year and expire on the occurrence of certain events.

Current
assets exceed current liabilities by $12.9 million at December 31, 2001. Net cash provided by operations was $19.4 million, a significant increase from
$8.8 million in 2000 and $2.6 million in 1999. Net cash flow from operations in 2001 was principally impacted by a decrease in accounts receivable of approximately $21.0 million
and the collection of $5.6 million in taxes receivable. Net cash flow from operations in 2000 was impacted by a decrease in accounts receivable of approximately $14.1 million due to
reduced revenue, and increases of payroll and related expenses and accrued expenses and liabilities of $3.8 million and $3.2 million, respectively. Net cash flow from operations in 1999
was impacted by approximately $5.0 million of estimated income tax payments made during the first half of the year that were refunded in the first half of 2000.

Capital
spending was approximately $1.9 million in both 2001 and 2000, a significant reduction from $12.0 million in 1999, as the Company had completed all the necessary
major capital spending relative to the new business model in 1999. The Company does not anticipate that its capital requirements going forward will be significantly greater than $2.0 million to
$3.0 million per annum.

The
Company believes its cash balances and funds from operations together with funds available under its new credit facility will be sufficient to meet all of its anticipated cash
requirements for at least the next 12 months.

15

---

QUARTERLY FINANCIAL RESULTS

The following tables set forth certain unaudited quarterly results of operations of the Company for 2001 and 2000. The quarterly operating results are not
necessarily indicative of future results of operations.

|(in thousands, except per share data)        |                   | Three Months Ended (unaudited) |       
|-------------------------------------------- | ----------------- | ------------------------------ | ------
|
|Statement of Operations Data:                |                   |                                |       
|Revenue                                      |                   | $                              | 57,720
|Cost of services                             |                   |                                | 40,869
|                                             |                   |                                |       
|                                             | Gross profit      |                                |       
|Selling, general and administrative expenses |                   |                                | 16,148
|                                             |                   |                                |       
|Income (loss) from operations                |                   |                                | 703   
|Other expense, net                           |                   |                                | 742   
|                                             |                   |                                |       
|Loss before income taxes                     |                   |                                | (39   
|Income tax expense (benefit)                 |                   |                                | 32    
|                                             |                   |                                |       
|Net loss                                     |                   | $                              | (71   
|                                             |                   |                                |       
|Loss per share:                              |                   |                                |       
|                                             | Basic and diluted |                                | $     
|                                             |                   |                                |       
|Weighted-average common shares outstanding:  |                   |                                |       
|                                             | Basic and diluted |                                |       
|                                             |                   |                                |       

|(in thousands, except per share data)        |                   | Three Months Ended (unaudited) |       
|-------------------------------------------- | ----------------- | ------------------------------ | ------
|
|Statement of Operations Data:                |                   |                                |       
|Revenue                                      |                   | $                              | 70,520
|Cost of services                             |                   |                                | 51,782
|                                             |                   |                                |       
|                                             | Gross profit      |                                |       
|                                             |                   |                                |       
|Selling, general and administrative expenses |                   |                                | 21,758
|Restructuring and other charges              |                   |                                |      
|                                             |                   |                                |       
|Total operating expenses                     |                   |                                | 21,758
|                                             |                   |                                |       
|Loss from operations                         |                   |                                | (3,020
|Other expense, net                           |                   |                                | 1,029 
|                                             |                   |                                |       
|Loss before income taxes                     |                   |                                | (4,049
|Income tax benefit                           |                   |                                | (1,541
|                                             |                   |                                |       
|Net loss                                     |                   | $                              | (2,508
|                                             |                   |                                |       
|Loss per share:                              |                   |                                |       
|                                             | Basic and diluted |                                | $     
|                                             |                   |                                |       
|Weighted-average common shares outstanding:  |                   |                                |       
|                                             | Basic and diluted |                                |       
|                                             |                   |                                |       

16

---

CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements are impacted by the accounting policies used, and the estimates and assumptions made by management. The most
significant accounting policies and management estimates that affect the presentation of the consolidated financial statements include revenue recognition, allowance for doubtful accounts, analysis of
goodwill impairment and valuation allowance for deferred tax assets.

Revenue Recognition

The Company recognizes revenues as services are performed, utilizing four different billing methodologies, as follows: (1) time and material billing,
whereby the client is billed by the hour on a weekly basis for past services performed; (2) project-based billing, for which fees are fixed and are based on specific contracts;
(3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; (4) and fee-based billing, which is used for
candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more
volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.

The
Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," in the fourth quarter of
2000. This Bulletin provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The implementation of SAB 101 did not have a material effect
on the financial position or results of operations of the Company.

Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers' current credit
worthiness. The Company continuously monitors collections and payments from its customer base and maintains a provision for estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified.
The Company specifically reviews outstanding account balances that are overdue 90 days or more in making its assessment of the provision for bad debt expense in each period. While the Company
has historically had sufficient coverage of allowances for credit losses, it cannot guarantee that it will continue to experience the same credit loss rates as in past periods.

Goodwill Impairment

On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets ("SFAS 142")." This Statement dictates that goodwill and
intangible assets with indefinite useful lives should be tested and written down for impairment at least annually, instead of being amortized on an ongoing basis. The Company has terminated its policy
of amortizing goodwill on a monthly basis and will perform a quarterly analysis of goodwill impairment, using the discounted future cash flows methodology prescribed by SFAS No. 142. Since the
Company wrote off the significant majority of its goodwill balance in 2000 due to impairment, it anticipates that the adoption of this standard will not have a significant impact on its financial
statements.

Valuation Allowance for Deferred Tax Asset

The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. Given the
uncertainty with respect to the future realization of deferred tax assets, particularly the net operating losses given no remaining carryback potential and the lack of ability to accurately forecast
taxable income over the 20 year net operating

17

---

loss carryforward period. When a valuation allowance is deemed necessary, the Company records an adjustment to the deferred tax asset, with a corresponding charge to the statement of operations. In
the event that the Company determines that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would
increase income, or reduce a net loss, in the period such determination was made.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 142, which supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how
intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. SFAS 142 also addresses how goodwill and
other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. SFAS 142 is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. As of the date of adoption, the Company has unamortized goodwill in the amount of approximately $2.7 million, which will be subject to the
transition provisions of SFAS 142 and will not be amortized going forward. In 2001, amortization expense was approximately $76,000. As such, management has deemed that the implementation of
this change will not be material.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"), which supersedes APB Opinion No. 16, "Business Combinations," and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 141 addresses financial accounting and reporting for business combinations and requires that all
business combinations within the scope of the SFAS 141 be accounted for using only the purchase method. SFAS 141 is required to be adopted for all business combinations initiated after
June 30, 2001. As the Company has not had any business combinations subsequent to June 30, 2001, management has assessed that there is no impact to date of the adoption of
SFAS 141 on its consolidated financial statements.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occuring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends
that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS 144 is effective for
the fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Management has assessed the impact of the adoption of SFAS 144 on its consolidated
financial statements and believes the impact will not be material.

In
December 2001, the FASB staff issued Topic No. D-103, "Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred" ("Topic D-103"), which is effective for fiscal years beginning after December 15, 2001. Topic D-103 requires
that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. Comparative financial statements for prior periods
must be conformed to this presentation. The Company currently records rebilled out-of-pocket expenses as an offset to the related expense and, accordingly, effective
January 1, 2002, the Company will change its presentation to reflect rebilled expenses as revenue and conform the presentation for prior periods.

18

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The market risk that the Company is exposed to primarily relates to changes in interest rates on its borrowings. At December 31, 2001, the Company had
$26.9 million in floating-rate debt. An adverse
change in interest rates during any period that the loan is outstanding would cause an increase in interest expense. A 100 basis point increase in the bank's base rate would increase the annual amount
of interest paid by $0.3 million.

The
Company does not currently have any derivative financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Reference is made to the financial statements, financial statement schedule and notes thereto included elsewhere in this report and listed under Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



| |  | The information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2002, under the caption "Election of Directors," which information
is hereby incorporated herein by reference. |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 



| |  | Reference is made to "Executive Officers of the Registrant" in Part I of this Form 10-K. |  | 
| |  | ---------------------------------------------------------------------------------------- |  | 

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2002,
under the captions "Executive Compensation" and "Board of Directors," which information is hereby incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is set forth in the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 13, 2002,
under the caption "Securities Beneficially Owned by Principal Stockholders and Management," which information is hereby incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On January 31, 2002, the Company issued to Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada L.P. (the "Wynnchurch
Companies") $10.0 million principal amount of convertible 15% Senior Subordinated Convertible Notes due January 31, 2009, ten million warrants to purchase shares of the Company's common
stock at $0.55 per share that are immediately exercisable,

19

---

and an additional one million warrants to purchase its common stock at $0.73 per share which are generally not exercisable for one year and expire on the occurrence of certain events. The Company
paid Wynnchurch Capital Ltd., an affiliate of the Wynnchurch Companies, a $250,000 commitment fee and a $50,000 closing fee in connection with these transactions. Wynnchurch was granted the right to
have two designees appointed to the Company's seven person board, with a right, upon request, to have the board increased by up to two members, and to appoint those additional directors. The
Wynnchurch Companies designated Messrs. John A. Hatherly and Frank G. Hayes, who were elected to
the Company's board on February 4, 2002. Mr. Hatherly is the president of the general partner of each of the Wynnchurch Companies and has a financial interest in the Wynnchurch
Companies.

20

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

| |     |       |                                                                                                                                                                                                  |                               | Page
| | --- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | ----
| | (a) | (i)   |                                                                                                                                                                                                  | FINANCIAL STATEMENTS          |     
| |     |       | Independent Auditors' Report                                                                                                                                                                     |                               | 27  
| |     |       | Consolidated Balance Sheetsas of December 31, 2001 and 2000                                                                                                                                     |                               | 28  
| |     |       | Consolidated Statements of Operationsyears ended December 31, 2001,
2000 and 1999                                                                                                               |                               | 29  
| |     |       | Consolidated Statements of Comprehensive Incomeyears ended December 31, 2001, 2000 and 1999                                                                                                     |                               | 30  
| |     |       | Consolidated Statements of Changes in Stockholders' Equityyears ended
December 31, 2001, 2000 and 1999                                                                                          |                               | 31  
| |     |       | Consolidated Statements of Cash Flowsyears ended December 31, 2001,
2000 and 1999                                                                                                               |                               | 32  
| |     |       | Notes to Consolidated Financial Statements                                                                                                                                                       |                               | 33  
| |     | (ii)  |                                                                                                                                                                                                  | FINANCIAL STATEMENT SCHEDULES |     
| |     |       | Schedule IIValuation and Qualifying Accounts                                                                                                                                                    |                               | 46  
| |     | (iii) |                                                                                                                                                                                                  | EXHIBITS                      |     
| |     |       | Exhibits submitted with the Annual Report on Form 10-K as filed with the Securities and Exchange Commission and those incorporated by reference to other filings are listed on the Exhibit Index |                               | 23  
| | (b) |       |                                                                                                                                                                                                  | REPORTS ON FORM 8-K           |     
| |     |       | There were no reports on Form 8-K filed during the three months ended
December 31, 2001.                                                                                                         |                               |     

21

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 22, 2002.

| | ALTERNATIVE RESOURCES CORPORATION
| | ---------------------------------
| | By                               

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities indicated on March 22, 2002.

|Signature                           |  | Title                                                                                                                         
|----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|                                    |  |                                                                                                                               
|/s/RAYMOND R. HIPPRaymond R. Hipp   |  | Chairman of the Board, President and Chief Executive Officer (Principle Executive Officer)                                    
|/s/STEVEN PURCELLSteven Purcell     |  | Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director (Principal Financial and Accounting Officer)
|/s/JOANNE BRANDESJoanne Brandes     |  | Director                                                                                                                      
|/s/CHARLES W. SWEETCharles W. Sweet |  | Director                                                                                                                      
|/s/SYD N. HEATONSyd N. Heaton       |  | Director                                                                                                                      
|/s/JOHN A. HATHERLYJohn A. Hatherly |  | Director                                                                                                                      
|/s/FRANK G. HAYESFrank G. Hayes     |  | Director                                                                                                                      

22

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                                      
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation, as amended. Incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1998. (File No. 0-23940)               
|3.2            |  | Amended and Restated By-Laws. Incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31,1996. (File No. 0-23940)                                                 
|4.1            |  | Rights Agreement dated October 15, 1998 between the Company and Harris Trust and Savings Bank, incorporated herein by reference to Exhibit 1 to the Company's Form 8-A dated October 20, 1998. (File
No. 0-23940)
|4.2            |  | Credit agreement dated November 7, 1997, incorporated herein by reference to Exhibit 4 to the Company's Form 8-K dated November 7, 1997. (File No. 0-23940)                                                      
|4.3            |  | Third amendment to credit agreement dated September 30, 1998 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)                  
|4.4            |  | Fourth amendment to credit agreement dated December 27, 1999, incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)                 
|4.5            |  | Fifth amendment to credit agreement dated March 24, 2000 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-Q for the period ended March 31, 2000. (File No. 0-23940)                      
|4.6            |  | Sixth amendment to credit agreement dated August 31, 2000 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)                  
|4.7            |  | Seventh amendment to credit agreement dated December 4, 2000 incorporated herein by reference to Exhibit 4.4 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)               
|4.8            |  | Eighth amendment to credit agreement dated December 29, 2000 incorporated herein by reference to Exhibit 4.5 to the Company's Form 10-K for the period ended December 31, 2000. (File No. 0-23940)               
|4.9            |  | Ninth amendment to credit agreement dated April 30, 2001 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended March 31, 2001. (File No. 0-23940)                      
|4.10           |  | Tenth amendment to credit agreement dated May 4, 2001 incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended March 31, 2001. (File No. 0-23940)                         
|4.11           |  | Eleventh amendment to credit agreement dated May 18, 2001 incorporated herein by reference to Exhibit 4.1 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)                      
|4.12           |  | Twelth amendment to credit agreement dated June 30, 2001 incorporated herein by reference to Exhibit 4.2 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)                       

23

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|4.13 |  | Thirteenth amendment to credit agreement dated July 2, 2001 incorporated herein by reference to Exhibit 4.3 to the Company's Form 10-Q for the period ended June 30, 2001. (File No. 0-23940)                                                                                                                                                                                 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.14 |  | Fourteenth amendment to credit agreement dated November 30, 2001.                                                                                                                                                                                                                                                                                                             
|4.15 |  | Credit and Security Agreement dated January 31, 2002 among Alternative Resources Corporation, ARC Services Inc., ARC Solutions, Inc., ARC Midholding, Inc. and Writers Inc. as joint and several
co-borrowers, and Fleet Capital Corporation as lender. Incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).
|4.16 |  | $30,000,000 Revolving Credit Note under the Credit and Security Agreement. Incorporated herein by reference to Exhibit 4.2 to the Company's Form 8-K dated February 12, 2002. (File
No. 0-23940).                                                                                                                                                                             
|4.17 |  | Securities Purchase Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference
to Exhibit 4.3 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                          
|4.18 |  | 15% Senior Subordinated Convertible Promissory Note dated January 31, 2002 and due January 31, 2009 in the principal amount of $4,920,208 issued to Wynnchurch Capital Partners, L.P. Incorporated herein by
reference to Exhibit 4.4 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                  
|4.19 |  | 15% Senior Subordinated Convertible Promissory Note dated January 31, 2002 and due January 31, 2009 in the principal amount of $5,079,792 issued to Wynnchurch Capital Partners Canada, L.P. Incorporated
herein by reference to Exhibit 4.5 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                           
|4.20 |  | Stock Purchase Warrant for 4,920,208 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners, L.P. Incorporated herein by reference to
Exhibit 4.6 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                  
|4.21 |  | Stock Purchase Warrant for 5,079,792 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to
Exhibit 4.7 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                           
|4.22 |  | Contingent Stock Purchase Warrant for 492,021 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners, L.P. Incorporated herein by reference to
Exhibit 4.8 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                         
|4.23 |  | Contingent Stock Purchase Warrant for 507,979 shares of Alternative Resources Corporation common stock, dated January 31, 2002 and issued to Wynnchurch Capital Partners Canada, L.P. Incorporated herein by
reference to Exhibit 4.9 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                  
|4.24 |  | Registration Rights Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference
to Exhibit 4.10 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                         

24

---

|4.25 |  | Subordination and Intercreditor Agreement dated as of January 31, 2002, among Wynnchurch Capital Partners, L.P., Wynnchurch Capital Partners Canada, L.P., Alternative Resources Corporation, ARC Service,
 Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers, Inc., and Fleet Capital Corporation. Incorporated herein by reference to Exhibit 4.11 to the Company's Form 8-K dated February 12, 2002. (File
No. 0-23940).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.26 |  | Pledge Agreement dated January 31, 2002, among Alternative Resources Corporation, ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers Inc. and Fleet Capital Corporation.
Incorporated herein by reference to Exhibit 4.12 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                                               
|4.27 |  | Pledge Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P., and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to
Exhibit 4.13 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                                                                         
|4.28 |  | Company Security Agreement dated January 31, 2002, among Alternative Resources Corporation, Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P. Incorporated herein by reference to
Exhibit 4.14 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                                                                
|4.29 |  | Guarantor Security Agreement dated January 31, 2002, among ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc., Writers Inc., Wynnchurch Capital Partners, L.P. and Wynnchurch Capital
Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.15 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                     
|4.30 |  | Guaranty dated January 31, 2002, made by ARC Service, Inc., ARC Solutions, Inc., ARC Midholding, Inc. and Writers Inc., for the benefit of Wynnchurch Capital Partners, L.P. and Wynnchurch
Capital Partners Canada, L.P. Incorporated herein by reference to Exhibit 4.16 to the Company's Form 8-K dated February 12, 2002. (File No. 0-23940).                                                                                 

Exhibits 10.1
through 10.10 are management contracts or compensatory plans or arrangements.

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1           |  | Amended and Restated Stock Option Plan. Incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the period ended June 30, 1997. (File No. 0-23940)                                                                                      
|10.2           |  | Form of Indemnity Agreement between Alternative Resources Corporation and its officers. Incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended,
Registration No. 33-76584.                         
|10.3           |  | Executive Employment Agreement between Alternative Resources Corporation and Raymond R. Hipp dated July 23, 1998. Incorporated herein by reference to the Exhibit 10.1 to the Company's Form 10-Q for the
period ended September 30, 1998. (File No. 0-23940).
|10.4           |  | Executive Employment Agreement between Alternative Resources Corporation and Steven Purcell dated August 1, 1998. Incorporated herein by reference to the Exhibit 10.2 to the Company's Form 10-Q for the
period ended September 30, 1998. (File No. 0-23940).

25

---

|10.5  |  | Stock Option Agreement between Alternative Resources Corporation and Raymond R. Hipp dated July 23, 1998. Incorporated herein by reference to the Exhibit 10.8 to the Company's Form 10-K for the period
ended December 31, 1999. (File No. 0-23940).           
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6  |  | Stock Option Agreement between Alternative Resources Corporation and Steven Purcell dated August 3, 1998. Incorporated herein by reference to the Exhibit 10.9 to the Company's Form 10-K for the period ended
December 31, 1999. (File No. 0-23940).           
|10.7  |  | Executive Employment Agreement between Alternative Resources Corporation and Miner Smith dated July 16, 2001.                                                                                                                                                   
|10.8  |  | Stock Option Agreement between Alternative Resources Corporation and Miner Smith dated July 16, 2001.                                                                                                                                                           
|10.9  |  | Executive Employment Agreement between Alternative Resources Corporation and Sharon McKinney dated November 1, 2000. Incorporated herein by reference to the Exhibit 10.9 to the Company's Form 10-K for the
period ended December 31, 2000. (File No. 0-23940).
|10.10 |  | Executive Employment Agreement between Alternative Resources Corporation and Victor Fricas dated November 1, 2000. Incorporated herein by reference to the Exhibit 10.10 to the Company's Form 10-K for the
period ended December 31, 2000. (File No. 0-23940). 
|10.11 |  | Indemnification Agreement between Alternative Resources Corporation and individual members of the Board of Directors dated February 4, 2002.                                                                                                                    
|21    |  | Subsidiaries of Alternative Resources Corporation                                                                                                                                                                                                               
|23    |  | Consent of KPMG LLP                                                                                                                                                                                                                                             

26

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INDEPENDENT AUDITORS' REPORT

THE
BOARD OF DIRECTORS AND STOCKHOLDERS
ALTERNATIVE RESOURCES CORPORATION:

We
have audited the accompanying consolidated balance sheets of Alternative Resources Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alternative Resources Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United States of America.

|                                    |  |             
|----------------------------------- |  | ------------
|                                    |  | /s/ KPMG LLP
|Chicago, Illinois
February 19, 2002 |  |             

27

---



ALTERNATIVE RESOURCES CORPORATION  CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                     | December 31, |       
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------
|
|
|ASSETS                                     |                                                                                                                                     |              |       
|Current Assets:                            |                                                                                                                                     |              |       
|                                           | Cash and cash equivalents                                                                                                           |              | $     
|                                           | Short-term investments                                                                                                              |              |       
|                                           | Trade accounts receivable, net of allowance for doubtful accounts, $1,179 in 2001 and $1,503 in 2000                                |              |       
|                                           | Prepaid expenses                                                                                                                    |              |       
|                                           | Income taxes receivable                                                                                                             |              |       
|                                           | Other receivables                                                                                                                   |              |       
|                                           | Deferred income taxes                                                                                                               |              |       
|                                           |                                                                                                                                     |              |       
|Total current assets                       |                                                                                                                                     |              | 40,438
|                                           |                                                                                                                                     |              |       
|Property and Equipment:                    |                                                                                                                                     |              |       
|                                           | Office equipment                                                                                                                    |              |       
|                                           | Furniture and fixtures                                                                                                              |              |       
|                                           | Software                                                                                                                            |              |       
|                                           | Leasehold improvements                                                                                                              |              |       
|                                           |                                                                                                                                     |              |       
|                                           |                                                                                                                                     |              | 31,986
|                                           | Less accumulated depreciation and amortization                                                                                      |              |       
|                                           |                                                                                                                                     |              |       
|Net property and equipment                 |                                                                                                                                     |              | 14,592
|                                           |                                                                                                                                     |              |       
|Other Assets:                              |                                                                                                                                     |              |       
|                                           | Goodwill, net of amortization, $2,727 in 2001 and $2,651 in 2000                                                                    |              |       
|                                           | Other assets                                                                                                                        |              |       
|                                           |                                                                                                                                     |              |       
|Total other assets                         |                                                                                                                                     |              | 4,362 
|                                           |                                                                                                                                     |              |       
|Total assets                               |                                                                                                                                     | $            | 59,392
|                                           |                                                                                                                                     |              |       
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                     |              |       
|Current Liabilities:                       |                                                                                                                                     |              |       
|                                           | Cash overdraft                                                                                                                      |              | $     
|                                           | Short-term debt                                                                                                                     |              |       
|                                           | Accounts payable                                                                                                                    |              |       
|                                           | Payroll and related expenses                                                                                                        |              |       
|                                           | Accrued expenses                                                                                                                    |              |       
|                                           |                                                                                                                                     |              |       
|Total current liabilities                  |                                                                                                                                     |              | 27,498
|                                           |                                                                                                                                     |              |       
|                                           | Long-term debt                                                                                                                      |              |       
|                                           | Other liabilities                                                                                                                   |              |       
|                                           | Deferred income taxes                                                                                                               |              |       
|                                           |                                                                                                                                     |              |       
|Total liabilities                          |                                                                                                                                     |              | 54,733
|                                           |                                                                                                                                     |              |       
|Stockholders' Equity:                      |                                                                                                                                     |              |       
|                                           | Preferred stock ($.01 par value, 1,000,000 shares authorized; none issued and outstanding)                                          |              |       
|                                           | Common stock ($.01 par value, 50,000,000 shares authorized; 17,556,569 and 17,390,594 shares issued in 2001 and 2000, respectively) |              |       
|                                           | Additional paid-in capital                                                                                                          |              |       
|                                           | Deferred compensation                                                                                                               |              |       
|                                           | Accumulated other comprehensive income                                                                                              |              |       
|                                           | Accumulated deficit                                                                                                                 |              |       
|                                           |                                                                                                                                     |              |       
|                                           |                                                                                                                                     |              | 9,456 
|                                           | Treasury shares, at cost (585,800 shares in 2001 and 2000, respectively)                                                            |              |       
|                                           |                                                                                                                                     |              |       
|Total stockholders' equity                 |                                                                                                                                     |              | 4,659 
|                                           |                                                                                                                                     |              |       
|Total liabilities and stockholders' equity |                                                                                                                                     | $            | 59,392
|                                           |                                                                                                                                     |              |       

See accompanying notes to consolidated financial statements.

28

---

ALTERNATIVE RESOURCES CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS

|                                             |                                                   | Year Ended December 31, |        
|-------------------------------------------- | ------------------------------------------------- | ----------------------- | -------
|
|
|Revenue                                      |                                                   | $                       | 201,745
|Cost of services                             |                                                   |                         | 141,836
|                                             |                                                   |                         |        
|                                             | Gross profit                                      |                         |        
|                                             |                                                   |                         |        
|Selling, general and administrative expenses |                                                   |                         | 59,386 
|Restructuring and other charges              |                                                   |                         |       
|                                             |                                                   |                         |        
|                                             | Operating expenses                                |                         |        
|                                             |                                                   |                         |        
|                                             | Income (loss) from operations                     |                         |        
|Other expense, net                           |                                                   |                         | (3,597 
|                                             |                                                   |                         |        
|                                             | Income (loss) before income tax expense (benefit) |                         |        
|Income tax expense (benefit)                 |                                                   |                         |       
|                                             |                                                   |                         |        
|                                             | Net loss                                          |                         | $      
|                                             |                                                   |                         |        
|Net loss per share:                          |                                                   |                         |        
|                                             | Basic and diluted                                 |                         | $      
|                                             |                                                   |                         |        
|Shares used to compute net loss per share:   |                                                   |                         |        
|                                             | Basic and diluted                                 |                         |        
|                                             |                                                   |                         |        

See
accompanying notes to consolidated financial statements.

29

---

ALTERNATIVE RESOURCES CORPORATION  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

|                                                 |                                                                   | Year Ended December 31, |       
|------------------------------------------------ | ----------------------------------------------------------------- | ----------------------- | ------
|
|
|Net loss                                         |                                                                   | $                       | (3,074
|Other comprehensive income (loss):               |                                                                   |                         |       
|                                                 | Foreign currency translation adjustment, net of tax               |                         |       
|Unrealized holding gain on security, net of tax: |                                                                   |                         |       
|                                                 | Unrealized holding gains arising during the period                |                         |       
|                                                 | Reclassification adjustment for gain included in loss, net of tax |                         |       
|                                                 |                                                                   |                         |       
|Other comprehensive income (loss)                |                                                                   |                         | (216  
|                                                 |                                                                   |                         |       
|Comprehensive loss                               |                                                                   | $                       | (3,290
|                                                 |                                                                   |                         |       

See
accompanying notes to consolidated financial statements.

30

---



ALTERNATIVE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

|                                                             |  |   |  |   |   |  |        |   |   |     |   |      |   |   |        |   |   |        |   | Accumulated Other Comprehensive Income |      |   |  
|------------------------------------------------------------ |  | - |  | - | - |  | ------ | - | - | --- | - | ---- | - | - | ------ | - | - | ------ | - | -------------------------------------- | ---- | - | -
|
|
|
|
|Balance at December 31, 1998                                 |  |  |  | $ |  |  | 15,957 |   | $ | 160 |   | (267 | ) | $ | (3,093 | ) | $ | 26,647 |   | $                                      |     |   | $
|Exercise of stock options                                    |  |  |  |   |  |  | 59     |   |   |    |   |     |   |   |       |   |   | 490    |   |                                        |     |   |  
|Repurchase of common stock                                   |  |  |  |   |  |  |       |   |   |    |   | (233 | ) |   | (1,610 | ) |   |       |   |                                        |     |   |  
|Payments to employee stock purchase plan                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   | (190   | ) |                                        |     |   |  
|Translation adjustment, net of tax                           |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|Tax effect recognized on stock options exercised             |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   | 53     |   |                                        |     |   |  
|Net loss                                                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|                                                             |  |   |  |   |   |  |        |   |   |     |   |      |   |   |        |   |   |        |   |                                        |      |   |  
|Balance at December 31, 1999                                 |  |  |  |   |  |  | 16,016 |   |   | 160 |   | (500 | ) |   | (4,703 | ) |   | 27,000 |   |                                        |     |   |  
|Exercise of stock options                                    |  |  |  |   |  |  | 21     |   |   |    |   |     |   |   |       |   |   | 52     |   |                                        |     |   |  
|Repurchase of common stock                                   |  |  |  |   |  |  |       |   |   |    |   | (86  | ) |   | (94    | ) |   |       |   |                                        |     |   |  
|Issuance of restricted common stock                          |  |  |  |   |  |  | 1,240  |   |   | 12  |   |     |   |   |       |   |   | 366    |   |                                        | (378 | ) |  
|Amortization of restricted stock deferred compensation       |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        | 60   |   |  
|Issuance of common stock to employee stock purchase plan     |  |  |  |   |  |  | 114    |   |   | 2   |   |     |   |   |       |   |   | 198    |   |                                        |     |   |  
|Payments to employee stock purchase plan                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   | (123   | ) |                                        |     |   |  
|Translation adjustment, net of tax                           |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|Tax effect recognized on stock options excercised            |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   | (68    | ) |                                        |     |   |  
|Unrealized gain on available-for-sale securities, net of tax |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|Net loss                                                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|                                                             |  |   |  |   |   |  |        |   |   |     |   |      |   |   |        |   |   |        |   |                                        |      |   |  
|Balance at December 31, 2000                                 |  |  |  |   |  |  | 17,391 |   |   | 174 |   | (586 | ) |   | (4,797 | ) |   | 27,425 |   |                                        | (318 | ) |  
|Amortization of restricted stock deferred compensation       |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        | 221  |   |  
|Cancellation of restricted common stock                      |  |  |  |   |  |  | (130   | ) |   | (1  | ) |     |   |   |       |   |   | (13    | ) |                                        |     |   |  
|Issuance of common stock to employee stock purchase plan     |  |  |  |   |  |  | 296    |   |   | 3   |   |     |   |   |       |   |   | 146    |   |                                        |     |   |  
|Payments to employee stock purchase plan                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   | (50    | ) |                                        |     |   |  
|Translation adjustment, net of tax                           |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|Realized gain on available-for-sale securities, net of tax   |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|Net loss                                                     |  |  |  |   |  |  |       |   |   |    |   |     |   |   |       |   |   |       |   |                                        |     |   |  
|                                                             |  |   |  |   |   |  |        |   |   |     |   |      |   |   |        |   |   |        |   |                                        |      |   |  
|Balance at December 31, 2001                                 |  |  |  | $ |  |  | 17,557 |   | $ | 176 |   | (586 | ) | $ | (4,797 | ) | $ | 27,508 |   | $                                      | (97  | ) | $
|                                                             |  |   |  |   |   |  |        |   |   |     |   |      |   |   |        |   |   |        |   |                                        |      |   |  

See accompanying notes to consolidated financial statements.

31

---

ALTERNATIVE RESOURCES CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                |                                                                      | Year Ended December 31,                |        
|------------------------------------------------------------------------------- | -------------------------------------------------------------------- | -------------------------------------- | -------
|
|
|Cash flows from operating activities:                                           |                                                                      |                                        |        
|                                                                                | Net loss                                                             |                                        | $      
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                      |                                        |        
|                                                                                | Depreciation and amortization                                        |                                        |        
|                                                                                | Realized net gain on sales of securities                             |                                        |        
|                                                                                | Deferred income taxes                                                |                                        |        
|                                                                                | Provision for doubtful accounts                                      |                                        |        
|                                                                                | Impairment of goodwill                                               |                                        |        
|                                                                                | Recognition of restricted stock deferred compensation                |                                        |        
|                                                                                | Gain on sale of software business                                    |                                        |        
|                                                                                | Impairment of fixed assets                                           |                                        |        
|                                                                                | Receipt of investment                                                |                                        |        
|                                                                                | Change in assets and liabilities:                                    |                                        |        
|                                                                                |                                                                      | Trade accounts receivable              |        
|                                                                                |                                                                      | Prepaid expenses                       |        
|                                                                                |                                                                      | Other receivables                      |        
|                                                                                |                                                                      | Other assets                           |        
|                                                                                |                                                                      | Accounts payable                       |        
|                                                                                |                                                                      | Payroll and related expenses           |        
|                                                                                |                                                                      | Accrued expenses and other liabilities |        
|                                                                                |                                                                      | Income taxes                           |        
|                                                                                |                                                                      |                                        |        
|Net cash provided by operating activities                                       |                                                                      |                                        | 19,392 
|                                                                                |                                                                      |                                        |        
|Cash flows from investing activities:                                           |                                                                      |                                        |        
|                                                                                | Purchases of property and equipment                                  |                                        |        
|                                                                                | Proceeds from sale of software business                              |                                        |        
|                                                                                | Proceeds from sale of investment                                     |                                        |        
|                                                                                |                                                                      |                                        |        
|Net cash used in investing activities                                           |                                                                      |                                        | (1,204 
|                                                                                |                                                                      |                                        |        
|Cash flows from financing activities:                                           |                                                                      |                                        |        
|                                                                                | Payments received on stock options exercised                         |                                        |        
|                                                                                | Proceeds from long-term debt                                         |                                        |        
|                                                                                | Payments on long-term debt                                           |                                        |        
|                                                                                | Repurchase of common stock                                           |                                        |        
|                                                                                | Payments to employee stock purchase plan                             |                                        |        
|                                                                                | Proceeds from issuance of shares to the employee stock purchase plan |                                        |        
|                                                                                | Cash overdraft                                                       |                                        |        
|                                                                                |                                                                      |                                        |        
|Net cash provided by (used in) financing activities                             |                                                                      |                                        | (18,101
|                                                                                |                                                                      |                                        |        
|Effect of exchange rate changes on cash and cash equivalents                    |                                                                      |                                        | (74    
|                                                                                |                                                                      |                                        |        
|Net increase (decrease) in cash and cash equivalents                            |                                                                      |                                        | 13     
|Cash and cash equivalents at beginning of year                                  |                                                                      |                                        | 114    
|                                                                                |                                                                      |                                        |        
|Cash and cash equivalents at end of year                                        |                                                                      | $                                      | 127    
|                                                                                |                                                                      |                                        |        
|Supplemental disclosures of cash flow information:                              |                                                                      |                                        |        
|                                                                                | Cash paid for interest                                               |                                        | $      
|                                                                                | Cash paid for income taxes                                           |                                        | $      
|Supplemental disclosures of noncash activities:                                 |                                                                      |                                        |        
|                                                                                | Tax effect on stock options exercised                                |                                        | $      

See
accompanying notes to consolidated financial statements.

32

---



ALTERNATIVE RESOURCES CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Alternative Resources Corporation ("ARC" or the "Company") was incorporated in Delaware on March 8, 1988, and is a leading provider of information
technology management and staffing services. The Company has developed a significant, high quality business in the IT staffing industry with an emphasis on Help Desk, Desktop Support, Technology
Deployment Service, and Field Service offerings. The Company also has a consulting practice, which supports those service offerings. The Company operates through 38 field offices with over 80
personnel in field sales, supported by 55 recruiters and its unique organization of over 50 client support managers. The Company serves Fortune 1000 and mid-sized clients throughout the
United States and Canada.

Principles of Consolidation

The operations of the Company are conducted through a parent holding company and three operating subsidiaries. The accompanying financial statements include the
consolidated financial position and results of operations of the Company and its subsidiaries with all intercompany transactions eliminated.

Segment Information

Management has considered the requirements of Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise
and Related Information," and has determined that the Company has one operating segment. ARC provides its services through two primary service lines called ARC Staffing Management Solutions and ARC
Technology Management Solutions. These service lines do not meet the definition of a "segment" within the meaning of SFAS No. 131, as discrete financial information is unavailable. To date,
discrete information by service line has not been considered relevant by management for purposes of making decisions about allocations of resources, as both service lines share the same pool of
technical resources and client base, as well as the same distribution model.

Use of Estimates

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

Cash and Cash Equivalents

Cash equivalents include all deposits in banks and highly liquid investments with original maturities of three months or less.

Investment Securities

Marketable securities are classified as available-for-sale under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and are recorded at fair market value, with unrealized holding gains or losses, if any, recorded as a separate component of stockholders' equity.

33

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The Company does not invest in trading securities. The Company uses the specific identification basis of accounting for individual securities.

Goodwill

Through December 31, 2001, goodwill represents the excess of purchase price over fair market value of net assets acquired, was amortized on a
straight-line basis over 40 years. Adjustments to the carrying value of goodwill were made when the sum of expected future discounted cash flows from the business acquired was less
than book value.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets
ranging from three to seven years. Software includes development costs for internal IT projects currently in progress and will be amortized upon completion over three to seven years. Leasehold
improvements are amortized using the straight-line method over the life of the related leases, generally three to five years.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If the carrying amount of the assets are less then the sum of the future undiscounted cash
flows such assets are considered to be impaired. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the discounted cash flows of the assets.
The discount rate used is the Company's expected rate of return. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Translation of Foreign Currencies

Assets and liabilities of the Company's Canadian operations are translated at the rate of exchange in effect on the balance sheet date; income and expenses are
translated at the weighted average rates of exchange prevailing during the year. The related translation adjustments are reflected as a foreign currency translation adjustment in stockholders' equity.
Foreign currency transaction gains and losses for the years presented were not material.

Revenue Recognition

Revenues are recognized as services are performed, utilizing four different billing methodologies, as follows: (1) time and material billing, whereby the
client is billed by the hour on a weekly basis for past services performed; (2) project-based billing, for which fees are fixed and are based on specific contracts;
(3) per-incident billing, whereby the Company charges a fee for each specific task related to certain services; (4) and fee-based billing, which is used for
candidate placement/recruiting fees and vendor management fees. The Company typically provides discounts on staffing services to its largest clients in exchange for the opportunity to sell more
volume, as well as the opportunity to sell its higher-margin, value-added services. All revenues are recognized net of such discounts and after services have been completed.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This bulletin
provides guidance

34

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from the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of 2000. The implementation of
SAB 101 did not have a material effect on the financial position or results of operations of the Company.

Concentration of Credit Risk

The Company provides services to clients including systems integrators, telecommunications companies, banking and financial services entities, manufacturers,
distributors, health care providers, and utilities throughout the United States. In 2001, 2000 and 1999, the largest client accounted for approximately 20%, 18% and 15%, the second largest client
accounted for approximately 17%, 15% and 14% and the third largest client accounted for 6%, 5% and 9% of the Company's total revenues, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.

Stock Options

The Company accounts for its stock options in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations. Under APB 25, no compensation cost has been
recognized for the Company's stock-based compensation plans. The Company continues to apply the provisions of APB 25 and provides the pro forma disclosures required by SFAS No. 123.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, except for short-term and long-term debt, approximate their fair values due to the short
maturity of these instruments. The carrying amount of short-term debt approximates its fair value due to its variable interest rate. The carrying amount of long-term debt approximates its
fair value given its interest rate is comparable to a similar rate that could be obtained on other long-term debt instruments.

Derivatives

In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity", an Amendment of SFAS No. 133." SFAS
No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are
effective for all fiscal quarters of all fiscal years beginning after December 31, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001, which did not
have a significant impact on its financial position or results of operations.

35

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During
1999, the Company utilized a derivative financial instrument. This derivative was sold during 2000 for a gain of $1.1 million. For the years ended, December 31, 2000
and 2001, the Company did not have any derivative financial instruments.

Computation of Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding for the year. Diluted earnings per share is based on the weighted
average number of common shares outstanding and includes the dilutive effect of unexercised vested stock options using the treasury stock method. Dilutive securities have not been included in the
weighted average shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive. At December 31, 2001,
2000 and 1999, potentially dilutive securities consisted of options to purchase 2.5 million, 2.9 million and 2.9 million shares of common stock, respectively. In addition, the
Company issued 10,000,000 warants in connection with its debt refinancing described in note 12. These warrants are also potentially dilutive securities.

Reclassification

Certain prior year balances have been reclassified in order to conform to the current year presentation.

2.    DIVESTITURE

During the third quarter of 1999, the Company sold a non-strategic software business for $1.6 million resulting in a pretax gain of $436,000.

3.    RESTRUCTURING AND OTHER CHARGES

Restructuring and Other Charges2000

The Company recorded a $36.6 million charge during the fourth quarter of 2000, which consisted of the following components (in millions):

Impairment of goodwill

$
34.9Impairment of assets and other Charges


1.2Restructuring charge


0.5$
36.6


Impairment of Goodwill2000

During the fourth quarter of 2000, the Company reviewed its intangibles relating to the 1997 acquisition of CGI Systems, Inc. ("CGI") for any impairment
based on current factors. After giving effect to purchase price adjustments, escrow refunds, acquisition costs, amortization and the write-down of goodwill in 1998, the remaining
unamortized goodwill balance as of September 30, 2000 was $37.7 million, which consisted of goodwill allocated to the following three components of CGI's acquired business (in millions):

National Technical Service ("NTS")

$
2.8Programming Services


18.2Consulting


16.7$
37.7


36

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The
Company allocated goodwill separately to each component of the acquired business due to each component having a different operating cash flow and business strategy. Thus, the Company
performed a recoverability analysis for each component of the business for purposes of impairment. The recoverability analysis compared the projected future undiscounted cash flows over the estimated
useful life for each component versus the carrying net book value of the goodwill allocated to each component. This analysis supported a goodwill valuation of zero for the Programming Services and
Consulting components of the acquired business, which resulted in a write off of impaired goodwill
totaling $34.9 million. The recoverability analysis for the NTS component of the business resulted in a positive future undiscounted cash flow in excess of the unamortized balance of goodwill
allocated to the NTS business; as such, there was no impairment to the $2.8 million goodwill allocated to NTS.

Impairment of Assets and Other Charges2000

The $1.2 million impairment of assets and other charges relates primarily to write-downs of fixed asset values due to the re-engineering of the
Company's field operations. The charge also includes a write-down of office furniture, leasehold improvements and computers to their estimated fair value as a result of the reduction in
staff and office space.

Restructuring Charge2000

The restructuring charge of $0.5 million represents the severance costs associated with the restructuring of the Company's sales, recruiting, delivery and
administrative support models. A total of 29 positions were eliminated, with 20 of them being administrative positions. This charge was a continuation of the 1998 restructuring, which was designed to
optimize the branch field model. At December 31, 2000, the remaining accrued severance costs on the balance sheet was $0.3 million, all of which was paid out during 2001.

Restructuring and Other Charges1999

The Company recorded a $5.2 million charge during the fourth quarter of 1999, which consisted of the following components (in millions):

Restructuring charge

$
4.1Impairment of assets and other charges


1.1$
5.2


Restructuring Charge1999

The 1999 restructuring charge, which totaled $4.1 million, represented real estate and severance costs associated with re-engineering the
Company's sales, recruiting and delivery models. This action was a natural extension of the changes announced in 1998, which were designed to optimize the existing branch field model, and entails a
comprehensive shift to a model organized along the functional lines of sales, recruiting and delivery. The new model is more efficient in terms of meeting the demands of the Company's clients at a
lower cost.

37

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The
primary components of the restructuring charge can be summarized as follows:

|                           |  | Total
Initial
Reserve |       | 1999
Cash
Payments |   | Balance at
December 31,
1999 |   | 2000
Cash
Payments |       | Balance at
December 31,
2000 |   | 2001
Cash
Payments |   | Balance at
December 31,
2001
|-------------------------- |  | --------------------- | ----- | ------------------ | - | ---------------------------- | - | ------------------ | ----- | ---------------------------- | - | ------------------ | - | ----------------------------
|
|Real estate costs          |  | $                     | 3,538 |                    | $ | (30                          | ) | $                  | 3,508 |                              | $ | (1,888             | ) | $                           
|Severance                  |  |                       | 630   |                    |   | (416                         | ) |                    | 214   |                              |   | (184               | ) |                             
|                           |  |                       |       |                    |   |                              |   |                    |       |                              |   |                    |   |                             
|Total restructuring charge |  | $                     | 4,168 |                    | $ | (446                         | ) | $                  | 3,722 |                              | $ | (2,072             | ) | $                           
|                           |  |                       |       |                    |   |                              |   |                    |       |                              |   |                    |   |                             

The
portion of the charge related to real estate costs, which totaled $3.5 million, relates to lease costs associated with vacating offices as the Company downsized its office
space requirements. Through a combination of adopting a more virtual office model and eliminating administrative functions that had been performed in the field offices, the Company relocated from most
of its existing leased office space to smaller office space that required 60% less square footage than what was in use. The costs associated with this charge related primarily to the present value of
ongoing lease obligations for vacated offices net of any anticipated sublease income. A portion of the charge also related to broker commissions and estimated leasehold improvement costs necessary to
sublease vacated offices.

The
$0.6 million severance charge related to head-count reductions associated with automating and centralizing field administrative processes as part of the
re-engineering exercise. A total of 88 positions were eliminated, 49 employees left in the fourth quarter of 1999, and the remainder left in the first quarter of 2000. The largest group of
positions eliminated was branch administrators with the remainder of positions being a mix of employees across the Company. The majority of the accrued real estate costs as of December 31, 2001
related to future lease obligations, which will be paid over the next 3 years.

Impairment of Assets and Other Charges1999

Approximately $0.8 million of the $1.1 million impairment of assets and other charges related to write-downs of fixed asset values primarily due to
the aforementioned re-engineering of the Company's field operations. The reduction in staff and office space created excess office furniture, leasehold improvements and computers, which
were written down to their fair value.

4.    INVESTMENTS

At December 31, 2000, the Company recorded a $0.2 million unrealized holding gain, net of $0.1 million in taxes, as other comprehensive
income. The aggregate fair value and amortized cost of investments classified as available-for-sale are as follows at December 31, 2000:

|                |  | Gross Unrealized Holding
|--------------- |  | ------------------------
|
|
|Equity security |  | $                       

During
2000, the Company received an investment as a refund of medical insurance premiums. This investment was sold during 2001 and a gain of $0.3 million was realized on the
sale.

5.    LONG-TERM BORROWINGS

The Company entered into a $53.5 million revolving credit facility to, in part, finance the acquisition of CGI and to meet anticipated cash needs. As of
December 31, 2001 and 2000, borrowings under the revolving credit facility were $26.9 million and $44.0 million, respectively. The average

38

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interest rate on the revolving credit facility was 9.36% and 9.70% in 2001 and 2000, respectively. The range of interest rates on the revolving credit facility during 2001 was 7.00% to 11.75%. As
part of this agreement, cash receipts into the Company's bank accounts are directly applied against the outstanding bank line of credit balance. Advances from the line of credit are determined on a
daily basis to minimize the Company's average debt balance. The revolving credit facility expired on January 31, 2002. The Company did not extend this credit facility and successfully
refinanced on a long-term basis as explained in Subsequent Events, note 12. The outstanding borrowings under the revolving credit facility have been reclassified to long-term debt as a result of the
refinancing.

The
Company has two irrevocable standby letters of credit for $1,268,000, which expire on December 31, 2002.

6.    LEASES

The Company leases its office facilities under noncancelable operating leases. Rental expense for operating leases during 2001, 2000 and 1999 was
$2.8 million, $3.5 million and $4.6 million, respectively.

Future
minimum lease payments and sublease income under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2001, are:

Year ending December 31,

Operating Lease
Payments

Operating Sublease
Income(in thousands)2002

$
4,290

$
(1,267
)2003


3,697


(907
)2004


3,188


(323
)2005


2,054


(23
)2006


1,587


Thereafter


3,343


Total

$
18,159

$
(2,520
)


7.    OTHER INCOME (EXPENSE), NET

Other income (expense), net, for the years ended December 31, 2001, 2000 and 1999 is comprised of the following:

2001

2000

1999(in thousands)Interest income

$
373

$
91

$
220Interest expense


(4,319
)

(6,680
)

(3,543
)Gain on sale of security


349





Gain on divestiture








436Gain on swap agreement





1,100


Loss on sublease and fixed assets








(589
)$
(3,597
)
$
(5,489
)
$
(3,476
)


The
loss on sublease and fixed assets relates primarily to the relocation of the Company's corporate office. The new facility also consolidated several locations and provided additional
space to establish an off-site help desk function for its customers at a lower cost per square foot.

39

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8.    INCOME TAXES

Income tax expense (benefit) is summarized as follows for the years ended December 31, 2001, 2000 and 1999:

2001

2000

1999(in thousands)Current:Federal

$
120

$
(3,382
)
$
(65
)State


98


125


234Foreign





203


0Total current


218


(3,054
)

169Deferred:Federal


(728
)

(830
)

770State


510


(595
)

(60
)Total deferred


(218
)

(1,425
)

710$


$
(4,479
)
$
879


The
reasons for the difference between the effective tax rate and the corporate federal income tax rate for the years ended December 31, 2001, 2000 and 1999 are as follows:

2001

2000

1999(in thousands)Federal income tax rate

(35.0
)%
(35.0
)%
35.0
%Items affecting federal income tax rate:State income taxes, net of federal tax benefits

5.0
%
(1.1
)%
26.1
%Valuation allowance

28.8
%

%

%Nondeductible amortization and impairment charges

0.9
%
26.1
%
109.5
%Other permanent differences

0.3
%
0.6
%
31.7
%Effective income tax rate


%
(9.4
)%
202.3
%


40

---

The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are as
follows:

2001

2000(in thousands)Deferred tax assets:Property and equipmentdepreciation

$
181

$
699Net operating loss


2,594


1,416Lease cancellation accrual


450


640Receivable reserves


507


501Prepaid assets


455


Deferred rent payable


32


45Accrued liabilities


996


1,162Gross deferred tax assets


5,215


4,463Valuation allowance


(895
)

Net deferred tax assets


4,320


4,463Deferred tax liabilities:Software development costs


(3,520
)

(3,949
)Employee savings plan costs


(800
)

(800
)Gross deferred tax liabilities


(4,320
)

(4,749
)Net deferred tax liability

$


$
(286
)


The
income tax benefit for tax deductions relating to the exercise of nonqualified stock options in excess of the tax benefits on the amount reflected as amortization of deferred stock
compensation has been recorded as additional paid-in-capital.

At
December 31, 2001, the Company had gross federal and state net operating losses of $22.2 million, which are available to offset taxable income through 2021.

Prior
to 2001, no valuation allowance for deferred tax assets had been recorded as the Company believed it was more likely than not the deferred tax assets would be realized in the
future. Beginning in 2001, a valuation allowance was established for the net deferred tax asset given the uncertainty with respect to the future realization of deferred tax assets, particularly the
net operating losses given no remaining carryback potential and the lack of ability to accurately forecast taxable income over the 20 years net operating loss carryforward period.

9.    EMPLOYEE SAVINGS PLAN

The Company sponsors a 401(k) plan ("the Plan"). The Plan covers each employee who has completed 1,000 hours of service in a 12-month period
commencing with the start of employment. The Company, in an amount to be determined at the Company's discretion bases contributions to the Plan on percentages of employee salaries, plus a matching
contribution. Vesting in the Company's contributions is based on length of service over a five-year period. Contributions by the Company on behalf of all employees approximated
$0.6 million, $0.5 million and $0.5 million during 2001, 2000 and 1999, respectively.

10.    STOCK OPTIONS

During 1994, the Company amended and restated the stock option plan adopted in 1992. Under the amended and restated Incentive Stock Option Plan ("Option Plan"),
officers and key employees

41

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may be granted non-qualified stock options, incentive stock options, performance units, and stock appreciation rights. The Option Plan also provides for automatic annual grants to each
non-affiliate director of non-qualified stock options to purchase up to 5,000 shares of common stock. The purchase price per share for such options will be equal to the fair
market value of a share of common stock on the date of grant. As such, there has been no compensation cost recognized in operations. Any such options will be exercisable one year after the date of
grant and will terminate upon the earlier of 90 days following the date on which such director ceases to serve on the Board or 10 years after the date of grant.

The
exercise price of incentive stock options granted under the Option Plan must be equal to at least 100% of the fair market value of the Company's common stock subject to the option on
the date of the grant. The incentive stock options granted by the Company may not be exercised during the first six months from the date granted and, thereafter, generally become exercisable at a rate
of 2.38% of the total shares subject to the option on and after the first day of each calendar month. The maximum term of a stock option under the Option Plan is 10 years.

In
the event employment is terminated for any reason other than gross and willful misconduct, death or disability, vested options are exercisable within 30 days after such
termination of employment. Termination due to gross and willful misconduct terminates the option as of the date of the misconduct. Upon death or disablement, vested options are exercisable within six
months after the date of death or disablement by the executors, administrators or applicable guardian of optionee.

During
1999, the Company issued certain non-qualified stock options outside the Option Plan in connection with executive management changes. These options were issued at the
fair market value as of the time of the grant. The terms and conditions of these grants are similar to the terms and conditions of options granted under the Option Plan with the exception that they
provide for accelerated vesting upon a change in control of the Company.

During
2000, the Company issued 1,240,000 restricted shares of the Company's stock pursuant to the Option Plan. The shares were issued with certain restrictions relating to each employee
remaining employed with the Company. The restrictions lapsed in April and July of 2001, with a remaining portion lapsing in July 2002. In connection with the issuance of the restricted stock,
945,000 previously issued stock options were cancelled. Total deferred compensation related to the restricted stock issuance was $378,000; of which, $221,000 and $60,000 was amortized as an operating
expense in 2001 and 2000, respectively.

During
2001, the Company issued 83,000 and 175,000 stock options and non-qualified stock options, respectively, pursuant to the Option Plan. These options were granted at fair market
value and thus, the Company did not record compensation expense as a result of these option grants.

The
fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2001, 2000
and 1999 respectively: risk-free interest rates of 4.6%, 5.0% and 5.0%; expected lives of 4 years; expected volatility of 101%, 134% and 80%; and no dividends expected to be paid.

42

---

The
following data reflect the pro forma effects of the stock-based compensation cost for the Company's stock option transactions in accordance with SFAS No. 123:

2001

2000

1999(in thousands, except
per share data)Net loss:As reported

$
(3,074
)
$
(43,394
)
$
(445
)Pro forma


(3,086
)

(47,364
)

(4,350
)Diluted loss per share:As reported


(0.18
)

(2.76
)

(0.03
)Pro forma


(0.18
)

(3.01
)

(0.28
)


Stock
option transactions for the years ended December 31, 1999, 2000 and 2001 are summarized as follows:

Shares

Weighted Average
Exercise Price(in thousands, except
per share data)Balance at December 31, 1998

3,324

10.42Options granted

488

7.02Options cancelled

(853
)
9.99Options exercised

(59
)
8.38Balance at December 31, 1999

2,900

9.97Options granted

1,808

0.73Options cancelled

(1,827
)
8.64Options exercised

(21
)
2.53Balance at December 31, 2000

2,860

4.94Options granted

258

0.51Options cancelled

(587
)
1.80Options exercised



Balance at December 31, 2001

2,531

4.70


For
the years ended December 31, 2001, 2000 and 1999, there were 1.7 million, 1.1 million and 1.5 million options exercisable, respectively. As of
December 31, 2001, there were 1.1 million stock options available for future grants under the Company's Incentive Stock Option Plan. The weighted-average grant-date
fair values of options granted during 2001, 2000 and 1999 were $0.51, $1.34 and $4.34 per share, respectively.

43

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The
following table summarizes information about stock options outstanding as of December 31, 2001:

|(shares in thousands) |  | Options Outstanding |  | Options Exercisable
|--------------------- |  | ------------------- |  | -------------------
|
|$0.28-$5.99           |  | 1,576               |  | 8.6                
|$6.00-$9.99           |  | 33                  |  | 5.5                
|$10.00-$10.99         |  | 801                 |  | 3.0                
|$11.00-$38.12         |  | 121                 |  | 3.9                
|                      |  |                     |  |                    
|$0.28-$38.12          |  | 2,531               |  | 6.6                
|                      |  |                     |  |                    

11.    EMPLOYEE STOCK PURCHASE PLAN

In 1995, the stockholders of the Company approved the Alternative Resources Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"). An aggregate of
300,000 shares of the Company's common stock (subject to adjustment for any dividend, stock split or other relevant changes in the Company's capitalization) were originally authorized to be sold
pursuant to the Stock Purchase Plan. In 1999, an additional 300,000 shares of the Company's common stock were approved by the stockholders for sale through the Employee Stock Purchase Plan. The Stock
Purchase Plan covers each employee who has completed 1,000 hours of service during the last 12 calendar months preceding the enrollment date. The Stock Purchase Plan enables employees to
purchase the Company's common stock at 85% of the market price. Employees may purchase the Company's common stock through the Stock Purchase Plan only by payroll deduction. Payroll deductions may not
exceed 20% of the employees' gross pay or $21,250 in any one-year. During 1999, all Stock Purchase Plan shares were purchased by the Plan on the open market with cash contributions from
the Company of $0.2 million. In 2001 and 2000, the Company's matching portion to the Stock Purchase Plan amounted to $0.1 million from both years and was in the form of cash
contributions and direct issuance of common stock.

12.    SUBSEQUENT EVENTS

On January 31, 2002, the Company entered into a Senior Secured Revolving Credit facility with a lending institution, that provides for up to
$30.0 million of revolving credit based on the Company's available collateral base. The credit facility has a three-year term and bears interest at LIBOR plus 3.25% or the lenders'
base rate plus 1.00%. As of February 28, 2002, the applicable rate is 5.75% which represents the bank's base rate plus 100 basis points. The initial proceeds of this facility together with the
net proceeds from the sale of Convertible Subordinated Notes described below were used to repay the Company's existing credit facility and to provide working capital.

On
January 31, 2002, the Company also entered into a Securities Purchase Agreement with a private equity investor, pursuant to which the Company sold $10.0 million
principal amount of 15% Senior Subordinated Convertible Notes due January 31, 2009. These notes are convertible into common stock anytime after January 31, 2002 at a conversion price of
$2.50 per share. At the Company's election, one half of the interest may be deferred during the first four years, subject to certain conditions.

In
conjunction with the sale of these notes, the Company issued 10,000,000 warrants to the private equity investor to purchase shares of the Company's common stock at $0.55 per share,
which are exercisable at anytime, and an additional 1,000,000 warrants to purchase its common stock at $0.73 per

44

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share, the latter of which are generally not exercisable for one year and expire on the occurrence of certain events. The warrants were recorded in 2002 at fair value and the related debt discount
will be amortized as interest expense over the debt term.

In
conjunction with the Securities Purchase Agreement on January 31, 2002, the Company's Board of Directors redeemed all of the rights issued under its Stockholders Rights Plan.
Each share of the Company's common stock carried with it one right to purchase a fraction of a share of the Company's preferred stock in certain circumstances described in the stockholder rights plan.
The rights were attached to, and could not be separated from, shares of the Company's common stock. The Company paid a redemption payment of $0.01 per right to stockholders on February 8, 2002,
at a total cost of approximately $172,000.

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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, and 1999

Description

Balance at
Beginning
of Year

Charged to
Expenses

Writeoffs

Balance
at End
of Year2001:Allowance for doubtful accounts

$
1,503

$
324

$
648

$
1,1792000:Allowance for doubtful accounts


1,522


550


569


1,5031999:Allowance for doubtful accounts


1,704


80


262


1,522


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