10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2002
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 001-13956

PERSONNEL GROUP OF AMERICA, INC.

(Exact name of Registrant as specified in its charter)

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

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

(704) 442-5100

(Registrant’s telephone number, including area code)

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)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

     The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002, computed by reference to the closing sale price on such date, was $23,654,002. (For purposes of calculating this amount only, all directors and executive officers are treated as affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.) As of March 31, 2003, 26,881,212 shares of the registrant’s Common Stock, $.01 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 29, 2002 (the “Annual Report”) furnished to the Commission pursuant to Rule 14a-3(b) are incorporated herein by reference into Parts II and IV hereof.

PART I.

Item 1. Business

     Personnel Group of America, Inc. (the “Company”), is a leading provider of information technology and commercial staffing services to businesses, professional and government organizations. The Company is organized into two divisions, the Information Technology Services Division (“IT Services”) and the Commercial Staffing Services Division (“Commercial Staffing”), and operates in strategic markets throughout the United States. Certain financial information is reported by segment in Note 17, “Segment Information,” to the Consolidated Financial Statements included in Part II, Item 8 of this report. The Company’s services include information technology consulting, temporary staffing, placement of full time employees, on-site management of temporary employees and training and testing of temporary and permanent workers. The Company also provides technology tools for human capital management that enable its customers to automate portions or all of their hiring processes. At February 28, 2003, the Company operated through a network of 118 offices located in major metropolitan areas throughout the United States.

     IT Services offers information technology professionals on a temporary basis and consulting services in a range of computer-related disciplines. Commercial Staffing offers a wide variety of temporary office, clerical, finance and accounting services. Commercial Staffing also provides light technical and light industrial services to its customers, but these services typically account for less than 25% of the division’s total revenues. Each division also offers permanent placement services in a range of specialties. For the year ended December 29, 2002, IT Services and Commercial Staffing represented approximately 53% and 47%, respectively, of the Company’s total revenues.

     The Company completed the rebranding of its operations in 2002, and renamed its IT operations “Venturi Technology Partners” and its Commercial Staffing operations “Venturi Staffing Partners” and, for commercial operations that have a specialty in permanent placement services, “Venturi Career Partners.” The Company’s shareholders approved a corporate name change to “Venturi Partners, Inc.” at the 2002 Annual Meeting of Shareholders, and the Company currently expects to complete that process later this spring. The Company endeavors to protect its intellectual property rights and has obtained registrations in the United States of certain of the trademarks, trade names and service marks that appear in this report.

     The Company completed a comprehensive financial restructuring in April 2003 in which it amended and restated its revolving credit facility, issued shares of Common Stock and Series B Preferred Stock in exchange for approximately $109.7 million of its outstanding 5.75% Convertible Subordinated Notes due 2004 (the “5.75% Notes”). As a result of the financial restructuring, the Company used substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $38.0 million of its outstanding credit facility and eliminated an additional $120.0 million of its outstanding indebtedness. See Note 1, “Subsequent Event – Comprehensive Financial Restructuring,” to the Consolidated Financial Statements included in Part II, Item 8 of this report.

Information Technology Services Division

     IT Services provides information technology professionals on a temporary basis and consulting services through 28 offices in 20 states at February 28, 2003. IT Services had approximately 1,860 consultants on assignment at February 28, 2003, of which approximately 590 (or 32%) were salaried employees. Of the balance (68% of the total), approximately 735 consultants were hourly employees and 535 consultants were independent contractors.

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Service Offerings

     IT Services provides skilled personnel, such as web developers and consultants, project managers, programmers, systems designers, software engineers, LAN administrators, systems integrators, helpdesk staff and other technology specialists, to a wide variety of clients, typically on an as-needed time and materials basis. A number of IT Services’ offices have developed technology specialties, and have entered into alliances with packaged software and systems vendors and other technology partners to provide services necessary to install, integrate and maintain their partners’ technologies. Many IT Services offices also provide software engineering, web design, applications development and strategic consulting services.

     IT Services’ staffing services include providing individuals or teams of computer professionals to corporations and other organizations that need assistance with project management, analysis, systems design, programming, maintenance, testing and special technologies for short-term and long-term information technology projects. The division’s service offerings encompass a wide variety of tasks, ranging from management of all aspects of a project or the implementation of turnkey systems to the fulfillment of temporary staffing needs for technology projects.

     Selected offices in IT Services also provide complementary or stand-alone consulting services in the information technology area, typically on a time and materials basis. For example, certain offices work with clients interested in alternatives to outsourcing their internal information technology organization, as well as implementing complex systems integration solutions, and offer a range of consulting services in areas such as systems development and client/server networks that span mainframe, mid-range and desktop systems. These services are provided at the client’s site or at off-site development centers. The Company intends to continue expanding the consulting services component of the IT Services service offerings as part of its strategy to offer a full range of IT services to its clients.

Technology Tools and Automated Hiring Systems

     To complement its core staffing and consulting services offerings, the Company also offers its customers a variety of technology tools and automated hiring systems designed to streamline and automate portions or all of their human capital management processes. These tools and systems include vendor management systems, a career enhancement website and internet job board, website development and hosting services and web based employment channels.

Sales and Marketing

     IT Services has developed a sales and marketing strategy that focuses on both national and local accounts, and is implemented in a decentralized manner through its various branch locations. At the national level, IT Services has focused on the attainment of preferred vendor status at large customers to provide leverage across the practice. These accounts are typically targeted by a local IT Services office with a presence in a specific market, and then are sold on the basis of the strength of IT Services’ geographic presence in multiple markets. IT Services also is supported by centralized proposal generating and vendor management systems sales departments, which assist in the development of responses to large account RFPs and support the division’s efforts to broaden its preferred vendor relationships.

     Local accounts are targeted and sold by account managers at the branch office level, permitting IT Services to capitalize on the established local expertise and relationships of its branch office employees. These accounts are solicited through personal sales presentations, telephone marketing, direct mail solicitation, referrals and advertising in a variety of local and national media. Advertisements appear in the Yellow Pages, newspapers and trade publications. Local employees are encouraged to be active in civic organizations and industry trade groups to facilitate the development of new customer relationships.

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     The information technology services business is affected by the timing of holidays and seasonal vacation patterns, generally resulting in lower IT revenues and lower operating margins in the fourth quarter of each year.

Commercial Staffing Services Division

     At February 28, 2003, Commercial Staffing operated through 90 offices in 14 states and the District of Columbia. Commercial Staffing provides temporary personnel who perform general office and administrative services, word processing and desktop publishing, office automation, records management, production/assembly/distribution, telemarketing, finance, accounting and other staffing services. Certain of Commercial Staffing’s offices also provide full-time placement and payrolling services. Payrolling services entail employment by Commercial Staffing of individuals recruited by a customer on a fee basis.

Operations

     Commercial Staffing markets its staffing services to local and regional clients through its network of offices across the United States.

     Commercial Staffing strives to satisfy the needs of its customers by providing customized services, such as on-site workforce management and full-time placement services. The flexibility of Commercial Staffing’s decentralized operations allows it to tailor its service offerings, reporting and pricing to meet local client requirements. For example, certain clients are provided with customized billings, utilization reports and safety awareness and training programs.

     To meet the growing demand in the staffing services business for vendor-on-premise (“VOP”) capability, Commercial Staffing offers SourcePLUS, its customized on-site temporary personnel management system. SourcePLUS places an experienced staffing service manager at the client facility to provide complete staffing support that is customized to meet client-specific needs. This program facilitates client use of temporary personnel and allows the client to outsource a portion of its personnel responsibility to Commercial Staffing’s on-site representative, who gathers and records requests for temporary jobs from client department heads and then fulfills client requirements. These Commercial Staffing representatives can also access Commercial Staffing’s systems through on-site personal computers.

     Commercial Staffing’s full-time placement services provide traditional staff selection and recruiting services to its clients. In addition to recruiting employees through referrals, Commercial Staffing places advertisements in local newspapers to recruit employees for specific positions at client companies. Commercial Staffing utilizes its expertise and selection methods to evaluate the applicant’s credentials. If the applicant receives and accepts a full-time position at the client, Commercial Staffing charges the employer a one-time fee, generally based on the annual salary of the employee.

     To maintain a consistent quality standard for all its temporary employees, Commercial Staffing uses a comprehensive automated system to screen and evaluate potential temporary personnel, make proper assignments and review a temporary employee’s performance. Commercial Staffing uses the QuestPLUS System to integrate the results of this skills testing with personal attributes and work history and automatically matches available candidates with customer requirements. Commercial Staffing also provides uniform training to all of its employees in sales, customer service and leadership skills.

Sales and Marketing

     Commercial Staffing has implemented a standardized Business Development Process to target potential customers with temporary staffing needs and to maintain and expand existing customer relationships. The marketing efforts of Commercial Staffing are decentralized and capitalize on the division’s long-standing customer relationships and the lengthy market tenure of the division’s offices, which have been in their existing geographic markets for more than 25 years on average. Commercial Staffing obtains new clients primarily through personal

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sales presentations and referrals from other clients and supports its sales efforts with telemarketing, direct mail solicitation and advertising in a variety of local and national media, including the Yellow Pages, newspapers, magazines and trade publications. Commercial Staffing also is supported by centralized proposal generation and large account sales departments, which assist in the development of responses to large account RFPs and otherwise support the division’s efforts to broaden its large account base.

     Commercial Staffing devotes the majority of its selling efforts to the local and regional operations of a wide variety of businesses (including a number of Fortune 500 companies) and to other potential customers that it has identified as consistent users of temporary staffing services. Local and regional accounts are characterized by shorter sales cycles and higher gross margins. Commercial Staffing generally does not seek low margin national account agreements, but does provide services to a wide variety of customers with national and international businesses. Bids for large user accounts and the provision of services to clients with multiple location requirements are coordinated at the Company’s headquarters.

     The commercial staffing business is subject to the seasonal impact of summer and holiday employment trends. Typically, the second half of each calendar year is more heavily affected, as companies tend to increase their use of temporary personnel during this period. While the commercial staffing industry is cyclical, the Company believes that the broad geographic coverage of its operations and the diversity of the services it provides (including its emphasis on high-end white collar clerical workers) may partially mitigate the adverse effects of economic cycles in a single industry or geographic region.

Recruiting and Retention of Temporary Employees

     The Company recruits its Commercial Staffing temporary associates and IT Services consultants through a decentralized recruiting program that primarily utilizes the internet and local and national advertisements. In addition, the Company has succeeded in recruiting qualified employees through referrals from its existing labor force. To encourage further referrals, the IT Services and Commercial Staffing operations pay referral fees to employees responsible for attracting new recruits. The Company interviews, tests, checks references and evaluates the skills of applicants for temporary employment, utilizing systems and procedures developed and enhanced over the years. Commercial Staffing employs temporary associates on an as needed basis dependent upon client demand. These temporary associates are paid only for time they actually work.

     In an effort to attract a broad spectrum of qualified employees, the Company offers a wide variety of employment options and training programs. In addition, IT Services operates a number of formal and informal training programs to provide its consultants with access to and training in new software applications and a diverse mix of mainframe, client/server and other computer technologies. The Company believes that these training initiatives have improved consultant recruitment and retention, increased the technical skills of IT Services’ personnel and resulted in better service for IT Services’ clients.

     The Company provides competitive compensation packages and comprehensive benefits for its Commercial Staffing temporary associates and IT Services consultants. Most of the temporary associates and IT Services consultants are also eligible for one of the Company’s 401(k) plans.

Organizational Structure

     The Company operates through a network of decentralized offices, none of which are franchised or licensed. Each office reports to a manager who is responsible for day-to-day operations and the profitability of the office. Depending on, among other things, the number of offices in a region, branch managers may report to operating company presidents, regional managers, division vice presidents or division presidents. Branch and regional managers are given a high level of autonomy in making decisions about the operations in their principal region. The compensation of branch and regional managers includes bonuses primarily based on the growth and profitability of their operations and is designed to motivate them to maximize revenue and profit growth each year.

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Systems

     Commercial Staffing uses a number of automated systems to measure the skills of the temporary employee candidates that make themselves available and to match skills with client requests. The ProficiencyPLUS program is designed to test specific computer-related skills by allowing the candidate to operate in the actual software program environment. The QuestPLUS system integrates the results of the Company’s skills testing with personal attributes and work history and automatically matches available candidates with customer requirements. This system also allows the Company to track the performance of its temporary employees and provide quality reports to customers that document the level of the Company’s performance.

     The Company utilizes separate paybill systems for IT Services and Commercial Staffing. The paybill processing systems provide payroll processing and customer invoicing. The Company has also installed common financial and human resources systems in all of its offices.

Competition

     Despite significant consolidation within the United States staffing services market, the market remains highly competitive and highly fragmented and has limited barriers to entry. A number of publicly owned companies specializing in professional staffing services in the United States have greater marketing, financial and other resources than the Company.

     In the temporary staffing industry, competition generally is limited to firms with offices located within a customer’s particular local market. In most major markets, commercial staffing competitors generally include many of the publicly traded companies and, in addition, numerous regional and local full-service and specialized temporary service agencies, some of which may operate only in a single market. Competitors for information technology services include local IT staffing and consulting firms, large, multi-service staffing and consulting firms and the consulting affiliates of large accounting firms.

     Since many clients contract for their staffing services locally, competition varies from market to market. In most areas, no single company has a dominant share of the market. Many client companies use more than one staffing services company, and it is common for large clients to use several staffing services companies at the same time. However, in recent years there has been a significant increase in the number of large customers consolidating their temporary staffing purchases with a single supplier or vendor manager, or with a smaller number of preferred vendors. The trend to consolidate temporary staffing purchases has in some cases made it more difficult for the Company to gain business from potential customers who have already contracted to fill their staffing needs with competitors of the Company. In other cases, the Company has been able to increase the volume of business with certain customers who choose to purchase staffing services primarily from the Company.

     The competitive factors in obtaining and retaining clients include an understanding of clients’ specific job requirements, the ability to provide appropriately skilled temporary personnel at the local level in a timely manner, the monitoring of job performance quality and the price of services. The primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, responsiveness to work schedules and the number of hours of work available. Management believes that it is highly competitive in these areas due to its focus on local markets and the autonomy given to its local management.

Regulation

     Temporary employment service firms are generally subject to one or more of the following types of government regulation: (i) regulation of the employer/employee relationship between a firm and its temporary employees; (ii) registration, licensing, record keeping and reporting requirements; and (iii) substantive limitations on its operations. Staffing services firms are the legal employers of their temporary workers (other than independent contractors) and are governed by laws regulating the employer/employee relationship, such as tax withholding or reporting, social security or retirement, anti-discrimination and workers’ compensation.

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Trademarks

     The Company maintains a number of trademarks, tradenames, service marks and other intellectual property rights, and licenses certain other proprietary rights in connection with its businesses. The Company is not currently aware of any infringing uses or other conditions that would materially and adversely affect its use of its proprietary rights.

Employees

     At February 28, 2003, the Company had approximately 1,025 permanent administrative employees. Additionally, approximately 1,325 of the information technology consultants in IT Services were full-time salaried or hourly employees. None of the Company’s employees are covered by collective bargaining agreements. The Company believes that its relationships with its employees are good.

Risk Factors and Forward Looking Information

     The Company’s financial performance is subject to a number of risks and uncertainties. Additionally, certain statements contained in or incorporated into this report are forward-looking statements regarding events and financial trends that may affect the Company’s future operating results or financial position. These statements may be identified by words such as “estimate,” “forecast,” “plan,” “intend,” “believe,” “should,” “expect,” “anticipate,” or variations or negatives thereof, or by similar or comparable words or phrases. Forward-looking statements are also subject to risks and uncertainties that could cause actual results to differ materially from those expressed in such statements.

     These risks and uncertainties include, but are not limited to, the following:

• changes in levels of unemployment and other economic conditions in the United States, or in particular regions or industries;

• continuing weakness or further reductions in corporate information technology spending levels;

• the ability of the Company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions;

• the impact of competitive pressures, including any change in the demand for the Company’s services, or the Company’s ability to maintain or improve its operating margins;

• an Internal Revenue Service audit of the Company’s income tax returns and the risk that assessments for additional taxes, penalties and interest could be levied against the Company;

• the entry of new competitors into the marketplace or expansion by existing competitors;

• the Company’s success in attracting, training and retaining qualified management personnel and other staff employees;

• reductions in the supply of qualified candidates for temporary employment or the Company’s ability to attract qualified candidates;

• the possibility of the Company incurring liability for the activities of its temporary employees or for events impacting its temporary employees on clients’ premises;

• the risk in an uncertain economic environment of increased incidences of employment disputes, employment litigation and workers’ compensation claims;

• the risk that further cost cutting or restructuring activities undertaken by the Company could cause an adverse impact on certain of the Company’s operations;

• economic declines that affect the Company’s liquidity or ability to comply with its loan covenants;

• the risks of defaults under the Company’s credit agreements or the demand by any holder of the Company’s remaining outstanding 5.75% Notes for repayment following the occurrence of a repurchase event under the indenture applicable to the 5.75% Notes;

• adverse changes in credit and capital markets conditions that may affect the Company’s ability to obtain financing or refinancing on favorable terms;

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• adverse changes to management’s periodic estimates of future cash flows that may affect management’s assessment of its ability to fully recover its goodwill;

• whether governments will impose additional regulations or licensing requirements on staffing services businesses in particular or on employer/employee relationships in general; and

• other matters discussed in this report and the Company’s other SEC filings.

Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or extrapolating past results. The Company undertakes no obligation to update information contained in this report.

Item 2. Properties

     Generally, the Company’s offices are leased under leases of relatively moderate duration (typically three to five years, with options to extend) containing customary terms and conditions. IT Services and Commercial Staffing offices are typically in office or industrial buildings, and occasionally in retail buildings, and the Company’s headquarters facilities and regional offices are in similar facilities.

Item 3. Legal Proceedings

     From time to time the Company is involved in certain disputes and litigation relating to claims arising out of its operations in the ordinary course of business. Further, the Company periodically is subject to government audits and inspections. In the opinion of the Company’s management, matters presently pending will not, individually or in the aggregate, have a material adverse effect on the Company’s results of operations or financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

     No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II.

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

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

     As of February 28, 2003, there were approximately 5,044 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by securities position listings.

     The Company’s policy has been to retain earnings for use in its business and, accordingly, it has not historically paid cash dividends on the Common Stock. In addition, the Company’s revolving credit facility currently prohibits the payment of dividends. In the future, the Company’s Board of Directors will determine whether to pay cash dividends based on conditions then existing, including the Company’s earnings, financial condition, capital requirements, financing arrangements, the terms of the Company’s credit agreements and any other factors deemed relevant by the Board of Directors.

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     The following table sets forth the high, low and closing sales prices for the Common Stock as reported on the New York Stock Exchange for each quarter during the fiscal year ended December 30, 2001, as well as for each quarter during the fiscal year ended December 29, 2002, through November 20, 2002. It also sets forth the range of high and low bids for the Common Stock from November 21, 2002 through the end of fiscal 2002 as reported by the OTC Bulletin Board:

	High		Low		Close
2002
First Quarter	$	1.50	$	0.81	$	1.35
Second Quarter		1.64		0.80		0.90
Third Quarter		1.00		0.24		0.35
Fourth Quarter (through November 20, 2002)		0.37		0.12		0.14
Fourth Quarter (beginning November 21, 2002)		0.18		0.06		0.14
2001
First Quarter	$	3.25	$	1.20	$	1.20
Second Quarter		2.07		1.09		1.38
Third Quarter		1.48		0.77		0.85
Fourth Quarter		1.11		0.40		0.88

The last reported bid price on March 31, 2003 was $0.17.

Item 6. Selected Financial Data.

     The information required by this Item is included in the Company’s Annual Report under the caption “Selected Financial Data,” which information is set forth in Exhibit 13.1 to this Form 10-K and is hereby incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The information required by this Item is included in the Company’s Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which information is set forth in Exhibit 13.1 to this Form 10-K and is hereby incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The information required by this Item is included in the Company’s Annual Report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Market Risk Disclosures,” which information is set forth in Exhibit 13.1 to this Form 10-K and is hereby incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

     The information required by this Item is included in the Company’s Annual Report under the captions “Report of Independent Accountants,” “Consolidated Balance Sheets,” “Consolidated Statements of Operations,” “Consolidated Statements of Shareholders’ Equity (Deficit),” “Consolidated Statements of Cash Flows” and “Notes to

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Consolidated Financial Statements,” which information is set forth in Exhibit 13.1 to this Form 10-K and is hereby incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

     The Company has no disagreements on accounting or financial disclosure matters with its independent public accountants to report under this Item 9.

PART III.

Item 10. Directors and Executive Officers of the Registrant.

Information About Directors and Executive Officers

     The following table sets forth information about our executive officers and directors as of the date of this report:

Name	Age		Position
Larry L. Enterline		50	Chief Executive Officer and Director
James C. Hunt		46	President and Chief Financial Officer
Michael H. Barker		48	President – Division Operations
Ken R. Bramlett, Jr.		43	Senior Vice President, General Counsel and Secretary
Thomas E. Stafford		58	Vice President of Human Resources
James V. Napier (1)(3)(5)		66	Director
Christopher Pechock (1)(2)(3)(4)		38	Director
Elias J. Sabo (1)(2)(3)(4)		32	Director
Janice L. Scites (3)		52	Director
William J. Simione, Jr. (2)(3)(5)		61	Director
Victor E. Mandel(4)		38	Director

(1)	Member of the Compensation Committee of the Board of Directors.
(2)	Member of the Governance Committee of the Board of Directors.
(3)	Member of the Audit Committee of the Board of Directors.
(4)	Messrs. Pechock, Sabo and Mandel were appointed to the Board in April 2003 to fill vacancies created following the completion of the Company’s financial restructuring. The Company is considering the Committee memberships of each of its Board members and may change the composition of certain or all of its Board Committees following a transitional period.
(5)	Messrs. Napier and Simione are currently serving as Class II directors and have advised the Company that they do not intend to stand for reelection to the Board at the Company’s upcoming 2003 Annual Meeting of Shareholders.

     Larry L. Enterline: Mr. Enterline has served as our Chief Executive Officer and as a director since December 2000. From 1984 to 1989, Mr. Enterline served as Vice President of Marketing and Sales with Bailey Controls. From 1989 to 1999, Mr. Enterline served in various management roles with Scientific-Atlanta, Inc., most recently as a Senior Vice President in charge of its worldwide sales and service organization. Mr. Enterline holds a bachelor’s degree in electrical engineering and a Master’s degree in business administration.

     James C. Hunt: Mr. Hunt has served as our President and Chief Financial Officer since January 2001. Prior to that time, Mr. Hunt served as our President from October 1999 to January 2001, Chief Financial Officer and Treasurer from March 1997 until October 1999 and Senior Vice President from January 1997 until March 1997. Mr. Hunt served as a director from January 1997 to April 2003. Prior to joining us in January 1997, Mr. Hunt spent 18 years with Arthur Andersen LLP, a worldwide accounting and consulting firm, the last six years as a partner.

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     Michael H. Barker: Mr. Barker has served as President of Division Operations since January 2003. From January 2001 through January 2003, Mr. Barker served as President of our IT Services Division. Prior to that time, Mr. Barker served as President of Division Operations from October 1999 to January 2001 and as President of the Commercial Staffing division from January 1998 until October 1999. Prior to joining us, from 1995 to 1997 Mr. Barker served as the Chief Operations Officer for the Computer Group Division of IKON Technology Services, a diversified technology company.

     Ken R. Bramlett, Jr.: Mr. Bramlett has served as our Senior Vice President, General Counsel and Secretary since January 2001. Prior to that time, Mr. Bramlett served as our Chief Financial Officer and Treasurer from October 1999 to January 2001 and as our Senior Vice President, General Counsel and Secretary from October 1996 until October 1999. Mr. Bramlett also served as a director from August 1997 to January 2001. Prior to joining us in October 1996, Mr. Bramlett spent 12 years with Robinson, Bradshaw & Hinson, P.A., a Charlotte, North Carolina law firm, the last six years as a partner. Mr. Bramlett serves on the board of directors of World Acceptance Corporation, a small loan consumer finance company headquartered in Greenville, South Carolina.

     Thomas E. Stafford: Mr. Stafford has served as our Vice President of Human Resources since January 2000. Prior to that time, Mr. Stafford served as the Director of Human Resources for the Film and Fiber Division of Hoechst Celanese Corporation from 1992 to April 1998 and as Director of Benefits from April 1998 to April 1999.

     James V. Napier: Mr. Napier has served as a director since September 1995. From November 1992 to November 2000, Mr. Napier served as the Chairman of Scientific-Atlanta, Inc., a telecommunications company. In addition to serving on our board of directors and on Scientific-Atlanta’s Board, Mr. Napier serves on the boards of directors of Engelhard Corporation, Vulcan Materials Company, McKesson Corporation, Intelligent Systems Corporation and WABTEC Corp.

     Christopher Pechock: From 1998 to 2003, Mr. Pechock has served as a partner at MatlinPatterson Global Opportunities Partners, an asset management firm specializing in corporate restructurings, and its predecessor. From 1996 to 1998, Mr. Pechock was employed by Turnberry Capital Management, a capital management firm. Mr. Pechock has a Master’s degree in business administration from Columbia Business School. Mr. Pechock also serves on the board of directors of Huntsman Holdings, Inc. and several private companies.

     Elias J. Sabo: From 1998 to 2003, Mr. Sabo has served as a founding partner at The Compass Group International LLC. Prior to joining Compass, Mr. Sabo worked in the acquisition department for Colony Capital, a Los Angeles-based real estate private equity firm, from 1992 to 1996 and as a healthcare investment banker for CIBC World Markets (formerly Oppenheimer & Co.) from 1996 to 1998. Mr. Sabo also serves on the boards of directors of several private companies.

     Janice L. Scites: Ms. Scites has served as a director since August 1999. Since 2000, Ms. Scites has served as President of Scites Associates, Inc., an information technology and management consulting firm. From 1995 to 2000, Ms. Scites served in various management roles with AT&T, initially as Vice President in its Business Customer Care and Value-Added Services organizations and most recently as Vice President in the Internet Implementation Strategy Group. Prior to joining AT&T, Ms. Scites spent 13 years with Phoenix Mutual Life Insurance Company and five years with Connecticut Mutual Life Insurance Company. Ms. Scites also serves on the board of directors of Central Vermont Public Service Corporation, a Vermont-based electric utility.

     William J. Simione, Jr.: Mr. Simione has served as a director since September 1995. From January 1996 to October 2001, Mr. Simione served as President of Simione Consulting, LLC, a subsidiary of CareCentric, Inc. (formerly Simione Central Holdings, Inc.). Since October 2001, Mr. Simione has served as managing principal of Simione Consulting, LLC, which provides consulting services and information systems to the home healthcare industry. Mr. Simione also serves on the board of directors of CareCentric, Inc. He is a member of the Prospective Payment Task Force, a Regulatory Affairs Subcommittee for the National Association for Home Care, and is one of the Subcommittee’s National Reimbursement Consultants.

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     Victor E. Mandel: Since 2001, Mr. Mandel has served as founder and Managing Member of Criterion Capital Management, an investment company. From May 1999 to November 2000, Mr. Mandel was Executive Vice President—Finance and Development of Snyder Communications, Inc., with operating responsibility for its publicly-traded division Circle.com. From June 1991 to May 1999, Mr. Mandel was a Vice President in the Investment Research department at Goldman Sachs & Co. covering emerging growth companies.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities. Executive officers, directors and greater than 10% stockholders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us during and for the fiscal year ended December 29, 2002, our executive officers and directors and any greater than 10% beneficial owners complied with all applicable Section 16(a) filing requirements.

Item 11. Executive Compensation.

     The following table sets forth compensation information for fiscal years 2002, 2001 and 2000 for those persons who were, except as otherwise noted, our Chief Executive Officer and our four other most highly paid executive officers as of December 29, 2002:

										Long Term
										Compensation
										Awards
			Annual Compensation							Securities
								Other Annual		Underlying		All Other
Name and Principal Position			Salary		Bonus			Compensation		Options(#)(1)		Compensation
Larry L. Enterline (2)		2002	$	409,476	$	—	(3)	$	—		—	$	—
	Chief Executive Officer	2001		414,666		—	(3)		—		—		4,404	(4)
		2000		5,000		—			—		700,000		—
James C. Hunt		2002	$	307,445	$	147,000		$	—		—	$	50,000	(5)
	President and Chief Financial Officer	2001		307,965		200,000			—		50,000		131,216	(6)
		2000		308,100		—			—		40,000		50,000	(7)
Michael H. Barker		2002	$	246,741	$	84,000		$	—		—	$	2,750	(5)
	President – Division Operations	2001		247,379		108,000			—		40,000		67,759	(6)
		2000		247,870		—			—		40,000		16,236	(7)
Ken R. Bramlett, Jr.		2002	$	247,175	$	84,000		$	—		—	$	20,160	(5)
	Senior Vice President, General Counsel and	2001		247,695		96,000			—		30,000		102,013	(6)
	Secretary	2000		248,100		—			—		40,000		50,000	(7)
Thomas M. Wittenschlaeger (8)		2002	$	205,441	$	70,000		$	—		—	$	16,215	(5)
	Senior Vice President, Corporate	2001		165,336		69,750			—		50,000		27,376	(9)
	Development and Chief Technology Officer

(1) Option grants for the named officers in 2000 and 2001 generally vested 25% on each of the first four anniversaries of the grant dates. In connection with the Company’s recently completed financial restructuring, each of the named executives has irrevocably waived his right to exercise all of his outstanding PGA stock options granted under the 1995 Stock Option Plan, including these options, and has forfeited all of such options to the Company.

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(2)	Mr. Enterline was appointed as our Chief Executive Officer in December 2000.
(3)	At the request of the Compensation Committee, Mr. Enterline has deferred the payment of his bonuses for 2001 and 2002. Mr. Enterline’s bonus for 2001 was a guaranteed $400,000, and his bonus for 2002 was $280,000.
(4)	Represents relocation expense reimbursements paid to Mr. Enterline in 2001.
(5)	Represents 2002 allocations to our non-qualified profit-sharing plan for Messrs. Hunt, Bramlett and Wittenschlaeger and a matching contribution to our IT Services Division 401(k) plan for Mr. Barker.
(6)	Represents 2001 allocations to our non-qualified profit-sharing plan for Messrs. Hunt, Barker and Bramlett of $50,000, $17,964 and $19,903, respectively, and $81,216, $49,795 and $82,110, respectively, paid to the named officers in connection with the termination and amendment of then in effect vacation and paid time off plans.
(7)	Represents 2000 allocations to our non-qualified profit-sharing plan for the named officers.
(8)	Mr. Wittenschlaeger served as our Senior Vice President, Corporate Development and Chief Technical Officer from April 2001 until his resignation in January 2003.
(9)	Represents a 2001 allocation to our non-qualified profit-sharing plan for Mr. Wittenschlaeger of $10,020 and $17,356 of relocation expense reimbursements.

     The Company did not grant stock options to any of the named officers in 2002.

Option Year-End Value Table

     The following table sets forth certain information concerning unexercised options held as of the end of 2002. None of the named officers exercised any options during 2002.

Fiscal Year-End Option Value

	Number of Securities Underlying				Value of Unexercised In-the-Money
	Unexercised Options at FY-End (#)(1)				Options at FY-End ($)(2)
Name	Exercisable		Unexercisable		Exercisable		Unexercisable
Larry L. Enterline		350,000		350,000	$	0	$	0
James C. Hunt		296,248		71,574		0		0
Ken R. Bramlett, Jr.		177,771		52,199		0		0
Michael H. Barker		103,471		54,375		0		0
Thomas M. Wittenschlaeger		12,500		37,500		0		0

(1)	In connection with PGA’s recently completed financial restructuring, each of the named officers has irrevocably waived his rights to exercise all of these options and forfeited them to the Company.
(2)	The fair market value of the common stock used for these computations was $0.14, which was the last bid price for our Common Stock on the OTC Bulletin Board on December 27, 2002.

Employment Agreements

     The following six paragraphs describe the employment agreements with our executive officers that were in effect until the completion of our financial restructuring in April 2003, or in the case of Mr. Wittenschlaeger, until his resignation as an executive officer in January 2003.

     Larry L. Enterline was employed pursuant to a letter agreement dated December 20, 2000. The letter agreement provided for (i) an annual base salary of $400,000 (subject to annual adjustment as determined by the Compensation Committee), and (ii) the right to earn bonuses under the Company’s Management Incentive Compensation Plan. The letter agreement also provided for a minimum annual bonus for 2001 of $400,000, but the Compensation Committee notified Mr. Enterline in December 2001 that it had elected to defer the payment

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of his 2001 bonus until January 2003. The letter agreement did not specify a term of employment for Mr. Enterline. However, it did provide that if Mr. Enterline’s employment were terminated within the first two years by the Company other than for cause or by Mr. Enterline following a change in control of the Company, the Company would pay Mr. Enterline severance equal to 12 months’ salary and any unpaid bonus to which he would otherwise have been entitled, and all unvested options to purchase Common Stock then held by Mr. Enterline would become immediately exercisable.

     James C. Hunt was employed pursuant to the terms of an employment agreement, dated as of January 2, 1997, that provided for his employment until December 31, 2002, subject to automatic renewal for successive one-year periods unless either the Company or Mr. Hunt gave notice of non-renewal six months prior to expiration. Neither the Company nor Mr. Hunt gave notice of non-renewal prior to June 30, 2002. The employment agreement provided for (i) an annual base salary of $300,000 (subject to annual adjustment as determined by the Compensation Committee) and (ii) the right to earn bonuses under the Company’s Management Incentive Compensation Plan.

     Michael H. Barker was employed pursuant to the terms of an employment agreement, dated as of January 19, 1998, that provided for his employment until January 18, 2003, subject to automatic renewal for successive one-year periods unless either the Company or Mr. Barker gave notice of non-renewal six months prior to expiration. Neither the Company nor Mr. Barker gave notice of non-renewal prior to July 18, 2002. The employment agreement provided for (i) an annual base salary of $240,000 (subject to annual adjustment as determined by the Compensation Committee) and (ii) the right to earn bonuses under the Company’s Management Incentive Compensation Plan.

     Ken R. Bramlett, Jr. was employed pursuant to the terms of an employment agreement, dated as of October 7, 1996, that provided for his employment until September 30, 2002, subject to automatic renewal for successive one-year periods unless either the Company or Mr. Bramlett gave notice of non-renewal six months prior to expiration. Neither the Company nor Mr. Bramlett gave notice of non-renewal prior to March 31, 2002. The employment agreement provided for (i) an annual base salary of $240,000 (subject to annual adjustment as determined by the Compensation Committee) and (ii) the right to earn bonuses under the Company’s Management Incentive Compensation Plan.

     Thomas M. Wittenschlaeger was employed pursuant to the terms of an employment agreement, dated as of April 11, 2001, that provided for his employment until April 11, 2003, subject to automatic renewal for successive one-year periods unless either the Company or Mr. Wittenschlaeger gave notice of non-renewal six months prior to expiration. The employment agreement currently provides for (i) an annual base salary of $200,000 (subject to annual adjustment as determined by our Compensation Committee) and (ii) the right to earn bonuses under the Company’s Management Incentive Compensation Plan. In accordance with the terms of Mr. Wittenschlaeger’s separation arrangement, the Company will pay him severance equal to one year’s base salary.

     Each of these employment agreements for Messrs. Hunt, Barker, Bramlett and Wittenschlaeger also provided that if the employment agreement were terminated by the Company other than for cause, or by the executive upon a change in terms and conditions of employment or following a change in control of the Company, the Company would pay the executive severance equal to 12 months’ salary (24 months’ salary, in the case of Mr. Hunt) and any unpaid bonus to which he would otherwise have been entitled, and all unvested options to purchase Common Stock then held by the executive would become immediately exercisable. Each employment agreement also contained a provision prohibiting the executive from competing with the Company or soliciting employees and customers of the Company for a period of two years from the date his employment with the Company ceased.

     Each of Messrs. Enterline, Hunt, Barker and Bramlett is now employed pursuant to an employment agreement dated as of the closing date of our financial restructuring. Each employment agreement provides for an annual base salary (subject to annual adjustment as determined by our Compensation Committee), the right to earn annual bonuses as described below and in the event that our shareholders approve our new equity incentive plan at our 2003 annual meeting, the right to participate in such new plan. The initial annual base salaries established in these agreements for Messrs. Enterline, Hunt, Barker and Bramlett are $400,000, $300,000, $240,000 and $240,000, respectively. Each employment agreement is for an initial term of two years, with automatic one-year

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extensions thereafter unless either party provides written notice of termination at least three months prior to any scheduled expiration date.

     Each annual bonus under these employment agreements will have both an objective component and a subjective component: 70% of the bonus will be tied to achievement of at least 90% of a targeted EBITDA figure for the year, with the executive eligible to earn the maximum portion of this component of the bonus if we achieve 140% of the targeted EBITDA figure. The remaining 30% will be subject to the discretion of our Compensation Committee. The targeted EBITDA bonus awards for each executive officer will be determined as a percentage of the executive’s base salary, as follows:

				Maximum
Executive	Bonus at Target EBITDA(1)			Bonus(1)
Larry L. Enterline		30	%		100	%
James C. Hunt		30	%		90	%
Michael H. Barker		30	%		90	%
Ken R. Bramlett, Jr.		30	%		60	%

(1) Percentage of base salary. The Bonus at Target EBITDA column is based upon achievement of 100% of the targeted EBITDA number, while the Maximum Bonus column is based upon achievement of 140% of the targeted EBITDA number. Both columns are based upon full award of the 30% of bonus that is subject to the Compensation Committee’s discretion.

     In connection with our recently completed financial restructuring, each of the named officers has irrevocably waived all of his rights to exercise his outstanding stock options granted under our 1995 Stock Option Plan and forfeited all of such options to the Company. For the number of options forfeited by each of these executives, see the table labeled “Fiscal Year-End Option Value” above. Each of these officers has also been awarded an initial grant of stock options under our new 2003 Equity Incentive Plan , subject to shareholder approval of the new plan at our upcoming 2003 Annual Meeting of Shareholders. Those initial stock option awards under the new plan were for 5,750,000 shares to Mr. Enterline, 2,985,000 shares to Mr. Hunt, 2,250,000 shares to Mr. Barker and 1,600,000 shares to Mr. Bramlett and all have exercise prices higher than the per share trading price of the Common Stock on the date of the award.

     The employment agreement of each of Messrs. Enterline, Hunt, Barker and Bramlett provides that options granted under the new equity incentive plan to these executive officers will vest on a pro rata basis over 4 years. If any of these executive officers is terminated without cause prior to the first anniversary of the date of his employment agreement, 25% of the options initially granted to him will vest automatically as of the date of termination. In addition, all of these options will vest automatically in the event of a change of control involving the Company. Following a termination of employment, each executive will have three months to exercise his vested stock options unless his termination was without cause, in which event the exercise period will be extended to 12 months.

     The employment agreements for Messrs. Enterline, Barker and Bramlett also provide these executive officers with one year of severance upon termination (including any non-renewal) without cause. Mr. Hunt’s employment agreement provides him with two years of severance. Each of the four employment agreements requires the executive to agree to customary non-compete and non-solicitation provisions.

     The employment agreements for Messrs. Enterline and Bramlett also provide them with additional severance benefits if there is a change of control involving the Company in the first year of their agreements’ term (i.e., before April 2004). If a change of control occurs during this first year, the severance benefits for Messrs. Enterline and Bramlett severance will be extended to two years from one year. However, if the sale price per share of our capital stock in such change of control transaction represents a total equity value of more than $100 million each of these officers’ additional severance will be reduced, dollar for dollar, if and to the extent that the sum of any stock option gains realized by the officer in such change of control transaction, plus the additional

15

severance, exceeds the sum of the officer’s additional severance plus his realized stock option gains in a change of control transaction with a total equity value equal to $100 million.

Director Compensation

     In 2002, Mr. Kevin Egan was paid $10,000 for his service as non-executive Chairman of the Board during the year and $10,000 for special services as a director in connection with our financial restructuring. Additionally, each non-employee director received an annual retainer of $15,000, and an additional annual retainer of $1,000 for each Board committee he or she chaired. Non-employee directors also received meeting fees of $1,000 per Board meeting attended and $750 per committee meeting attended, plus reimbursement of expenses. Members of the Special Committee of the Board received an additional $10,000 for their service on that committee. Mr. Egan and Mr. Roger King (each of whom had served on our Board of Directors since 1995) recently resigned from the Board simultaneously with the closing of our financial restructuring.

     We offer a deferred fee plan for our non-employee directors under which participating directors may defer any or all of their retainer and meeting fees for specified time periods. The deferred fee plan is non-qualified for tax purposes. Deferred fees under the plan earn interest at the prime rate or, at each participating director’s option, a return based on our stock price performance over time. Each non-employee director, except for Mr. King, elected to defer 100% of the retainer and meeting fees to which he or she otherwise was entitled in 2002 under the deferred fee plan. None of our directors are participating in this plan for 2003.

     Each of our 2002 directors also received an annual option grant to purchase 3,000 shares of common stock in 2002 under our 1995 Stock Option Plan, which required that the exercise price for options granted under the plan equal the fair market value of our common stock on the date of grant. In connection with the Company’s recently completed financial restructuring, each of our 2002 directors (other than Mr. King) has irrevocably waived his or her right to exercise all of his or her outstanding PGA stock options granted under the 1995 Stock Option Plan, including these options, and has forfeited all of such options to the Company. Additionally, the 1995 Stock Option Plan has been terminated.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     The following table sets forth, as of March 31, 2003 (except where otherwise noted), the number and percentage of outstanding shares beneficially owned by each person known by us to own beneficially more than 5% of our common stock, by each of our directors who were serving as directors on March 31, 2003, by our Chief Executive Officer, by all of our executive officers (including the four other most highly paid executive officers for 2002) and by all of our 2002 directors and executive officers as a group. Except as otherwise set forth below, each stockholder named has sole voting and investment power with respect to his or her or its shares.

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		Amount and Nature of Shares			Percent of Common
Name and Address* of Beneficial Owner		Beneficially Owned(1)			Stock Outstanding
MatlinPatterson Global Opportunities Partners L.P. and MatlinPatterson Global Opportunities Partners (Bermuda) L.P.			3,398,568	(2)		11.2%
	520 Madison Avenue
	New York, New York 10022 and Links Partners, L.P. and Inland Partners, L.P. 61 Wilton Avenue, 2nd Floor Westport, Connecticut 06880
Amalgamated Gadget, L.P.			2,012,051	(3)		7.3%
	City Center Tower II
	301 Commerce Street, Suite 2975
	Fort Worth, Texas 76102
SC Fundamental Value Fund, L.P. et al			1,583,087	(4)		5.9%
	420 Lexington Avenue, Suite 2601
	New York, New York 10170
Larry L. Enterline			450,000			1.7%
James C. Hunt			334,282	(5)		1.2%
Michael H. Barker			144,948			**
Ken R. Bramlett, Jr.			202,185	(6)		**
Thomas M. Wittenschlaeger			37,500			**
Thomas E. Stafford			15,063			**
Kevin P. Egan			201,974			**
J. Roger King			99,200	(7)		**
James V. Napier			85,000			**
William J. Simione, Jr.			48,000			**
Janice L. Scites			35,750			**
All directors and executive officers as a group (11 persons)			1,653,902	(8)		5.9%

*	Addresses are furnished only for beneficial owners of more than 5% of our common stock
**	Less than one percent
(1)	Includes the following shares subject to stock options exercisable within 60 days after March 31, 2003: Mr. Enterline – 350,000; Mr. Hunt – 311,572; Mr. Barker – 113,471; Mr. Bramlett – 188,095; Mr. Wittenschlaeger – 12,500; Mr. Stafford – 13,125; Mr. Egan – 97,000; Mr. Napier – 40,000; Mr. King – 40,000; Mr. Simione – 40,000; Ms. Scites – 24,750; and all directors and executive officers as a group – 1,230,513. Each of these persons (other than Mr. King) has irrevocably waived his or her right to exercise all of these options and has forfeited all of such options to the Company. Additionally, the 1995 Equity Participation has been terminated
(2)	The amount and nature of the shares beneficially owned are as of March 14, 2003, and are based on the most recent Schedule 13D amendment on file with us. Such amendment was filed by MatlinPatterson Global Opportunities Partners L.P., MatlinPatterson Global Opportunities Partners (Bermuda) L.P., Links Partners, L.P., Inland Partners, L.P., MatlinPatterson Global Advisers LLC, MatlinPatterson Global Partners LLC, MatlinPatterson Asset Management LLC, MATLINPATTERSON LLC, Coryton Management Ltd., Arthur Coady, Elias Sabo and I. Joseph Massoud and the parties reported shared voting and dispositive powers with respect to all shares reported.
(3)	The amount and nature of the shares beneficially owned are as of February 10, 2003, and are based on the most recent Schedule 13G (or amendment thereto) on file with us. Amalgamated Gadget reports sole voting and dispositive power with respect to only 1,223,000 of the shares reported.
(4)	In its Schedule 13G dated as of January 2, 2003, the most recent Schedule 13G or amendment on file with us, SC Fundamental Value Fund, L.P., reports voting and dispositive power with respect to 647,150 shares, and SC Fundamental Value BVI, Ltd. reports sole voting and dispositive power with respect to 823,641 shares. Related parties variously report shared voting and dispositive power with respect to 647,150, 823,641 and 1,470,791 shares.
(5)	Includes 1,120 shares held in the names of Mr. Hunt’s spouse and children.
(6)	Includes 500 shares held in the name of Mr. Bramlett’s spouse.
(7)	Includes 8,500 shares and options to purchase 15,500 shares over which beneficial ownership has been transferred to Mr. King’s ex-spouse under the terms of a property settlement. Mr. King disclaims beneficial ownership of these shares. Also includes 1,700 shares held in the name of Mr. King’s current spouse.

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Equity Compensation Plan Information

     The table below contains information about the Company’s compensation plans as of December 29, 2002 under which equity securities of the Company are authorized for issuance.

						Number of
						securities
						remaining available
		Number of				for future issuance
		securities to be				under equity
		issued upon		Weighted-average		compensation plans
		exercise of		exercise price of		(excluding
		outstanding		outstanding		securities
		options, warrants		options, warrants		reflected in column
Plan Category		and rights		and rights		(a))
		(a)		(b)		(c)
Equity compensation plans approved by security holders(1)			2,837,635	$	6.63		2,162,968
Equity compensation plans not approved by security holders			—		—		—
	Total (2)		2,837,635	$	6.63		2,162,968

(1)

A number of the Company’s employees, including each of the Company’s executive officers at the end of 2002, and all but one of the Company’s 2002 Directors have irrevocably cancelled any and all rights that they had to exercise any and all stock options that were previously granted to such persons and agreed that all such options would be forfeited to the Company. These directors and employees held in the aggregate 2,190,030 of the stock options that were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a result of these voluntary forfeitures, only 545,445 stock options remain outstanding under the 1995 Stock Option Plan and these options have a weighted average exercise price of $9.23 per share. Although the 1995 Stock Option Plan has been terminated and no future issuances thereunder will be made, these remaining outstanding stock options will continue to be exercisable in accordance with their terms.

(2)

Excludes 1,734,894 shares reserved at December 29, 2002 for issuance under the Company’s 2001 Non-Qualified Employee Stock Purchase Plan, which plan was terminated on December 31, 2002.

Item 13. Certain Relationships and Related Transactions

     The Company has no relationships or transactions to report under this Item 13.

Item 14. Controls and Procedures

     Within the 90 days prior to the date of this annual report on Form 10-K, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (“disclosure controls”), and its internal controls and procedures for financial reporting (“internal controls”). Disclosure controls mean those controls and other procedures that are designed for the purpose of ensuring that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Internal controls are procedures designed for the purpose of providing reasonable assurance that the Company’s transactions are properly authorized, its assets are safeguarded against unauthorized or improper use and its transactions are properly recorded and reported, all to permit the preparation of the Company’s financial statements in conformity with generally accepted accounting principles. This evaluation was performed under the

18

supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

a. Documents filed as part of this report:

(1) The following Report of Independent Accountants and financial statements of the Company are contained in Item 8 above:

Consolidated Financial Statements:

Report of Independent Accountants

Consolidated Balance Sheets as of December 29, 2002 and December 30, 2001

Consolidated Statements of Operations for the years ended December 29, 2002, December 30, 2001 and December 31, 2000

Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 29, 2002, December 30, 2001 and December 31, 2000

Consolidated Statements of Cash Flows for the years ended December 29, 2002, December 30, 2001 and December 31, 2000

Notes to Consolidated Financial Statements

(2) No financial statement schedules are filed as part of this report. All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the notes to the financial statements referred to above.

(3) Exhibits:

The Exhibits filed with or incorporated by reference into this annual report on Form 10-K are listed in the accompanying Exhibit Index.

b. Reports on Form 8-K:

The Company submitted the following reports on Form 8-K during the fourth quarter:

(i)	November 12, 2002, in which the Company reported on the execution of an Agreement in Principle for a financial restructuring; and
(ii)	November 19, 2002, in which the Company commented on an announcement by the NYSE of its intent to suspend the Common Stock from trading on the NYSE and to seek the delisting of the Common Stock.

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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 April 14, 2003.

PERSONNEL GROUP of AMERICA, INC.
By:	/s/ Larry L. Enterline
	Larry L. Enterline Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the Chief Executive Officer and Chief Financial Officer of the Company, and by a majority of the Company’s Board of Directors, on April 14, 2003.

Signature
/s/ Larry L. Enterline Larry L. Enterline	Chief Executive Officer and Director
/s/ James C. Hunt James C. Hunt	President and Chief Financial Officer
/s/ James V. Napier James V. Napier	Director
/s/ William J. Simione, Jr. William J. Simione, Jr.	Director
/s/ Janice L. Scites Janice L. Scites	Director

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CERTIFICATIONS

     I, Larry L. Enterline, certify that:

     1.     I have reviewed this annual report on Form 10-K of Personnel Group of America, Inc. (the “registrant”);

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

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

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

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

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

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

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

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

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

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

Date: April 14, 2003	/s/ Larry L. Enterline
	Larry L. Enterline Chief Executive Officer

21

CERTIFICATIONS

I, James C. Hunt, certify that:

     1.     I have reviewed this annual report on Form 10-K of Personnel Group of America, Inc. (the “registrant”);

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

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

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

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

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

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

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

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

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

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

Date: April 14, 2003	/s/ James C. Hunt
	James C. Hunt President and Chief Financial Officer

22

EXHIBIT INDEX

		Filed Herewith (*)
		Non-Applicable (NA)
		or Incorporated by
		Reference from
		Previous		Company Reg. No.
Exhibit		Exhibit		or
Number	Description	Number		Report
3.1	Restated Certificate of Incorporation of the Company, as amended		3.1	333-31863
3.2	Amended and Restated Bylaws of the Company		3.2	33-95228
4.0	Specimen Stock Certificate		4.0	33-95228
4.1	Rights Agreement between the Company and First Union National Bank (as successor trustee)		1	0-27792
4.2	First Amendment to Rights Agreement		4.1	8-K filed 12/31/01
4.3	Indenture between the Company and HSBC Bank USA (as successor trustee)		4.2	333-31863
4.4	Form of Note Certificate for 5-3/4% Convertible Subordinates Notes		4.3	333-31863
10.1+	1995 Equity Participation Plan, as amended		10.1	333-31863
10.2+	Amended and Restated Management Incentive Compensation Plan		10.2	10-K for year ended 1/3/99
10.3+	2001 Non-Qualified Employee Stock Purchase Plan		4.1	333-66334
10.4#+	Director and Officer Indemnification Agreement of James V. Napier		10.3	10-K for year ended 12/31/95
10.5+	Letter of Employment between the Company and Larry L. Enterline		10.5	10-K for year ended 12/31/00
10.6+	Supplemental Retirement Plan for Edward P. Drudge, Jr.		10.7	10K for year ended 1/2/00
10.7+	Form of Retirement Agreement between the Company and Edward P. Drudge, Jr.		10.8	10-K for year ended 1/2/00
10.8+	Employment Agreement between the Company and James C. Hunt		10.10	10-K for year ended 12/29/96
10.9+	Employment Agreement between the Company and Ken R. Bramlett, Jr.		10.13	10-K for year ended 12/29/96

23

		Filed Herewith (*)
		Non-Applicable (NA)
		or Incorporated by
		Reference from
		Previous		Company Reg. No.
Exhibit		Exhibit		or
Number	Description	Number		Report
10.10+	Employment Agreement between the Company and Michael H. Barker		10.9	10-K for year ended 1/3/99
10.11+	Employment Agreement between the Company and Thomas M. Wittenschlaeger		10.11	10-K for year ended 12/30/01
10.12	Amended and Restated Non-Qualified Profit-Sharing Plan		10.16	10-K for year ended 12/29/96
10.13+	Director’s Non-Qualified Deferred Fee Plan		10.12	10-K for year ended 12/28/97
10.14	Amendment No. 4 to Amended and Restated Credit Agreement among the Company and its subsidiaries, the lenders party thereto and Bank of America, as Agent		99.2	8-K filed 2/12/02
10.15	Equity Appreciation Rights Agreement		99.3	8-K filed 2/12/02
10.16	Registration Rights Agreement between the Company and the Initial Purchasers		10.17	333-31863
10.17	Agreement-in-principle among the Company, certain of its lenders under Amendment No. 4 to the Amended and Restated Credit Agreement and certain holders of the Company’s 5-3/4% Convertible Subordinated Notes, due 2004		99.2	8-K filed 11/12/02
10.18	Purchase Option Agreement among the Company, certain of its lenders and Bank of America, N.A., as agent under Amendment No. 4 to the Amended and Restated Credit Agreement, and certain holders of the Company’s 5-3/4% Convertible Subordinated Notes, due 2004		99.3	8-K filed 11/12/02
10.19	Amendment No. 5 to Amended and Restated Credit Agreement among the Company and its subsidiaries, the lenders party thereto and Bank of America, as Agent		*

24

		Filed Herewith (*)
		Non-Applicable (NA)
		or Incorporated by
		Reference from
		Previous		Company Reg. No.
Exhibit		Exhibit		or
Number	Description	Number		Report
12.1	Statement regarding computation of ratio of earnings to fixed charges		*
13.1	Those portions of the Annual Report incorporated by reference in Parts II, Items 6, 7, 7A and 8 and Part IV, Item 15(a)(1) of this report		*
21.1	Subsidiaries of the Company		*
23.1	Consent of PricewaterhouseCoopers LLP		*
99.1	Section 906 Certification of Larry L. Enterline, Chief Executive Officer of the Company		*
99.2	Section 906 Certification of James C. Hunt, Chief Financial Officer of the Company		*

     # This Exhibit is substantially identical to Director and Officer Indemnification Agreements (i) of the same date between the Company and the following individuals: Kevin P. Egan, J. Roger King, and William Simione, Jr.; (ii) dated April 17, 1998 between the Company and each of James C. Hunt and Ken R. Bramlett, Jr.; and (iii) dated August 9, 1999 between the Company and Janice L. Scites.

     + Management Contract or Compensatory plan required to be filed under Item 14(c) of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission.

25 EX-10.19 3 g81654k1exv10w19.txt AMENDMENT NO. 5 TO AMENDED AND RESTATED CREDIT EXHIBIT 10.19 Amendment No. 5 to Amended and Restated Credit Agreement among the Company and its subsidiaries, the lenders party thereto and Bank of America, as Agent AMENDMENT NO. 5 TO AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER THIS AMENDMENT NO. 5 TO AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER (this "Amendment"), dated as of December 31, 2002, is entered into by and among PERSONNEL GROUP OF AMERICA, INC. (the "Borrower"), certain subsidiaries of the Borrower identified on the signatures pages hereto, the financial institutions identified on the signature pages hereto and BANK OF AMERICA, N.A., formerly known as NationsBank, N.A., as agent for the Lenders (in such capacity, the "Agent"). Except as otherwise defined in this Amendment, terms defined in the Credit Agreement referred to below (as amended by this Amendment) are used herein as defined therein. RECITALS A. The Borrower, the Guarantors party thereto, the Lenders party thereto and the Agent entered into that certain Amended and Restated Credit Agreement dated as of June 23, 1997 (as amended by Amendment No. 1 to Amended and Restated Credit Agreement dated as of March 17, 1998, Amendment No. 2 to Amended and Restated Credit Agreement dated as of September 29, 1999, Amendment No. 3 to Amended and Restated Credit Agreement dated as of March 21, 2001, a Waiver Agreement dated as of December 14, 2001 and Amendment No. 4 to Amended and Restated Credit Agreement dated as of February 8, 2002 and as otherwise modified prior to the date hereof, the "Credit Agreement"). B. The Borrower and the Lenders have agreed to certain modifications to the Credit Agreement. C. Such modifications require the consent of the Required Lenders. D. The Required Lenders have consented to the requested modifications on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: A. AMENDMENTS TO CREDIT AGREEMENT 1. Amendment of Section 1.1. The definition of "Consolidated EBITDA" set forth in Section 1.1 is hereby amended and restated in its entirety to read as follows: "Consolidated EBITDA" means, for any period, the sum of (i) Consolidated Net Income for such period plus (ii) an amount which, in the determination of Consolidated Net Income for such period, has been deducted for (A) interest expense, (B) total Federal, state, local and foreign income, value added and similar taxes, (C) depreciation and amortization expense, (D) for the Borrower's fourth quarter of its 2001 fiscal year, Restructuring Charges taken by the Borrower and its Subsidiaries in such period (but in no event shall all of the add-backs pursuant to this clause (D) exceed $5,750,000 in the aggregate for the Borrower's fourth quarter of its 2001 fiscal year), (E) for any period during the Borrower's fiscal year 2002 and beyond, Restructuring Charges taken by the Borrower and its Subsidiaries (but in no event shall all of the add-backs pursuant to this clause (E) exceed $6,000,000 (plus the amount of any Restructuring Charges consisting of (x) expenses that may be incurred in connection with the hiring of investment advisers to address the Borrower's capital structure and (y) other fees and expenses not to exceed $5,500,000 in the aggregate incurred by the Borrower after September 30, 2002 in connection with any financial restructuring transaction)), (F) for the Borrower's fourth quarter of its 2001 fiscal year, non-cash charges taken by the Borrower in connection with the sale of Paladin Consulting, Inc. (but in no event shall all of the add-backs pursuant to this clause (F) exceed $7,750,000 in the aggregate), (G) non-cash intangible asset impairment charges taken by the Borrower and its Subsidiaries in any such period (but in no event shall all of the add-backs pursuant to this clause (G) exceed $400,000,000 in the aggregate) and (H) non-cash charges taken by the Borrower and its Subsidiaries in connection with the Equity Appreciation Rights Agreement. 2. Further Amendment of Section 1.1. Section 1.1 is further amended by adding the following new definition: "Purchase Option Agreement" means that certain Purchase Option Agreement, dated as of November 11, 2002, by and among the Borrower, the Lenders party thereto, the Subordinated Noteholders party thereto and the Agent. 3. Further Amendment of Section 1.1. Section 1.1 is further amended by adding the following new definition: "Repurchase Event" shall have the meaning assigned to such term in the Subordinated Note Indenture. 4. Amendment of Section 2.1(a). Section 2.1(a) is hereby amended by deleting the reference therein to "ONE HUNDRED THIRTY SIX MILLION DOLLARS ($136,000,000)" and replacing it with "ONE HUNDRED FOURTEEN MILLION DOLLARS ($114,000,000)". 5. Amendment of Section 6.2. Section 6.2 is hereby amended by deleting the parenthetical clause in subsection (a) thereof and replacing it with the following: (except as has been publicly disclosed prior to the Fifth Amendment Effective Date)". 6. Amendment of Section 6.3. Section 6.3 is hereby amended by adding "or limited partnership" after "limited liability company" in clause (a) thereof. 7. Amendment of Section 7.1(k). Section 7.1(k) is hereby amended by replacing the last sentence thereof with the following: Additionally, on a monthly basis concurrently with the delivery of the other items set forth in this Section 7.1(k), (i) a written report shall be provided to the Lenders, in reasonable detail and in a form reasonably acceptable to the Agent, updating the Lenders as of the end of such calendar month on the status of (A) the Proposed Restructuring (as defined in Exhibit B to the Purchase Option Agreement) and (B) the de-listing of the Borrower's common stock from the New York Stock Exchange and (ii) a certificate of the chief financial officer of the Borrower demonstrating compliance with the financial covenants set forth in Section 7.11 as of the end of such fiscal month or quarter (as applicable) and stating that no Default or Event of Default exists, or if any Default or Event of Default does exist, specifying the nature and extent thereof and what action the Borrower proposes to take with respect thereto. 2 8. Amendment of Section 7.8. Section 7.8 is hereby amended and restated in its entirety to read as follows: 7.8 PERFORMANCE OF OBLIGATIONS. The Borrower will, and will cause each of its Subsidiaries to, perform in all material respects all of its obligations under the terms of all material agreements, indentures, mortgages, security agreements or other debt instruments to which it is a party or by which it is bound; provided, however, that to the extent the Borrower is not in compliance with the Subordinated Note Documents due to the de-listing of the Borrower's stock or any related Repurchase Event, such non-compliance shall be deemed not to constitute a violation of this Section 7.8 9. Amendment of Section 7.11(e). Section 7.11(e) is hereby amended and restated in its entirety to read as follows: (e) Minimum Rolling Consolidated EBITDA. Consolidated EBITDA, calculated monthly on a three-month rolling basis, shall not be less the amount shown below:

FISCAL MONTH ENDING NEAREST MINIMUM 3-MONTH ROLLING CONSOLIDATED EBITDA --------------------------- ------------------------------------------- November 30, 2002 $3,449,000 December 31, 2002 $2,851,000 January 31, 2003 $2,029,000 February 28, 2003 $1,771,000 March 31, 2003 $2,737,000 April 30, 2003 $2,997,000 May 31, 2003 $3,713,000 June 30, 2003 $3,679,000

10. Amendment of Section 7. Section 7 is hereby amended to add the following subsection after Section 7.18: 7.19 PERIODIC MEETINGS. (a) On a quarterly basis, and in conjunction with the filing of the Borrower's Form 10-Q with the Securities and Exchange Commission, the Borrower shall hold a telephonic meeting, at an agreed upon time, at which (i) the Lenders' Financial Advisor will present to the Lenders (subject to existing confidentiality and other applicable restrictions among the Agent and any of the Lenders) a written report prepared by the Lenders' Financial Advisor analyzing the Borrower's financial results as of the end of such fiscal quarter, and (ii) the Borrower will review such financial results and discuss the market outlook. (b) Upon the request of the Agent, the Borrower shall hold a meeting on an agreed upon date and at an agreed upon location to discuss the reports delivered pursuant to Section 7.1(k) or Section 7.19(a). 11. Amendment of Section 9.1(g)(i). Section 9.1(g)(i) is hereby amended and restated in its entirety to read as follows: (i) The Borrower or any of its Subsidiaries shall default in the performance or observance (beyond the applicable grace period with respect thereto, if any) or any material obligation or condition of any contract or lease material to the Borrower and its Subsidiaries taken as a whole; provided, however, that 3 to the extent the Borrower is not in compliance with the Subordinated Note Documents due to the de- listing of the Borrower's stock or any related Repurchase Event, such non-compliance, default or non-performance shall be deemed not to constitute a Default or Event of Default hereunder; or 12. Amendment of Section 9.1(k). Section 9.1(k) is hereby amended and restated in its entirety to read as follows: (k) Subordinated Note Indentures. (i) There shall occur and be continuing any Event of Default or Repurchase Event under, and in each case, as defined in the Subordinated Note Indenture, and the Subordinated Noteholders have caused the Subordinated Indebtedness to be accelerated and such acceleration is not rescinded within 30 days, or (ii) any of the Borrower's Obligations for any reason shall cease to be "Senior Indebtedness" under and as defined in the Subordinated Note Indenture; or 13. Amendment of Schedules. The following schedules are amended and restated in their entirety and attached hereto: Schedule 1.1B - Liens; Schedule 6.9 - Intellectual Property Schedule 6.11 - Taxes; Schedule 6.14 - Subsidiaries; and Schedule 8.1 Indebtedness. B. WAIVER The Required Lenders hereby waive any failure of the Borrower to comply with the financial covenants measured by Section 7.11(a), (b), (c) and (d) of the Credit Agreement during the period from the Payment Date (as defined in the Purchase Option Agreement) through the Expiration Date (as defined in the Purchase Option Agreement). This is a one time waiver and shall not be construed to be (i) an amendment or modification to the Credit Agreement, (ii) an agreement to waive any other future Defaults or Events of Default or (iii) a waiver of any other Default or Event of Default except as expressly set forth herein. C. CONSENT TO INTERNAL REORGANIZATION 1. Reorganization. The Credit Parties are undertaking certain internal reorganization steps as follows (collectively, the "Reorganization"): (a) Convert InfoTech Services, Inc. in to a North Carolina LLC. The Borrower is making a capital contribution of the intercompany debt due from InfoTech Services, Inc. to PFI Corp., which will then contribute this intercompany debt to the capital of InfoTech Services, Inc. InfoTech Services, Inc. will convert to a North Carolina limited liability company on or prior to December 29, 2002. (b) California Restructuring. The Borrower will transfer all of its Los Angeles-area commercial staffing branches (except for its Ontario branch) to Venturi Staffing Partners LLC, effective January 1, 2003. The transfer of assets, liabilities and employees, as described above, will be accomplished by contributing the property first from the Borrower to PFI Corp., a wholly owned subsidiary of the Borrower, then PFI Corp. contributes the property to Staffplus, Inc., a wholly owned subsidiary of PFI Corp. and, finally, Staffplus, Inc. contributes the property to Venturi Staffing Partners, LLC, a wholly owned, Subsidiary of Staffplus, Inc. (c) Texas Restructuring. Staffplus, Inc. will transfer the assets and employees of its Houston-area commercial staffing branch to a new Texas limited partnership to be named, Venturi Texas Staffing Partners, LP, effective January 1, 2003. The assets, liabilities and employees (collectively, "the property") as described above will be transferred to the Texas LP as follows: 4 - a 1% interest in the property is transferred directly to the Texas LP from Staffplus in exchange for a 1% general partnership interest in the Texas LP, - a 99% interest in the property will be transferred to Venturi Staffing Partners, LLC from Staffplus Inc., and - the 99% interest in the property will then be transferred, in its entirety, to the Texas LP in exchange for a 99% limited partnership interest in the Texas LP. (d) Illinois. Staffplus, Inc. will transfer the assets and employees of all of its Chicago-area commercial staffing branches (except for its downtown Chicago office) to Venturi Staffing Partners, LLC effective January 1, 2003. 2. Notwithstanding anything in Section 8.4 of the Credit Agreement to the contrary, the Required Lenders hereby consent to the Reorganization and, in furtherance of the foregoing, the Credit Parties hereby agree, contemporaneously herewith, to, in accordance with the terms of the Credit Agreement, cooperate with the Agent to (i) cause InfoTech Services, LLC and Venturi Staffing Partners Texas Limited Partnership to execute a Joinder Agent in the form of Schedule 7.12 to the Credit Agreement, (ii) cause the partnership or membership interests of InfoTech Services, LLC and Venturi Texas Staffing Partners, LP to be pledged to the Agent, for the benefit of the Lenders, and (iii) deliver such documentation as the Agent may reasonably request in connection with the foregoing, including without limitation, certified resolutions and organizational and authorizing documents of each such entity, and appropriate UCC-1 financing statements, all in form, content and scope reasonably satisfactory to the Agent. D. MISCELLANEOUS 1. Representations and Warranties. Each of the Credit Parties represents and warrants to the Lenders and the Agent as follows: (a) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment. (b) This Amendment has been duly executed and delivered by such Credit Party and constitutes such Credit Party's legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be limited (x) by general principles of equity and conflicts of laws or (y) by bankruptcy, reorganization, insolvency, moratorium or other laws of general application relating to or affecting the enforcement, of creditors' rights. (c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Credit Party of this Amendment. (d) The execution and delivery of this Amendment does not diminish or reduce its obligations under the Credit Documents (including, without limitation, in the case of each Guarantor, such Guarantor's guaranty pursuant to Section 4 of the Credit Agreement) in any manner, except as specifically set forth herein. (e) Such Credit Party has no claims, counterclaims, offsets, or defenses to the Credit Documents and the performance of its obligations thereunder, or if such Credit Party has any such 5 claims, counterclaims, offsets, or defenses to the Credit Documents or any transaction related to the Credit Documents, the same are hereby waived, relinquished and released in consideration of the Required Lenders' execution and delivery of this Amendment. (f) The representations and warranties of the Credit Parties set forth in Section 6 of the Credit Agreement are true and correct as of the date hereof (except those that expressly relate to an earlier date) and all of the provisions of the Credit Documents, except as amended hereby, are in full force and effect. (g) Subsequent to the execution and delivery of this Amendment and after giving effect hereto, no unwaived event has occurred and is continuing which constitutes a Default or an Event of Default. 2. Liens. Each Credit Party affirms the liens and security interests created and granted by it in the Credit Documents (including, but not limited to, the Pledge Agreement and the Security Agreement) and agrees that this Amendment shall in no manner adversely affect or impair such liens and security interests. 3. Effect of Amendment. Except as expressly modified and amended in this Amendment, all of the terms, provisions and conditions of the Credit Documents shall remain unchanged and in full force and effect. The Credit Documents and any and all other documents heretofore, now or hereafter executed and delivered pursuant to the terms of the Credit Agreement are hereby amended so that any reference to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. 4. Expenses. The Borrower agrees to pay on demand all reasonable costs and expenses of the Agent incurred in connection with the negotiation, preparation, execution and delivery of this Amendment, including the reasonable fees and expenses of the Agent's legal counsel (including without limitation amounts incurred and invoiced on or prior to the Fifth Amendment Effective Date and referenced in Part C, Section 5(d) below). 5. Conditions Precedent. This Amendment shall become effective as of the date hereof (the "Fifth Amendment Effective Date") once each of the following conditions precedent has been satisfied: (a) the Agent shall have received counterparts of (i) this Amendment, duly executed and delivered by each of the Credit Parties, the Required Lenders and the Agent; (ii) a Joinder Agreement dated as of the date hereof which shall have been executed by InfoTech Services, LLC and Venturi Texas Staffing Partners, LP along with all such organizational and authorizing documents as the Agent may reasonably request; and (iii) such UCC-1 Financing Statements as the Agent shall reasonably require. (b) the Agent shall have received a certified copy of the resolutions of the Board of Directors of the Borrower and each other Credit Party evidencing its approval of this Amendment and the other Credit Documents and matters contemplated hereby, and a certified copy of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Amendment and the other Credit Documents; (c) no Default or Event of Default shall have occurred and be continuing; and (d) the Borrower shall have paid any and all out-of-pocket costs (to the extent invoiced) incurred by the Agent (including the reasonable fees and expenses of the Agent's legal 6 counsel), and fees and other amounts payable to the Agent, in each case in connection with the negotiation, preparation, execution and delivery of this Amendment. 6. Counterparts/Telecopy. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts by telecopy shall be effective as an original and shall constitute a representation that an original will be delivered. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of North Carolina. 8. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THESE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. 9. Severability. If any provision of this Amendment is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions. 10. Release. In consideration of the Required Lenders execution of this Amendment, the Credit Parties hereby release the Agent, the Lenders and each of their respective Affiliates, officers, employees, representatives, agents, trustees, counsel and directors (collectively, the "Released Persons") from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises from any action or failure to act by any of the Released Persons on or prior to the date hereof in connection with the Credit Documents and transactions related thereto. [the remainder of this page intentionally left blank] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment, to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWER: PERSONNEL GROUP OF AMERICA, INC., a Delaware corporation By: /s/ James C. Hunt ------------------------- Name: James C. Hunt Title: President and Chief Financial Officer GUARANTORS: STAFFPLUS, INC., a Delaware corporation INFOTECH SERVICES LLC, a North Carolina limited liability company BAL ASSOCIATES INCORPORATED, a California corporation ADVANCED BUSINESS CONSULTANTS, INC., a Kansas corporation PERSONNEL GROUP HOLDINGS, INC., a Florida corporation VENTURI STAFFING PARTNERS, LLC, a California limited liability company By: /s/ James C. Hunt ------------------------- Name: James C. Hunt Title: Senior Vice President of each of the above-named Guarantors PFI CORP., a Delaware corporation By: /s/ James C. Hunt ------------------------- Name: James C. Hunt Title: President AGENT: BANK OF AMERICA, N.A., formerly known as NATIONSBANK, N.A. and BANK OF AMERICA ILLINOIS, as AGENT By: /s/ H. Leonard Norman ---------------------------- Name: H. Leonard Norman Title: Managing Director LENDERS: BANC OF AMERICA STRATEGIC SOLUTIONS, INC. By: /s/ H. Leonard Norman ---------------------------- Name: H. Leonard Norman Title: Managing Director BNP PARIBAS By: /s/ Stephanie Rogers ---------------------------- Name: Stephanie Rogers Title: Vice President By: /s/ Rick Pace ---------------------------- Name: Rick Pace Title: Director BANK ONE, NA By: /s/ Dianne M. Stark ---------------------------- Name: Dianne M. Stark Title: First Vice President HBV CAPITAL MANAGEMENT LLC By: /s/ George J. Konomos ---------------------------- Name: George J. Konomos Title: Portfolio Manager INLAND PARTNERS L.P. By: /s/ Elias J. Sabo ---------------------------- Name: Elias J. Sabo Title: Attorney-in-fact LINKS PARTNERS L.P. By: /s/ Elias J. Sabo ---------------------------- Name: Elias J. Sabo Title: Attorney-in-fact MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS L.P. By: MatlinPatterson Global Advisors LLC By: /s/ David J. Matlin ---------------------------- Name: David J. Matlin Title: ---------------------------- EX-12.1 4 g81654k1exv12w1.txt STATEMENT REGARDING COMPUTATION RATIO OF EARNINGS . . . EXHIBIT 12.1

1998 1999 2000 2001 2002 --------- --------- --------- --------- --------- FIXED CHARGES: Interest expense including amortization of debt issuance costs $ 12,491 $ 16,447 $ 20,108 $ 18,278 $ 17,301 Interest on rent expense (1) 2,463 3,419 3,453 3,564 2,938 --------- --------- --------- --------- --------- Total fixed charges 14,954 19,866 23,561 21,842 20,239 EARNINGS: Income (loss) before income taxes 53,757 51,830 6,803 (76,364) (107,427) Fixed charges 14,954 19,866 23,561 21,842 20,239 --------- --------- --------- --------- --------- Income (loss) before fixed charges 68,711 71,696 30,364 (54,522) (87,188) RATIO OF EARNINGS TO FIXED CHARGES 4.6 3.6 1.3 -2.5 -4.3

(1) The Company believes one-third of rent expense represents a reasonable approximation of the interest factor. EX-13.1 5 g81654k1exv13w1.txt THOSE PORTIONS OF THE ANNUAL REPORT INCORPORATED EXHIBIT 13.1 PART II EXHIBITS FOR ITEMS 6 THROUGH 8 AND PART IV, ITEM 15 (A)(1) ITEM 6. SELECTED FINANCIAL DATA (in thousands, except earnings per share)

2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- RESULTS OF OPERATIONS Revenues $ 557,748 $ 732,327 $ 881,992 $ 918,437 $ 783,925 Goodwill impairment 89,935 56,779 11,021 -- -- Restructuring and rationalization charges 8,278 16,134 1,960 -- -- Operating income (loss) (90,126) (58,086) 26,911 68,277 66,248 Interest expense 17,301 18,278 20,108 16,447 12,491 Income (loss) before cumulative effect of change in accounting principle (108,030) (66,678) (2,175) 29,753 31,017 Cumulative effect of change in accounting principle, net of taxes (242,497) -- -- -- -- Net income (loss) (350,327) (66,678) (2,175) 29,753 31,017 Earnings per diluted share:(1) Earnings before cumulative effect of change in accounting principle (4.04) (2.52) (0.09) 0.99 0.96 Cumulative effect of change in accounting principle (9.06) -- -- -- -- Net income (loss) $ (13.10) $ (2.52) $ (0.09) $ 0.99 $ 0.96 Average diluted shares outstanding(1) 26,756 26,503 25,090 34,299 36,752 FINANCIAL POSITION Working capital $ 17,494 $ 72,241 $ 82,577 $ 86,787 $ 84,151 Goodwill 103,532 478,162 561,452 557,421 535,981 Total assets 247,406 634,123 743,593 735,350 708,890 Short- and long-term debt 218,648 234,882 265,647 254,351 235,406 Shareholders' equity (deficit) (52,348) 298,093 364,299 369,843 394,630 PRO FORMA FINANCIAL DATA(2) Total assets $ 225,716 Short- and long-term debt 94,192 Shareholders' equity 51,957

(1) The assumed conversion of the Company's 5.75% Notes into Common Stock was excluded from the calculation of earnings per diluted share in 2002, 2001 and 2000 because the effect of conversion was antidilutive. (2) Pro forma financial data as of December 29, 2002 reflects the effects of the financial restructuring completed in April 2003 as if the financial restructuring had been completed on December 29, 2002. For a complete discussion of the financial restructuring, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 1, "Subsequent Event - Comprehensive Financial Restructuring," to the Consolidated Financial Statements included elsewhere in this Annual Report. 1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes appearing elsewhere in this report. The Company's fiscal years end on the Sunday nearest to each December 31 and its fiscal quarters end on the Sunday nearest to the end of each calendar quarter. FORWARD-LOOKING INFORMATION In addition to historical information, this report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain statements that are forward-looking statements regarding events and financial trends that may affect the Company's future operating results or financial position. These statements may be identified by words such as "estimate," "forecast," "plan," "intend," "believe," "should," "expect," "anticipate," or variations or negatives thereof, or by similar or comparable words or phrases. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected in such statements. These risks and uncertainties include, but are not limited to, the following: - changes in levels of unemployment and other economic conditions in the United States, or in particular regions or industries; - continuing weakness or further reductions in corporate information technology spending levels; - the ability of the Company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions; - the impact of competitive pressures, including any change in the demand for the Company's services, or the Company's ability to maintain or improve its operating margins; - an Internal Revenue Service audit of the Company's income tax returns and the risk that assessments for additional taxes, penalties and interest could be levied against the Company; - the entry of new competitors into the marketplace or expansion by existing competitors; - the Company's success in attracting, training and retaining qualified management personnel and other staff employees; - reductions in the supply of qualified candidates for temporary employment or the Company's ability to attract qualified candidates; - the possibility of the Company incurring liability for the activities of its temporary employees or for events impacting its temporary employees on clients' premises; - the risk in an uncertain economic environment of increased incidences of employment disputes, employment litigation and workers' compensation claims; - the risk that further cost cutting or restructuring activities undertaken by the Company could cause an adverse impact on certain of the Company's operations; - economic declines that affect the Company's liquidity or ability to comply with its loan covenants; - the risks of defaults under the Company's credit agreements or the demand by any holder of the Company's remaining outstanding 5.75% Notes for repayment following the occurrence of a repurchase event under the indenture applicable to the 5.75% Notes; - adverse changes in credit and capital markets conditions that may affect the Company's ability to obtain financing or refinancing on favorable terms; - adverse changes to management's periodic estimates of future cash flows that may affect management's assessment of its ability to fully recover its goodwill; - whether governments will impose additional regulations or licensing requirements on staffing services businesses in particular or on employer/employee relationships in general; and - other matters discussed in this Annual Report and the Company's SEC filings. Because long-term contracts are not a significant part of the Company's business, future results cannot be reliably predicted by considering past trends or extrapolating past results. The Company undertakes no obligation to update information contained in this annual report. 2 OVERVIEW The Company is organized into two Divisions: the Information Technology Services Division ("IT Services"), which provides information technology staffing and consulting services in a range of computer-related disciplines and technology tools for human capital management, and the Commercial Staffing Services Division ("Commercial Staffing"), which provides a variety of temporary office, clerical, accounting and finance, light technical and light industrial staffing services. Approximately 53% of the Company's 2002 revenues came from IT Services and 47% came from Commercial Staffing. The following table sets forth the number of the Company's offices by Division at the end of each of the years indicated:

2002 2001 2000 --- --- --- IT Services 28 33 45 Commercial Staffing 90 92 104 --- --- --- Total offices 118 125 149 === === ===

The Company's operating results declined overall in each of 2001 and 2002 due primarily to the weak economic environment, including a continued decline in corporate technology spending, and its impact on revenue. Although the Company continued its aggressive cost cutting programs throughout 2002, these efforts could not offset the overall revenue declines in IT Services and Commercial Staffing and as a result served only to slow the reduction in overall operating profitability. Although the Company remains optimistic that demand for its services will recover long-term, it does not expect any meaningful improvement in the current demand climate or customer spending patterns before the second half of 2003. The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142") as of the beginning of 2002, which resulted in a goodwill impairment charge of $242.5 million, net of an income tax benefit of $42.2 million. This charge was recorded as a cumulative effect of change in accounting principle. SFAS 142 requires goodwill to be tested at least annually for impairment. In the fourth quarter of 2002, the Company performed its annual test for impairment and recorded an impairment charge of $89.9 million for goodwill associated with its IT Services operations. The Company experienced lower than expected operating profits and cash flows in 2002 for the IT Services reporting unit. As a result of this trend and the overall industry expectations, the projected operating profits and cash flows for the IT Services operations were reduced for the next five years resulting in a reduction in the fair value of the Company's goodwill. The decrease in fair value resulted in the recognition of the $89.9 million impairment loss. No additional impairment was identified for the goodwill associated with the Company's Commercial Staffing reporting unit. In response to the decline in demand for the Company's services, the Company has restructured and rationalized certain operations. The goal with the restructuring initiatives was to better align the Company's cost structure with its expected lower revenue levels through elimination of inefficiencies and duplicate functions, while realigning its sales and recruiting teams to achieve greater customer penetration and improve customer service. As a result, the Company recorded charges totaling $8.3 million in 2002 primarily related to employee severance, lease abandonment and termination costs and, in connection with the Company's financial restructuring, $3.6 million of professional services fees and expenses, consisting primarily of legal and accounting services. See " -- Results of Operations." After the end of 2002, the Company completed a comprehensive financial restructuring with its senior lenders and the holders of approximately $109.7 million of its outstanding 5.75% Notes in which it amended and extended its revolving credit facility and exchanged newly issued shares of the Company's common and preferred stock with the participating noteholders representing approximately 82% of the Company's outstanding capital stock immediately after the financial restructuring. As part of the financial restructuring transaction, the Company used substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $38.0 million of its outstanding credit facility and eliminated an additional $120.0 million of its outstanding indebtedness, which will result in substantial reductions in the Company's interest expense in future periods. Equally as important, however, the financial restructuring greatly reduced the debt overhang that has restricted the Company's financial flexibility over the last two years. See " -- Liquidity and Capital Resources, Financial Restructuring." 3 IT Services' business is affected by the timing of holidays and seasonal vacation patterns, generally resulting in lower IT revenues and operating margins in the fourth quarter of each year. Commercial Staffing's business is subject to the seasonal impact of summer and holiday employment trends. Typically, Commercial Staffing's business is stronger in the second half of each calendar year than in the first half. The following table summarizes certain income statement information for the Company for years 2002, 2001 and 2000 both in dollars and as a percentage of total revenues: (dollars in thousands)

2002 2001 2000 ---------------------- ---------------------- ---------------------- Revenues: IT Services $ 295,387 53.0% $ 447,862 61.2% $ 537,535 60.9% Commercial Staffing 262,361 47.0% 284,465 38.8% 344,457 39.1% --------- --------- --------- --------- --------- --------- Total revenues 557,748 100.0% 732,327 100.0% 881,992 100.0% Direct costs of services 427,947 76.7% 540,659 73.8% 631,442 71.6% --------- --------- --------- --------- --------- --------- Gross profit 129,801 23.3% 191,668 26.2% 250,550 28.4% Operating expenses: Selling, general and administrative 114,590 20.5% 152,928 20.9% 185,743 21.1% Depreciation and amortization 7,124 1.3% 23,913 3.3% 24,915 2.8% Goodwill impairment 89,935 16.1% 56,779 7.8% 11,021 1.2% Restructuring and rationalization charges 8,278 3.2% 16,134 2.2% 1,960 0.2% --------- --------- --------- --------- --------- --------- Operating income (loss) (90,126) -16.2% (58,086) -7.9% 26,911 3.1% Interest expense 17,301 3.1% 18,278 2.5% 20,108 2.3% --------- --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (107,427) -19.3% (76,364) -10.4% 6,803 0.8% Provision (benefit) for income taxes 603 0.1% (9,686) -1.3% 8,978 1.0% --------- --------- --------- --------- --------- --------- Net loss before cumulative effect of change in accounting principle (108,030) -19.4% (66,678) -9.1% (2,175) -0.2% Cumulative effect of change in accounting principle, net of taxes (242,497) -43.5% -- -- -- -- --------- --------- --------- --------- --------- --------- Net loss $(350,527) -62.8% $ (66,678) -9.1% $ (2,175) -0.2% ========= ========= ========= ========= ========= =========

4 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 29, 2002 VERSUS YEAR ENDED DECEMBER 30, 2001 REVENUES Total revenues decreased 23.8% to $557.7 million in 2002 from $732.3 million in 2001 due to the weak economic environment, including a continued decline in corporate technology spending. IT Services revenues decreased 34.0% primarily as the result of the continuing industry-wide slowdown in customer demand for IT staffing services. IT Services billable consultants on assignment declined from approximately 2,500 at year-end 2001 to approximately 1,970 at year-end 2002. Commercial Staffing revenues declined 7.8% to $262.4 million in 2002 primarily due to the weak economic climate, which resulted in declines in permanent placement revenues and the retail component of the Company's temporary staffing business. Permanent placement revenues were 3.2% of Commercial Staffing revenues in 2002, down from 6.3% in 2001, while the retail component of temporary staffing also declined to 62.0% of Commercial Staffing revenues in 2002, down from 69.9% in 2001. Offsetting these declines was the increase in the vendor-on-premise ("VOP") business. VOP revenues totaled 34.8% in 2002 and 23.8% in 2001 of Commercial Staffing revenues, respectively. The Company does not expect improvements in demand for its services before the second half of 2003 in light of ongoing economic and geopolitical uncertainties. In addition, there can be no assurance that IT Services revenues will increase as the broader economy strengthens or these other uncertainties subside. DIRECT COSTS OF SERVICES AND GROSS PROFIT Direct costs, consisting of payroll and related expenses of consultants and temporary workers, decreased 20.8% to $427.9 million in 2002 on the lower revenues. Gross profit decreased 32.3% to $129.8 million on the lower revenues. Gross profit as a percentage of revenue also decreased to 23.3% in 2002 from 26.2% in 2001. These decreases primarily were the result of the continued softening in the higher margin sectors of the staffing and consulting businesses, the significant decline in permanent placement services and continuing downward bill rate pressure imposed by many of the Company's larger customers. OPERATING EXPENSES Operating expenses, consisting of selling, general and administrative expenses and depreciation and amortization expense, decreased 31.2% to $121.7 million in 2002 from $176.8 million in 2001. The decrease was primarily due to the Company's aggressive cost reduction program, including its workforce reduction and office consolidation initiatives. Approximately 17.5% (26% in 2001) of the Company's permanent workforce was eliminated during the year. Also, variable or incentive compensation declined due to lower revenues and operating margins. As a percentage of revenues, selling, general and administrative expenses decreased to 20.5% in 2002 from 20.9% in 2001. In addition, depreciation and amortization expense decreased to 1.3% of revenues in 2002 from 3.3% in 2001 primarily due to the change in accounting principle eliminating goodwill amortization in 2002. Goodwill amortization expense was $15.4 million in 2001. GOODWILL IMPAIRMENT Effective at the beginning of 2002, the Company adopted SFAS 142. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that goodwill and indefinite-lived intangibles assets be tested at least annually for impairment. In the second quarter of 2002, the Company completed its initial valuation as of the adoption date, December 31, 2001 and in the fourth quarter of 2002 completed its annual test for impairment. In order to assess the fair value of its goodwill, the Company engaged an independent valuation firm to assist in determining the fair value. The fair value of each of the Company's two reporting units was calculated as of December 31, 2001 and December 29, 2002, on an enterprise value basis using the market multiple approach and discounted cash flow approach. Under the market multiple approach, market ratios and performance fundamentals relating to similar public companies' stock prices or enterprise values were applied to the reporting units to determine their enterprise value. Under the discounted cash flow ("DCF") approach, the indicated enterprise value was determined using the present value of the future cash flows projected to be generated considering appropriate discount rates. The discount rates used in the calculation reflected all associated risks of realizing the projected future cash flows. Certain of the valuation assumptions were based on management's expectations for future performance of the IT Services and Commercial Staffing reporting units. These assumptions included expected time frames for recoveries in technology spending and the broader economy as well as future growth rates in the IT Services and Commercial Staffing businesses. A relatively high discount rate of 17% was utilized in the discounted cash flow valuation approach due principally to the inherent uncertainties associated with these assumptions. 5 Based upon the results of the initial valuation, which was completed in the second quarter of 2002, the Company recorded a goodwill impairment charge of $284.7 million ($242.5 million net of an income tax benefit of $42.2 million) as a cumulative effect of the change in accounting principle. In the fourth quarter of 2002, the Company performed its annual impairment test and recorded an additional impairment charge of $89.9 million for goodwill associated with its IT Services operations. The Company experienced lower than expected operating profits and cash flows in 2002 for the IT Services reporting unit. As a result of this trend and the overall industry expectations, the projected operating profits and cash flows for the IT Services operations were reduced for the next five years resulting in a reduction in the fair value of the Company's goodwill. The decrease in fair value resulted in the recognition of the $89.9 million impairment loss. No additional impairment was identified for the goodwill associated with the Company's Commercial Staffing reporting unit. At December 29, 2002, the Company had goodwill with a carrying value of $103.5 million of which $41.2 million relates to IT Services and $62.3 million relates to Commercial Staffing. Prior to the adoption of SFAS 142, the Company followed SFAS 121 to test for its goodwill and intangible asset impairment. The Company's policy included a projection of undiscounted cash flows for each operating company to determine if the goodwill associated with that business component was recoverable. When the Company performed its analysis in the fourth quarter of fiscal 2001, it identified several operations, principally in the IT Services division, for which negative cash flows were projected in early years and for which projected undiscounted cash flows were not sufficient to recover the carrying amount of related goodwill. As a result, the Company recorded a goodwill impairment charge of $56.8 million in the fourth quarter of 2001. The impairment charges for IT Services and Commercial Staffing were $41.1 million and $15.7 million, respectively. These charges related to operations where future cash flows were projected to be negative and, accordingly, the impairment charge represented the entire carrying amount of the related goodwill. RESTRUCTURING AND RATIONALIZATION CHARGES Beginning in 2001, the Company implemented a plan to restructure and rationalize certain operations. As a result, the Company recorded charges totaling $8.3 million and $16.1 million in 2002 and 2001, respectively. These charges were comprised of the following components (in thousands):

2002 2001 -------- -------- Employee severance $ 1,915 $ 1,678 Lease abandonment and termination costs 2,689 3,869 Professional services charges 3,628 875 Property abandonment charges 46 2,568 Loss on sale of business -- 7,683 Other -- (539) -------- -------- Total restructuring and rationalization charges $ 8,278 $ 16,134 ======== ========

Following is a summary of the accrued liability for cash restructuring and rationalization charges for the years ended December 29, 2002 and December 30, 2001 (in thousands):

EMPLOYEE LEASE PROFESSIONAL SEVERANCE COSTS SERVICES OTHER TOTAL --------- ----- -------- ----- ----- Initial charges $ 1,678 $ 3,869 $ 875 $ 434 $ 6,856 Cash payments (1,636) (760) (675) (113) (3,184) ------- ------- ------- ------- ------- Accrued liability at December 30, 2001 42 3,109 200 321 3,672 2002 charges 1,915 2,689 3,628 -- 8,232 Cash payments (1,398) (1,140) (2,782) (237) (5,557) ------- ------- ------- ------- ------- Accrued liability at December 29, 2002 $ 559 $ 4,658 $ 1,046 $ 84 $ 6,347 ======= ======= ======= ======= =======

Employee severance-related costs included the elimination of both administrative and income-producing employees. Under the workforce reduction plan, approximately 17.5% (26% in 2001) of the Company's permanent workforce, or 194 (395 in 2001) employees, was eliminated during the year. Lease abandonment and termination costs related primarily to office closures, branch consolidations and leased space reductions. Professional services charges consisted primarily of legal and accounting services incurred in connection with the financial restructuring. 6 Property abandonment costs consisted of the write-down of abandoned leasehold improvements and other equipment. These assets were written down to zero as they were abandoned. The loss on the sale of business related to the sale of one of the Company's IT Services offices in Dallas, which was completed on December 31, 2001. Other rationalization expenses of ($0.5) million were recorded in 2001 associated with incremental costs in downsizing the business to current operating levels, the loss on the sale of CareerShop and changes in estimates for previous lease terminations of $0.4 million, net of other income of $1.6 million related to favorably settling certain obligations. Of the remaining accrued liability at December 29, 2002, the Company expects to pay approximately $3.1 million over the next twelve months and the balance, primarily lease payments, over the following seven years. The Company expects to continue consolidating operations in other geographic markets in which it currently operates multiple branches and to downsize in selected other existing locations, which will result in additional restructuring and rationalization charges in 2003; however, the amount of such additional charges is not currently determinable. The Company also incurred substantial professional services charges and lending fees in connection with its financial restructuring in the first and second quarters of 2003. See " - Liquidity and Capital Resources, Financial Restructuring." INTEREST EXPENSE Interest expense decreased 5.3% to $17.3 million in 2002 from $18.3 million in 2001 due to lower borrowing levels under the Company's revolving credit facility. The average interest rate on borrowings was 7.3% in 2002, up 10 basis points from 2001. With the recent completion of its financial restructuring, the Company expects a substantial reduction in its interest expense for future periods. See " -- Liquidity and Capital Resources, Financial Restructuring." PROVISION (BENEFIT) FOR INCOME TAXES In 2002, the Company recorded an income tax provision of $0.6 million, comprised of an income tax benefit of $4.6 million related to its operating losses, offset by a charge of $5.2 million related to the adoption of SFAS 142. This charge provided a valuation allowance against certain deferred tax assets, but had no effect on the Company's cash flows. The effective tax benefit rate of 12.7% in 2001 was lower than the U.S. federal statutory rate of 35% primarily due to the impact of non-deductible amortization expense, valuation allowances established during the year, and certain nondeductible restructuring and rationalization charges, offset in part by the $1.4 million tax benefit related to the diminution in value in the Company's investment in CareerShop, which was sold during the second quarter of 2001. YEAR ENDED DECEMBER 30, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000 REVENUES Total revenues decreased 17.0% to $732.3 million in 2001 from $882.0 million in 2000. IT Services revenues decreased 16.7% primarily as the result of the continuing industry-wide slowdown in customer demand for IT staffing services. IT Services billable consultants on assignment declined from approximately 3,700 at year-end 2000 to approximately 2,500 at year-end 2001. Commercial Staffing revenues declined 17.4% to $284.5 million in 2001 primarily due to the weak economic climate, which resulted in declines in permanent placement revenues and the retail component of the Company's temporary staffing business. Permanent placement revenues were 6.3% of Commercial Staffing revenues in 2001, down from 10.0% in 2000, while the retail component of temporary staffing declined to 69.9% of Commercial Staffing revenues in 2001, down from 73.5% in 2000. DIRECT COSTS OF SERVICES AND GROSS PROFIT Direct costs, consisting of payroll and related expenses of consultants and temporary workers, decreased 14.4% to $540.7 million in 2001 on lower revenues. Gross profit decreased 23.5% to $191.7 million on the lower revenues. Gross profit as a percentage of revenue also decreased 220 basis points to 26.2% in 2001 from 28.4% in 2000. These decreases primarily were the result of the continued softening in the higher margin sectors of the staffing and consulting businesses, the significant decline in permanent placement services and downward bill rate pressure imposed by many of the Company's larger customers. 7 OPERATING EXPENSES Operating expenses, consisting of selling, general and administrative expenses and depreciation and amortization expense, decreased 16.1% to $176.8 million in 2001 from $210.7 million in 2000. The decrease was primarily due to the Company's aggressive cost reduction program, including its workforce reduction and office consolidation initiatives. Approximately 26% of the Company's permanent workforce was eliminated during 2001. Also, variable or incentive compensation declined due to lower revenues and operating margins. As a percentage of revenues, selling, general and administrative expenses decreased to 20.9% in 2001 from 21.1% in 2000. In addition, depreciation and amortization expense increased to 3.3% of revenues in 2001 from 2.8% in 2000 primarily due to the decline in revenues in 2001. GOODWILL IMPAIRMENT Prior to the adoption of SFAS 142, the Company followed SFAS 121 to test for its goodwill and intangible asset impairment. The Company's policy included a projection of undiscounted cash flows for each operating company to determine if the goodwill associated with that business component was recoverable. When the Company performed its analysis in the fourth quarter of fiscal 2001, it identified several operations, principally in the IT Services division, for which negative cash flows were projected in early years and for which projected undiscounted cash flows were not sufficient to recover the carrying amount of related goodwill. As a result, the Company recorded a goodwill impairment charge of $56.8 million in the fourth quarter of 2001. The impairment charges for IT Services and Commercial Staffing were $41.1 million and $15.7 million, respectively. These charges related to operations where future cash flows were projected to be negative and, accordingly, the impairment charge represented the entire carrying amount of the related goodwill. In the fourth quarter of 2000, the Company incurred a goodwill impairment charge of $11.0 million related primarily to CareerShop.com. RESTRUCTURING AND RATIONALIZATION CHARGES Beginning in 2001 the Company implemented a plan to restructure and rationalize certain operations. As a result, the Company recorded charges totaling $16.1 million in 2001. These charges were comprised of the following components: employee severance of $1.7 million, lease abandonment and termination charges of $3.9 million, professional services of $0.9 million, property abandonment charges of $2.6 million, loss on sale of business of $7.7 million and other charges of ($0.5) million. Employee severance-related costs included the elimination of both administrative and income-producing employees. Under the workforce reduction plan, approximately 26% of the Company's permanent workforce, or 395 employees, was eliminated in 2001. Lease abandonment and termination costs related primarily to office closures, branch consolidations and leased space reductions. Property abandonment costs consisted of the write-down of abandoned leasehold improvements and other equipment. These assets were written down to estimated fair value, generally zero, as they were abandoned. The loss on the sale of business related to the sale of one of the Company's IT Services offices in Dallas, which was completed December 31, 2001. On the date of the sale, the net book value of this operation was $11.5 million and consideration of $3.8 million was received, resulting in the write-down of $7.7 million of goodwill in the fourth quarter of 2001. This business was included in the IT Services segment and contributed $11.5 million in revenues and $0.3 million in net income for the year ended December 30, 2001. Professional services charges consisted primarily of legal and accounting services incurred in connection with the Company's financial restructuring. Other rationalization expenses of $(0.5) million were recorded in 2001 associated with incremental costs in downsizing the business to current operating levels, the loss on the sale of CareerShop, changes in estimates for previous lease terminations of $0.4 million, net of other income of $1.6 million related to favorably settling certain obligations. INTEREST EXPENSE Interest expense decreased 9.1% to $18.3 million in 2001 from $20.1 million in 2000 due to lower borrowing levels under the Company's revolving credit facility and decreases in interest rates throughout the year. The average interest rate on borrowings was 7.2% in 2001, down 80 basis points from 2000. See " -- Liquidity and Capital Resources." 8 PROVISION (BENEFIT) FOR INCOME TAXES The effective tax benefit rate of 12.7% in 2001 was lower than the U.S. federal statutory rate of 35% primarily due to the impact of non-deductible amortization expense, valuation allowances established during the year, and certain nondeductible restructuring and rationalization charges, offset in part by the $1.4 million tax benefit related to the diminution in value in the Company's investment in CareerShop which was sold during the second quarter of 2001. The effective tax rate was 132.0% in 2000, higher than the U.S. federal statutory rate of 35%, primarily due to nondeductible amortization expense and state income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company has experienced declines in revenues over the last two years as the result of ongoing weak economic conditions and does not expect any significant improvements in demand for its services before the second half of 2003. In light of these revenue declines, the Company has focused on reducing expenses generally, limiting capital expenditures to only the highest priority projects and managing its accounts receivable very closely. As a result of the reduced need for working capital and these priorities, the Company's cash needs have been reduced substantially from prior years. During 2002, the committed amount of the Company's senior revolving credit facility was reduced in anticipation of the Company's financial restructuring and the Company's primary sources of cash during the year were cash from operations and income tax refunds. As a result of the recent completion of the Company's financial restructuring and the execution of further amendments and maturity date extensions to the revolving credit facility (as amended, the "Credit Facility") in connection therewith, the Company's sources of cash in 2003 will also include available borrowings under the Credit Facility. The Company's principal uses of cash are to repay debt, fund working capital and meet its diminished requirements for capital expenditures. The Company believes, subject to the conditions and contingencies described above in "--Forward-Looking Information," that cash flow from operations and borrowings under the Credit Facility will be adequate to meet its debt repayment objectives and its diminished needs for working capital and capital expenditures. For the year ended December 29, 2002, the Company's $20.9 million of cash provided by operating activities included $19.2 million in federal income tax refunds received in June 2002. Cash provided by operating activities in 2002 was substantially lower than the $55.6 million of cash provided from operations in 2001, which was more favorably impacted by the reduction in accounts receivable. The Company had $22.6 million of cash on hand as of December 29, 2002. In the aggregate, day's sales outstanding decreased to 49 days at December 29, 2002 from 50 days at December 30, 2001. Cash provided by investing activities was $2.0 million during 2002 due primarily to the cash proceeds received from the sale of a business. Cash used for investing activities of $12.7 million in 2001 related primarily to the Company's final contingent earn-out obligations (which expired in October 2001) and capital spending. Capital spending in 2002 was $1.8 million, down from $3.0 million in 2001. Cash used for financing activities was $17.8 million in 2002, down from $31.5 million in 2001, as the Company continued to focus on the repayment of its revolving credit facility. Congress passed new federal tax legislation in 2002 that allowed the Company to carry back federal net operating losses for five years, substantially increasing the Company's ability to recover income taxes previously paid. As of December 29, 2002, the Company had recorded an additional $25.5 million of recoverable income taxes and it received $25.0 million of these recoverable taxes in refunds subsequent to year-end. The Company is subject to periodic review by federal, state and local taxing authorities in the ordinary course of business and as is customary for tax returns claiming significant income tax refunds has been advised by the Internal Revenue Service that the Service is reviewing the Company's 2001 and 2000 federal income tax returns to determine whether to perform an income tax audit for one or both of those tax years. If any of the Company's income tax returns are audited, certain tax positions taken by the Company could be challenged and adjustments proposed that could result in assessments for additional taxes payable, together with penalties and interest. The Company believes that its tax positions comply with applicable tax laws and the Company would vigorously defend these positions if challenged. Although the Company believes that it has adequately accrued for any foreseeable payments resulting from tax examinations, there can be no assurance that any such additional taxes, penalties or interest payable would not have a material effect on the Company's liquidity or financial condition. 9 The Company's revolving credit facility in effect during 2002 provided for a $114.0 million revolving line of credit due June 2003 and was subject to certain maturity date extensions in six-month increments up through January 2004. As a result of the recent completion of the Company's financial restructuring and the execution of further amendments and maturity date extensions to the credit facility, $65.0 million of the $103.0 million outstanding at December 29, 2002, was classified as long-term in the Company's consolidated balance sheet. The facility contained customary covenants that required monthly maintenance of minimum tangible net worth and EBITDA levels, as defined in the agreement. The Company was in compliance with these financial covenants as of December 29, 2002. The facility also contained restrictions on the payment of cash dividends on the Common Stock and placed additional limitations on share repurchases, acquisitions and capital expenditures. Interest rates payable under the revolving credit facility were set at prime plus 300 basis points through June 2003. As of February 28, 2003, the interest rate payable under the facility was 7.25%. After the end of 2002, the Company was able to maintain compliance with its revolving credit facility covenant requiring minimum EBITDA levels as of the three-month period ended February 23, 2003, by obtaining a waiver in March 2003 of an anticipated default of that covenant. FINANCIAL RESTRUCTURING On April 14, 2003, the Company completed a comprehensive financial restructuring with its senior lenders and the holders of approximately $109.7 million of its outstanding 5.75% Convertible Subordinated Notes due 2004 in which it issued shares of the Company's Common Stock and Series B Preferred Stock to the participating noteholders in exchange for their 5.75% Notes (the "Exchange Transaction"). In the Exchange Transaction, which was privately negotiated, the Company exchanged newly issued equity with the participating noteholders and issued the following consideration for each $1,000 in principal amount of notes exchanged: - $28.75 in cash; - 190.9560 shares of newly issued shares of the Company's Common Stock; and - 9.5242 shares of Series B Preferred Stock of the Company, each share of which will be convertible into 100 shares of Common Stock and will automatically convert into shares of Common Stock upon any amendment to the Company's charter increasing the authorized number of shares of Common Stock or effecting a reverse split of outstanding shares of Common Stock that increases the number of authorized but unissued shares. The Series B Preferred Stock will vote on all matters with the Common Stock as if converted, will have a liquidation preference of $.01 per share, and otherwise will have no greater rights or privileges than the Common Stock. In connection with the Exchange Transaction, the Company entered into an agreement with each of the former noteholders participating in the exchange to provide them with registration rights with respect to the shares of Common Stock issued in the exchange or acquired upon conversion of the Series B Preferred Stock. As a result of the Exchange Transaction, the participating noteholders in the aggregate were issued 20,940,425 shares of Common Stock and 1,044,433 shares of Series B Preferred Stock, which together represent approximately 82% of the Company's outstanding Common Stock (assuming for this purpose that all shares of the Series B Preferred Stock issued to the participating noteholders have been converted). The existing shareholders retained ownership of their outstanding 26,881,212 shares of Common Stock, which represent approximately 18% of the outstanding Common Stock (on the same, as-converted, basis). In connection with this ownership change, the Company also reconstituted its Board of Directors to provide for a seven-person Board and the designation of two representatives of the new major shareholders to serve as new Board members, together with the Company's Chief Executive Officer, one incumbent independent Board member who was designated by the Company with the consent of the participating noteholders and three independent Board members, two of whom are incumbents, who were designated by the participating noteholders (although these two incumbents have stated their intention not to stand for reelection at the upcoming 2003 Annual Meeting of Shareholders). 10 In order to permit the closing of the Exchange Transaction contemplated in the financial restructuring and to provide for the terms on which the existing senior lenders would continue to finance the Company's working capital needs, the Company and its existing senior lenders also executed definitive loan agreements for the Credit Facility, which provided for certain further amendments and maturity date extensions to the revolving credit facility and eliminated the Equity Appreciation Right (the "EAR") held by the senior lenders (the "Senior Debt Restructuring"). The Senior Debt Restructuring provided for the forgiveness of indebtedness in the amount of $10.3 million. As a result of the Exchange Transaction and the Senior Debt Restructuring, the Company used substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $38.0 million of its outstanding credit facility and eliminated an additional $120.0 million of its outstanding indebtedness, which will result in substantial reductions in the Company's interest expense in future periods. The Company does not anticipate that any material income tax liability will arise as a result of the forgiveness of debt in these financial restructuring transactions due to sufficient current period tax losses and net operating loss carryforwards available to offset any taxable income on the debt forgiveness. The Credit Facility provides for a $70.7 million revolving line of credit due May 1, 2004 and is subject to certain maturity date extensions in six-month increments up through May 1, 2005. Availability of borrowings under the Credit Facility is subject to a borrowing base calculated as specified percentages of the Company's eligible accounts receivable (as defined) in the aggregate, and the Company had approximately $8.0 million of availability thereunder as of the closing date. The Credit Facility contains customary covenants, including financial covenants that require monthly maintenance of cumulative monthly EBITDA levels (as defined in the amended agreement) commencing with April 2003 and an interest and funded indebtedness coverage ratio. The Credit Facility also contains restrictions on the payment of cash dividends on the Company's capital stock and places additional limitations on share repurchases, acquisitions and capital expenditures. Finally, in lieu of the EAR included as part of the revolving credit facility that was in effect in 2002 the Company has issued common stock purchase warrants to the lenders under the Credit Facility entitling them to purchase a total of 19,224,916 shares of Common Stock, or 10% of the outstanding Common Stock on a fully diluted basis. These warrants are exercisable in whole or part over a 10-year period and the exercise price thereunder is $0.3121 per share (which was based on a stated equity valuation for the Company of $60.0 million). The exercise price for these warrants is not necessarily indicative of fair value. Interest rates payable under the Credit Facility are set at prime plus 325 basis points through June 2003 with increases during each six-month period through May 1, 2005. In connection with the financial restructuring the Company agreed to seek shareholder approval at the 2003 Annual Meeting of Shareholders to amend and restate its certificate of incorporation. The proposed amendments to the certificate of incorporation include the following: - a reverse stock split of the Company's Common Stock at a one-for-twenty-five ratio; - elimination of provisions that separate the Board of Directors into three classes and that prohibit action by consent of shareholders without a meeting; - an election by the Company not to be governed by Section 203 of the Delaware General Corporation Law, which restricts the ability of the Company to engage, directly or indirectly, in a business combination transaction with a holder of 15% or more of its voting stock; - addition of provisions requiring a supermajority vote of the Board of Directors or shareholders to adopt changes to the certificate of incorporation or bylaws; and - addition of a provision to protect minority shareholders in connection with certain transactions with a shareholder that beneficially owns 20% or more of the shares of the Company's capital stock that are entitled to vote on matters submitted to a vote of the shareholders. Each of the noteholders that participated in the exchange have agreed to vote their shares of Common Stock and Series B Preferred Stock in favor of these proposals. The Company has agreed that pending shareholder approval of the amended and restated certificate of incorporation, it will comply with the proposed provision to protect minority shareholders described above. 11 In addition, in connection with the financial restructuring, the Board of Directors amended and restated the Company's bylaws. The amended and restated bylaws provide, among other things, that, as long as there are "Significant Holders" (defined as the beneficial owners of shares of capital stock of the Company representing 20% or more of the votes entitled to be cast by holders of outstanding shares of voting capital stock), the Significant Holders shall be entitled to designate, in the aggregate, two members (such designees, being "Significant Holder Designees") of the Board of Directors, the size of which is initially set at seven members, and to designate two observers entitled to attend all meetings of the Board of Directors and its committees. Furthermore, the amended and restated bylaws provide that, subject to applicable law, for so long as there are any Significant Holders, a committee comprised of the two Significant Holder Designees and one independent director who is not also a Significant Holder Designee shall be responsible for designating between one (1) and four (4) independent nominees for election to the Board of Directors, with the number within such range depending on the amount of voting stock beneficially owned by the Significant Holders. As a result of the financial restructuring, three former noteholders, two of which are affiliates of one another, are Significant Holders within the meaning of the amended and restated bylaws. These three former noteholders are also senior lenders under the Credit Facility. Also as a result of the financial restructuring, these three former noteholders collectively beneficially own common and Series B preferred stock of the Company having approximately 45% of the voting power of the Company's capital stock in the aggregate, excluding any shares of Common Stock under warrants issued to them as senior lenders in connection with the amendment and restatement of the Credit Facility. Accordingly, these three former noteholders have the power to designate either directly, or through a committee including Significant Holder Designees, an aggregate of six nominees for election to the board of directors (at least four of whom must qualify as independent directors under applicable exchange rules and listing standards) and two board observers. In connection with the financial restructuring, the Company amended and restated the shareholder rights agreement that governs the terms of preferred share purchase rights that currently accompany the Common Stock. The amendments include, among other things, exemptions preventing the following from triggering separation of the rights from the Common Stock: (i) beneficial ownership of capital stock by the participating noteholders acquired in the financial restructuring; (ii) beneficial ownership by any Significant Holder of capital stock of the Issuer acquired in accordance with the amended and restated certificate of incorporation; and (iii) beneficial ownership by any third party of capital stock of the Issuer acquired in a transfer from a Significant Holder pursuant to a transaction that complies with the amended and restated certificates of incorporation. In addition, the shareholder rights plan was amended to include a tag-along right for the benefit of any holder (including certain holders of more than 2% acting together as a group) of 5% or more of the voting stock of the Company pursuant to which such holder (or group) will be entitled to participate pro rata, for the same amount and form of consideration and otherwise on substantially the same terms and conditions, in any transfer by any Significant Holders of capital stock of the Company of 20% or more of the voting stock of the Company. In connection with the Company's financial restructuring, the Company has terminated its 1995 Stock Option Plan. See Note 12, "Capital Stock and Stock Options" to the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report. Additionally, a number of the Company's employees, including each of the Company's executive officers at the end of 2002 and all but one of the Company's Board of Directors have irrevocably canceled any and all rights that they had to exercise any and all stock options that were previously granted to such persons and agreed that all such options would be forfeited to the Company. These directors and employees held in the aggregate 2,190,030 of the stock options that were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a result of these voluntary forfeitures, only 545,445 stock options remain outstanding under the 1995 Stock Option Plan and these options have a weighted average exercise price of $9.23 per share. Although the 1995 Stock Option Plan has been terminated and no future issuances thereunder will be made, these remaining outstanding stock options will continue to be exercisable in accordance with their terms. The Company's Board of Directors adopted the 2003 Equity Incentive Plan (the "2003 Equity Plan") simultaneously with the completion of the Company's financial restructuring. The 2003 Equity Plan authorizes grants of stock options, stock appreciation rights (or "SARs"), restricted stock, deferred stock awards and performance awards (and dividend equivalent rights relating to options, SARs, deferred stock and performance awards), in the case of stock or option awards, for up to 19,870,873 shares, or 10.3%, of the Company's fully diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key employees, directors and consultants as selected by the Board of Directors or the Compensation Committee. The duration of any option or SAR granted under the 2003 Equity Plan will not exceed ten years. Awards will generally vest 20% on each 12 anniversary of the date of grant unless either the Board of Directors or Compensation Committee approves or a participant's employment agreement provides otherwise. Following a termination of employment, vested options and/or SARs must be exercised within 3 months (12 months in the case of death or disability), except that options and SARs terminate immediately upon a termination for cause as defined in the relevant participant's employment agreement, or as determined in the discretion of the Board of Directors or the Compensation Committee if no employment agreement exists. Any non-vested option, SARs or other awards issued under the 2003 Equity Plan will be forfeited upon any termination. The Board of Directors and Compensation Committee retain the discretion to extend the post-employment exercise period of an option or SAR and to accelerate vesting of awards under the 2003 Equity Plan. In connection with the financial restructuring, four executive officers, including the Company's chief executive officer and chief financial officer, entered into employment agreements with the Company. These employment agreements replaced the existing employment agreements with these executive officers. Each of these new employment agreements provides for an annual base salary approximately equal to the current base salary (subject to annual adjustment as determined by the Company's Compensation Committee), the right to earn annual bonuses ranging from a maximum of 60% of annual salary to 100% of annual salary (for the chief executive officer) and, subject to shareholder approval of the 2003 Equity Plan, options under that plan as described below. Each of these executive officers had previously surrendered all options awarded to them under existing option plans. Each employment agreement is for an initial term of two years, with automatic one-year extensions thereafter unless either party provides written notice of termination at least three months prior to any scheduled expiration date. Each employment agreement provides severance payment equal to one year's salary (two years' salary for the chief financial officer) and a pro-rated portion of any earned bonus following termination of employment by the Company without cause. In addition, certain of these executive officers, other than the chief financial officer, would be entitled to additional severance of up to one year's salary if in the first year following the financial restructuring the Company is acquired at a price per share below a specified threshold. Subject to shareholder approval of the 2003 Equity Plan at the Company's 2003 Annual Meeting, the Board of Directors has approved the granting of stock options for 12,585,000 shares, representing 6.5% of the Company's fully diluted Common Stock, to these executive officers. Of these initial grants, 8,700,000 options have an exercise price of $0.3121 per share, and the other 3,885,000 options in these initial grants have an exercise price of $0.4681 per share. The initial stock option grants to these officers vest monthly at an annual rate of 25% and each will have 12 months following the termination of his employment (other than for cause) to exercise vested stock options held as of the termination date. The exercise price of a portion of these options is based on an aggregate stated equity value of the Company of $60.0 million and for the remaining options the exercise price is based on an aggregate stated equity value of $90.0 million. The exercise price for these stock options is not necessarily indicative of fair value. Following these initial grants, options for 7,285,873 shares, or 3.8%, of the Company's fully diluted Common Stock will remain authorized for issuance under the 2003 Equity Plan and will be reserved for future grants. For any grants within six months after the date any existing options are cancelled, the Company will be required to apply variable accounting to such new options which may result in non-cash compensation expense in future periods. PRO FORMA FINANCIAL INFORMATION Because of the significance of the financial restructuring transactions discussed above on the Company's financial position, the Company has included certain pro forma financial information to highlight the impact of such transactions. The following pro forma consolidated financial data as of December 29, 2002 has been derived from the application of pro forma adjustments to the Company's historical consolidated financial statements. The pro forma data is presented for illustrative purposes only and is not necessarily indicative of the financial position that would have actually been reported had the financial restructuring transactions occurred as of December 29, 2002, nor is it indicative of the Company's future financial position. The pro forma condensed consolidated balance sheet as of December 29, 2002 gives effect to the Exchange Transaction and the Senior Debt Restructuring as if each had occurred on the date of the consolidated balance sheet. 13 PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 29, 2002 (IN THOUSANDS)

PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- ASSETS Cash and cash equivalents $ 22,623 $ (14,795)(1) $ 1,575 (3,153)(2) (3,100)(4) Other current assets 80,118 80,118 Recoverable income taxes 25,476 25,476 --------- --------- --------- Total current assets 128,217 (21,048) 107,169 Noncurrent assets 119,189 (642)(3) 118,547 --------- --------- --------- Total assets $ 247,406 $ (21,690) $ 225,716 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current portion of long-term debt $ 38,633 $ (13,685)(1) $ 24,948 Other current liabilities 72,090 (1,100)(4) 70,990 --------- --------- --------- Total current liabilities 110,723 (14,785) 95,938 Long-term debt - Convertible, subordinated notes 115,000 (109,661)(2) 5,339 Revolving credit facility 65,015 (1,110)(1) 63,905 Other long-term liabilities 9,016 (439)(1) 8,577 --------- --------- --------- Total liabilities 299,754 (125,995) 173,759 Total shareholders' equity (deficit) (52,348) 104,305(1,2,3,4) 51,957 --------- --------- --------- Total liabilities and shareholders' equity (deficit) $ 247,406 $ (21,690) $ 225,716 ========= ========= =========

(1) Adjustments to reflect cash paid to existing senior lenders which includes $13,685 of principal debt repayments and $1,110 of fees paid in connection with the completion of the Credit Facility, as amended, and cancellation of equity appreciation rights resulting in a reduction in accrued liabilities of $439. (2) Adjustments to reflect payments to participating holders of the 5.75% Notes and exchange of $109,661 of such notes for newly issued shares of the Company's Common and Series B Preferred Stock. The equity issued in exchange for the 5.75% Notes is recorded at estimated fair value. (3) Adjustments to reflect the write-off of deferred debt issuance costs of $642 associated with the 5.75% Notes exchanged for equity. (4) Adjustment to record estimated professional fees incurred and paid in connection with the comprehensive financial restructuring including $1,100 which had been accrued in the Company's historical balance sheet at December 29, 2002. ACCOUNTING FOR FINANCIAL RESTRUCTURING TRANSACTIONS Upon consummation of the Exchange Transaction, the Company will record the issuance of its equity securities in exchange for outstanding 5.75% Notes at the fair value of the newly issued equity securities, with the excess of the debt carrying value over the fair value of equity securities recorded as a gain. The forgiveness of $10.3 million in Senior Debt will reduce future interest expense over the term of the amended Credit Facility and the $1.1 million of fees paid to the senior lenders will be reflected as a reduction in the principal balances outstanding as required under accounting for troubled debt restructuring. The Company will determine and record the fair value, if any, of the warrants issued in connection with the Senior Debt Restructuring as additional shareholders' equity with a corresponding reduction in the outstanding Senior Debt, with 14 such amount recognized as a component of interest expense over the term of the Senior Debt. The Company will complete the determination of fair value and the accounting adjustments required as a result of the Exchange Transaction and the Senior Debt Restructuring in the second quarter of fiscal 2003. The net gain from debt restructuring will be classified as a component of income from operations in accordance with the recently issued SFAS No. 145. MANAGEMENT'S PLANS FOR LIQUIDITY AND DEBT COMPLIANCE The Company experienced declining revenue and significant operating losses in 2001 and 2002. In response to the declining operating performance, the Company undertook several initiatives beginning in 2001 including the following: - Execution of the Exchange Transaction and the Senior Debt Restructuring discussed above, which has resulted in the Company using substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $38.0 million of its outstanding credit facility and elimination of an additional $120.0 million of its outstanding indebtedness, which will result in a substantial reduction in prospective annual interest expense; - Filing for and receiving substantial income tax refunds by carrying back current period tax losses to recover income taxes previously paid, with a substantial portion of such refunds used to reduce outstanding indebtedness; - Restructuring actions including the reduction of approximately 17.5% (26% in 2001) of the permanent workforce during 2002 and rationalization of office space; - Reduction in accounts receivable with resulting cash flow used to reduce outstanding indebtedness; and - Plans for further office space rationalization to reduce operating costs and improve efficiency in 2003. The Company's ability to continue operating is largely dependent upon its ability to maintain compliance with the financial covenants of the Credit Facility. The financial covenants include a cumulative monthly EBITDA requirement (as defined) commencing with April 2003 and an interest and funded indebtedness coverage ratio. These covenants require the Company to generate EBITDA, as defined, in the aggregate amount of $5.9 million from April through December 2003; this compares to $12.2 million of EBITDA, as defined, actually reported for April through December 2002. Based on the Company's fiscal 2003 and 2004 projections, which reflect declining demand for the Company's services, offset by reductions in costs associated with the reduced revenues and resulting from personnel and office space rationalization, management believes the Company will be able to maintain compliance with the financial covenants for the remaining term of the Credit Facility. The Company also believes that the operating trends in the first quarter of 2003 support the key assumptions in its 2003 and 2004 operating plans. However, there can be no assurance that the economy or the Company will perform as expected or that further economic declines will not adversely impact the Company's ability to comply with the financial covenants. If the Company does violate future covenants, it would seek waivers and amendments from its lenders, but can give no assurance that any such waivers and amendments would be available at all or on acceptable terms. If the Company were unable to obtain a waiver of future covenant violations, the lenders would be entitled to require immediate repayment of all amounts outstanding under the Credit Facility. An acceleration of outstanding amounts under the Credit Facility would also cause a default under, and permit acceleration of, the Company's remaining 5.75% Convertible Subordinated Notes. In the event of one or more such defaults, the Company's ongoing viability would be seriously threatened, and it would be forced to evaluate a number of strategic alternatives, including a further debt restructuring or other reorganization, the closure of certain operating locations or the sale of certain or all of its assets in order to continue to fund its operations. In the current economic environment, management believes that any such sale of assets would be at depressed prices that could be significantly lower than the net book value of assets sold and may not be sufficient to satisfy the Company's liabilities. The Company's Common Stock has traded since November 2002 on the Over the Counter Bulletin Board (the "OTC Bulletin Board") following notification by the New York Stock Exchange (the "NYSE") of its intent to seek the removal of the Common Stock from the NYSE list. Following an unsuccessful appeal of the NYSE's decision pursuant to NYSE rules, the Common Stock was delisted by the NYSE in February 2003. The restructuring agreement for the Company's recently completed financial restructuring contemplates that the Company will use its best efforts to procure a new stock exchange listing for the shares of Common Stock issued in the restructuring (or to be issued upon the conversion of the Series B Preferred Stock), but in the meantime the Company expects that the Common Stock will continue to trade on the OTC Bulletin Board. 15 As a result of the financial restructuring recently completed by the Company, the aggregate outstanding principal amount of the 5.75% Notes was reduced to approximately $5.3 million. As of April 14, 2003, the Company believes it is in compliance with the indenture related to the 5.75% Notes. Failure to maintain or effect the listing of the Common Stock on a national securities exchange or an established automated over-the-counter trading market in the United States would constitute a repurchase event under the 5.75% Notes and entitle each remaining noteholder to demand repayment of its Notes in full. In the event that the Company is unable to repay any noteholder who makes such a demand following a repurchase event and also unable to obtain waivers of such repurchase event from each affected noteholder, events of default could occur under the 5.75% Notes and the Credit Facility and the noteholders could demand repayment of their respective debt obligations in full. Additionally, in the event that the noteholders accelerated the payment of the debt obligations evidenced by the remaining outstanding Notes, the Credit Facility lenders could demand repayment of the Credit Facility in full. CONTRACTUAL AND COMMERCIAL COMMITMENTS The following table summarizes contractual obligations and commercial commitments at December 29, 2002 after reflecting the effects of the financial restructuring completed in April 2003 as if the restructuring had been completed on December 29, 2002:

PAYMENTS DUE BY PERIOD -------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-9 YEARS - ----------------------- ----- ---------------- --------- --------- Short- and long-term debt $ 94,192 $ 24,948 $ 69,244 $ -- Operating leases 25,939 8,667 14,621 2,651 -------- -------- -------- -------- Total contractual cash obligations $120,131 $ 33,615 $ 83,865 $ 2,651 ======== ======== ======== ========

COMMITMENT EXPIRATION PER PERIOD TOTAL AMOUNT ----------------------------------------------------- OTHER COMMERCIAL COMMITMENTS COMMITTED LESS THAN 1 YEAR 1-3 YEARS 4-9 YEARS - ---------------------------- --------- ---------------- --------- --------- Letters of credit $9,002 $ -- $9,002 $ --

MARKET RISK DISCLOSURES The Company's outstanding debt under its revolving credit facility at February 28, 2003 was $103.0 million. Interest on borrowings under that facility was based on the prime rate plus a variable margin. Based on the outstanding balance at February 28, 2003, a change of 1% in the interest rate would cause a change in interest expense of approximately $1.0 million on an annual basis. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions. These estimates include the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to the recoverability of goodwill, collectibility of accounts receivable, useful lives of property and equipment, reserves against permanent placement revenues, workers' compensation costs, restructuring and rationalization reserves and realization of deferred tax assets. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from these estimates. The Company believes the following accounting policies are critical to its business operations and the understanding of its results of operations and include the more significant judgments and estimates used in the preparation of its consolidated financial statements. 16 RECOVERABILITY OF GOODWILL Effective at the beginning of 2002, the Company adopted SFAS 142, which provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested at least annually for impairment. Assumptions and estimates used in the determination of the recoverability of goodwill, such as future cash flows, operating margins, growth rates and discount rates may affect the carrying value of goodwill, and possible impairment expense in the Company's consolidated financial statements. COLLECTIBILITY OF ACCOUNTS RECEIVABLE The Company maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. Additional allowances may be required if the financial condition of the economy or the Company's customers deteriorates. USEFUL LIVES OF PROPERTY AND EQUIPMENT The Company records depreciation based on estimated useful lives of the property and equipment. If the Company determines that an asset has a shorter useful life than originally estimated, additional expense may be required. RESERVES AGAINST PERMANENT PLACEMENT REVENUES In the Company's permanent placement businesses, the Company recognizes revenue when employment candidates accept offers of permanent employment. Allowances are established, based on historical data, to estimate losses due to placed candidates not remaining employed through the Company's guarantee period, typically 90 days or less. Additional allowances may be required if a greater percentage of candidates do not fulfill the guarantee period than historical rates reflect. WORKERS' COMPENSATION COSTS The Company maintains a self-insurance program for workers' compensation and accrues liabilities under that program based on the loss and loss adjustment expenses as estimated by an outside administrator. If actual claims experience deteriorates from historical experience, additional expense may be required. RESTRUCTURING AND RATIONALIZATION RESERVES The Company records restructuring and rationalization reserves as a result of its workforce reduction program and cost reduction initiatives which resulted in closing and consolidating certain offices. The reserve primarily relates to lease abandonment and termination costs that have been reduced by the amount of subleases expected to be collected. The Company uses current market information to estimate sublease income. If the sublease income is less than estimated, additional reserves may be required. INCOME TAX ASSETS AND LIABILITIES The Company records an income tax valuation allowance when it is no longer more likely than not that its certain deferred tax assets, net of operating losses and capital loss carryforwards, will be realized. These deferred tax items represent expenses recognized for financial reporting purposes, which will result in tax deductions over varying future periods. Certain judgments, assumptions and estimates may affect the carrying value of the deferred tax assets such as estimates of future taxable income, availability of capital gains in future periods, timing or amount of future reversals of existing deferred tax liabilities, and other tax planning strategies that may be available to the Company. The Company records an estimated tax liability or tax benefit for income and other taxes based on what it determines will likely be paid in the various tax jurisdictions in which it operates. Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent upon various matters, including resolution of tax audits, and may differ from amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. 17 RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies Emerging Issues Task Force Issue No. 94-3 ("Issue 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that adoption of this statement will have a material impact on the Company's results of operations, financial position or cash flows. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Personnel Group of America, Inc.: In our opinion, the accompanying consolidated balance sheets, together with the pro forma consolidated balance sheet data as of December 29, 2002, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of Personnel Group of America, Inc. and subsidiaries (collectively, the "Company") at December 29, 2002 and December 30, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, on April 14, 2003 the Company completed a comprehensive financial restructuring. The pro forma consolidated balance sheet data reflects the impact of the financial restructuring on the Company's financial condition at December 29, 2002 had the financial restructuring been completed on that date. As disclosed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for goodwill and indefinite-lived intangible assets as of December 31, 2001. /s/ PricewaterhouseCoopers LLP Charlotte, North Carolina April 14, 2003 19 PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- DECEMBER 29, 2002 AND DECEMBER 30, 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 29, 2002 DECEMBER 30, --------------------------- --------- PRO FORMA HISTORICAL 2001 --------- --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,575 $ 22,623 $ 17,557 Accounts receivable, net of allowance for doubtful accounts of $2,956 and $2,451 in 2002 and 2001, respectively 76,178 76,178 87,088 Prepaid expenses and other current assets 3,940 3,940 7,975 Recoverable income taxes 25,476 25,476 10,005 Deferred income taxes -- -- 11,896 --------- --------- --------- Total current assets 107,169 128,217 134,521 Property and equipment, net 13,240 13,240 18,061 Goodwill 103,532 103,532 478,162 Other assets 1,775 2,417 3,379 --------- --------- --------- Total assets $ 225,716 $ 247,406 $ 634,123 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 24,948 $ 38,633 $ 882 Accounts payable 9,887 9,887 9,598 Accrued wages, benefits and other 61,103 62,203 51,800 --------- --------- --------- Total current liabilities 95,938 110,723 62,280 Long-term debt - Convertible, subordinated notes 5,339 115,000 115,000 Revolving credit facility 63,905 65,015 119,000 Other long-term liabilities 8,577 9,016 39,750 --------- --------- --------- Total liabilities 173,759 299,754 336,030 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value; shares authorized 5,000; no shares issued and outstanding 10 -- -- Common stock, $.01 par value; shares authorized 95,000; 33,065 shares issued and outstanding 540 331 331 Additional paid-in capital 337,227 315,404 316,694 Retained earnings (accumulated deficit) (242,281) (324,544) 25,983 Less common stock held in treasury at cost - 6,184 shares at December 29, 2002 and 6,371 shares at December 30, 2001 (43,539) (43,539) (44,915) --------- --------- --------- Total shareholders' equity (deficit) 51,957 (52,348) 298,093 --------- --------- --------- Total liabilities and shareholders' equity (deficit) $ 225,716 $ 247,406 $ 634,123 ========= ========= =========

The accompanying notes are an integral part of these balance sheets. 20 PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)

2002 2001 2000 --------- --------- --------- REVENUES $ 557,748 $ 732,327 $ 881,992 DIRECT COSTS OF SERVICES 427,947 540,659 631,442 --------- --------- --------- GROSS PROFIT 129,801 191,668 250,550 OPERATING EXPENSES: Selling, general and administrative 114,590 152,928 185,743 Depreciation and amortization 7,124 23,913 24,915 Goodwill impairment 89,935 56,779 11,021 Restructuring and rationalization charges 8,278 16,134 1,960 --------- --------- --------- OPERATING INCOME (LOSS) (90,126) (58,086) 26,911 INTEREST EXPENSE 17,301 18,278 20,108 --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (107,427) (76,364) 6,803 PROVISION (BENEFIT) FOR INCOME TAXES 603 (9,686) 8,978 --------- --------- --------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (108,030) (66,678) (2,175) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES (242,497) -- -- --------- --------- --------- NET LOSS $(350,527) $ (66,678) $ (2,175) ========= ========= ========= BASIC AND DILUTED EARNINGS PER COMMON SHARE: Loss before cumulative effect of change in accounting principle $ (4.04) $ (2.52) $ (0.09) Cumulative effect of change in accounting principle (9.06) -- -- --------- --------- --------- Net loss $ (13.10) $ (2.52) $ (0.09) ========= ========= ========= WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING 26,756 26,503 25,090

The accompanying notes are an integral part of these statements. 21 PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS)

RETAINED COMMON ADDITIONAL EARNINGS STOCK COMMON STOCK PAID-IN (ACCUMULATED DEFERRED HELD IN SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION TREASURY TOTAL ------ ------ --------- --------- --------- --------- --------- BALANCE, JANUARY 2, 2000 33,065 $ 331 $ 330,237 $ 94,836 $ (61) $(55,500) $ 369,843 Stock issued for acquisitions -- -- (6,520) -- -- 11,588 5,068 Repurchases of common stock -- -- -- -- -- (10,584) (10,584) Stock issued for employee stock purchase plan and exercises of stock options -- -- (3,807) -- -- 5,893 2,086 Amortization of deferred compensation -- -- -- -- 61 -- 61 Net loss -- -- -- (2,175) -- -- (2,175) ------ ------ --------- --------- --------- -------- --------- BALANCE, DECEMBER 31, 2000 33,065 331 319,910 92,661 -- (48,603) 364,299 ------ ------ --------- --------- --------- -------- --------- Stock issued for employee stock purchase plan -- -- (3,216) -- -- 3,688 472 Net loss -- -- -- (66,678) -- -- (66,678) ------ ------ --------- --------- --------- -------- --------- BALANCE, DECEMBER 30, 2001 33,065 331 316,694 25,983 -- (44,915) 298,093 ------ ------ --------- --------- --------- -------- --------- Stock issued for employee stock purchase plan -- -- (1,290) -- -- 1,376 86 Net loss -- -- -- (350,527) -- -- (350,527) ------ ------ --------- --------- --------- -------- --------- BALANCE, DECEMBER 29, 2002 33,065 $ 331 $ 315,404 $(324,544) $ -- $(43,539) $ (52,348) ====== ====== ========= ========= ========= ======== =========

The accompanying notes are an integral part of these statements. PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS)

2002 2001 2000 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(350,527) $ (66,678) $ (2,175) Adjustments to reconcile loss to net cash provided by operating activities: Depreciation and amortization 7,124 23,913 24,915 Cumulative effect of change in accounting principle, net of deferred tax benefit of $42,198 242,497 -- -- Loss on abandonment and disposals -- 10,743 -- Goodwill impairment charge 89,935 56,779 11,515 Deferred income taxes on loss before cumulative effect of change in accounting principle, net (including $19,217 of income tax refunds received in 2002) 20,117 (2,479) 6,050 Changes in assets and liabilities: Accounts receivable 10,910 39,124 (1,324) Accounts payable and accrued liabilities (1,260) (8,690) 10,451 Other, net 2,081 2,878 (493) --------- --------- --------- Net cash provided by operating activities 20,877 55,590 48,939 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of business 3,825 372 -- Acquisition-related payments -- (10,120) (43,127) Purchase of property and equipment, net (1,831) (2,999) (7,924) --------- --------- --------- Net cash provided by (used in) investing activities 1,994 (12,747) (51,051) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under credit facility (44,000) (53,000) (51,500) Borrowings under credit facility 28,000 22,000 63,500 Credit facility amendment fees (1,657) (1,227) -- Repurchases of common stock -- -- (10,638) Repayments of other debt, net (234) 236 (855) Proceeds from employee stock purchase plan 86 472 2,086 --------- --------- --------- Net cash provided by (used in) financing activities (17,805) (31,519) 2,593 --------- --------- --------- Net increase in cash and cash equivalents 5,066 11,324 481 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,557 6,233 5,752 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,623 $ 17,557 $ 6,233 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during the year for -- Income taxes $ 24 $ 518 $ 5,497 Interest $ 15,194 $ 15,942 $ 18,588 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Accrued acquisition related earnout payments $ -- $ -- $ 11,458

The accompanying notes are an integral part of these statements. PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUBSEQUENT EVENT - COMPREHENSIVE FINANCIAL RESTRUCTURING On April 14, 2003, Personnel Group of America, Inc. and its subsidiaries (collectively, the "Company") completed a comprehensive financial restructuring with its senior lenders and the holders of approximately $109,661 of its outstanding 5.75% Convertible Subordinated Notes due 2004 (the "5.75% Notes") in which it issued shares of the Company's Common Stock and Series B Preferred Stock to the participating noteholders in exchange for their 5.75% Notes (the "Exchange Transaction"). In the Exchange Transaction, which was privately negotiated, the Company exchanged newly issued equity with the participating noteholders and issued the following consideration for each $1 in principal amount of notes exchanged: - $28.75 in cash (not in thousands); - 190.9560 shares of newly issued shares of the Company's Common Stock; and - 9.5242 shares of Series B Preferred Stock of the Company, each share of which will be convertible into 100 shares of Common Stock and will automatically convert into shares of Common Stock upon any amendment to the Company's charter increasing the authorized number of shares of Common Stock or effecting a reverse split of outstanding shares of Common Stock that increases the number of authorized but unissued shares. The Series B Preferred Stock will vote on all matters with the Common Stock as if converted, will have a liquidation preference of $.01 per share, and otherwise will have no greater rights or privileges than the Common Stock. In connection with the Exchange Transaction, the Company entered into an agreement with each of the former noteholders participating in the exchange to provide them with registration rights with respect to the shares of Common Stock issued in the exchange or acquired upon conversion of the Series B Preferred Stock. As a result of the Exchange Transaction, the participating noteholders in the aggregate were issued 20,940,425 shares of Common Stock and 1,044,433 shares of Series B Preferred Stock, which together represent approximately 82% of the Company's outstanding Common Stock (assuming for this purpose that all shares of the Series B Preferred Stock issued to the participating noteholders have been converted). The existing shareholders retained ownership of their outstanding 26,881,212 shares of Common Stock, which represent approximately 18% of the outstanding Common Stock (on the same, as-converted, basis). In connection with this ownership change, the Company also reconstituted its Board of Directors to provide for a seven-person Board and the designation of two representatives of the new major shareholders to serve as new Board members, together with the Company's Chief Executive Officer, one incumbent independent Board member who was designated by the Company with the consent of the participating noteholders and three independent Board members, two of whom are incumbents, who were designated by the participating noteholders (although these two incumbents have stated their intention not to stand for reelection at the upcoming 2003 Annual Meeting of Shareholders). In order to permit the closing of the Exchange Transaction contemplated in the financial restructuring and to provide for the terms on which the existing senior lenders would continue to finance the Company's working capital needs, the Company and its existing senior lenders also executed definitive loan agreements for the Credit Facility, which provided for certain further amendments and maturity date extensions to the revolving credit facility and eliminated the Equity Appreciation Right (the "EAR") held by the senior lenders (the "Senior Debt Restructuring"). The Senior Debt Restructuring provided for the forgiveness of indebtedness in the amount of $10,300. As a result of the Exchange Transaction and the Senior Debt Restructuring, the Company used substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $37,985 of its outstanding credit facility and eliminated an additional $119,961 of its outstanding indebtedness, 24 which will result in substantial reductions in the Company's interest expense in future periods. The Company does not anticipate that any material income tax liability will arise as a result of the forgiveness of debt in these financial restructuring transactions due to sufficient current period tax losses and net operating loss carryforwards available to offset any taxable income on the debt forgiveness. The Credit Facility provides for a $70,700 revolving line of credit due May 1, 2004 and is subject to certain maturity date extensions in six-month increments up through May 1, 2005. Availability of borrowings under the Credit Facility is subject to a borrowing base calculated as specified percentages of the Company's eligible accounts receivable (as defined) in the aggregate, and the Company had approximately $8,000 of availability thereunder as of the closing date. The Credit Facility contains customary covenants, including financial covenants that require monthly maintenance of cumulative monthly EBITDA levels (as defined in the amended agreement) commencing with April 2003 and an interest and funded indebtedness coverage ratio. The Credit Facility also contains restrictions on the payment of cash dividends on the Company's capital stock and places additional limitations on share repurchases, acquisitions and capital expenditures. Finally, in lieu of the EAR included as part of the revolving credit facility that was in effect in 2002 the Company has issued common stock purchase warrants to the lenders under the Credit Facility entitling them to purchase a total of 19,224,916 shares of Common Stock, or 10% of the outstanding Common Stock on a fully diluted basis. These warrants are exercisable in whole or part over a 10-year period and the exercise price thereunder is $0.3121 per share (which was based on a stated equity valuation for the Company of $60,000). The exercise price for these warrants is not necessarily indicative of fair value. Interest rates payable under the Credit Facility are set at prime plus 325 basis points through June 2003 with increases during each six-month period through May 1, 2005. In connection with the financial restructuring the Company agreed to seek shareholder approval at the 2003 Annual Meeting of Shareholders to amend and restate its certificate of incorporation. The proposed amendments to the certificate of incorporation include the following: - a reverse stock split of the Company's Common Stock at a one-for-twenty-five ratio; - elimination of provisions that separate the Board of Directors into three classes and that prohibit action by consent of shareholders without a meeting; - an election by the Company not to be governed by Section 203 of the Delaware General Corporation Law, which restricts the ability of the Company to engage, directly or indirectly, in a business combination transaction with a holder of 15% or more of its voting stock; - addition of provisions requiring a supermajority vote of the Board of Directors or shareholders to adopt changes to the certificate of incorporation or bylaws; and - addition of a provision to protect minority shareholders in connection with certain transactions with a shareholder that beneficially owns 20% or more of the shares of the Company's capital stock that are entitled to vote on matters submitted to a vote of the shareholders. Each of the noteholders that participated in the exchange have agreed to vote their shares of Common Stock and Series B Preferred Stock in favor of these proposals. The Company has agreed that pending shareholder approval of the amended and restated certificate of incorporation, it will comply with the proposed provision to protect minority shareholders described above. In connection with the financial restructuring, the Company amended and restated the shareholder rights agreement that governs the terms of preferred share purchase rights that currently accompany the Common Stock. The amendments include, among other things, exemptions preventing the following from triggering separation of the rights from the Common Stock: (i) beneficial ownership of capital stock by the participating noteholders acquired in the financial restructuring; (ii) beneficial ownership by any Significant Holder of capital stock of the Issuer acquired in 25 accordance with the amended and restated certificate of incorporation; and (iii) beneficial ownership by any third party of capital stock of the Issuer acquired in a transfer from a Significant Holder pursuant to a transaction that complies with the amended and restated certificates of incorporation. In addition, the shareholder rights plan was amended to include a tag-along right for the benefit of any holder (including certain holders of more than 2% acting together as a group) of 5% or more of the voting stock of the Company pursuant to which such holder (or group) will be entitled to participate pro rata, for the same amount and form of consideration and otherwise on substantially the same terms and conditions, in any transfer by any Significant Holders of capital stock of the Company of 20% or more of the voting stock of the Company. In connection with the Company's financial restructuring, the Company has terminated its 1995 Stock Option Plan. See Note 12, "Capital Stock and Stock Options" to the Audited Consolidated Financial Statements appearing elsewhere in this Annual Report. Additionally, a number of the Company's employees, including each of the Company's executive officers at the end of 2002 and all but one of the Company's Board of Directors have irrevocably cancelled any and all rights that they had to exercise any and all stock options that were previously granted to such employees and agreed that all such options would be forfeited to the Company. These directors and employees held in the aggregate 2,190,030 of the stock options that were outstanding under the 1995 Stock Option Plan as of December 29, 2002. As a result of these voluntary forfeitures, only 545,445 stock options remain outstanding under the 1995 Stock Option Plan and these options have a weighted average exercise price of $9.23 per share. Although the 1995 Stock Option Plan has been terminated and no future issuances there under will be made, these remaining outstanding stock options will continue to be exercisable in accordance with their terms. The Company's Board of Directors adopted the 2003 Equity Incentive Plan (the "2003 Equity Plan") simultaneously with the completion of the Company's financial restructuring. The 2003 Equity Plan authorizes grants of stock options, stock appreciation rights (or "SARs"), restricted stock, deferred stock awards and performance awards (and dividend equivalent rights relating to options, SARs, deferred stock and performance awards), in the case of stock or option awards, for up to 19,870,873 shares, or 10.3%, of the Company's fully diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key employees, directors and consultants as selected by the Board of Directors or the Compensation Committee. The duration of any option or SAR granted under the 2003 Equity Plan will not exceed ten years. Awards will generally vest 20% on each anniversary of the date of grant unless either the Board of Directors or Compensation Committee approves or a participant's employment agreement provides otherwise. Following a termination of employment, vested options and/or SARs must be exercised within 3 months (12 months in the case of death or disability), except that options and SARs terminate immediately upon a termination for cause as defined in the relevant participant's employment agreement, or as determined in the discretion of the Board of Directors or the Compensation Committee if no employment agreement exists. Any non-vested option, SARs or other awards issued under the 2003 Equity Plan will be forfeited upon any termination. The Board of Directors and Compensation Committee retain the discretion to extend the post-employment exercise period of an option or SAR and to accelerate vesting of awards under the 2003 Equity Plan. Subject to stockholder approval of the 2003 Equity Plan at the Company's 2003 Annual Meeting, the Board of Directors has approved the granting of stock options for 12,585,000 shares, representing 6.5% of the Company's fully diluted Common Stock, to these executive officers. Of these initial grants, 8,700,000 options have an exercise price of $0.3121 per share, and the other 3,885,000 options in these initial grants have an exercise price of $0.4681 per share. The initial stock option grants to these officers vest monthly at an annual rate of 25% and each will have 12 months following the termination of his employment (other than for cause) to exercise vested stock options held as of the termination date. The exercise price of a portion of these options is based on an aggregate stated equity value of the Company of $60,000 and for the remaining options the exercise price is based on an aggregate stated equity value of $90,000. The exercise price for these stock options is not necessarily indicative of fair value. Following these initial grants, options for 7,285,873 shares, or 3.8%, of the Company's fully diluted Common Stock will remain authorized for issuance under the 2003 Equity Plan and will be reserved for future grants. For any grants within six months after the date any existing options are cancelled, the Company will be required to apply variable accounting to such new options which may result in non-cash compensation expense in future periods. 26 PRO FORMA FINANCIAL INFORMATION Because of the significance of the financial restructuring transactions discussed above on the Company's financial position, the Company has included certain pro forma financial information to highlight the impact of such transactions. The following pro forma consolidated financial data as of December 29, 2002 has been derived from the application of pro forma adjustments to the Company's historical consolidated financial statements. The pro forma data is presented for illustrative purposes only and is not necessarily indicative of the financial position that would have actually been reported had the financial restructuring transactions occurred as of December 29, 2002, nor is it indicative of the Company's future financial position. The pro forma condensed consolidated balance sheet as of December 29, 2002 gives effect to the Exchange Transaction and the Senior Debt Restructuring as if each had occurred on the date of the consolidated balance sheet. PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 29, 2002 (IN THOUSANDS)

PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- ASSETS Cash and cash equivalents $ 22,623 $ (14,795)(1) $ 1,575 (3,153)(2) (3,100)(4) Other current assets 80,118 80,118 Recoverable income taxes 25,476 25,476 --------- --------- --------- Total current assets 128,217 (21,048) 107,169 Noncurrent assets 119,189 (642)(3) 118,547 --------- --------- --------- Total assets $ 247,406 $ (21,690) $ 225,716 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current portion of long-term debt $ 38,633 $ (13,685)(1) $ 24,948 Other current liabilities 72,090 (1,100)(4) 70,990 --------- --------- --------- Total current liabilities 110,723 (14,785) 95,938 Long-term debt - Convertible, subordinated notes 115,000 (109,661)(2) 5,339 Revolving credit facility 65,015 (1,110)(1) 63,905 Other long-term liabilities 9,016 (439)(1) 8,577 --------- --------- --------- Total liabilities 299,754 (125,995) 173,759 Total shareholders' equity (deficit) (52,348) 104,305(1,2,3,4) 51,957 --------- --------- --------- Total liabilities and shareholders' equity (deficit) $ 247,406 $ (21,690) $ 225,716 ========= ========= =========

(1) Adjustments to reflect cash paid to existing senior lenders which includes $13,685 of principal debt repayments and $1,110 of fees paid in connection with the completion of the Credit Facility, as amended, and cancellation of equity appreciation rights resulting in a reduction in accrued liabilities of $439. (2) Adjustments to reflect payments to participating holders of the 5.75% Notes and exchange of $109,661 of such notes for newly issued shares of the Company's Common and Series B Preferred Stock. The equity issued in exchange for the 5.75% Notes is recorded at estimated fair value. (3) Adjustments to reflect the write-off of deferred debt issuance costs of $642 associated with the 5.75% Notes exchanged for equity. (4) Adjustment to record estimated professional fees incurred and paid in connection with the comprehensive financial restructuring including $1,100 which had been accrued in the Company's historical balance sheet at December 29, 2002. 27 ACCOUNTING FOR FINANCIAL RESTRUCTURING TRANSACTIONS Upon consummation of the Exchange Transaction, the Company will record the issuance of its equity securities in exchange for outstanding 5.75% Notes at the fair value of the newly issued equity securities, with the excess of the debt carrying value over the fair value of equity securities recorded as a gain. The forgiveness of $10,300 in Senior Debt will reduce future interest expense over the term of the amended Credit Facility and the $1,110 of fees paid to the senior lenders will be reflected as a reduction in the principal balances outstanding as required under accounting for troubled debt restructuring. The Company will determine and record the fair value, if any, of the warrants issued in connection with the Senior Debt Restructuring as additional shareholders' equity with a corresponding reduction in the outstanding Senior Debt, with such amount recognized as a component of interest expense over the term of the Senior Debt. The Company will complete the determination of fair value and the accounting adjustments required as a result of the Exchange Transaction and the Senior Debt Restructuring in the second quarter of fiscal 2003. The net gain from debt restructuring will be classified as a component of income from operations in accordance with the recently issued SFAS No. 145. MANAGEMENT'S PLANS FOR LIQUIDITY AND DEBT COMPLIANCE The Company experienced declining revenue and significant operating losses in 2001 and 2002. In response to the declining operating performance, the Company undertook several initiatives beginning in 2001 including the following: - Execution of the Exchange Transaction and the Senior Debt Restructuring discussed above, which has resulted in the Company using substantially all of its cash on hand (after payment of transaction expenses) to repay approximately $37,985 of its outstanding credit facility and elimination of an additional $119,961 of its outstanding indebtedness, which will result in a substantial reduction in prospective annual interest expense; - Filing for and receiving substantial income tax refunds by carrying back current period tax losses to recover income taxes previously paid, with a substantial portion of such refunds used to reduce outstanding indebtedness; - Restructuring actions including the reduction of approximately 17.5% (26% in 2001) of the permanent workforce during 2002 and rationalization of office space; - Reduction in accounts receivable with resulting cash flow used to reduce outstanding indebtedness; and - Plans for further office space rationalization to reduce operating costs and improve efficiency in 2003. The Company's ability to continue operating is largely dependent upon its ability to maintain compliance with the financial covenants of the Credit Facility. The financial covenants include a cumulative monthly EBITDA requirement (as defined) commencing with April 2003 and an interest and funded indebtedness coverage ratio. These covenants require the Company to generate EBITDA, as defined, in the aggregate amount of $5,946 from April through December 2003; this compares to $12,157 of EBITDA, as defined, actually reported for April through December 2002. Based on the Company's fiscal 2003 and 2004 projections, which reflect declining demand for the Company's services, offset by reductions in costs associated with the reduced revenues and resulting from personnel and office space rationalization, management believes the Company will be able to maintain compliance with the financial covenants for the remaining term of the Credit Facility. The Company also believes that the operating trends in the first quarter of 2003 support the key assumptions in its 2003 and 2004 operating plans. However, there can be no assurance that the economy or the Company will perform as expected or that further economic declines will not adversely impact the Company's ability to comply with the financial covenants. If the Company does violate future covenants, it would seek waivers and amendments from its lenders, but can give no assurance that any such waivers and amendments would 28 be available at all or on acceptable terms. If the Company were unable to obtain a waiver of future covenant violations, the lenders would be entitled to require immediate repayment of all amounts outstanding under the Credit Facility. An acceleration of outstanding amounts under the Credit Facility would also cause a default under, and permit acceleration of, the Company's remaining 5.75% Convertible Subordinated Notes. In the event of one or more such defaults, the Company's ongoing viability would be seriously threatened, and it would be forced to evaluate a number of strategic alternatives, including a further debt restructuring or other reorganization, the closure of certain operating locations or the sale of certain or all of its assets in order to continue to fund its operations. In the current economic environment, management believes that any such sale of assets would be at depressed prices that could be significantly lower than the net book value of assets sold and may not be sufficient to satisfy the Company's liabilities. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The consolidated financial statements include the accounts of Personnel Group of America, Inc. and its subsidiaries. All significant intercompany transactions have been eliminated. Certain amounts in prior years have been reclassified to conform to the 2002 presentation. The Company's fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 are referred to in these financial statements as years 2002, 2001 and 2000, respectively. The Company is organized into two Divisions: the Information Technology Services Division ("IT Services"), which provides information technology staffing and consulting services in a range of computer-related disciplines and technology tools for human capital management, and the Commercial Staffing Services Division ("Commercial Staffing"), which provides a variety of temporary office, clerical, accounting and finance, light technical and light industrial staffing services. All of the IT Services and Commercial Staffing branch offices are located in the United States, and none are franchised or licensed. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company recognizes revenue at the time its services are performed. Substantially all revenues of the Company are derived from or generated in connection with the sale of staffing and consulting services. Permanent placement revenues are recognized when employment candidates accept offers of permanent employment. Allowances are established, based upon historical data, to estimate losses due to placed candidates not remaining employed through the Company's guarantee period, typically 90 days or less. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. PROPERTY AND EQUIPMENT Property and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives, generally three to seven years. Computer software costs consist of costs to purchase and develop software. The Company capitalizes internally developed software costs in accordance with SOP 98-1, whereby the costs are capitalized only after it is probable that the project will be completed and the software will be used for the function intended. The majority of capitalized software costs are depreciated on a straight-line basis over a period of six years. Leasehold improvements are stated at cost and amortized over the shorter of the lease term or the useful life of the improvements. GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), at the beginning of 2002. Goodwill, which was previously amortized on a straight-line basis 29 over the periods benefited, is no longer being amortized to earnings, but instead is subject to testing for impairment at least annually based on the fair value of these assets compared to their carrying value. Intangible assets determined to have definite lives are amortized over their remaining useful lives. The Company's businesses have been acquired from unrelated third parties for cash and other consideration and have been accounted for using the purchase method of accounting. The assets and liabilities of the entities acquired were recorded at their estimated fair values at the dates of the acquisitions. Goodwill has been recorded at historical cost. Other intangible assets consist mainly of covenants not to compete. Certain of the Company's acquisitions provided for additional purchase price consideration upon attainment of certain specified targets for various periods after closing of the acquisition. The Company paid $10,120 and $36,555 (of which $2,483 was paid by the issuance of 784,437 shares of Common Stock in 2000) in contingent consideration in 2001 and 2000, respectively. The Company completed, in 2001, its obligation to make additional earn-out payments on the acquired businesses. All consideration was recorded as additional purchase price when earned and increased the amount of goodwill. INCOME TAXES Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year 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 the Consolidated Statement of Operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized. STOCK OPTIONS The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not currently recognize compensation expense for its stock-based awards to employees in the Consolidated Statements of Operations. Pursuant to the requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the following disclosures are presented to reflect the Company's pro forma net income for 2002, 2001 and 2000 as if the fair value method of accounting prescribed by SFAS 123 had been used. In preparing these disclosures, the Company has determined the value of all stock options granted under the 1995 Stock Option Plan using the Black-Scholes model, as discussed in SFAS 123, and based on the following weighted average assumptions used for grants:

2002 2001 2000 --------- --------- --------- Risk-free interest rate 4.2% 5.7% 6.2% Expected dividend yield 0.0% 0.0% 0.0% Expected life 4.7 years 5.6 years 6.5 years Expected volatility 80.3% 68.1% 60.0%

The fair value of the stock options granted under the 1995 Stock Option Plan and the Stock Purchase Plan issuances in 2002, 2001 and 2000 were approximately $35, $459 and $2,560, respectively. Had compensation expense been determined consistent with SFAS 123, utilizing the assumptions set forth above and the straight-line amortization method over the vesting period, the Company's net loss would have been increased to the following pro forma amounts: 30

2002 2001 2000 ----------- ----------- ----------- Net loss, as reported $ (350,527) $ (66,678) $ (2,175) Earnings per diluted share, as reported (13.10) (2.52) (0.09) Pro forma net loss $ (352,086) $ (69,041) $ (5,400) Pro forma earnings per diluted share (13.16) (2.61) (0.21)

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates include the reported amounts of assets and liabilities, the 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 amounts could differ from management's estimates. Estimates are used for, but not limited to, recoverability of goodwill, collectibility of accounts receivable, useful lives of property and equipment, reserves against permanent placement revenues, workers' compensation costs, restructuring and rationalization reserves, taxes and contingencies. 3. RECENT ACCOUNTING PRONOUNCEMENTS: In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities" which nullifies Emerging Issues Task Force Issue No. 94-3 ("Issue 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that adoption of this statement will have a material impact on the Company's results of operations, financial position or cash flows. The Company will apply SFAS 146 to restructuring activities initiated after December 29, 2002. 4. ACCOUNTS RECEIVABLE: Accounts receivable consisted of the following at December 29, 2002 and December 30, 2001:

2002 2001 --------- --------- Trade accounts receivable $ 79,134 $ 89,539 Less - Allowance for doubtful accounts (2,956) (2,451) --------- --------- $ 76,178 $ 87,088 ========= =========

The following table sets forth further information on the Company's allowance for doubtful accounts:

BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END YEAR ENDED OF YEAR EXPENSES DEDUCTIONS OF YEAR - ----------------- ---------- ---------- ---------- ------- December 29, 2002 $ 2,451 $ 3,084 $ (2,579) $ 2,956 December 30, 2001 3,799 7,077 (8,425) 2,451 December 31, 2000 2,690 9,159 (8,050) 3,799

31 5. PROPERTY AND EQUIPMENT, NET: Property and equipment, net, consisted of the following at December 29, 2002 and December 30, 2001:

2002 2001 -------- -------- Software and computer equipment $ 30,892 $ 35,027 Furniture and other equipment 5,553 6,822 Leasehold improvements 2,017 2,567 -------- -------- 38,462 44,416 Less - Accumulated depreciation (25,222) (26,355) -------- -------- $ 13,240 $ 18,061 ======== ========

Depreciation expense was $6,652, $7,635 and $8,089 for 2002, 2001 and 2000, respectively. 6. LONG-TERM DEBT: Long-term debt at December 29, 2002 and December 30, 2001 was as follows:

2002 2001 -------- -------- 5.75% Convertible Subordinated Notes due July 2004 $115,000 $115,000 Revolving credit facility 103,000 119,000 Other 648 882 -------- -------- 218,648 234,882 Less current portion 38,633 882 -------- -------- $180,015 $234,000 ======== ========

The Company's 5.75% Convertible Subordinated Notes are due July 2004. Interest on the 5.75% Notes is payable semi-annually. The 5.75% Notes are convertible into Common Stock of the Company at any time before maturity at an initial conversion price of $17.81 per share. Beginning in July 2000, the Company was permitted to redeem the 5.75% Notes initially at 103.29% and at decreasing prices thereafter to 100% at maturity, in each case together with accrued interest. The 5.75% Notes are subordinated to all present and future senior indebtedness of the Company (as defined), including indebtedness under the Company's Credit Facility. The Company's revolving credit facility was amended in 2002 to provide for a $114,000 revolving line of credit due January 2003. The Company was permitted to extend the maturity of the facility in six-month increments up through January 2004 subject to specified conditions and did elect to extend the maturity date to June 2003. As a result of the recent completion of the Company's financial restructuring and the execution of further amendments and maturity date extensions to the Credit Facility, $65,015 of the $103,000 outstanding at December 29, 2002 was classified as long-term in the consolidated balance sheet. The revolving credit facility in effect in 2002 contained customary covenants that required monthly maintenance of minimum tangible net worth and EBITDA levels (as defined). It also contained restrictions on the payment of cash dividends on the Common Stock and placed additional limitations on share repurchases, acquisitions and capital expenditures. Interest rates payable under revolving credit facility were set at prime plus 300 basis points through June 2003 and but for the closing of the Credit Facility in connection with the financial restructuring would have increased to prime plus 400 basis points for the period from July 2003 through January 2004. 32 During 2002, the maximum aggregate outstanding borrowing under the revolving credit facility was $125,000 and the average outstanding balance during the year was $108,100. In addition, approximately $9,002 of the revolving credit facility was used at December 29, 2002 for the issuance of undrawn letters of credit primarily to secure the Company's workers' compensation program. The daily weighted average interest rate under the revolving credit facility was 7.3% during 2002. The weighted average interest rate for the Company's borrowings under the facility was 7.3% at December 29, 2002. As of February 28, 2003, the interest rate under the facility was 7.25%. Scheduled maturities of long-term debt at December 29, 2002 were as follows: 2003 $ 38,633 2004 180,015 -------- $218,648 ======== Subsequent to year end, the Company completed a comprehensive financial restructuring. See Note 1, "Subsequent Event - Comprehensive Financial Restructuring." 7. GOODWILL IMPAIRMENT: Effective at the beginning of 2002, the Company adopted SFAS 142. The provisions of SFAS 142 prohibit the amortization of goodwill and indefinite-lived intangible assets and require that goodwill and indefinite-lived intangibles assets be tested at least annually for impairment. In the second quarter of 2002, the Company completed its initial valuation as of the adoption date, December 31, 2001, and in the fourth quarter of 2002 completed its annual test for impairment. In order to assess the fair value of its goodwill, the Company engaged an independent valuation firm to assist in determining the fair value. The fair value of each of the Company's two reporting units was calculated as of December 31, 2001 and December 29, 2002, on an enterprise value basis using the market multiple approach and discounted cash flow approach. Under the market multiple approach, market ratios and performance fundamentals relating to similar public companies' stock prices or enterprise values were applied to the reporting units to determine their enterprise value. Under the discounted cash flow ("DCF") approach, the indicated enterprise value was determined using the present value of the projected future cash flows to be generated considering appropriate discount rates. The discount rates used in the calculation reflected all associated risks of realizing the projected future cash flows. Certain of the valuation assumptions were based on management's expectations for future performance of the IT Services and Commercial Staffing reporting units. These assumptions include expected time frame of technology spending and broader economic recoveries as well as future growth rates in the IT Services and Commercial Staffing businesses. A relatively high discount rate of 17% was utilized in the discounted cash flow valuation approach due principally to the inherent uncertainties associated with these assumptions. Based upon the results of the initial valuation, which was completed in the second quarter, the Company recorded a goodwill impairment charge of $284,695 ($242,497 net of an income tax benefit of $42,198) as a cumulative effect of the change in accounting principle. In the fourth quarter of 2002, the Company performed its annual impairment test and recorded an impairment charge of $89,935 million for goodwill associated with its IT Services operations. The Company experienced lower than expected operating profits and cash flows in 2002 for the IT Services reporting unit. As a result of this trend and the overall industry expectations, the projected operating profits and cash flows for IT Services operations were reduced for the next five years resulting in a reduction in the fair value of the Company's goodwill. The decrease in fair value resulted in the recognition of the $89,935 million impairment loss. No additional impairment was identified for the goodwill associated with the Company's Commercial Staffing reporting unit. 33 A reconciliation of goodwill for the years ended December 29, 2002 and December 30, 2001 is as follows:

COMMERCIAL IT SERVICES STAFFING TOTAL ----------- ---------- --------- Balance, December 31, 2000 $ 440,679 $ 120,773 $ 561,452 Impairment loss under SFAS 121 (41,027) (15,752) (56,779) Sale of a business and other (11,146) 7 (11,139) Amortization expense (11,968) (3,404) (15,372) ----------- ---------- --------- Balance, December 30, 2001 376,538 101,624 478,162 Impairment loss resulting from SFAS 142 adoption (245,373) (39,322) (284,695) Impairment loss resulting from SFAS 142 annual test (89,935) -- (89,935) ----------- ---------- --------- Balance, December 29, 2002 $ 41,230 $ 62,302 $ 103,532 =========== ========== =========

The following table sets forth a reconciliation of net loss and earnings per share information for 2002, 2001 and 2000 as adjusted for the non-amortization provisions of SFAS 142:

2002 2001 2000 ------------ ------------ ------------ Net loss before cumulative effect of accounting change, as reported $ (108,030) $ (66,678) $ (2,175) Add: Goodwill amortization, net of tax -- 11,297 11,627 ------------ ------------ ------------ Adjusted net income (loss) before cumulative effect of accounting change (108,030) (55,381) 9,452 Cumulative effect of accounting change, net of tax (242,497) -- -- ------------ ------------ ------------ Adjusted net income (loss) $ (350,527) $ (55,381) $ 9,452 ============ ============ ============ BASIC AND DILUTED EARNINGS PER SHARE: Net loss before cumulative effect of accounting change, as reported $ (4.04) $ (2.52) $ (0.09) Add: Goodwill amortization, net of tax -- 0.43 0.47 ------------ ------------ ------------ Adjusted net income (loss) before cumulative effect of accounting change (4.04) (2.09) 0.38 Cumulative effect of accounting change, net of tax (9.06) -- -- ------------ ------------ ------------ Adjusted net income (loss) $ (13.10) $ (2.09) $ 0.38 ============ ============ ============

The following table sets forth a reconciliation of intangible assets subject to amortization, which are included in other assets on the Consolidated Balance Sheets, by intangible asset class as of December 29, 2002 and December 30, 2001:

2002 2001 ----------------------------------- ---------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET -------- ------------ ------ -------- ------------ ------ Non-Compete agreements $ 2,413 $ (2,223) $ 190 $ 5,997 $ (5,338) $ 659 Trade names 29 (17) 12 29 (14) 15 -------- ------------ ------ -------- ------------ ------ Total intangible assets subject to amortization $ 2,442 $ (2,240) $ 202 $ 6,026 $ (5,352) $ 674 ======== ============ ====== ======== ============ ======

Non-compete agreements are amortized over a period of five years and trade names are amortized over a period of 10 years. Amortization expense for 2002, 2001 and 2000 was $472, $16,278 and $16,826, respectively. Estimated amortization expense remaining for the succeeding fiscal years is $190 in 2003, $6 in 2004, $3 in each of 2005 and 2006 and $1 in 2007. 34 In the fourth quarter of 2001, the Company conducted a strategic review of its operations within each business segment. The strategic review triggered an impairment review of the goodwill related to certain of these operations. The Company evaluated the recoverability of the goodwill by estimating future undiscounted cash flows that were deemed inadequate to support the carrying value of the goodwill associated with certain operations. As a result, the Company recorded a goodwill impairment charge of $56,779 in the fourth quarter of 2001 based on fair value determined by discounted cash flows. The impairment charge related to operations located principally within certain geographic markets for which the operating performance through the fourth quarter of 2001 had substantially under-performed the broader operating segment and where management did not anticipate recovery to profitable levels. The impairment charges for IT Services and Commercial Staffing were $41,059 and $15,720, respectively. In the fourth quarter of 2000, the Company incurred a goodwill impairment charge of $11,021 related primarily to CareerShop.com. At the time of the CareerShop.com acquisition, the Company expected CareerShop.com's job board and related businesses to become cash positive by the end of 2000 and break even from a profit standpoint during 2001. Acquired assets, consisting primarily of $11,232 of intangibles, were recorded as a result of the acquisition (total consideration paid, including assumption of debt, was $11,949, of which $9,365 was cash and the remainder was stock). However, CareerShop.com's separate businesses failed to produce expected results. Due to the significance of the change in conditions, management performed an evaluation of the recoverability of the goodwill related to these operations and recorded the impairment charge. CareerShop.com was sold in June 2001, resulting in a loss of $660. 8. RESTRUCTURING AND RATIONALIZATION CHARGES: Beginning in 2001, the Company implemented a plan to restructure and rationalize certain operations. As a result, the Company recorded charges totaling $8,278 and $16,134 in 2002 and 2001, respectively comprised of the following components:

2002 2001 -------- -------- Employee severance $ 1,915 $ 1,678 Lease abandonment and termination costs 2,689 3,869 Professional services charges 3,628 875 Property abandonment charges 46 2,568 Loss on sale of business -- 7,683 Other -- (539) -------- -------- Total restructuring and rationalization charges $ 8,278 $ 16,134 ======== ========

Following is a summary of the accrued liability for cash restructuring and rationalization charges for 2002 and 2001:

EMPLOYEE LEASE PROFESSIONAL SEVERANCE COSTS SERVICES OTHER TOTAL --------- ------- ------------ --------- ------- Initial charges $ 1,678 $ 3,869 $ 875 $ 434 $ 6,856 Cash payments (1,636) (760) (675) (113) (3,184) --------- ------- ------------ --------- ------- Accrued liability at December 30, 2001 42 3,109 200 321 3,672 2002 charges 1,915 2,689 3,628 -- 8,232 Cash payments (1,398) (1,140) (2,782) (237) (5,557) --------- ------- ------------ --------- ------- Accrued liability at December 29, 2002 $ 559 $ 4,658 $ 1,046 $ 84 $ 6,347 ========= ======= ============ ========= =======

Employee severance-related costs included the elimination of both administrative and income-producing employees. Under the workforce reduction plan, approximately 17.5% (26% in 2001) of the Company's permanent workforce, or 194 (395 in 2001) employees, was eliminated during the year. Lease abandonment and termination costs related primarily to office closures, branch consolidations and leased space reductions. Professional services charges consisted primarily of legal and accounting services incurred in connection with the financial restructuring. Property abandonment costs consisted of the write-down of abandoned leasehold improvements and other equipment. These assets 35 were written down to zero as they have been abandoned. The loss on the sale of business relates to the sale of one of the Company's IT Services offices in Dallas, which was completed on December 31, 2001. On the date of the sale, the net book value of this operation was $11,508 and consideration of $3,825 was received, resulting in the write-down of $7,683 of goodwill for the year ended December 30, 2001. This business was included in the IT Services segment and contributed $11,499 in revenues and $310 in net income for the year ended December 30, 2001. Other rationalization expenses of ($539) were recorded in 2001 associated with incremental costs in downsizing the business to current operating levels, the loss on the sale of CareerShop and changes in estimates for previous lease terminations of $433, net of other income of $1,633 related to favorably settling certain obligations. Of the remaining accrued liability at December 29, 2002, the Company expects to pay approximately $3,115 over the next twelve months and the balance, primarily lease payments, over the following seven years. Restructuring and rationalization charges of $1,960 were recorded in 2000, related primarily to severance and other benefits related to the early retirement of the former Chief Executive Officer. 9. ACCRUED LIABILITIES: Accrued liabilities consisted of the following at December 29, 2002 and December 30, 2001:

2002 2001 -------- -------- Accrued wages, benefits and other personnel costs $25,364 $32,644 Accrued interest 4,251 5,009 Accrued workers' compensation benefits 3,856 2,652 Accrued restructuring and rationalization charges 3,115 1,478 Income tax reserves 17,755 3,535 Other 7,862 6,482 -------- -------- $62,203 $51,800 ======== ========

See Note 13, "Income Taxes," for further discussion of the Company's income tax reserves. 10. OTHER LONG-TERM LIABILITIES: Other long-term liabilities consisted of the following at December 29, 2002 and December 30, 2001:

2002 2001 -------- -------- Deferred tax liabilities $ 342 $33,068 Employee benefit obligations 3,514 3,114 Workers' compensation reserves 1,928 1,374 Accrued restructuring and rationalization charges 3,232 2,194 -------- -------- $ 9,016 $39,750 ======== ========

11. EMPLOYEE BENEFIT PLANS: The Company has 401(k) profit sharing and nonqualified profit sharing plans, which cover substantially all of its employees. Company contributions or allocations are made on a discretionary basis for these plans (except for matching contributions made to certain 401(k) profit sharing plans as required by the terms of such plans). Contributions charged to operating expenses were $1,507, $2,288 and $2,914 in 2002, 2001 and 2000, respectively. The Company does not provide post-retirement health care and life insurance benefits to retired employees or post-employment benefits to terminated employees. 36 During 1999, the Company established a Supplemental Employee Retirement Plan (the "SERP") for its then Chief Executive Officer. The Company announced the retirement of such officer in February 2000, and in connection therewith the annual benefit payable under the SERP was fixed at $150. As of December 29, 2002, the Company had accrued approximately $1,465 for the SERP. 12. CAPITAL STOCK AND STOCK OPTIONS: The Company repurchased 1,664,300 shares of its Common Stock at an aggregate purchase price of $10,584 in 2000, under a stock repurchase program. The Company's Board of Directors adopted the 2001 Non-Qualified Employee Stock Purchase Plan (the "2001 Stock Purchase Plan") for the purpose of encouraging employee participation in the ownership of the Company. This plan replaced the 1997 Employee Stock Purchase Plan (the "1997 Stock Purchase Plan"), which terminated in the first quarter of 2001. Purchases under the 2001 Stock Purchase Plan were made monthly at the market price on the last day of the calendar month. Under the 1997 Stock Purchase Plan, employees could elect to have payroll deductions made to purchase Common Stock at a discount. During 2001 and 2000, 423,856 and 798,978 shares, respectively, of Common Stock were issued under the 1997 Stock Purchase Plan. During 2002 and 2001, 187,147 and 77,959 shares, respectively, of Common Stock were issued under the 2001 Stock Purchase Plan. The Company terminated the 2001 Stock Purchase Plan effective December 31, 2002. The Company's Board of Directors adopted its 1995 Equity Participation Plan (the "1995 Stock Option Plan") to attract and retain officers, key employees, consultants and directors. The 1995 Stock Option Plan had reserved for issuance 15% of the Common Stock issued and outstanding, as defined, from time to time. The Stock Option Plan allowed for the issuance of options, stock appreciation rights, restricted or deferred stock awards and other awards. Incentive stock options were granted only to employees and, when granted, were to have an exercise price equal to at least 100% of the fair market value of the Common Stock on the grant date and a term not longer than 10 years. As of December 29, 2002, 2,162,968 shares were reserved for the issuance of new options under the Stock Option Plan. In addition, nonemployee directors (including the directors who administer the Stock Option Plan) receive nondiscretionary grants of nonqualified stock options ("NQSOs") under the Stock Option Plan pursuant to a formula specified in the Plan. The NQSOs granted to nonemployee directors were fully vested and exercisable upon grant, and the term of each such option was 10 years. NQSOs could also be granted to an employee or consultant for any term specified by the compensation committee of the Board and provide for the right to purchase Common Stock at a specified price which, except with respect to NQSOs intended to qualify as performance-based compensation, could have been less than fair market value on the date of grant (but not less than par value), and may become exercisable (at the discretion of the compensation committee) in one or more installments after the grant date. A summary of stock option activity under the 1995 Stock Option Plan follows: 37

WEIGHTED SHARES AVERAGE UNDER PRICE PER OPTION SHARE ---------- ----------- Outstanding, January 2, 2000 3,475,305 $ 11.88 Granted in 2000 1,461,250 2.33 Exercised 1,300 6.69 Canceled 529,958 12.32 ---------- ----------- Outstanding, December 31, 2000 4,405,297 8.68 Granted in 2001 321,875 1.75 Canceled 344,160 9.07 ---------- ----------- Outstanding, December 30, 2001 4,383,012 8.14 Granted in 2002 57,500 0.93 Canceled 1,602,877 10.56 ---------- ----------- Outstanding, December 29, 2002 2,837,635 $ 6.63 ========= ========== Exercisable, December 31, 2000 2,286,797 $ 11.99 ========= ========== Exercisable, December 30, 2001 2,814,878 $ 10.74 ========= ========== Exercisable, December 29, 2002 1,976,068 $ 8.55 ========= ==========

The following table summarizes options outstanding and options exercisable under the 1995 Stock Option Plan as of December 29, 2002, and the related weighted average remaining contractual life (years) and weighted average exercise price:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ------------------------------ AVERAGE REMAINING AVERAGE RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ----------- -------- ----------- -------------- $0.59 - $1.20 50,000 9.4 $ 0.89 15,000 $ 1.03 $1.21 - $2.50 1,014,625 8.0 1.56 449,527 1.54 $2.51 - $5.00 390,587 7.5 2.66 206,144 2.73 $5.01 - $8.00 280,271 5.7 5.73 229,456 5.83 $8.01 - $12.00 365,364 5.1 10.48 345,114 10.57 $12.01 - $18.00 623,488 5.3 13.75 617,527 13.75 $18.01 - $23.08 113,300 5.0 18.91 113,300 18.91 ----------- ----------- -------- ----------- -------------- 2,837,635 6.7 $ 6.63 1,976,068 $ 8.55 =========== =========== ======== =========== ==============

On February 6, 1996, as amended in December 2001, the Company declared a dividend of one nonvoting preferred share purchase right (a "Right") for each outstanding share of Common Stock. This dividend was paid on February 27, 1996 to the shareholders of record on that date. In the event of an acquisition, or the announcement of an acquisition, by a party of a beneficial interest of at least 20% of the Common Stock, each right would become exercisable (the "Distribution Date"). Each Right entitled the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company at a price of $95.00 per one one-hundredth of a share of Preferred Stock, subject to adjustment. In addition, each Right entitled the right holder to certain other rights as specified in the Company's rights agreement. The Rights were not exercisable prior to the Distribution Date. In March 2003, the agreement governing the Rights was amended to permit 38 the issuance of capital stock and warrants to holders of the 5.75% Notes and the senior lenders in the Company's financial restructuring without causing the Rights to become exercisable even though certain of such received a beneficial interest in more than 20% of the Common Stock as a result of the transactions. In connection with the Company's financial restructuring, the Company implemented a new stock option plan, terminated the 1995 Stock Option Plan, issued stock purchase warrants to its senior lenders and amended and restated its rights plan. For a description of these matters and of the financial restructuring generally, see Note 1, "Subsequent Event - Comprehensive Financial Restructuring". 13. INCOME TAXES: The provision (benefit) for income taxes for 2002, 2001 and 2000 consisted of the following:

2002 2001 2000 --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle $(107,427) $ (76,364) $ 6,803 ========= ========= ========= Provision (benefit) for income taxes: Current provision (benefit) Federal $ (20,530) $ (11,858) $ 2,443 State (235) (169) 485 --------- --------- --------- Total current provision (benefit) (20,765) (12,027) 2,928 --------- --------- --------- Deferred provision Federal 21,368 2,235 4,840 State -- 106 1,210 --------- --------- --------- Total deferred provision 21,368 2,341 6,050 --------- --------- --------- Total provision (benefit) for income taxes $ 603 $ (9,686) $ 8,978 ========= ========= =========

The reconciliation of the effective tax rate is as follows:

2002 2001 2000 --------- --------- --------- Federal statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit -- 4.3 13.3 Effect of increase in valuation allowances (34.3) (23.1) -- Effect of nondeductible amortization and other (1.3) (3.5) 83.7 --------- --------- --------- Total (0.6)% 12.7% 132.0% ========= ========= =========

39 The components of the Company's net deferred tax liability were as follows at December 29, 2002 and December 30, 2001:

2002 2001 --------- --------- Deferred income tax assets: Goodwill impairment $ 76,428 $ 15,151 Accrued workers' compensation and other 2,557 2,193 Allowance for doubtful accounts 964 1,041 Accrued benefits 1,498 1,157 Net operating loss carryforward 101,983 2,242 Other 7,409 7,773 Valuation allowances (187,111) (17,661) --------- --------- Total deferred tax assets $ 3,728 $ 11,896 ========= ========= Deferred tax liabilities: Goodwill $ -- $ 28,445 Property and equipment 3,734 4,251 Other 336 372 --------- --------- Total deferred tax liabilities $ 4,070 $ 33,068 ========= ========= Net deferred tax liability $ 342 $ 21,172 ========= =========

As of December 29, 2002 and December 30, 2001, the Company had deferred income tax assets of $76,428 and $15,151, respectively, related to the goodwill impairment charges recorded by the Company. The Company also had federal and state net operating loss carryforwards with a tax benefit of $101,983 and $2,242, respectively, most of which expire primarily after the year 2012. The Company has recorded valuation allowances totaling $187,111 and $17,661 as of December 29, 2002 and December 30, 2001, respectively, primarily related to the goodwill impairment, net operating loss carryforwards and the loss on the sale of one of the Company's IT Services offices in Dallas. These valuation allowances were recorded as the Company concluded it is more likely than not that these deferred income tax assets would not be realized. Although realization is not assured, the Company has concluded that it is more likely than not that the remaining deferred tax assets will be realized based on the scheduling of deferred tax liabilities and projected taxable income. The amount of the net deferred tax assets actually realized, however, could vary if there are differences in the timing or amount of future reversals of existing deferred tax liabilities or changes in the actual amounts of future taxable income. The Company is subject to periodic review by federal, state and local taxing authorities in the ordinary course of business and as is the custom for tax returns claiming significant income tax refunds has been advised by the Internal Revenue Service that the Service is reviewing the Company's 2001 and 2000 federal income tax returns to determine whether to perform an income tax audit for one or both of those tax years. The Company believes its tax positions comply with applicable tax laws and would vigorously defend these positions if challenged. The final disposition of any positions challenged by any taxing authority could require the Company to make additional tax payments or pay interest and penalties, and accordingly, the Company has recorded a provision for such risks. 40 14. EARNINGS PER SHARE The following table reconciles net loss and weighted average shares outstanding to the amounts used to calculate basic and diluted earnings per share for each of 2002, 2001 and 2000:

2002 2001 2000 ------------ ------------ ------------ Basic and diluted earnings per share: Loss before cumulative effect of change in accounting principle $ (108,030) $ (66,678) $ (2,175) Add: Interest expense on 5.75% Notes, net of tax -- -- -- ------------ ------------ ------------ Diluted loss before cumulative effect of change in accounting principle (108,030) (66,678) (2,175) Cumulative effect of change in accounting principle (242,497) -- -- ------------ ------------ ------------ Diluted net loss $ (350,527) $ (66,678) $ (2,175) ============ ============ ============ Weighted average common shares outstanding 26,755,651 26,503,412 25,090,199 Add: Dilutive employee stock options -- -- -- Add: Assumed conversion of 5.75% Notes -- -- -- ------------ ------------ ------------ Diluted weighted average common shares outstanding 26,755,651 26,503,412 25,090,199 ============ ============ ============ Basic and diluted earnings per share: Loss before cumulative effect of change in accounting principle $ (4.04) $ (2.52) $ (0.09) Cumulative effect of change in accounting principle (9.06) -- -- ------------ ------------ ------------ Net loss $ (13.10) $ (2.52) $ (0.09) ============ ============ ============

Stock options to purchase 2,837,635, 4,383,012 and 4,405,297 shares of Common Stock were outstanding for 2002, 2001 and 2000, respectively, but were excluded from the computation of earnings per diluted share because their effect was antidilutive. The conversion of the 5.75% Notes into common shares was excluded from the computation of earnings per diluted share in 2002, 2001 and 2000 because their effect was antidilutive. 15. FINANCIAL INSTRUMENTS: FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated the book value at December 29, 2002, due to the short-term nature of these instruments. The fair value of the Company's borrowings under the revolving credit facility and other long-term debt approximated the book value at December 29, 2002, because of the variable rate associated with the borrowings. The 5.75% Notes had an estimated fair value of approximately $36,500 and $48,000 at December 29, 2002 and December 30, 2001, respectively, as compared to the carrying value of $115,000. See Note 1, "Subsequent Event - Comprehensive Financial Restructuring." CONCENTRATION OF CREDIT RISK The Company maintains cash and cash equivalents with various financial institutions, which at times exceeds federally insured limits. Credit risk with respect to accounts receivable is dispersed due to the nature of the business, the large number of customers and the diversity of industries serviced. The Company performs credit evaluations of its customers. 41 16. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company leases facilities under operating leases, certain of which require it to pay property taxes, insurance and maintenance costs. Total rent expense under operating leases amounted to $8,813, $10,692 and $10,360 for 2002, 2001 and 2000, respectively. Operating leases for facilities are usually renewable at the Company's option and include escalation clauses linked to inflation. Future minimum annual rentals for the next five years are as follows:

GROSS SUBLEASE NET RENTALS INCOME RENTALS ------- -------- ------- 2003 $10,025 $ (1,358) $ 8,667 2004 7,625 (979) 6,646 2005 5,824 (898) 4,926 2006 3,605 (556) 3,049 2007 2,274 (486) 1,788 Thereafter 1,666 (803) 863 ------- -------- ------- $31,019 $ (5,080) $25,939 ======= ======== =======

INSURANCE The Company maintains self-insurance programs for workers' compensation and medical and dental claims. The Company accrues liabilities under the workers' compensation program based on the loss and loss adjustment expenses as estimated by an outside administrator. At December 29, 2002, the Company had standby letters of credit with a bank in connection with a portion of its workers' compensation program. Additionally, the Company maintains certain workers' compensation and medical catastrophic insurance coverages. The Company is subject to claims and legal actions in the ordinary course of business. The Company maintains professional liability insurance for losses. EMPLOYMENT AGREEMENTS The Company has agreements with several executive officers providing for cash compensation and other benefits in the event that a change in control of the Company occurs. See Note 1, "Subsequent Event - Comprehensive Financial Restructuring." LEGAL PROCEEDINGS The Company is involved in various legal actions and claims. In the opinion of management, after considering appropriate legal advice, the future resolutions of all actions and claims are not expected to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 17. SEGMENT INFORMATION: The Company is organized in two segments: IT Services and Commercial Staffing. IT Services provides technical staffing, training and information technology consulting services and technology tools for human capital management. Commercial Staffing provides temporary staffing services, placement of full-time employees and on-site management of temporary employees. The Company evaluates segment performance based on income from operations before corporate expenses, amortization of goodwill and intangible assets, interest and income taxes. Because of the 42 Company's substantial goodwill, management does not consider total assets by segment an important management tool and, accordingly, the Company does not report this information separately. The table below presents segment information for IT Services and Commercial Staffing for 2002, 2001 and 2000:

OPERATING RESULTS 2002 2001 2000 --------- --------- --------- Total revenues IT Services $ 295,387 $ 447,862 $ 537,535 Commercial Staffing 262,361 284,465 344,457 --------- --------- --------- Total revenues 557,748 732,327 881,992 Gross profit IT Services 72,007 114,524 145,268 Commercial Staffing 57,794 77,144 105,282 --------- --------- --------- Total gross profit 129,801 191,668 250,550 Operating income IT Services 13,457 28,994 38,223 Commercial Staffing 11,263 18,161 33,696 --------- --------- --------- Total segment operating income, as defined 24,720 47,155 71,919 Unallocated corporate expenses 16,161 16,050 15,201 Goodwill impairment 89,935 56,779 11,021 Restructuring and rationalization charges 8,278 16,134 1,960 Amortization of goodwill and intangible assets 472 16,278 16,826 Interest expense 17,301 18,278 20,108 Income (loss) before income taxes and cumulative effect of change in --------- --------- --------- accounting principle $(107,427) $ (76,364) $ 6,803 ========= ========= ========= OTHER FINANCIAL INFORMATION Accounts receivable, net IT Services $ 46,318 $ 59,313 $ 85,344 Commercial Staffing 29,860 27,775 41,398 Corporate -- -- 550 --------- --------- --------- Total accounts receivable, net $ 76,178 $ 87,088 $ 127,292 ========= ========= =========

43 18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED): The following table sets forth quarterly financial information for each quarter in 2002 and 2001:

2002 ------------------------------------------------ FIRST SECOND THIRD FOURTH --------- --------- --------- --------- Revenues $ 142,053 $ 141,732 $ 137,681 $ 136,282 Gross profit 33,761 33,349 31,716 30,975 Goodwill impairment -- -- -- (89,935) Restructuring and rationalization charges (263) (1,348) (1,001) (5,666) Operating income (loss) 1,496 1,008 1,582 (94,212) Cumulative effect of change in accounting principle, net of taxes (242,497) -- -- -- Net loss (249,631) (2,721) (2,159) (96,016) Diluted earnings per share $ (9.35) $ (0.10) $ (0.08) $ (3.58)

2001 ------------------------------------------------ FIRST SECOND THIRD FOURTH --------- --------- --------- --------- Revenues $ 209,624 $ 194,370 $ 173,573 $ 154,760 Gross profit 56,674 51,855 44,122 39,017 Goodwill impairment -- -- -- (56,779) Restructuring and rationalization charges (387) (3,858) (440) (11,449) Operating income (loss) 6,649 1,757 2,568 (69,060) Net loss 930 (1,059) (1,170) (65,379) Diluted earnings per share $ 0.04 $ (0.04) $ (0.04) $ (2.45)

44 EX-21.1 6 g81654k1exv21w1.txt SUBSIDIARIES OF THE COMPANY . . . EXHIBIT 21.1 SUBSIDIARIES OF PERSONNEL GROUP OF AMERICA, INC.

State of Subsidiary Incorporation Does Business As - ----------------------------------- ------------------ -------------------------------------------------- PFI Corp Delaware N/A; serves as a holding company StaffPLUS, Inc. Delaware Venturi Staffing Partners, Venturi Career Partners Personnel Group Holdings, Inc. Florida N/A; serves as a holding company InfoTech Services, LLC North Carolina Venturi Technology Partners; Broughton Systems limited liability company BAL Associates, Inc. California Venturi Technology Partners Advanced Business Consultants, Inc. Kansas Venturi Technology Partners Venturi Staffing Partners, LLC California limited Venturi Staffing Partners, Venturi Career Partners liability company Venturi Texas Staffing Partners, LP Texas limited Venturi Staffing Partners, Venturi Career Partners partnership

EX-23.1 7 g81654k1exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-19541, 333-39361 and 333-66334) and Form S-3 (File No. 333-31863) of Personnel Group of America, Inc. of our report dated April 14, 2003 relating to the financial statements, which appears as Exhibit 13.1 in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Charlotte, North Carolina April 14, 2003 EX-99.1 8 g81654k1exv99w1.txt SECTION 906 CERTIFICATION FOR CEO EXHIBIT 99.1 PERSONNEL GROUP OF AMERICA, INC. AND AFFILIATES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Personnel Group of America, Inc.(the "Company"), on Form 10-K for the period ending December 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, Larry L. Enterline, Chief Executive Officer of the Company, hereby certifies that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Larry L. Enterline - -------------------------- Larry L. Enterline Chief Executive Officer April 14, 2003 EX-99.2 9 g81654k1exv99w2.txt SECTION 906 CERTIFICATION FOR CFO EXHIBIT 99.2 PERSONNEL GROUP OF AMERICA, INC. AND AFFILIATES CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Personnel Group of America, Inc.(the "Company"), on Form 10-K for the period ending December 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, James C. Hunt, Chief Financial Officer of the Company, hereby certifies that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James C. Hunt - -------------------------- James C. Hunt Chief Financial Officer April 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.19

                                  EXHIBIT 10.19

 Amendment No. 5 to Amended and Restated Credit Agreement among the Company and
   its subsidiaries, the lenders party thereto and Bank of America, as Agent

                     AMENDMENT NO. 5 TO AMENDED AND RESTATED
                           CREDIT AGREEMENT AND WAIVER

            THIS AMENDMENT NO. 5 TO AMENDED AND RESTATED CREDIT AGREEMENT AND
WAIVER (this "Amendment"), dated as of December 31, 2002, is entered into by and
among PERSONNEL GROUP OF AMERICA, INC. (the "Borrower"), certain subsidiaries of
the Borrower identified on the signatures pages hereto, the financial
institutions identified on the signature pages hereto and BANK OF AMERICA, N.A.,
formerly known as NationsBank, N.A., as agent for the Lenders (in such capacity,
the "Agent"). Except as otherwise defined in this Amendment, terms defined in
the Credit Agreement referred to below (as amended by this Amendment) are used
herein as defined therein.

                                    RECITALS

            A. The Borrower, the Guarantors party thereto, the Lenders party
thereto and the Agent entered into that certain Amended and Restated Credit
Agreement dated as of June 23, 1997 (as amended by Amendment No. 1 to Amended
and Restated Credit Agreement dated as of March 17, 1998, Amendment No. 2 to
Amended and Restated Credit Agreement dated as of September 29, 1999, Amendment
No. 3 to Amended and Restated Credit Agreement dated as of March 21, 2001, a
Waiver Agreement dated as of December 14, 2001 and Amendment No. 4 to Amended
and Restated Credit Agreement dated as of February 8, 2002 and as otherwise
modified prior to the date hereof, the "Credit Agreement").

            B. The Borrower and the Lenders have agreed to certain modifications
to the Credit Agreement.

            C. Such modifications require the consent of the Required Lenders.

            D. The Required Lenders have consented to the requested
modifications on the terms and conditions set forth herein.

                                    AGREEMENT

            NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

A. AMENDMENTS TO CREDIT AGREEMENT

            1. Amendment of Section 1.1. The definition of "Consolidated EBITDA"
set forth in Section 1.1 is hereby amended and restated in its entirety to read
as follows:

            "Consolidated EBITDA" means, for any period, the sum of (i)
Consolidated Net Income for such period plus (ii) an amount which, in the
determination of Consolidated Net Income for such period, has been deducted for
(A) interest expense, (B) total Federal, state, local and foreign income, value
added and similar taxes, (C) depreciation and amortization expense, (D) for the
Borrower's fourth quarter of its 2001 fiscal year, Restructuring Charges taken
by the Borrower and its Subsidiaries in such period (but in no event shall all
of the add-backs pursuant to this clause (D) exceed $5,750,000 in the aggregate
for the Borrower's fourth quarter of its 2001 fiscal year), (E) for any period
during the Borrower's fiscal year 2002 and beyond, Restructuring Charges taken
by the Borrower and its Subsidiaries (but in no event shall

all of the add-backs pursuant to this clause (E) exceed $6,000,000 (plus the
amount of any Restructuring Charges consisting of (x) expenses that may be
incurred in connection with the hiring of investment advisers to address the
Borrower's capital structure and (y) other fees and expenses not to exceed
$5,500,000 in the aggregate incurred by the Borrower after September 30, 2002 in
connection with any financial restructuring transaction)), (F) for the
Borrower's fourth quarter of its 2001 fiscal year, non-cash charges taken by the
Borrower in connection with the sale of Paladin Consulting, Inc. (but in no
event shall all of the add-backs pursuant to this clause (F) exceed $7,750,000
in the aggregate), (G) non-cash intangible asset impairment charges taken by the
Borrower and its Subsidiaries in any such period (but in no event shall all of
the add-backs pursuant to this clause (G) exceed $400,000,000 in the aggregate)
and (H) non-cash charges taken by the Borrower and its Subsidiaries in
connection with the Equity Appreciation Rights Agreement.

            2. Further Amendment of Section 1.1. Section 1.1 is further amended
by adding the following new definition:

            "Purchase Option Agreement" means that certain Purchase Option
Agreement, dated as of November 11, 2002, by and among the Borrower, the Lenders
party thereto, the Subordinated Noteholders party thereto and the Agent.

            3. Further Amendment of Section 1.1. Section 1.1 is further amended
by adding the following new definition:

            "Repurchase Event" shall have the meaning assigned to such term in
the Subordinated Note Indenture.

            4. Amendment of Section 2.1(a). Section 2.1(a) is hereby amended by
deleting the reference therein to "ONE HUNDRED THIRTY SIX MILLION DOLLARS
($136,000,000)" and replacing it with "ONE HUNDRED FOURTEEN MILLION DOLLARS
($114,000,000)".

            5. Amendment of Section 6.2. Section 6.2 is hereby amended by
deleting the parenthetical clause in subsection (a) thereof and replacing it
with the following: (except as has been publicly disclosed prior to the Fifth
Amendment Effective Date)".

            6. Amendment of Section 6.3. Section 6.3 is hereby amended by adding
"or limited partnership" after "limited liability company" in clause (a)
thereof.

            7. Amendment of Section 7.1(k). Section 7.1(k) is hereby amended by
replacing the last sentence thereof with the following:

                  Additionally, on a monthly basis concurrently with the
            delivery of the other items set forth in this Section 7.1(k), (i) a
            written report shall be provided to the Lenders, in reasonable
            detail and in a form reasonably acceptable to the Agent, updating
            the Lenders as of the end of such calendar month on the status of
            (A) the Proposed Restructuring (as defined in Exhibit B to the
            Purchase Option Agreement) and (B) the de-listing of the Borrower's
            common stock from the New York Stock Exchange and (ii) a certificate
            of the chief financial officer of the Borrower demonstrating
            compliance with the financial covenants set forth in Section 7.11 as
            of the end of such fiscal month or quarter (as applicable) and
            stating that no Default or Event of Default exists, or if any
            Default or Event of Default does exist, specifying the nature and
            extent thereof and what action the Borrower proposes to take with
            respect thereto.

                                       2

            8. Amendment of Section 7.8. Section 7.8 is hereby amended and
restated in its entirety to read as follows:

            7.8 PERFORMANCE OF OBLIGATIONS.

            The Borrower will, and will cause each of its Subsidiaries to,
perform in all material respects all of its obligations under the terms of all
material agreements, indentures, mortgages, security agreements or other debt
instruments to which it is a party or by which it is bound; provided, however,
that to the extent the Borrower is not in compliance with the Subordinated Note
Documents due to the de-listing of the Borrower's stock or any related
Repurchase Event, such non-compliance shall be deemed not to constitute a
violation of this Section 7.8

            9. Amendment of Section 7.11(e). Section 7.11(e) is hereby amended
and restated in its entirety to read as follows:

            (e) Minimum Rolling Consolidated EBITDA. Consolidated EBITDA,
calculated monthly on a three-month rolling basis, shall not be less the amount
shown below:



                FISCAL MONTH ENDING NEAREST      MINIMUM 3-MONTH ROLLING CONSOLIDATED EBITDA
                ---------------------------      -------------------------------------------
                                              
              November 30, 2002                                  $3,449,000
              December 31, 2002                                  $2,851,000
              January 31, 2003                                   $2,029,000
              February 28, 2003                                  $1,771,000
              March 31, 2003                                     $2,737,000
              April 30, 2003                                     $2,997,000
              May 31, 2003                                       $3,713,000
              June 30, 2003                                      $3,679,000


            10. Amendment of Section 7. Section 7 is hereby amended to add the
following subsection after Section 7.18:

            7.19 PERIODIC MEETINGS.

            (a) On a quarterly basis, and in conjunction with the filing of the
Borrower's Form 10-Q with the Securities and Exchange Commission, the Borrower
shall hold a telephonic meeting, at an agreed upon time, at which (i) the
Lenders' Financial Advisor will present to the Lenders (subject to existing
confidentiality and other applicable restrictions among the Agent and any of the
Lenders) a written report prepared by the Lenders' Financial Advisor analyzing
the Borrower's financial results as of the end of such fiscal quarter, and (ii)
the Borrower will review such financial results and discuss the market outlook.

            (b) Upon the request of the Agent, the Borrower shall hold a meeting
on an agreed upon date and at an agreed upon location to discuss the reports
delivered pursuant to Section 7.1(k) or Section 7.19(a).

            11. Amendment of Section 9.1(g)(i). Section 9.1(g)(i) is hereby
amended and restated in its entirety to read as follows:

            (i) The Borrower or any of its Subsidiaries shall default in the
performance or observance (beyond the applicable grace period with respect
thereto, if any) or any material obligation or condition of any contract or
lease material to the Borrower and its Subsidiaries taken as a whole; provided,
however, that

                                       3

to the extent the Borrower is not in compliance with the Subordinated Note
Documents due to the de- listing of the Borrower's stock or any related
Repurchase Event, such non-compliance, default or non-performance shall be
deemed not to constitute a Default or Event of Default hereunder; or

            12. Amendment of Section 9.1(k). Section 9.1(k) is hereby amended
and restated in its entirety to read as follows:

            (k) Subordinated Note Indentures. (i) There shall occur and be
continuing any Event of Default or Repurchase Event under, and in each case, as
defined in the Subordinated Note Indenture, and the Subordinated Noteholders
have caused the Subordinated Indebtedness to be accelerated and such
acceleration is not rescinded within 30 days, or (ii) any of the Borrower's
Obligations for any reason shall cease to be "Senior Indebtedness" under and as
defined in the Subordinated Note Indenture; or

            13. Amendment of Schedules. The following schedules are amended and
restated in their entirety and attached hereto: Schedule 1.1B - Liens; Schedule
6.9 - Intellectual Property Schedule 6.11 - Taxes; Schedule 6.14 - Subsidiaries;
and Schedule 8.1 Indebtedness.

B. WAIVER

            The Required Lenders hereby waive any failure of the Borrower to
comply with the financial covenants measured by Section 7.11(a), (b), (c) and
(d) of the Credit Agreement during the period from the Payment Date (as defined
in the Purchase Option Agreement) through the Expiration Date (as defined in the
Purchase Option Agreement). This is a one time waiver and shall not be construed
to be (i) an amendment or modification to the Credit Agreement, (ii) an
agreement to waive any other future Defaults or Events of Default or (iii) a
waiver of any other Default or Event of Default except as expressly set forth
herein.

C. CONSENT TO INTERNAL REORGANIZATION

            1. Reorganization. The Credit Parties are undertaking certain
internal reorganization steps as follows (collectively, the "Reorganization"):

            (a) Convert InfoTech Services, Inc. in to a North Carolina LLC. The
Borrower is making a capital contribution of the intercompany debt due from
InfoTech Services, Inc. to PFI Corp., which will then contribute this
intercompany debt to the capital of InfoTech Services, Inc. InfoTech Services,
Inc. will convert to a North Carolina limited liability company on or prior to
December 29, 2002.

            (b) California Restructuring. The Borrower will transfer all of its
Los Angeles-area commercial staffing branches (except for its Ontario branch) to
Venturi Staffing Partners LLC, effective January 1, 2003. The transfer of
assets, liabilities and employees, as described above, will be accomplished by
contributing the property first from the Borrower to PFI Corp., a wholly owned
subsidiary of the Borrower, then PFI Corp. contributes the property to
Staffplus, Inc., a wholly owned subsidiary of PFI Corp. and, finally, Staffplus,
Inc. contributes the property to Venturi Staffing Partners, LLC, a wholly owned,
Subsidiary of Staffplus, Inc.

            (c) Texas Restructuring. Staffplus, Inc. will transfer the assets
and employees of its Houston-area commercial staffing branch to a new Texas
limited partnership to be named, Venturi Texas Staffing Partners, LP, effective
January 1, 2003. The assets, liabilities and employees (collectively, "the
property") as described above will be transferred to the Texas LP as follows:

                                       4

                  -     a 1% interest in the property is transferred directly to
                        the Texas LP from Staffplus in exchange for a 1% general
                        partnership interest in the Texas LP,

                  -     a 99% interest in the property will be transferred to
                        Venturi Staffing Partners, LLC from Staffplus Inc., and

                  -     the 99% interest in the property will then be
                        transferred, in its entirety, to the Texas LP in
                        exchange for a 99% limited partnership interest in the
                        Texas LP.

            (d) Illinois. Staffplus, Inc. will transfer the assets and employees
of all of its Chicago-area commercial staffing branches (except for its downtown
Chicago office) to Venturi Staffing Partners, LLC effective January 1, 2003.

            2. Notwithstanding anything in Section 8.4 of the Credit Agreement
to the contrary, the Required Lenders hereby consent to the Reorganization and,
in furtherance of the foregoing, the Credit Parties hereby agree,
contemporaneously herewith, to, in accordance with the terms of the Credit
Agreement, cooperate with the Agent to (i) cause InfoTech Services, LLC and
Venturi Staffing Partners Texas Limited Partnership to execute a Joinder Agent
in the form of Schedule 7.12 to the Credit Agreement, (ii) cause the partnership
or membership interests of InfoTech Services, LLC and Venturi Texas Staffing
Partners, LP to be pledged to the Agent, for the benefit of the Lenders, and
(iii) deliver such documentation as the Agent may reasonably request in
connection with the foregoing, including without limitation, certified
resolutions and organizational and authorizing documents of each such entity,
and appropriate UCC-1 financing statements, all in form, content and scope
reasonably satisfactory to the Agent.

D. MISCELLANEOUS

            1. Representations and Warranties. Each of the Credit Parties
represents and warrants to the Lenders and the Agent as follows:

                  (a) It has taken all necessary action to authorize the
            execution, delivery and performance of this Amendment.

                  (b) This Amendment has been duly executed and delivered by
            such Credit Party and constitutes such Credit Party's legal, valid
            and binding obligation, enforceable in accordance with its terms,
            except as such enforceability may be limited (x) by general
            principles of equity and conflicts of laws or (y) by bankruptcy,
            reorganization, insolvency, moratorium or other laws of general
            application relating to or affecting the enforcement, of creditors'
            rights.

                  (c) No consent, approval, authorization or order of, or
            filing, registration or qualification with, any court or
            governmental authority or third party is required in connection with
            the execution, delivery or performance by such Credit Party of this
            Amendment.

                  (d) The execution and delivery of this Amendment does not
            diminish or reduce its obligations under the Credit Documents
            (including, without limitation, in the case of each Guarantor, such
            Guarantor's guaranty pursuant to Section 4 of the Credit Agreement)
            in any manner, except as specifically set forth herein.

                  (e) Such Credit Party has no claims, counterclaims, offsets,
            or defenses to the Credit Documents and the performance of its
            obligations thereunder, or if such Credit Party has any such

                                       5

            claims, counterclaims, offsets, or defenses to the Credit Documents
            or any transaction related to the Credit Documents, the same are
            hereby waived, relinquished and released in consideration of the
            Required Lenders' execution and delivery of this Amendment.

                  (f) The representations and warranties of the Credit Parties
            set forth in Section 6 of the Credit Agreement are true and correct
            as of the date hereof (except those that expressly relate to an
            earlier date) and all of the provisions of the Credit Documents,
            except as amended hereby, are in full force and effect.

                  (g) Subsequent to the execution and delivery of this Amendment
            and after giving effect hereto, no unwaived event has occurred and
            is continuing which constitutes a Default or an Event of Default.

            2. Liens. Each Credit Party affirms the liens and security interests
created and granted by it in the Credit Documents (including, but not limited
to, the Pledge Agreement and the Security Agreement) and agrees that this
Amendment shall in no manner adversely affect or impair such liens and security
interests.

            3. Effect of Amendment. Except as expressly modified and amended in
this Amendment, all of the terms, provisions and conditions of the Credit
Documents shall remain unchanged and in full force and effect. The Credit
Documents and any and all other documents heretofore, now or hereafter executed
and delivered pursuant to the terms of the Credit Agreement are hereby amended
so that any reference to the Credit Agreement shall mean a reference to the
Credit Agreement as amended hereby.

            4. Expenses. The Borrower agrees to pay on demand all reasonable
costs and expenses of the Agent incurred in connection with the negotiation,
preparation, execution and delivery of this Amendment, including the reasonable
fees and expenses of the Agent's legal counsel (including without limitation
amounts incurred and invoiced on or prior to the Fifth Amendment Effective Date
and referenced in Part C, Section 5(d) below).

            5. Conditions Precedent. This Amendment shall become effective as of
the date hereof (the "Fifth Amendment Effective Date") once each of the
following conditions precedent has been satisfied:

                  (a) the Agent shall have received counterparts of (i) this
            Amendment, duly executed and delivered by each of the Credit
            Parties, the Required Lenders and the Agent; (ii) a Joinder
            Agreement dated as of the date hereof which shall have been executed
            by InfoTech Services, LLC and Venturi Texas Staffing Partners, LP
            along with all such organizational and authorizing documents as the
            Agent may reasonably request; and (iii) such UCC-1 Financing
            Statements as the Agent shall reasonably require.

                  (b) the Agent shall have received a certified copy of the
            resolutions of the Board of Directors of the Borrower and each other
            Credit Party evidencing its approval of this Amendment and the other
            Credit Documents and matters contemplated hereby, and a certified
            copy of all documents evidencing other necessary corporate action
            and governmental approvals, if any, with respect to this Amendment
            and the other Credit Documents;

                  (c) no Default or Event of Default shall have occurred and be
            continuing; and

                  (d) the Borrower shall have paid any and all out-of-pocket
            costs (to the extent invoiced) incurred by the Agent (including the
            reasonable fees and expenses of the Agent's legal

                                       6

            counsel), and fees and other amounts payable to the Agent, in each
            case in connection with the negotiation, preparation, execution and
            delivery of this Amendment.

            6. Counterparts/Telecopy. This Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same instrument.
Delivery of executed counterparts by telecopy shall be effective as an original
and shall constitute a representation that an original will be delivered.

            7. Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of North Carolina.

            8. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER
CREDIT DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERSEDE
ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER
HEREOF. THESE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.

            9. Severability. If any provision of this Amendment is determined to
be illegal, invalid or unenforceable, such provision shall be fully severable
and the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.

            10. Release. In consideration of the Required Lenders execution of
this Amendment, the Credit Parties hereby release the Agent, the Lenders and
each of their respective Affiliates, officers, employees, representatives,
agents, trustees, counsel and directors (collectively, the "Released Persons")
from any and all actions, causes of action, claims, demands, damages and
liabilities of whatever kind or nature, in law or in equity, now known or
unknown, suspected or unsuspected to the extent that any of the foregoing arises
from any action or failure to act by any of the Released Persons on or prior to
the date hereof in connection with the Credit Documents and transactions related
thereto.

              [the remainder of this page intentionally left blank]

                                       7

            IN WITNESS WHEREOF, the parties hereto have caused this Amendment,
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.


BORROWER:                  PERSONNEL GROUP OF AMERICA, INC.,
                           a Delaware corporation

                           By:      /s/ James C. Hunt
                                    -------------------------
                           Name:    James C. Hunt
                           Title:   President and
                                    Chief Financial Officer

GUARANTORS:                STAFFPLUS, INC.,
                           a Delaware corporation
                           INFOTECH SERVICES LLC,
                           a North Carolina limited liability company
                           BAL ASSOCIATES INCORPORATED,
                           a California corporation
                           ADVANCED BUSINESS CONSULTANTS, INC.,
                           a Kansas corporation
                           PERSONNEL GROUP HOLDINGS, INC.,
                           a Florida corporation
                           VENTURI STAFFING PARTNERS, LLC,
                           a California limited liability company


                           By:      /s/ James C. Hunt
                                    -------------------------
                           Name:    James C. Hunt
                           Title:   Senior Vice President of each of the
                                    above-named Guarantors


                           PFI CORP.,
                           a Delaware corporation

                           By:      /s/ James C. Hunt
                                    -------------------------
                           Name:    James C. Hunt
                           Title:   President

AGENT:                     BANK OF AMERICA, N.A.,
                           formerly known as NATIONSBANK, N.A.
                           and BANK OF AMERICA ILLINOIS,
                           as AGENT


                           By:           /s/ H. Leonard Norman
                                         ----------------------------
                           Name:         H. Leonard Norman
                           Title:        Managing Director


LENDERS:                   BANC OF AMERICA
                           STRATEGIC SOLUTIONS, INC.

                           By:           /s/ H. Leonard Norman
                                         ----------------------------
                           Name:         H. Leonard Norman
                           Title:        Managing Director

                           BNP PARIBAS

                           By:           /s/ Stephanie Rogers
                                         ----------------------------
                           Name:         Stephanie Rogers
                           Title:        Vice President

                           By:           /s/ Rick Pace
                                         ----------------------------
                           Name:         Rick Pace
                           Title:        Director

                           BANK ONE, NA

                           By:           /s/ Dianne M. Stark
                                         ----------------------------
                           Name:         Dianne M. Stark
                           Title:        First Vice President

                           HBV CAPITAL MANAGEMENT LLC

                           By:           /s/ George J. Konomos
                                         ----------------------------
                           Name:         George J. Konomos
                           Title:        Portfolio Manager

                           INLAND PARTNERS L.P.

                           By:           /s/ Elias J. Sabo
                                         ----------------------------
                           Name:         Elias J. Sabo
                           Title:        Attorney-in-fact

                           LINKS PARTNERS L.P.

                           By:           /s/ Elias J. Sabo
                                         ----------------------------
                           Name:         Elias J. Sabo
                           Title:        Attorney-in-fact

                           MATLINPATTERSON GLOBAL OPPORTUNITIES PARTNERS L.P.

                           By:  MatlinPatterson Global Advisors LLC

                           By:           /s/ David J. Matlin
                                         ----------------------------
                           Name:         David J. Matlin
                           Title:
                                         ----------------------------

EX-12.1

                                                                               .
                                                                               .
                                                                               .
                                  EXHIBIT 12.1


                                             1998           1999          2000         2001           2002
                                           ---------     ---------     ---------     ---------      ---------
                                                                                     
FIXED CHARGES:
Interest expense including
   amortization of debt issuance costs     $  12,491     $  16,447     $  20,108     $  18,278      $  17,301
Interest on rent expense (1)                   2,463         3,419         3,453         3,564          2,938
                                           ---------     ---------     ---------     ---------      ---------
Total fixed charges                           14,954        19,866        23,561        21,842         20,239

EARNINGS:
Income (loss) before income taxes             53,757        51,830         6,803       (76,364)      (107,427)
Fixed charges                                 14,954        19,866        23,561        21,842         20,239
                                           ---------     ---------     ---------     ---------      ---------
Income (loss) before fixed charges            68,711        71,696        30,364       (54,522)       (87,188)

RATIO OF EARNINGS TO FIXED CHARGES               4.6           3.6           1.3          -2.5           -4.3



      (1)   The Company believes one-third of rent expense represents a
            reasonable approximation of the interest factor.

EX-13.1

                                  EXHIBIT 13.1

       PART II EXHIBITS FOR ITEMS 6 THROUGH 8 AND PART IV, ITEM 15 (A)(1)

ITEM 6.  SELECTED FINANCIAL DATA

(in thousands, except earnings per share)



                                                       2002            2001           2000          1999          1998
                                                     ---------      ---------      ---------      ---------     ---------
                                                                                                 
RESULTS OF OPERATIONS

Revenues                                             $ 557,748      $ 732,327      $ 881,992      $ 918,437     $ 783,925

Goodwill impairment                                     89,935         56,779         11,021             --            --
Restructuring and rationalization charges                8,278         16,134          1,960             --            --

Operating income (loss)                                (90,126)       (58,086)        26,911         68,277        66,248

Interest expense                                        17,301         18,278         20,108         16,447        12,491

Income (loss) before cumulative effect of change
  in accounting principle                             (108,030)       (66,678)        (2,175)        29,753        31,017
Cumulative effect of change in accounting
  principle, net of taxes                             (242,497)            --             --             --            --

Net income (loss)                                     (350,327)       (66,678)        (2,175)        29,753        31,017

Earnings per diluted share:(1)
  Earnings before cumulative effect of change
   in accounting principle                               (4.04)         (2.52)         (0.09)          0.99          0.96
  Cumulative effect of change in accounting
   principle                                             (9.06)            --             --             --            --
  Net income (loss)                                  $  (13.10)     $   (2.52)     $   (0.09)     $    0.99     $    0.96

Average diluted shares outstanding(1)                   26,756         26,503         25,090         34,299        36,752

FINANCIAL POSITION

Working capital                                      $  17,494      $  72,241      $  82,577      $  86,787     $  84,151
Goodwill                                               103,532        478,162        561,452        557,421       535,981
Total assets                                           247,406        634,123        743,593        735,350       708,890
Short- and long-term debt                              218,648        234,882        265,647        254,351       235,406
Shareholders' equity (deficit)                         (52,348)       298,093        364,299        369,843       394,630

PRO FORMA FINANCIAL DATA(2)

Total assets                                         $ 225,716
Short- and long-term debt                               94,192
Shareholders' equity                                    51,957





(1)  The assumed conversion of the Company's 5.75% Notes into Common Stock was
     excluded from the calculation of earnings per diluted share in 2002, 2001
     and 2000 because the effect of conversion was antidilutive.

(2)  Pro forma financial data as of December 29, 2002 reflects the effects of
     the financial restructuring completed in April 2003 as if the financial
     restructuring had been completed on December 29, 2002. For a complete
     discussion of the financial restructuring, see "Management's Discussion and
     Analysis of Financial Condition and Results of Operations - Liquidity and
     Capital Resources" and Note 1, "Subsequent Event - Comprehensive Financial
     Restructuring," to the Consolidated Financial Statements included elsewhere
     in this Annual Report.


                                       1

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

    The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes appearing
elsewhere in this report. The Company's fiscal years end on the Sunday nearest
to each December 31 and its fiscal quarters end on the Sunday nearest to the end
of each calendar quarter.

FORWARD-LOOKING INFORMATION

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

      -     changes in levels of unemployment and other economic conditions in
            the United States, or in particular regions or industries;

      -     continuing weakness or further reductions in corporate information
            technology spending levels;

      -     the ability of the Company to maintain existing client relationships
            and attract new clients in the context of changing economic or
            competitive conditions;

      -     the impact of competitive pressures, including any change in the
            demand for the Company's services, or the Company's ability to
            maintain or improve its operating margins;

      -     an Internal Revenue Service audit of the Company's income tax
            returns and the risk that assessments for additional taxes,
            penalties and interest could be levied against the Company;

      -     the entry of new competitors into the marketplace or expansion by
            existing competitors;

      -     the Company's success in attracting, training and retaining
            qualified management personnel and other staff employees;

      -     reductions in the supply of qualified candidates for temporary
            employment or the Company's ability to attract qualified candidates;

      -     the possibility of the Company incurring liability for the
            activities of its temporary employees or for events impacting its
            temporary employees on clients' premises;

      -     the risk in an uncertain economic environment of increased
            incidences of employment disputes, employment litigation and
            workers' compensation claims;

      -     the risk that further cost cutting or restructuring activities
            undertaken by the Company could cause an adverse impact on certain
            of the Company's operations;

      -     economic declines that affect the Company's liquidity or ability to
            comply with its loan covenants;

      -     the risks of defaults under the Company's credit agreements or the
            demand by any holder of the Company's remaining outstanding 5.75%
            Notes for repayment following the occurrence of a repurchase event
            under the indenture applicable to the 5.75% Notes;

      -     adverse changes in credit and capital markets conditions that may
            affect the Company's ability to obtain financing or refinancing on
            favorable terms;

      -     adverse changes to management's periodic estimates of future cash
            flows that may affect management's assessment of its ability to
            fully recover its goodwill;

      -     whether governments will impose additional regulations or licensing
            requirements on staffing services businesses in particular or on
            employer/employee relationships in general; and

      -     other matters discussed in this Annual Report and the Company's SEC
            filings.

Because long-term contracts are not a significant part of the Company's
business, future results cannot be reliably predicted by considering past trends
or extrapolating past results. The Company undertakes no obligation to update
information contained in this annual report.


                                       2

OVERVIEW

      The Company is organized into two Divisions: the Information Technology
Services Division ("IT Services"), which provides information technology
staffing and consulting services in a range of computer-related disciplines and
technology tools for human capital management, and the Commercial Staffing
Services Division ("Commercial Staffing"), which provides a variety of temporary
office, clerical, accounting and finance, light technical and light industrial
staffing services. Approximately 53% of the Company's 2002 revenues came from IT
Services and 47% came from Commercial Staffing.

      The following table sets forth the number of the Company's offices by
Division at the end of each of the years indicated:



                          2002        2001       2000
                           ---        ---        ---
                                        
IT Services                 28         33         45
Commercial Staffing         90         92        104
                           ---        ---        ---
      Total offices        118        125        149
                           ===        ===        ===


      The Company's operating results declined overall in each of 2001 and 2002
due primarily to the weak economic environment, including a continued decline in
corporate technology spending, and its impact on revenue. Although the Company
continued its aggressive cost cutting programs throughout 2002, these efforts
could not offset the overall revenue declines in IT Services and Commercial
Staffing and as a result served only to slow the reduction in overall operating
profitability. Although the Company remains optimistic that demand for its
services will recover long-term, it does not expect any meaningful improvement
in the current demand climate or customer spending patterns before the second
half of 2003.

      The Company adopted Statement of Financial Accounting Standards No. 142
("SFAS 142") as of the beginning of 2002, which resulted in a goodwill
impairment charge of $242.5 million, net of an income tax benefit of $42.2
million. This charge was recorded as a cumulative effect of change in accounting
principle.

      SFAS 142 requires goodwill to be tested at least annually for impairment.
In the fourth quarter of 2002, the Company performed its annual test for
impairment and recorded an impairment charge of $89.9 million for goodwill
associated with its IT Services operations. The Company experienced lower than
expected operating profits and cash flows in 2002 for the IT Services reporting
unit. As a result of this trend and the overall industry expectations, the
projected operating profits and cash flows for the IT Services operations were
reduced for the next five years resulting in a reduction in the fair value of
the Company's goodwill. The decrease in fair value resulted in the recognition
of the $89.9 million impairment loss. No additional impairment was identified
for the goodwill associated with the Company's Commercial Staffing reporting
unit.

      In response to the decline in demand for the Company's services, the
Company has restructured and rationalized certain operations. The goal with the
restructuring initiatives was to better align the Company's cost structure with
its expected lower revenue levels through elimination of inefficiencies and
duplicate functions, while realigning its sales and recruiting teams to achieve
greater customer penetration and improve customer service. As a result, the
Company recorded charges totaling $8.3 million in 2002 primarily related to
employee severance, lease abandonment and termination costs and, in connection
with the Company's financial restructuring, $3.6 million of professional
services fees and expenses, consisting primarily of legal and accounting
services. See " -- Results of Operations."

      After the end of 2002, the Company completed a comprehensive financial
restructuring with its senior lenders and the holders of approximately $109.7
million of its outstanding 5.75% Notes in which it amended and extended its
revolving credit facility and exchanged newly issued shares of the Company's
common and preferred stock with the participating noteholders representing
approximately 82% of the Company's outstanding capital stock immediately after
the financial restructuring. As part of the financial restructuring transaction,
the Company used substantially all of its cash on hand (after payment of
transaction expenses) to repay approximately $38.0 million of its outstanding
credit facility and eliminated an additional $120.0 million of its outstanding
indebtedness, which will result in substantial reductions in the Company's
interest expense in future periods. Equally as important, however, the financial
restructuring greatly reduced the debt overhang that has restricted the
Company's financial flexibility over the last two years. See " -- Liquidity and
Capital Resources, Financial Restructuring."


                                       3

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

      The following table summarizes certain income statement information for
the Company for years 2002, 2001 and 2000 both in dollars and as a percentage of
total revenues:

(dollars in thousands)



                                                     2002                      2001                     2000
                                            ----------------------    ----------------------    ----------------------
                                                                                           
Revenues:
  IT Services                               $ 295,387         53.0%   $ 447,862         61.2%   $ 537,535         60.9%
  Commercial Staffing                         262,361         47.0%     284,465         38.8%     344,457         39.1%
                                            ---------    ---------    ---------    ---------    ---------    ---------
     Total revenues                           557,748        100.0%     732,327        100.0%     881,992        100.0%
Direct costs of services                      427,947         76.7%     540,659         73.8%     631,442         71.6%
                                            ---------    ---------    ---------    ---------    ---------    ---------
Gross profit                                  129,801         23.3%     191,668         26.2%     250,550         28.4%
Operating expenses:
  Selling, general and administrative         114,590         20.5%     152,928         20.9%     185,743         21.1%
  Depreciation and amortization                 7,124          1.3%      23,913          3.3%      24,915          2.8%
  Goodwill impairment                          89,935         16.1%      56,779          7.8%      11,021          1.2%
  Restructuring and rationalization
    charges                                     8,278          3.2%      16,134          2.2%       1,960          0.2%
                                            ---------    ---------    ---------    ---------    ---------    ---------
Operating income (loss)                       (90,126)      -16.2%      (58,086)       -7.9%       26,911          3.1%
Interest expense                               17,301          3.1%      18,278          2.5%      20,108          2.3%
                                            ---------    ---------    ---------    ---------    ---------    ---------
Income (loss) before income taxes
  and cumulative effect of change
  in accounting principle                    (107,427)      -19.3%      (76,364)      -10.4%        6,803          0.8%
Provision (benefit) for income taxes              603          0.1%      (9,686)       -1.3%        8,978          1.0%
                                            ---------    ---------    ---------    ---------    ---------    ---------
Net loss before cumulative effect of
  change in accounting principle             (108,030)      -19.4%      (66,678)       -9.1%       (2,175)       -0.2%
Cumulative effect of change in
  accounting principle, net of taxes         (242,497)      -43.5%           --           --           --           --
                                            ---------    ---------    ---------    ---------    ---------    ---------
Net loss                                    $(350,527)      -62.8%    $ (66,678)       -9.1%    $  (2,175)       -0.2%
                                            =========    =========    =========    =========    =========    =========



                                       4

RESULTS OF OPERATIONS

        YEAR ENDED DECEMBER 29, 2002 VERSUS YEAR ENDED DECEMBER 30, 2001

REVENUES

      Total revenues decreased 23.8% to $557.7 million in 2002 from $732.3
million in 2001 due to the weak economic environment, including a continued
decline in corporate technology spending. IT Services revenues decreased 34.0%
primarily as the result of the continuing industry-wide slowdown in customer
demand for IT staffing services. IT Services billable consultants on assignment
declined from approximately 2,500 at year-end 2001 to approximately 1,970 at
year-end 2002. Commercial Staffing revenues declined 7.8% to $262.4 million in
2002 primarily due to the weak economic climate, which resulted in declines in
permanent placement revenues and the retail component of the Company's temporary
staffing business. Permanent placement revenues were 3.2% of Commercial Staffing
revenues in 2002, down from 6.3% in 2001, while the retail component of
temporary staffing also declined to 62.0% of Commercial Staffing revenues in
2002, down from 69.9% in 2001. Offsetting these declines was the increase in the
vendor-on-premise ("VOP") business. VOP revenues totaled 34.8% in 2002 and 23.8%
in 2001 of Commercial Staffing revenues, respectively. The Company does not
expect improvements in demand for its services before the second half of 2003 in
light of ongoing economic and geopolitical uncertainties. In addition, there can
be no assurance that IT Services revenues will increase as the broader economy
strengthens or these other uncertainties subside.

DIRECT COSTS OF SERVICES AND GROSS PROFIT

      Direct costs, consisting of payroll and related expenses of consultants
and temporary workers, decreased 20.8% to $427.9 million in 2002 on the lower
revenues. Gross profit decreased 32.3% to $129.8 million on the lower revenues.
Gross profit as a percentage of revenue also decreased to 23.3% in 2002 from
26.2% in 2001. These decreases primarily were the result of the continued
softening in the higher margin sectors of the staffing and consulting
businesses, the significant decline in permanent placement services and
continuing downward bill rate pressure imposed by many of the Company's larger
customers.

OPERATING EXPENSES

      Operating expenses, consisting of selling, general and administrative
expenses and depreciation and amortization expense, decreased 31.2% to $121.7
million in 2002 from $176.8 million in 2001. The decrease was primarily due to
the Company's aggressive cost reduction program, including its workforce
reduction and office consolidation initiatives. Approximately 17.5% (26% in
2001) of the Company's permanent workforce was eliminated during the year. Also,
variable or incentive compensation declined due to lower revenues and operating
margins. As a percentage of revenues, selling, general and administrative
expenses decreased to 20.5% in 2002 from 20.9% in 2001. In addition,
depreciation and amortization expense decreased to 1.3% of revenues in 2002 from
3.3% in 2001 primarily due to the change in accounting principle eliminating
goodwill amortization in 2002. Goodwill amortization expense was $15.4 million
in 2001.

GOODWILL IMPAIRMENT

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


                                       5

      Based upon the results of the initial valuation, which was completed in
the second quarter of 2002, the Company recorded a goodwill impairment charge of
$284.7 million ($242.5 million net of an income tax benefit of $42.2 million) as
a cumulative effect of the change in accounting principle.

      In the fourth quarter of 2002, the Company performed its annual impairment
test and recorded an additional impairment charge of $89.9 million for goodwill
associated with its IT Services operations. The Company experienced lower than
expected operating profits and cash flows in 2002 for the IT Services reporting
unit. As a result of this trend and the overall industry expectations, the
projected operating profits and cash flows for the IT Services operations were
reduced for the next five years resulting in a reduction in the fair value of
the Company's goodwill. The decrease in fair value resulted in the recognition
of the $89.9 million impairment loss. No additional impairment was identified
for the goodwill associated with the Company's Commercial Staffing reporting
unit. At December 29, 2002, the Company had goodwill with a carrying value of
$103.5 million of which $41.2 million relates to IT Services and $62.3 million
relates to Commercial Staffing.

      Prior to the adoption of SFAS 142, the Company followed SFAS 121 to test
for its goodwill and intangible asset impairment. The Company's policy included
a projection of undiscounted cash flows for each operating company to determine
if the goodwill associated with that business component was recoverable. When
the Company performed its analysis in the fourth quarter of fiscal 2001, it
identified several operations, principally in the IT Services division, for
which negative cash flows were projected in early years and for which projected
undiscounted cash flows were not sufficient to recover the carrying amount of
related goodwill. As a result, the Company recorded a goodwill impairment charge
of $56.8 million in the fourth quarter of 2001. The impairment charges for IT
Services and Commercial Staffing were $41.1 million and $15.7 million,
respectively. These charges related to operations where future cash flows were
projected to be negative and, accordingly, the impairment charge represented the
entire carrying amount of the related goodwill.

RESTRUCTURING AND RATIONALIZATION CHARGES

      Beginning in 2001, the Company implemented a plan to restructure and
rationalize certain operations. As a result, the Company recorded charges
totaling $8.3 million and $16.1 million in 2002 and 2001, respectively. These
charges were comprised of the following components (in thousands):



                                                         2002            2001
                                                       --------        --------
                                                                 
Employee severance                                     $  1,915        $  1,678
Lease abandonment and termination costs                   2,689           3,869
Professional services charges                             3,628             875
Property abandonment charges                                 46           2,568
Loss on sale of business                                     --           7,683
Other                                                        --            (539)
                                                       --------        --------
Total restructuring and rationalization charges        $  8,278        $ 16,134
                                                       ========        ========


      Following is a summary of the accrued liability for cash restructuring and
rationalization charges for the years ended December 29, 2002 and December 30,
2001 (in thousands):



                                             EMPLOYEE          LEASE       PROFESSIONAL
                                             SEVERANCE         COSTS         SERVICES          OTHER           TOTAL
                                             ---------         -----         --------          -----           -----
                                                                                               
Initial charges                               $ 1,678         $ 3,869         $   875         $   434         $ 6,856
Cash payments                                  (1,636)           (760)           (675)           (113)         (3,184)
                                              -------         -------         -------         -------         -------
Accrued liability at December 30, 2001             42           3,109             200             321           3,672
2002 charges                                    1,915           2,689           3,628              --           8,232
Cash payments                                  (1,398)         (1,140)         (2,782)           (237)         (5,557)
                                              -------         -------         -------         -------         -------
Accrued liability at December 29, 2002        $   559         $ 4,658         $ 1,046         $    84         $ 6,347
                                              =======         =======         =======         =======         =======


      Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 17.5% (26% in 2001) of the Company's permanent workforce, or
194 (395 in 2001) employees, was eliminated during the year. Lease abandonment
and termination costs related primarily to office closures, branch
consolidations and leased space reductions. Professional services charges
consisted primarily of legal and accounting services incurred in connection with
the financial restructuring.


                                       6

      Property abandonment costs consisted of the write-down of abandoned
leasehold improvements and other equipment. These assets were written down to
zero as they were abandoned. The loss on the sale of business related to the
sale of one of the Company's IT Services offices in Dallas, which was completed
on December 31, 2001. Other rationalization expenses of ($0.5) million were
recorded in 2001 associated with incremental costs in downsizing the business to
current operating levels, the loss on the sale of CareerShop and changes in
estimates for previous lease terminations of $0.4 million, net of other income
of $1.6 million related to favorably settling certain obligations.

      Of the remaining accrued liability at December 29, 2002, the Company
expects to pay approximately $3.1 million over the next twelve months and the
balance, primarily lease payments, over the following seven years.

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

INTEREST EXPENSE

      Interest expense decreased 5.3% to $17.3 million in 2002 from $18.3
million in 2001 due to lower borrowing levels under the Company's revolving
credit facility. The average interest rate on borrowings was 7.3% in 2002, up 10
basis points from 2001. With the recent completion of its financial
restructuring, the Company expects a substantial reduction in its interest
expense for future periods. See " -- Liquidity and Capital Resources, Financial
Restructuring."

PROVISION (BENEFIT) FOR INCOME TAXES

      In 2002, the Company recorded an income tax provision of $0.6 million,
comprised of an income tax benefit of $4.6 million related to its operating
losses, offset by a charge of $5.2 million related to the adoption of SFAS 142.
This charge provided a valuation allowance against certain deferred tax assets,
but had no effect on the Company's cash flows. The effective tax benefit rate of
12.7% in 2001 was lower than the U.S. federal statutory rate of 35% primarily
due to the impact of non-deductible amortization expense, valuation allowances
established during the year, and certain nondeductible restructuring and
rationalization charges, offset in part by the $1.4 million tax benefit related
to the diminution in value in the Company's investment in CareerShop, which was
sold during the second quarter of 2001.

        YEAR ENDED DECEMBER 30, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000

REVENUES

      Total revenues decreased 17.0% to $732.3 million in 2001 from $882.0
million in 2000. IT Services revenues decreased 16.7% primarily as the result of
the continuing industry-wide slowdown in customer demand for IT staffing
services. IT Services billable consultants on assignment declined from
approximately 3,700 at year-end 2000 to approximately 2,500 at year-end 2001.
Commercial Staffing revenues declined 17.4% to $284.5 million in 2001 primarily
due to the weak economic climate, which resulted in declines in permanent
placement revenues and the retail component of the Company's temporary staffing
business. Permanent placement revenues were 6.3% of Commercial Staffing revenues
in 2001, down from 10.0% in 2000, while the retail component of temporary
staffing declined to 69.9% of Commercial Staffing revenues in 2001, down from
73.5% in 2000.

DIRECT COSTS OF SERVICES AND GROSS PROFIT

      Direct costs, consisting of payroll and related expenses of consultants
and temporary workers, decreased 14.4% to $540.7 million in 2001 on lower
revenues. Gross profit decreased 23.5% to $191.7 million on the lower revenues.
Gross profit as a percentage of revenue also decreased 220 basis points to 26.2%
in 2001 from 28.4% in 2000. These decreases primarily were the result of the
continued softening in the higher margin sectors of the staffing and consulting
businesses, the significant decline in permanent placement services and downward
bill rate pressure imposed by many of the Company's larger customers.


                                       7

OPERATING EXPENSES

      Operating expenses, consisting of selling, general and administrative
expenses and depreciation and amortization expense, decreased 16.1% to $176.8
million in 2001 from $210.7 million in 2000. The decrease was primarily due to
the Company's aggressive cost reduction program, including its workforce
reduction and office consolidation initiatives. Approximately 26% of the
Company's permanent workforce was eliminated during 2001. Also, variable or
incentive compensation declined due to lower revenues and operating margins. As
a percentage of revenues, selling, general and administrative expenses decreased
to 20.9% in 2001 from 21.1% in 2000. In addition, depreciation and amortization
expense increased to 3.3% of revenues in 2001 from 2.8% in 2000 primarily due to
the decline in revenues in 2001.

GOODWILL IMPAIRMENT

      Prior to the adoption of SFAS 142, the Company followed SFAS 121 to test
for its goodwill and intangible asset impairment. The Company's policy included
a projection of undiscounted cash flows for each operating company to determine
if the goodwill associated with that business component was recoverable. When
the Company performed its analysis in the fourth quarter of fiscal 2001, it
identified several operations, principally in the IT Services division, for
which negative cash flows were projected in early years and for which projected
undiscounted cash flows were not sufficient to recover the carrying amount of
related goodwill. As a result, the Company recorded a goodwill impairment charge
of $56.8 million in the fourth quarter of 2001. The impairment charges for IT
Services and Commercial Staffing were $41.1 million and $15.7 million,
respectively. These charges related to operations where future cash flows were
projected to be negative and, accordingly, the impairment charge represented the
entire carrying amount of the related goodwill.

      In the fourth quarter of 2000, the Company incurred a goodwill impairment
charge of $11.0 million related primarily to CareerShop.com.

RESTRUCTURING AND RATIONALIZATION CHARGES

      Beginning in 2001 the Company implemented a plan to restructure and
rationalize certain operations. As a result, the Company recorded charges
totaling $16.1 million in 2001. These charges were comprised of the following
components: employee severance of $1.7 million, lease abandonment and
termination charges of $3.9 million, professional services of $0.9 million,
property abandonment charges of $2.6 million, loss on sale of business of $7.7
million and other charges of ($0.5) million.

      Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 26% of the Company's permanent workforce, or 395 employees,
was eliminated in 2001. Lease abandonment and termination costs related
primarily to office closures, branch consolidations and leased space reductions.
Property abandonment costs consisted of the write-down of abandoned leasehold
improvements and other equipment. These assets were written down to estimated
fair value, generally zero, as they were abandoned. The loss on the sale of
business related to the sale of one of the Company's IT Services offices in
Dallas, which was completed December 31, 2001. On the date of the sale, the net
book value of this operation was $11.5 million and consideration of $3.8 million
was received, resulting in the write-down of $7.7 million of goodwill in the
fourth quarter of 2001. This business was included in the IT Services segment
and contributed $11.5 million in revenues and $0.3 million in net income for the
year ended December 30, 2001. Professional services charges consisted primarily
of legal and accounting services incurred in connection with the Company's
financial restructuring. Other rationalization expenses of $(0.5) million were
recorded in 2001 associated with incremental costs in downsizing the business to
current operating levels, the loss on the sale of CareerShop, changes in
estimates for previous lease terminations of $0.4 million, net of other income
of $1.6 million related to favorably settling certain obligations.

INTEREST EXPENSE

      Interest expense decreased 9.1% to $18.3 million in 2001 from $20.1
million in 2000 due to lower borrowing levels under the Company's revolving
credit facility and decreases in interest rates throughout the year. The average
interest rate on borrowings was 7.2% in 2001, down 80 basis points from 2000.
See " -- Liquidity and Capital Resources."


                                       8

PROVISION (BENEFIT) FOR INCOME TAXES

      The effective tax benefit rate of 12.7% in 2001 was lower than the U.S.
federal statutory rate of 35% primarily due to the impact of non-deductible
amortization expense, valuation allowances established during the year, and
certain nondeductible restructuring and rationalization charges, offset in part
by the $1.4 million tax benefit related to the diminution in value in the
Company's investment in CareerShop which was sold during the second quarter of
2001. The effective tax rate was 132.0% in 2000, higher than the U.S. federal
statutory rate of 35%, primarily due to nondeductible amortization expense and
state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

      The Company has experienced declines in revenues over the last two years
as the result of ongoing weak economic conditions and does not expect any
significant improvements in demand for its services before the second half of
2003. In light of these revenue declines, the Company has focused on reducing
expenses generally, limiting capital expenditures to only the highest priority
projects and managing its accounts receivable very closely. As a result of the
reduced need for working capital and these priorities, the Company's cash needs
have been reduced substantially from prior years.

      During 2002, the committed amount of the Company's senior revolving credit
facility was reduced in anticipation of the Company's financial restructuring
and the Company's primary sources of cash during the year were cash from
operations and income tax refunds. As a result of the recent completion of the
Company's financial restructuring and the execution of further amendments and
maturity date extensions to the revolving credit facility (as amended, the
"Credit Facility") in connection therewith, the Company's sources of cash in
2003 will also include available borrowings under the Credit Facility. The
Company's principal uses of cash are to repay debt, fund working capital and
meet its diminished requirements for capital expenditures. The Company believes,
subject to the conditions and contingencies described above in
"--Forward-Looking Information," that cash flow from operations and borrowings
under the Credit Facility will be adequate to meet its debt repayment objectives
and its diminished needs for working capital and capital expenditures.

      For the year ended December 29, 2002, the Company's $20.9 million of cash
provided by operating activities included $19.2 million in federal income tax
refunds received in June 2002. Cash provided by operating activities in 2002 was
substantially lower than the $55.6 million of cash provided from operations in
2001, which was more favorably impacted by the reduction in accounts receivable.
The Company had $22.6 million of cash on hand as of December 29, 2002. In the
aggregate, day's sales outstanding decreased to 49 days at December 29, 2002
from 50 days at December 30, 2001. Cash provided by investing activities was
$2.0 million during 2002 due primarily to the cash proceeds received from the
sale of a business. Cash used for investing activities of $12.7 million in 2001
related primarily to the Company's final contingent earn-out obligations (which
expired in October 2001) and capital spending. Capital spending in 2002 was $1.8
million, down from $3.0 million in 2001. Cash used for financing activities was
$17.8 million in 2002, down from $31.5 million in 2001, as the Company continued
to focus on the repayment of its revolving credit facility.

      Congress passed new federal tax legislation in 2002 that allowed the
Company to carry back federal net operating losses for five years, substantially
increasing the Company's ability to recover income taxes previously paid. As of
December 29, 2002, the Company had recorded an additional $25.5 million of
recoverable income taxes and it received $25.0 million of these recoverable
taxes in refunds subsequent to year-end.

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


                                       9

      The Company's revolving credit facility in effect during 2002 provided for
a $114.0 million revolving line of credit due June 2003 and was subject to
certain maturity date extensions in six-month increments up through January
2004. As a result of the recent completion of the Company's financial
restructuring and the execution of further amendments and maturity date
extensions to the credit facility, $65.0 million of the $103.0 million
outstanding at December 29, 2002, was classified as long-term in the Company's
consolidated balance sheet. The facility contained customary covenants that
required monthly maintenance of minimum tangible net worth and EBITDA levels, as
defined in the agreement. The Company was in compliance with these financial
covenants as of December 29, 2002. The facility also contained restrictions on
the payment of cash dividends on the Common Stock and placed additional
limitations on share repurchases, acquisitions and capital expenditures.
Interest rates payable under the revolving credit facility were set at prime
plus 300 basis points through June 2003. As of February 28, 2003, the interest
rate payable under the facility was 7.25%.

      After the end of 2002, the Company was able to maintain compliance with
its revolving credit facility covenant requiring minimum EBITDA levels as of the
three-month period ended February 23, 2003, by obtaining a waiver in March 2003
of an anticipated default of that covenant.

FINANCIAL RESTRUCTURING

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

      -     $28.75 in cash;

      -     190.9560 shares of newly issued shares of the Company's Common
            Stock; and

      -     9.5242 shares of Series B Preferred Stock of the Company, each share
            of which will be convertible into 100 shares of Common Stock and
            will automatically convert into shares of Common Stock upon any
            amendment to the Company's charter increasing the authorized number
            of shares of Common Stock or effecting a reverse split of
            outstanding shares of Common Stock that increases the number of
            authorized but unissued shares. The Series B Preferred Stock will
            vote on all matters with the Common Stock as if converted, will have
            a liquidation preference of $.01 per share, and otherwise will have
            no greater rights or privileges than the Common Stock.

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

      As a result of the Exchange Transaction, the participating noteholders in
the aggregate were issued 20,940,425 shares of Common Stock and 1,044,433 shares
of Series B Preferred Stock, which together represent approximately 82% of the
Company's outstanding Common Stock (assuming for this purpose that all shares of
the Series B Preferred Stock issued to the participating noteholders have been
converted). The existing shareholders retained ownership of their outstanding
26,881,212 shares of Common Stock, which represent approximately 18% of the
outstanding Common Stock (on the same, as-converted, basis). In connection with
this ownership change, the Company also reconstituted its Board of Directors to
provide for a seven-person Board and the designation of two representatives of
the new major shareholders to serve as new Board members, together with the
Company's Chief Executive Officer, one incumbent independent Board member who
was designated by the Company with the consent of the participating noteholders
and three independent Board members, two of whom are incumbents, who were
designated by the participating noteholders (although these two incumbents have
stated their intention not to stand for reelection at the upcoming 2003 Annual
Meeting of Shareholders).


                                       10

      In order to permit the closing of the Exchange Transaction contemplated in
the financial restructuring and to provide for the terms on which the existing
senior lenders would continue to finance the Company's working capital needs,
the Company and its existing senior lenders also executed definitive loan
agreements for the Credit Facility, which provided for certain further
amendments and maturity date extensions to the revolving credit facility and
eliminated the Equity Appreciation Right (the "EAR") held by the senior lenders
(the "Senior Debt Restructuring"). The Senior Debt Restructuring provided for
the forgiveness of indebtedness in the amount of $10.3 million. As a result of
the Exchange Transaction and the Senior Debt Restructuring, the Company used
substantially all of its cash on hand (after payment of transaction expenses) to
repay approximately $38.0 million of its outstanding credit facility and
eliminated an additional $120.0 million of its outstanding indebtedness, which
will result in substantial reductions in the Company's interest expense in
future periods. The Company does not anticipate that any material income tax
liability will arise as a result of the forgiveness of debt in these financial
restructuring transactions due to sufficient current period tax losses and net
operating loss carryforwards available to offset any taxable income on the debt
forgiveness.

      The Credit Facility provides for a $70.7 million revolving line of credit
due May 1, 2004 and is subject to certain maturity date extensions in six-month
increments up through May 1, 2005. Availability of borrowings under the Credit
Facility is subject to a borrowing base calculated as specified percentages of
the Company's eligible accounts receivable (as defined) in the aggregate, and
the Company had approximately $8.0 million of availability thereunder as of the
closing date. The Credit Facility contains customary covenants, including
financial covenants that require monthly maintenance of cumulative monthly
EBITDA levels (as defined in the amended agreement) commencing with April 2003
and an interest and funded indebtedness coverage ratio. The Credit Facility also
contains restrictions on the payment of cash dividends on the Company's capital
stock and places additional limitations on share repurchases, acquisitions and
capital expenditures. Finally, in lieu of the EAR included as part of the
revolving credit facility that was in effect in 2002 the Company has issued
common stock purchase warrants to the lenders under the Credit Facility
entitling them to purchase a total of 19,224,916 shares of Common Stock, or 10%
of the outstanding Common Stock on a fully diluted basis. These warrants are
exercisable in whole or part over a 10-year period and the exercise price
thereunder is $0.3121 per share (which was based on a stated equity valuation
for the Company of $60.0 million). The exercise price for these warrants is not
necessarily indicative of fair value. Interest rates payable under the Credit
Facility are set at prime plus 325 basis points through June 2003 with increases
during each six-month period through May 1, 2005.

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

      -     a reverse stock split of the Company's Common Stock at a
            one-for-twenty-five ratio;

      -     elimination of provisions that separate the Board of Directors into
            three classes and that prohibit action by consent of shareholders
            without a meeting;

      -     an election by the Company not to be governed by Section 203 of the
            Delaware General Corporation Law, which restricts the ability of the
            Company to engage, directly or indirectly, in a business combination
            transaction with a holder of 15% or more of its voting stock;

      -     addition of provisions requiring a supermajority vote of the Board
            of Directors or shareholders to adopt changes to the certificate of
            incorporation or bylaws; and

      -     addition of a provision to protect minority shareholders in
            connection with certain transactions with a shareholder that
            beneficially owns 20% or more of the shares of the Company's capital
            stock that are entitled to vote on matters submitted to a vote of
            the shareholders.

Each of the noteholders that participated in the exchange have agreed to vote
their shares of Common Stock and Series B Preferred Stock in favor of these
proposals. The Company has agreed that pending shareholder approval of the
amended and restated certificate of incorporation, it will comply with the
proposed provision to protect minority shareholders described above.


                                       11

      In addition, in connection with the financial restructuring, the Board of
Directors amended and restated the Company's bylaws. The amended and restated
bylaws provide, among other things, that, as long as there are "Significant
Holders" (defined as the beneficial owners of shares of capital stock of the
Company representing 20% or more of the votes entitled to be cast by holders of
outstanding shares of voting capital stock), the Significant Holders shall be
entitled to designate, in the aggregate, two members (such designees, being
"Significant Holder Designees") of the Board of Directors, the size of which is
initially set at seven members, and to designate two observers entitled to
attend all meetings of the Board of Directors and its committees. Furthermore,
the amended and restated bylaws provide that, subject to applicable law, for so
long as there are any Significant Holders, a committee comprised of the two
Significant Holder Designees and one independent director who is not also a
Significant Holder Designee shall be responsible for designating between one (1)
and four (4) independent nominees for election to the Board of Directors, with
the number within such range depending on the amount of voting stock
beneficially owned by the Significant Holders.

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

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

      In connection with the Company's financial restructuring, the Company has
terminated its 1995 Stock Option Plan. See Note 12, "Capital Stock and Stock
Options" to the Audited Consolidated Financial Statements appearing elsewhere in
this Annual Report. Additionally, a number of the Company's employees, including
each of the Company's executive officers at the end of 2002 and all but one of
the Company's Board of Directors have irrevocably canceled any and all rights
that they had to exercise any and all stock options that were previously granted
to such persons and agreed that all such options would be forfeited to the
Company. These directors and employees held in the aggregate 2,190,030 of the
stock options that were outstanding under the 1995 Stock Option Plan as of
December 29, 2002. As a result of these voluntary forfeitures, only 545,445
stock options remain outstanding under the 1995 Stock Option Plan and these
options have a weighted average exercise price of $9.23 per share. Although the
1995 Stock Option Plan has been terminated and no future issuances thereunder
will be made, these remaining outstanding stock options will continue to be
exercisable in accordance with their terms.

      The Company's Board of Directors adopted the 2003 Equity Incentive Plan
(the "2003 Equity Plan") simultaneously with the completion of the Company's
financial restructuring. The 2003 Equity Plan authorizes grants of stock
options, stock appreciation rights (or "SARs"), restricted stock, deferred stock
awards and performance awards (and dividend equivalent rights relating to
options, SARs, deferred stock and performance awards), in the case of stock or
option awards, for up to 19,870,873 shares, or 10.3%, of the Company's fully
diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key
employees, directors and consultants as selected by the Board of Directors or
the Compensation Committee. The duration of any option or SAR granted under the
2003 Equity Plan will not exceed ten years. Awards will generally vest 20% on
each


                                       12

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

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

      Subject to shareholder approval of the 2003 Equity Plan at the Company's
2003 Annual Meeting, the Board of Directors has approved the granting of
stock options for 12,585,000 shares, representing 6.5% of the Company's fully
diluted Common Stock, to these executive officers. Of these initial grants,
8,700,000 options have an exercise price of $0.3121 per share, and the other
3,885,000 options in these initial grants have an exercise price of $0.4681 per
share. The initial stock option grants to these officers vest monthly at an
annual rate of 25% and each will have 12 months following the termination of his
employment (other than for cause) to exercise vested stock options held as of
the termination date. The exercise price of a portion of these options is based
on an aggregate stated equity value of the Company of $60.0 million and for the
remaining options the exercise price is based on an aggregate stated equity
value of $90.0 million. The exercise price for these stock options is not
necessarily indicative of fair value. Following these initial grants, options
for 7,285,873 shares, or 3.8%, of the Company's fully diluted Common Stock will
remain authorized for issuance under the 2003 Equity Plan and will be reserved
for future grants. For any grants within six months after the date any existing
options are cancelled, the Company will be required to apply variable accounting
to such new options which may result in non-cash compensation expense in future
periods.

PRO FORMA FINANCIAL INFORMATION

      Because of the significance of the financial restructuring transactions
discussed above on the Company's financial position, the Company has included
certain pro forma financial information to highlight the impact of such
transactions. The following pro forma consolidated financial data as of December
29, 2002 has been derived from the application of pro forma adjustments to the
Company's historical consolidated financial statements. The pro forma data is
presented for illustrative purposes only and is not necessarily indicative of
the financial position that would have actually been reported had the financial
restructuring transactions occurred as of December 29, 2002, nor is it
indicative of the Company's future financial position.

      The pro forma condensed consolidated balance sheet as of December 29, 2002
gives effect to the Exchange Transaction and the Senior Debt Restructuring as if
each had occurred on the date of the consolidated balance sheet.


                                       13


                      PRO FORMA CONSOLIDATED BALANCE SHEET
                                DECEMBER 29, 2002
                                 (IN THOUSANDS)



                                                                                   PRO FORMA
                                                                 HISTORICAL        ADJUSTMENTS                 PRO FORMA
                                                                 ----------        -----------                 ---------
                                                                                                      
ASSETS
Cash and cash equivalents                                        $  22,623         $  (14,795)(1)             $    1,575
                                                                                       (3,153)(2)
                                                                                       (3,100)(4)
Other current assets                                                 80,118                                       80,118
Recoverable income taxes                                             25,476                                       25,476
                                                                  ---------         ---------                  ---------
      Total current assets                                          128,217           (21,048)                   107,169
Noncurrent assets                                                   119,189              (642)(3)                118,547
                                                                  ---------         ---------                  ---------
      Total assets                                                $ 247,406         $ (21,690)                 $ 225,716
                                                                  =========         =========                  =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt                                 $  38,633         $ (13,685)(1)              $  24,948
Other current liabilities                                            72,090            (1,100)(4)                 70,990
                                                                  ---------         ---------                  ---------
      Total current liabilities                                     110,723           (14,785)                    95,938
  Long-term debt -
    Convertible, subordinated notes                                 115,000          (109,661)(2)                  5,339
    Revolving credit facility                                        65,015            (1,110)(1)                 63,905
  Other long-term liabilities                                         9,016              (439)(1)                  8,577
                                                                  ---------         ---------                  ---------
      Total liabilities                                             299,754          (125,995)                   173,759
Total shareholders' equity (deficit)                                (52,348)          104,305(1,2,3,4)            51,957
                                                                  ---------         ---------                  ---------
      Total liabilities and shareholders' equity (deficit)        $ 247,406         $ (21,690)                 $ 225,716
                                                                  =========         =========                  =========


(1)   Adjustments to reflect cash paid to existing senior lenders which
      includes $13,685 of principal debt repayments and $1,110 of fees paid in
      connection with the completion of the Credit Facility, as amended, and
      cancellation of equity appreciation rights resulting in a reduction in
      accrued liabilities of $439.

(2)   Adjustments to reflect payments to participating holders of the 5.75%
      Notes and exchange of $109,661 of such notes for newly issued shares of
      the Company's Common and Series B Preferred Stock. The equity issued in
      exchange for the 5.75% Notes is recorded at estimated fair value.

(3)   Adjustments to reflect the write-off of deferred debt issuance costs of
      $642 associated with the 5.75% Notes exchanged for equity.

(4)   Adjustment to record estimated professional fees incurred and paid in
      connection with the comprehensive financial restructuring including
      $1,100 which had been accrued in the Company's historical balance
      sheet at December 29, 2002.

ACCOUNTING FOR FINANCIAL RESTRUCTURING TRANSACTIONS

      Upon consummation of the Exchange Transaction, the Company will record the
issuance of its equity securities in exchange for outstanding 5.75% Notes at the
fair value of the newly issued equity securities, with the excess of the debt
carrying value over the fair value of equity securities recorded as a gain. The
forgiveness of $10.3 million in Senior Debt will reduce future interest expense
over the term of the amended Credit Facility and the $1.1 million of fees paid
to the senior lenders will be reflected as a reduction in the principal
balances outstanding as required under accounting for troubled debt
restructuring. The Company will determine and record the fair value, if any, of
the warrants issued in connection with the Senior Debt Restructuring as
additional shareholders' equity with a corresponding reduction in the
outstanding Senior Debt, with


                                       14

such amount recognized as a component of interest expense over the term of the
Senior Debt. The Company will complete the determination of fair value and the
accounting adjustments required as a result of the Exchange Transaction and the
Senior Debt Restructuring in the second quarter of fiscal 2003. The net gain
from debt restructuring will be classified as a component of income from
operations in accordance with the recently issued SFAS No. 145.

MANAGEMENT'S PLANS FOR LIQUIDITY AND DEBT COMPLIANCE

      The Company experienced declining revenue and significant operating losses
in 2001 and 2002. In response to the declining operating performance, the
Company undertook several initiatives beginning in 2001 including the following:

      -     Execution of the Exchange Transaction and the Senior Debt
            Restructuring discussed above, which has resulted in the Company
            using substantially all of its cash on hand (after payment of
            transaction expenses) to repay approximately $38.0 million of its
            outstanding credit facility and elimination of an additional
            $120.0 million of its outstanding indebtedness, which will result in
            a substantial reduction in prospective annual interest expense;

      -     Filing for and receiving substantial income tax refunds by carrying
            back current period tax losses to recover income taxes previously
            paid, with a substantial portion of such refunds used to reduce
            outstanding indebtedness;

      -     Restructuring actions including the reduction of approximately 17.5%
            (26% in 2001) of the permanent workforce during 2002 and
            rationalization of office space;

      -     Reduction in accounts receivable with resulting cash flow used to
            reduce outstanding indebtedness; and

      -     Plans for further office space rationalization to reduce operating
            costs and improve efficiency in 2003.

      The Company's ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement (as defined) commencing with April 2003 and an interest and funded
indebtedness coverage ratio. These covenants require the Company to generate
EBITDA, as defined, in the aggregate amount of $5.9 million from April through
December 2003; this compares to $12.2 million of EBITDA, as defined, actually
reported for April through December 2002. Based on the Company's fiscal 2003 and
2004 projections, which reflect declining demand for the Company's services,
offset by reductions in costs associated with the reduced revenues and resulting
from personnel and office space rationalization, management believes the Company
will be able to maintain compliance with the financial covenants for the
remaining term of the Credit Facility. The Company also believes that the
operating trends in the first quarter of 2003 support the key assumptions in its
2003 and 2004 operating plans. However, there can be no assurance that the
economy or the Company will perform as expected or that further economic
declines will not adversely impact the Company's ability to comply with the
financial covenants. If the Company does violate future covenants, it would seek
waivers and amendments from its lenders, but can give no assurance that any such
waivers and amendments would be available at all or on acceptable terms. If the
Company were unable to obtain a waiver of future covenant violations, the
lenders would be entitled to require immediate repayment of all amounts
outstanding under the Credit Facility. An acceleration of outstanding amounts
under the Credit Facility would also cause a default under, and permit
acceleration of, the Company's remaining 5.75% Convertible Subordinated Notes.
In the event of one or more such defaults, the Company's ongoing viability would
be seriously threatened, and it would be forced to evaluate a number of
strategic alternatives, including a further debt restructuring or other
reorganization, the closure of certain operating locations or the sale of
certain or all of its assets in order to continue to fund its operations. In the
current economic environment, management believes that any such sale of assets
would be at depressed prices that could be significantly lower than the net book
value of assets sold and may not be sufficient to satisfy the Company's
liabilities.

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


                                       15


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

CONTRACTUAL AND COMMERCIAL COMMITMENTS

      The following table summarizes contractual obligations and commercial
commitments at December 29, 2002 after reflecting the effects of the financial
restructuring completed in April 2003 as if the restructuring had been completed
on December 29, 2002:



                                                                 PAYMENTS DUE BY PERIOD
                                                      --------------------------------------------
CONTRACTUAL OBLIGATIONS                    TOTAL      LESS THAN 1 YEAR   1-3 YEARS       4-9 YEARS
- -----------------------                    -----      ----------------   ---------       ---------
                                                                             
Short- and long-term debt                 $ 94,192        $ 24,948        $ 69,244        $     --
Operating leases                            25,939           8,667          14,621           2,651
                                          --------        --------        --------        --------
Total contractual cash obligations        $120,131        $ 33,615        $ 83,865        $  2,651
                                          ========        ========        ========        ========




                                                            COMMITMENT EXPIRATION PER PERIOD
                              TOTAL AMOUNT      -----------------------------------------------------
OTHER COMMERCIAL COMMITMENTS   COMMITTED        LESS THAN 1 YEAR         1-3 YEARS            4-9 YEARS
- ----------------------------   ---------        ----------------         ---------            ---------
                                                                                  
Letters of credit               $9,002               $   --               $9,002               $   --


MARKET RISK DISCLOSURES

      The Company's outstanding debt under its revolving credit facility at
February 28, 2003 was $103.0 million. Interest on borrowings under that facility
was based on the prime rate plus a variable margin. Based on the outstanding
balance at February 28, 2003, a change of 1% in the interest rate would cause a
change in interest expense of approximately $1.0 million on an annual basis.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The Company's analysis and discussion of its financial condition and
results of operations are based upon its consolidated financial statements that
have been prepared in accordance with generally accepted accounting principles
in the United States (US GAAP). The preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions.
These estimates include the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
The Company evaluates these estimates and assumptions on an ongoing basis,
including but not limited to those related to the recoverability of goodwill,
collectibility of accounts receivable, useful lives of property and equipment,
reserves against permanent placement revenues, workers' compensation costs,
restructuring and rationalization reserves and realization of deferred tax
assets. Estimates and assumptions are based on historical and other factors
believed to be reasonable under the circumstances. The results of these
estimates may form the basis of the carrying value of certain assets and
liabilities and may not be readily apparent from other sources. Actual results,
under conditions and circumstances different from those assumed, may differ from
these estimates.

      The Company believes the following accounting policies are critical to its
business operations and the understanding of its results of operations and
include the more significant judgments and estimates used in the preparation of
its consolidated financial statements.


                                       16

RECOVERABILITY OF GOODWILL

      Effective at the beginning of 2002, the Company adopted SFAS 142, which
provides that goodwill and other intangible assets with indefinite lives will
not be amortized, but will be tested at least annually for impairment.
Assumptions and estimates used in the determination of the recoverability of
goodwill, such as future cash flows, operating margins, growth rates and
discount rates may affect the carrying value of goodwill, and possible
impairment expense in the Company's consolidated financial statements.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE

      The Company maintains accounts receivable allowances for estimated losses
resulting from the inability of its customers to make required payments.
Additional allowances may be required if the financial condition of the economy
or the Company's customers deteriorates.

USEFUL LIVES OF PROPERTY AND EQUIPMENT

      The Company records depreciation based on estimated useful lives of the
property and equipment. If the Company determines that an asset has a shorter
useful life than originally estimated, additional expense may be required.

RESERVES AGAINST PERMANENT PLACEMENT REVENUES

      In the Company's permanent placement businesses, the Company recognizes
revenue when employment candidates accept offers of permanent employment.
Allowances are established, based on historical data, to estimate losses due to
placed candidates not remaining employed through the Company's guarantee period,
typically 90 days or less. Additional allowances may be required if a greater
percentage of candidates do not fulfill the guarantee period than historical
rates reflect.

WORKERS' COMPENSATION COSTS

      The Company maintains a self-insurance program for workers' compensation
and accrues liabilities under that program based on the loss and loss adjustment
expenses as estimated by an outside administrator. If actual claims experience
deteriorates from historical experience, additional expense may be required.

RESTRUCTURING AND RATIONALIZATION RESERVES

      The Company records restructuring and rationalization reserves as a result
of its workforce reduction program and cost reduction initiatives which resulted
in closing and consolidating certain offices. The reserve primarily relates to
lease abandonment and termination costs that have been reduced by the amount of
subleases expected to be collected. The Company uses current market information
to estimate sublease income. If the sublease income is less than estimated,
additional reserves may be required.

INCOME TAX ASSETS AND LIABILITIES

      The Company records an income tax valuation allowance when it is no longer
more likely than not that its certain deferred tax assets, net of operating
losses and capital loss carryforwards, will be realized. These deferred tax
items represent expenses recognized for financial reporting purposes, which will
result in tax deductions over varying future periods. Certain judgments,
assumptions and estimates may affect the carrying value of the deferred tax
assets such as estimates of future taxable income, availability of capital gains
in future periods, timing or amount of future reversals of existing deferred tax
liabilities, and other tax planning strategies that may be available to the
Company.

      The Company records an estimated tax liability or tax benefit for income
and other taxes based on what it determines will likely be paid in the various
tax jurisdictions in which it operates. Management uses its best judgment in the
determination of these amounts. However, the liabilities ultimately realized and
paid are dependent upon various matters, including resolution of tax audits, and
may differ from amounts recorded. An adjustment to the estimated liability would
be recorded through income in the period in which it becomes probable that the
amount of the actual liability differs from the recorded amount.


                                       17

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities" which nullifies Emerging
Issues Task Force Issue No. 94-3 ("Issue 94-3"), "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as defined in Issue 94-3 was recognized at the date of an entity's commitment to
an exit plan. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect that adoption of this statement will
have a material impact on the Company's results of operations, financial
position or cash flows.


                                       18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Personnel Group of America, Inc.:

In our opinion, the accompanying consolidated balance sheets, together with the
pro forma consolidated balance sheet data as of December 29, 2002, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Personnel Group of America, Inc. and subsidiaries (collectively, the
"Company") at December 29, 2002 and December 30, 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 29, 2002, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As described in Note 1, on April 14, 2003 the Company completed a comprehensive
financial restructuring. The pro forma consolidated balance sheet data reflects
the impact of the financial restructuring on the Company's financial condition
at December 29, 2002 had the financial restructuring been completed on that
date.

As disclosed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and indefinite-lived intangible
assets as of December 31, 2001.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina
April 14, 2003


                                       19

                PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
     CONSOLIDATED BALANCE SHEETS -- DECEMBER 29, 2002 AND DECEMBER 30, 2001
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                             DECEMBER 29, 2002             DECEMBER 30,
                                                                        ---------------------------         ---------
                                                                        PRO FORMA        HISTORICAL           2001
                                                                        ---------         ---------         ---------
                                                                                                  
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                             $   1,575         $  22,623         $  17,557
  Accounts receivable, net of allowance for doubtful accounts of
     $2,956 and $2,451 in 2002 and 2001, respectively                      76,178            76,178            87,088
  Prepaid expenses and other current assets                                 3,940             3,940             7,975
  Recoverable income taxes                                                 25,476            25,476            10,005
  Deferred income taxes                                                        --                --            11,896
                                                                        ---------         ---------         ---------
      Total current assets                                                107,169           128,217           134,521
Property and equipment, net                                                13,240            13,240            18,061
Goodwill                                                                  103,532           103,532           478,162
Other assets                                                                1,775             2,417             3,379
                                                                        ---------         ---------         ---------
      Total assets                                                      $ 225,716         $ 247,406         $ 634,123
                                                                        =========         =========         =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Current portion of long-term debt                                     $  24,948         $  38,633         $     882
  Accounts payable                                                          9,887             9,887             9,598
  Accrued wages, benefits and other                                        61,103            62,203            51,800
                                                                        ---------         ---------         ---------
      Total current liabilities                                            95,938           110,723            62,280
  Long-term debt -
    Convertible, subordinated notes                                         5,339           115,000           115,000
    Revolving credit facility                                              63,905            65,015           119,000
  Other long-term liabilities                                               8,577             9,016            39,750
                                                                        ---------         ---------         ---------
      Total liabilities                                                   173,759           299,754           336,030
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
  Preferred stock, $.01 par value; shares authorized 5,000;
    no shares issued and outstanding                                           10                --                --
  Common stock, $.01 par value; shares authorized 95,000;
    33,065 shares issued and outstanding                                      540               331               331
  Additional paid-in capital                                              337,227           315,404           316,694
  Retained earnings (accumulated deficit)                                (242,281)         (324,544)           25,983
  Less common stock held in treasury at cost -
    6,184 shares at December 29, 2002 and 6,371 shares
    at December 30, 2001                                                  (43,539)          (43,539)          (44,915)
                                                                        ---------         ---------         ---------
      Total shareholders' equity (deficit)                                 51,957           (52,348)          298,093
                                                                        ---------         ---------         ---------
      Total liabilities and shareholders' equity (deficit)              $ 225,716         $ 247,406         $ 634,123
                                                                        =========         =========         =========


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


                                       20

                PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                           2002              2001              2000
                                                                         ---------         ---------         ---------
                                                                                                    
REVENUES                                                                 $ 557,748         $ 732,327         $ 881,992
DIRECT COSTS OF SERVICES                                                   427,947           540,659           631,442
                                                                         ---------         ---------         ---------
GROSS PROFIT                                                               129,801           191,668           250,550
OPERATING EXPENSES:
  Selling, general and administrative                                      114,590           152,928           185,743
  Depreciation and amortization                                              7,124            23,913            24,915
  Goodwill impairment                                                       89,935            56,779            11,021
  Restructuring and rationalization charges                                  8,278            16,134             1,960
                                                                         ---------         ---------         ---------
OPERATING INCOME (LOSS)                                                    (90,126)          (58,086)           26,911
INTEREST EXPENSE                                                            17,301            18,278            20,108
                                                                         ---------         ---------         ---------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE                                          (107,427)          (76,364)            6,803
PROVISION (BENEFIT) FOR INCOME TAXES                                           603            (9,686)            8,978
                                                                         ---------         ---------         ---------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE           (108,030)          (66,678)           (2,175)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES         (242,497)               --                --
                                                                         ---------         ---------         ---------
NET LOSS                                                                 $(350,527)        $ (66,678)        $  (2,175)
                                                                         =========         =========         =========
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
  Loss before cumulative effect of change in accounting principle        $   (4.04)        $   (2.52)        $   (0.09)
  Cumulative effect of change in accounting principle                        (9.06)               --                --
                                                                         ---------         ---------         ---------
  Net loss                                                               $  (13.10)        $   (2.52)        $   (0.09)
                                                                         =========         =========         =========
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING                       26,756            26,503            25,090


        The accompanying notes are an integral part of these statements.


                                       21


                PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000
                                 (IN THOUSANDS)



                                                                                      RETAINED                  COMMON
                                                                         ADDITIONAL   EARNINGS                  STOCK
                                                         COMMON STOCK      PAID-IN  (ACCUMULATED   DEFERRED    HELD IN
                                                        SHARES   AMOUNT   CAPITAL     DEFICIT)   COMPENSATION  TREASURY    TOTAL
                                                        ------   ------  ---------    ---------   ---------   ---------  ---------
                                                                                                    
BALANCE, JANUARY 2, 2000                                33,065   $  331  $ 330,237    $  94,836   $     (61)  $(55,500)  $ 369,843

        Stock issued for acquisitions                       --       --     (6,520)          --          --     11,588       5,068
        Repurchases of common stock                         --       --         --           --          --    (10,584)    (10,584)
        Stock issued for employee stock purchase plan
               and exercises of stock options               --       --     (3,807)          --          --      5,893       2,086
        Amortization of deferred compensation               --       --         --           --          61         --          61
        Net loss                                            --       --         --       (2,175)         --         --      (2,175)
                                                        ------   ------  ---------    ---------   ---------   --------   ---------
BALANCE, DECEMBER 31, 2000                              33,065      331    319,910       92,661          --    (48,603)    364,299
                                                        ------   ------  ---------    ---------   ---------   --------   ---------
        Stock issued for employee stock purchase plan       --       --     (3,216)          --          --      3,688         472
        Net loss                                            --       --         --      (66,678)         --         --     (66,678)
                                                        ------   ------  ---------    ---------   ---------   --------   ---------
BALANCE, DECEMBER 30, 2001                              33,065      331    316,694       25,983          --    (44,915)    298,093
                                                        ------   ------  ---------    ---------   ---------   --------   ---------
        Stock issued for employee stock purchase plan       --       --     (1,290)          --          --      1,376          86
        Net loss                                            --       --         --     (350,527)         --         --    (350,527)
                                                        ------   ------  ---------    ---------   ---------   --------   ---------
BALANCE, DECEMBER 29, 2002                              33,065   $  331  $ 315,404    $(324,544)  $      --   $(43,539)  $ (52,348)
                                                        ======   ======  =========    =========   =========   ========   =========



        The accompanying notes are an integral part of these statements.

                PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 AND DECEMBER 31, 2000
                                 (IN THOUSANDS)



                                                                                      2002              2001              2000
                                                                                    ---------         ---------         ---------
                                                                                                               
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net loss                                                                     $(350,527)        $ (66,678)        $  (2,175)
       Adjustments to reconcile loss to net cash provided
                by operating activities:
       Depreciation and amortization                                                    7,124            23,913            24,915
       Cumulative effect of change in accounting principle, net of deferred
                tax benefit of $42,198                                                242,497                --                --
       Loss on abandonment and disposals                                                   --            10,743                --
       Goodwill impairment charge                                                      89,935            56,779            11,515
       Deferred income taxes on loss before cumulative effect of
                change in accounting principle, net (including $19,217 of income
                tax refunds received in 2002)                                          20,117            (2,479)            6,050
       Changes in assets and liabilities:
       Accounts receivable                                                             10,910            39,124            (1,324)
       Accounts payable and accrued liabilities                                        (1,260)           (8,690)           10,451
       Other, net                                                                       2,081             2,878              (493)
                                                                                    ---------         ---------         ---------
                Net cash provided by operating activities                              20,877            55,590            48,939
CASH FLOWS FROM INVESTING ACTIVITIES:
       Proceeds from sale of business                                                   3,825               372                --
       Acquisition-related payments                                                        --           (10,120)          (43,127)
       Purchase of property and equipment, net                                         (1,831)           (2,999)           (7,924)
                                                                                    ---------         ---------         ---------
                Net cash provided by (used in) investing activities                     1,994           (12,747)          (51,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
       Repayments under credit facility                                               (44,000)          (53,000)          (51,500)
       Borrowings under credit facility                                                28,000            22,000            63,500
       Credit facility amendment fees                                                  (1,657)           (1,227)               --
       Repurchases of common stock                                                         --                --           (10,638)
       Repayments of other debt, net                                                     (234)              236              (855)
       Proceeds from employee stock purchase plan                                          86               472             2,086
                                                                                    ---------         ---------         ---------
                Net cash provided by (used in) financing activities                   (17,805)          (31,519)            2,593
                                                                                    ---------         ---------         ---------
Net increase in cash and cash equivalents                                               5,066            11,324               481
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                         17,557             6,233             5,752
                                                                                    ---------         ---------         ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                            $  22,623         $  17,557         $   6,233
                                                                                    =========         =========         =========
SUPPLEMENTAL CASH FLOW INFORMATION:
       Cash payments during the year for --
                Income taxes                                                        $      24         $     518         $   5,497
                Interest                                                            $  15,194         $  15,942         $  18,588
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
       Accrued acquisition related earnout payments                                 $      --         $      --         $  11,458



        The accompanying notes are an integral part of these statements.





                PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. SUBSEQUENT EVENT - COMPREHENSIVE FINANCIAL RESTRUCTURING

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

      -     $28.75 in cash (not in thousands);

      -     190.9560 shares of newly issued shares of the Company's Common
            Stock; and

      -     9.5242 shares of Series B Preferred Stock of the Company, each share
            of which will be convertible into 100 shares of Common Stock and
            will automatically convert into shares of Common Stock upon any
            amendment to the Company's charter increasing the authorized number
            of shares of Common Stock or effecting a reverse split of
            outstanding shares of Common Stock that increases the number of
            authorized but unissued shares. The Series B Preferred Stock will
            vote on all matters with the Common Stock as if converted, will have
            a liquidation preference of $.01 per share, and otherwise will have
            no greater rights or privileges than the Common Stock.

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

      As a result of the Exchange Transaction, the participating noteholders in
the aggregate were issued 20,940,425 shares of Common Stock and 1,044,433 shares
of Series B Preferred Stock, which together represent approximately 82% of the
Company's outstanding Common Stock (assuming for this purpose that all shares of
the Series B Preferred Stock issued to the participating noteholders have been
converted). The existing shareholders retained ownership of their outstanding
26,881,212 shares of Common Stock, which represent approximately 18% of the
outstanding Common Stock (on the same, as-converted, basis). In connection with
this ownership change, the Company also reconstituted its Board of Directors to
provide for a seven-person Board and the designation of two representatives of
the new major shareholders to serve as new Board members, together with the
Company's Chief Executive Officer, one incumbent independent Board member who
was designated by the Company with the consent of the participating noteholders
and three independent Board members, two of whom are incumbents, who were
designated by the participating noteholders (although these two incumbents have
stated their intention not to stand for reelection at the upcoming 2003 Annual
Meeting of Shareholders).

      In order to permit the closing of the Exchange Transaction contemplated in
the financial restructuring and to provide for the terms on which the existing
senior lenders would continue to finance the Company's working capital needs,
the Company and its existing senior lenders also executed definitive loan
agreements for the Credit Facility, which provided for certain further
amendments and maturity date extensions to the revolving credit facility and
eliminated the Equity Appreciation Right (the "EAR") held by the senior lenders
(the "Senior Debt Restructuring"). The Senior Debt Restructuring provided for
the forgiveness of indebtedness in the amount of $10,300. As a result of the
Exchange Transaction and the Senior Debt Restructuring, the Company used
substantially all of its cash on hand (after payment of transaction expenses)
to repay approximately $37,985 of its outstanding credit facility and
eliminated an additional $119,961 of its outstanding indebtedness,


                                       24


which will result in substantial reductions in the Company's interest expense
in future periods. The Company does not anticipate that any material income tax
liability will arise as a result of the forgiveness of debt in these financial
restructuring transactions due to sufficient current period tax losses and net
operating loss carryforwards available to offset any taxable income on the debt
forgiveness.

      The Credit Facility provides for a $70,700 revolving line of credit due
May 1, 2004 and is subject to certain maturity date extensions in six-month
increments up through May 1, 2005. Availability of borrowings under the Credit
Facility is subject to a borrowing base calculated as specified percentages of
the Company's eligible accounts receivable (as defined) in the aggregate, and
the Company had approximately $8,000 of availability thereunder as of the
closing date. The Credit Facility contains customary covenants, including
financial covenants that require monthly maintenance of cumulative monthly
EBITDA levels (as defined in the amended agreement) commencing with April 2003
and an interest and funded indebtedness coverage ratio. The Credit Facility also
contains restrictions on the payment of cash dividends on the Company's capital
stock and places additional limitations on share repurchases, acquisitions and
capital expenditures. Finally, in lieu of the EAR included as part of the
revolving credit facility that was in effect in 2002 the Company has issued
common stock purchase warrants to the lenders under the Credit Facility
entitling them to purchase a total of 19,224,916 shares of Common Stock, or 10%
of the outstanding Common Stock on a fully diluted basis. These warrants are
exercisable in whole or part over a 10-year period and the exercise price
thereunder is $0.3121 per share (which was based on a stated equity valuation
for the Company of $60,000). The exercise price for these warrants is not
necessarily indicative of fair value. Interest rates payable under the Credit
Facility are set at prime plus 325 basis points through June 2003 with increases
during each six-month period through May 1, 2005.

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

      -     a reverse stock split of the Company's Common Stock at a
            one-for-twenty-five ratio;

      -     elimination of provisions that separate the Board of Directors into
            three classes and that prohibit action by consent of shareholders
            without a meeting;

      -     an election by the Company not to be governed by Section 203 of the
            Delaware General Corporation Law, which restricts the ability of the
            Company to engage, directly or indirectly, in a business combination
            transaction with a holder of 15% or more of its voting stock;

      -     addition of provisions requiring a supermajority vote of the Board
            of Directors or shareholders to adopt changes to the certificate of
            incorporation or bylaws; and

      -     addition of a provision to protect minority shareholders in
            connection with certain transactions with a shareholder that
            beneficially owns 20% or more of the shares of the Company's capital
            stock that are entitled to vote on matters submitted to a vote of
            the shareholders.

Each of the noteholders that participated in the exchange have agreed to vote
their shares of Common Stock and Series B Preferred Stock in favor of these
proposals. The Company has agreed that pending shareholder approval of the
amended and restated certificate of incorporation, it will comply with the
proposed provision to protect minority shareholders described above.

      In connection with the financial restructuring, the Company amended and
restated the shareholder rights agreement that governs the terms of preferred
share purchase rights that currently accompany the Common Stock. The amendments
include, among other things, exemptions preventing the following from triggering
separation of the rights from the Common Stock: (i) beneficial ownership of
capital stock by the participating noteholders acquired in the financial
restructuring; (ii) beneficial ownership by any Significant Holder of capital
stock of the Issuer acquired in


                                       25

accordance with the amended and restated certificate of incorporation; and (iii)
beneficial ownership by any third party of capital stock of the Issuer acquired
in a transfer from a Significant Holder pursuant to a transaction that complies
with the amended and restated certificates of incorporation. In addition, the
shareholder rights plan was amended to include a tag-along right for the benefit
of any holder (including certain holders of more than 2% acting together as a
group) of 5% or more of the voting stock of the Company pursuant to which such
holder (or group) will be entitled to participate pro rata, for the same amount
and form of consideration and otherwise on substantially the same terms and
conditions, in any transfer by any Significant Holders of capital stock of the
Company of 20% or more of the voting stock of the Company.

      In connection with the Company's financial restructuring, the Company has
terminated its 1995 Stock Option Plan. See Note 12, "Capital Stock and Stock
Options" to the Audited Consolidated Financial Statements appearing elsewhere in
this Annual Report. Additionally, a number of the Company's employees, including
each of the Company's executive officers at the end of 2002 and all but one of
the Company's Board of Directors have irrevocably cancelled any and all rights
that they had to exercise any and all stock options that were previously granted
to such employees and agreed that all such options would be forfeited to the
Company. These directors and employees held in the aggregate 2,190,030 of the
stock options that were outstanding under the 1995 Stock Option Plan as of
December 29, 2002. As a result of these voluntary forfeitures, only 545,445
stock options remain outstanding under the 1995 Stock Option Plan and these
options have a weighted average exercise price of $9.23 per share. Although the
1995 Stock Option Plan has been terminated and no future issuances there under
will be made, these remaining outstanding stock options will continue to be
exercisable in accordance with their terms.

      The Company's Board of Directors adopted the 2003 Equity Incentive Plan
(the "2003 Equity Plan") simultaneously with the completion of the Company's
financial restructuring. The 2003 Equity Plan authorizes grants of stock
options, stock appreciation rights (or "SARs"), restricted stock, deferred stock
awards and performance awards (and dividend equivalent rights relating to
options, SARs, deferred stock and performance awards), in the case of stock or
option awards, for up to 19,870,873 shares, or 10.3%, of the Company's fully
diluted Common Stock. Awards under the 2003 Equity Plan are to be made to key
employees, directors and consultants as selected by the Board of Directors or
the Compensation Committee. The duration of any option or SAR granted under the
2003 Equity Plan will not exceed ten years. Awards will generally vest 20% on
each anniversary of the date of grant unless either the Board of Directors or
Compensation Committee approves or a participant's employment agreement provides
otherwise. Following a termination of employment, vested options and/or SARs
must be exercised within 3 months (12 months in the case of death or
disability), except that options and SARs terminate immediately upon a
termination for cause as defined in the relevant participant's employment
agreement, or as determined in the discretion of the Board of Directors or the
Compensation Committee if no employment agreement exists. Any non-vested option,
SARs or other awards issued under the 2003 Equity Plan will be forfeited upon
any termination. The Board of Directors and Compensation Committee retain the
discretion to extend the post-employment exercise period of an option or SAR and
to accelerate vesting of awards under the 2003 Equity Plan.

      Subject to stockholder approval of the 2003 Equity Plan at the Company's
2003 Annual Meeting, the Board of Directors has approved the granting of stock
options for 12,585,000 shares, representing 6.5% of the Company's fully diluted
Common Stock, to these executive officers. Of these initial grants, 8,700,000
options have an exercise price of $0.3121 per share, and the other 3,885,000
options in these initial grants have an exercise price of $0.4681 per share. The
initial stock option grants to these officers vest monthly at an annual rate of
25% and each will have 12 months following the termination of his employment
(other than for cause) to exercise vested stock options held as of the
termination date. The exercise price of a portion of these options is based on
an aggregate stated equity value of the Company of $60,000 and for the remaining
options the exercise price is based on an aggregate stated equity value of
$90,000. The exercise price for these stock options is not necessarily
indicative of fair value. Following these initial grants, options for 7,285,873
shares, or 3.8%, of the Company's fully diluted Common Stock will remain
authorized for issuance under the 2003 Equity Plan and will be reserved for
future grants. For any grants within six months after the date any existing
options are cancelled, the Company will be required to apply variable accounting
to such new options which may result in non-cash compensation expense in future
periods.




                                       26

PRO FORMA FINANCIAL INFORMATION

      Because of the significance of the financial restructuring transactions
discussed above on the Company's financial position, the Company has included
certain pro forma financial information to highlight the impact of such
transactions. The following pro forma consolidated financial data as of December
29, 2002 has been derived from the application of pro forma adjustments to the
Company's historical consolidated financial statements. The pro forma data is
presented for illustrative purposes only and is not necessarily indicative of
the financial position that would have actually been reported had the financial
restructuring transactions occurred as of December 29, 2002, nor is it
indicative of the Company's future financial position.

      The pro forma condensed consolidated balance sheet as of December 29, 2002
gives effect to the Exchange Transaction and the Senior Debt Restructuring as if
each had occurred on the date of the consolidated balance sheet.

                      PRO FORMA CONSOLIDATED BALANCE SHEET
                                DECEMBER 29, 2002
                                 (IN THOUSANDS)




                                                                                    PRO FORMA
                                                                 HISTORICAL         ADJUSTMENTS                PRO FORMA
                                                                 ----------         -----------                ---------
                                                                                                      
ASSETS
Cash and cash equivalents                                         $  22,623         $ (14,795)(1)              $   1,575
                                                                                       (3,153)(2)
                                                                                       (3,100)(4)
Other current assets                                                 80,118                                       80,118
Recoverable income taxes                                             25,476                                       25,476
                                                                  ---------         ---------                  ---------
      Total current assets                                          128,217           (21,048)                   107,169
Noncurrent assets                                                   119,189              (642)(3)                118,547
                                                                  ---------         ---------                  ---------
      Total assets                                                $ 247,406         $ (21,690)                 $ 225,716
                                                                  =========         =========                  =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current portion of long-term debt                                 $  38,633         $ (13,685)(1)              $  24,948
Other current liabilities                                            72,090            (1,100)(4)                 70,990
                                                                  ---------         ---------                  ---------
      Total current liabilities                                     110,723           (14,785)                    95,938
  Long-term debt -
    Convertible, subordinated notes                                 115,000          (109,661)(2)                  5,339
    Revolving credit facility                                        65,015            (1,110)(1)                 63,905
  Other long-term liabilities                                         9,016              (439)(1)                  8,577
                                                                  ---------         ---------                  ---------
      Total liabilities                                             299,754          (125,995)                   173,759
Total shareholders' equity (deficit)                                (52,348)          104,305(1,2,3,4)            51,957
                                                                  ---------         ---------                  ---------
      Total liabilities and shareholders' equity (deficit)        $ 247,406         $ (21,690)                 $ 225,716
                                                                  =========         =========                  =========


(1)   Adjustments to reflect cash paid to existing senior lenders which
      includes $13,685 of principal debt repayments and $1,110 of fees paid in
      connection with the completion of the Credit Facility, as amended, and
      cancellation of equity appreciation rights resulting in a reduction in
      accrued liabilities of $439.

(2)   Adjustments to reflect payments to participating holders of the 5.75%
      Notes and exchange of $109,661 of such notes for newly issued shares of
      the Company's Common and Series B Preferred Stock. The equity issued in
      exchange for the 5.75% Notes is recorded at estimated fair value.

(3)   Adjustments to reflect the write-off of deferred debt issuance costs of
      $642 associated with the 5.75% Notes exchanged for equity.

(4)   Adjustment to record estimated professional fees incurred and paid in
      connection with the comprehensive financial restructuring including
      $1,100 which had been accrued in the Company's historical balance
      sheet at December 29, 2002.


                                       27

ACCOUNTING FOR FINANCIAL RESTRUCTURING TRANSACTIONS

      Upon consummation of the Exchange Transaction, the Company will record the
issuance of its equity securities in exchange for outstanding 5.75% Notes at the
fair value of the newly issued equity securities, with the excess of the debt
carrying value over the fair value of equity securities recorded as a gain. The
forgiveness of $10,300 in Senior Debt will reduce future interest expense
over the term of the amended Credit Facility and the $1,110 of fees paid
to the senior lenders will be reflected as a reduction in the principal balances
outstanding as required under accounting for troubled debt restructuring. The
Company will determine and record the fair value, if any, of the warrants issued
in connection with the Senior Debt Restructuring as additional shareholders'
equity with a corresponding reduction in the outstanding Senior Debt, with such
amount recognized as a component of interest expense over the term of the Senior
Debt. The Company will complete the determination of fair value and the
accounting adjustments required as a result of the Exchange Transaction and the
Senior Debt Restructuring in the second quarter of fiscal 2003. The net gain
from debt restructuring will be classified as a component of income from
operations in accordance with the recently issued SFAS No. 145.

MANAGEMENT'S PLANS FOR LIQUIDITY AND DEBT COMPLIANCE

      The Company experienced declining revenue and significant operating losses
in 2001 and 2002. In response to the declining operating performance, the
Company undertook several initiatives beginning in 2001 including the following:

      -     Execution of the Exchange Transaction and the Senior Debt
            Restructuring discussed above, which has resulted in the Company
            using substantially all of its cash on hand (after payment of
            transaction expenses) to repay approximately $37,985 of its
            outstanding credit facility and elimination of an additional
            $119,961 of its outstanding indebtedness, which will result in a
            substantial reduction in prospective annual interest expense;

      -     Filing for and receiving substantial income tax refunds by carrying
            back current period tax losses to recover income taxes previously
            paid, with a substantial portion of such refunds used to reduce
            outstanding indebtedness;

      -     Restructuring actions including the reduction of approximately 17.5%
            (26% in 2001) of the permanent workforce during 2002 and
            rationalization of office space;

      -     Reduction in accounts receivable with resulting cash flow used to
            reduce outstanding indebtedness; and

      -     Plans for further office space rationalization to reduce operating
            costs and improve efficiency in 2003.

      The Company's ability to continue operating is largely dependent upon its
ability to maintain compliance with the financial covenants of the Credit
Facility. The financial covenants include a cumulative monthly EBITDA
requirement (as defined) commencing with April 2003 and an interest and funded
indebtedness coverage ratio. These covenants require the Company to generate
EBITDA, as defined, in the aggregate amount of $5,946 from April through
December 2003; this compares to $12,157 of EBITDA, as defined, actually reported
for April through December 2002. Based on the Company's fiscal 2003 and 2004
projections, which reflect declining demand for the Company's services, offset
by reductions in costs associated with the reduced revenues and resulting from
personnel and office space rationalization, management believes the Company will
be able to maintain compliance with the financial covenants for the remaining
term of the Credit Facility. The Company also believes that the operating trends
in the first quarter of 2003 support the key assumptions in its 2003 and 2004
operating plans. However, there can be no assurance that the economy or the
Company will perform as expected or that further economic declines will not
adversely impact the Company's ability to comply with the financial covenants.
If the Company does violate future covenants, it would seek waivers and
amendments from its lenders, but can give no assurance that any such waivers and
amendments would


                                       28

be available at all or on acceptable terms. If the Company were unable to obtain
a waiver of future covenant violations, the lenders would be entitled to require
immediate repayment of all amounts outstanding under the Credit Facility. An
acceleration of outstanding amounts under the Credit Facility would also cause a
default under, and permit acceleration of, the Company's remaining 5.75%
Convertible Subordinated Notes. In the event of one or more such defaults, the
Company's ongoing viability would be seriously threatened, and it would be
forced to evaluate a number of strategic alternatives, including a further debt
restructuring or other reorganization, the closure of certain operating
locations or the sale of certain or all of its assets in order to continue to
fund its operations. In the current economic environment, management believes
that any such sale of assets would be at depressed prices that could be
significantly lower than the net book value of assets sold and may not be
sufficient to satisfy the Company's liabilities.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


BASIS OF PRESENTATION

      The consolidated financial statements include the accounts of Personnel
Group of America, Inc. and its subsidiaries. All significant intercompany
transactions have been eliminated. Certain amounts in prior years have been
reclassified to conform to the 2002 presentation.

      The Company's fiscal years ended December 29, 2002, December 30, 2001 and
December 31, 2000 are referred to in these financial statements as years 2002,
2001 and 2000, respectively.

      The Company is organized into two Divisions: the Information Technology
Services Division ("IT Services"), which provides information technology
staffing and consulting services in a range of computer-related disciplines and
technology tools for human capital management, and the Commercial Staffing
Services Division ("Commercial Staffing"), which provides a variety of temporary
office, clerical, accounting and finance, light technical and light industrial
staffing services. All of the IT Services and Commercial Staffing branch offices
are located in the United States, and none are franchised or licensed.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

      The Company recognizes revenue at the time its services are performed.
Substantially all revenues of the Company are derived from or generated in
connection with the sale of staffing and consulting services. Permanent
placement revenues are recognized when employment candidates accept offers of
permanent employment. Allowances are established, based upon historical data, to
estimate losses due to placed candidates not remaining employed through the
Company's guarantee period, typically 90 days or less.

CASH AND CASH EQUIVALENTS

      Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.

PROPERTY AND EQUIPMENT

      Property and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives, generally three to seven
years. Computer software costs consist of costs to purchase and develop
software. The Company capitalizes internally developed software costs in
accordance with SOP 98-1, whereby the costs are capitalized only after it is
probable that the project will be completed and the software will be used for
the function intended. The majority of capitalized software costs are
depreciated on a straight-line basis over a period of six years. Leasehold
improvements are stated at cost and amortized over the shorter of the lease term
or the useful life of the improvements.

GOODWILL AND OTHER INTANGIBLE ASSETS

      The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), at the beginning of 2002.
Goodwill, which was previously amortized on a straight-line basis


                                       29

over the periods benefited, is no longer being amortized to earnings, but
instead is subject to testing for impairment at least annually based on the fair
value of these assets compared to their carrying value. Intangible assets
determined to have definite lives are amortized over their remaining useful
lives.

      The Company's businesses have been acquired from unrelated third parties
for cash and other consideration and have been accounted for using the purchase
method of accounting. The assets and liabilities of the entities acquired were
recorded at their estimated fair values at the dates of the acquisitions.
Goodwill has been recorded at historical cost. Other intangible assets consist
mainly of covenants not to compete.

      Certain of the Company's acquisitions provided for additional purchase
price consideration upon attainment of certain specified targets for various
periods after closing of the acquisition. The Company paid $10,120 and $36,555
(of which $2,483 was paid by the issuance of 784,437 shares of Common Stock in
2000) in contingent consideration in 2001 and 2000, respectively. The Company
completed, in 2001, its obligation to make additional earn-out payments on the
acquired businesses. All consideration was recorded as additional purchase price
when earned and increased the amount of goodwill.

INCOME TAXES

      Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year 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 the Consolidated Statement of Operations in
the period that includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets if it is more likely than
not that such assets will not be realized.

STOCK OPTIONS

      The Company uses the intrinsic-value method of accounting for stock-based
awards granted to employees and, accordingly, does not currently recognize
compensation expense for its stock-based awards to employees in the Consolidated
Statements of Operations.

      Pursuant to the requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," the
following disclosures are presented to reflect the Company's pro forma net
income for 2002, 2001 and 2000 as if the fair value method of accounting
prescribed by SFAS 123 had been used. In preparing these disclosures, the
Company has determined the value of all stock options granted under the 1995
Stock Option Plan using the Black-Scholes model, as discussed in SFAS 123, and
based on the following weighted average assumptions used for grants:




                             2002          2001        2000
                           ---------    ---------    ---------
                                            
Risk-free interest rate          4.2%         5.7%         6.2%
Expected dividend yield          0.0%         0.0%         0.0%
Expected life              4.7 years    5.6 years    6.5 years
Expected volatility             80.3%        68.1%        60.0%


      The fair value of the stock options granted under the 1995 Stock Option
Plan and the Stock Purchase Plan issuances in 2002, 2001 and 2000 were
approximately $35, $459 and $2,560, respectively. Had compensation expense been
determined consistent with SFAS 123, utilizing the assumptions set forth above
and the straight-line amortization method over the vesting period, the Company's
net loss would have been increased to the following pro forma amounts:



                                       30



                                              2002           2001          2000
                                          -----------    -----------   -----------
                                                              
Net loss, as reported                     $  (350,527)   $   (66,678)  $    (2,175)
Earnings per diluted share, as reported        (13.10)         (2.52)        (0.09)

Pro forma net loss                        $  (352,086)   $   (69,041)  $    (5,400)
Pro forma earnings per diluted share           (13.16)         (2.61)        (0.21)



USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates include the reported amounts of assets and
liabilities, the 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 amounts could differ from management's
estimates. Estimates are used for, but not limited to, recoverability of
goodwill, collectibility of accounts receivable, useful lives of property and
equipment, reserves against permanent placement revenues, workers' compensation
costs, restructuring and rationalization reserves, taxes and contingencies.

3. RECENT ACCOUNTING PRONOUNCEMENTS:

      In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities" which nullifies Emerging
Issues Task Force Issue No. 94-3 ("Issue 94-3"), "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
as defined in Issue 94-3 was recognized at the date of an entity's commitment to
an exit plan. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect that adoption of this statement will
have a material impact on the Company's results of operations, financial
position or cash flows. The Company will apply SFAS 146 to restructuring
activities initiated after December 29, 2002.

4. ACCOUNTS RECEIVABLE:

      Accounts receivable consisted of the following at December 29, 2002 and
December 30, 2001:




                                                        2002           2001
                                                     ---------      ---------
                                                              
   Trade accounts receivable                         $  79,134      $  89,539
   Less - Allowance for doubtful accounts               (2,956)        (2,451)
                                                     ---------      ---------
                                                     $  76,178      $  87,088
                                                     =========      =========




      The following table sets forth further information on the Company's
allowance for doubtful accounts:




                                 BALANCE AT   CHARGED TO                 BALANCE
                                 BEGINNING    COSTS AND                  AT END
    YEAR ENDED                    OF YEAR     EXPENSES     DEDUCTIONS    OF YEAR
- -----------------                ----------   ----------   ----------    -------
                                                             
December 29, 2002                $    2,451   $    3,084   $   (2,579)   $ 2,956
December 30, 2001                     3,799        7,077       (8,425)     2,451
December 31, 2000                     2,690        9,159       (8,050)     3,799





                                       31

5. PROPERTY AND EQUIPMENT, NET:

      Property and equipment, net, consisted of the following at December 29,
2002 and December 30, 2001:




                                                         2002            2001
                                                       --------        --------
                                                                 
   Software and computer equipment                     $ 30,892        $ 35,027
   Furniture and other equipment                          5,553           6,822
   Leasehold improvements                                 2,017           2,567
                                                       --------        --------
                                                         38,462          44,416
   Less - Accumulated depreciation                      (25,222)        (26,355)
                                                       --------        --------
                                                       $ 13,240        $ 18,061
                                                       ========        ========



      Depreciation expense was $6,652, $7,635 and $8,089 for 2002, 2001 and
2000, respectively.

6. LONG-TERM DEBT:

      Long-term debt at December 29, 2002 and December 30, 2001 was as follows:




                                                              2002        2001
                                                            --------    --------
                                                                  
5.75% Convertible Subordinated Notes due July 2004          $115,000    $115,000
Revolving credit facility                                    103,000     119,000
Other                                                            648         882
                                                            --------    --------
                                                             218,648     234,882
Less current portion                                          38,633         882
                                                            --------    --------
                                                            $180,015    $234,000
                                                            ========    ========


      The Company's 5.75% Convertible Subordinated Notes are due July 2004.
Interest on the 5.75% Notes is payable semi-annually. The 5.75% Notes are
convertible into Common Stock of the Company at any time before maturity at an
initial conversion price of $17.81 per share. Beginning in July 2000, the
Company was permitted to redeem the 5.75% Notes initially at 103.29% and at
decreasing prices thereafter to 100% at maturity, in each case together with
accrued interest. The 5.75% Notes are subordinated to all present and future
senior indebtedness of the Company (as defined), including indebtedness under
the Company's Credit Facility.

      The Company's revolving credit facility was amended in 2002 to provide for
a $114,000 revolving line of credit due January 2003. The Company was permitted
to extend the maturity of the facility in six-month increments up through
January 2004 subject to specified conditions and did elect to extend the
maturity date to June 2003. As a result of the recent completion of the
Company's financial restructuring and the execution of further amendments and
maturity date extensions to the Credit Facility, $65,015 of the $103,000
outstanding at December 29, 2002 was classified as long-term in the consolidated
balance sheet. The revolving credit facility in effect in 2002 contained
customary covenants that required monthly maintenance of minimum tangible net
worth and EBITDA levels (as defined). It also contained restrictions on the
payment of cash dividends on the Common Stock and placed additional limitations
on share repurchases, acquisitions and capital expenditures. Interest rates
payable under revolving credit facility were set at prime plus 300 basis points
through June 2003 and but for the closing of the Credit Facility in connection
with the financial restructuring would have increased to prime plus 400 basis
points for the period from July 2003 through January 2004.



                                       32

      During 2002, the maximum aggregate outstanding borrowing under the
revolving credit facility was $125,000 and the average outstanding balance
during the year was $108,100. In addition, approximately $9,002 of the revolving
credit facility was used at December 29, 2002 for the issuance of undrawn
letters of credit primarily to secure the Company's workers' compensation
program. The daily weighted average interest rate under the revolving credit
facility was 7.3% during 2002. The weighted average interest rate for the
Company's borrowings under the facility was 7.3% at December 29, 2002. As of
February 28, 2003, the interest rate under the facility was 7.25%.

      Scheduled maturities of long-term debt at December 29, 2002 were as
follows:


                           
       2003                   $ 38,633
       2004                    180,015
                              --------
                              $218,648
                              ========



      Subsequent to year end, the Company completed a comprehensive financial
restructuring. See Note 1, "Subsequent Event - Comprehensive Financial
Restructuring."

7. GOODWILL IMPAIRMENT:

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

      Based upon the results of the initial valuation, which was completed in
the second quarter, the Company recorded a goodwill impairment charge of
$284,695 ($242,497 net of an income tax benefit of $42,198) as a cumulative
effect of the change in accounting principle.

      In the fourth quarter of 2002, the Company performed its annual impairment
test and recorded an impairment charge of $89,935 million for goodwill
associated with its IT Services operations. The Company experienced lower than
expected operating profits and cash flows in 2002 for the IT Services reporting
unit. As a result of this trend and the overall industry expectations, the
projected operating profits and cash flows for IT Services operations were
reduced for the next five years resulting in a reduction in the fair value of
the Company's goodwill. The decrease in fair value resulted in the recognition
of the $89,935 million impairment loss. No additional impairment was identified
for the goodwill associated with the Company's Commercial Staffing reporting
unit.


                                       33

      A reconciliation of goodwill for the years ended December 29, 2002 and
December 30, 2001 is as follows:




                                                                        COMMERCIAL
                                                         IT SERVICES     STAFFING         TOTAL
                                                         -----------    ----------      ---------

                                                                               
 Balance, December 31, 2000                              $   440,679    $  120,773      $ 561,452
    Impairment loss under SFAS 121                           (41,027)      (15,752)       (56,779)
    Sale of a business and other                             (11,146)            7        (11,139)
    Amortization expense                                     (11,968)       (3,404)       (15,372)
                                                         -----------    ----------      ---------
 Balance, December 30, 2001                                  376,538       101,624        478,162
    Impairment loss resulting from SFAS 142 adoption        (245,373)      (39,322)      (284,695)
    Impairment loss resulting from SFAS 142 annual test      (89,935)           --        (89,935)
                                                         -----------    ----------      ---------
 Balance, December 29, 2002                              $    41,230    $   62,302      $ 103,532
                                                         ===========    ==========      =========



      The following table sets forth a reconciliation of net loss and earnings
per share information for 2002, 2001 and 2000 as adjusted for the
non-amortization provisions of SFAS 142:




                                                                    2002            2001            2000
                                                                ------------    ------------    ------------
                                                                                       
Net loss before cumulative effect of accounting change,
      as reported                                               $   (108,030)   $    (66,678)   $     (2,175)
Add:  Goodwill amortization, net of tax                                   --          11,297          11,627
                                                                ------------    ------------    ------------
Adjusted net income (loss) before cumulative effect of
      accounting change                                             (108,030)        (55,381)          9,452
Cumulative effect of accounting change, net of tax                  (242,497)             --              --
                                                                ------------    ------------    ------------
Adjusted net income (loss)                                      $   (350,527)   $    (55,381)   $      9,452
                                                                ============    ============    ============

BASIC AND DILUTED EARNINGS PER SHARE:
      Net loss before cumulative effect of accounting change,
            as reported                                         $      (4.04)   $      (2.52)   $      (0.09)
      Add:  Goodwill amortization, net of tax                             --            0.43            0.47
                                                                ------------    ------------    ------------
      Adjusted net income (loss) before cumulative effect of
            accounting change                                          (4.04)          (2.09)           0.38
      Cumulative effect of accounting change, net of tax               (9.06)             --              --
                                                                ------------    ------------    ------------
      Adjusted net income (loss)                                $     (13.10)   $      (2.09)   $       0.38
                                                                ============    ============    ============



      The following table sets forth a reconciliation of intangible assets
subject to amortization, which are included in other assets on the Consolidated
Balance Sheets, by intangible asset class as of December 29, 2002 and December
30, 2001:




                                                      2002                                  2001
                                     -----------------------------------     ----------------------------------
                                      GROSS                                   GROSS
                                     CARRYING    ACCUMULATED                 CARRYING   ACCUMULATED
                                      AMOUNT     AMORTIZATION       NET       AMOUNT    AMORTIZATION      NET
                                     --------    ------------     ------     --------   ------------     ------
                                                                                       
Non-Compete agreements               $  2,413    $     (2,223)    $  190     $  5,997   $     (5,338)    $  659

Trade names                                29             (17)        12           29            (14)        15
                                     --------    ------------     ------     --------   ------------     ------
  Total intangible assets subject
     to amortization                 $  2,442    $     (2,240)    $  202     $  6,026   $     (5,352)    $  674
                                     ========    ============     ======     ========   ============     ======



      Non-compete agreements are amortized over a period of five years and trade
names are amortized over a period of 10 years. Amortization expense for 2002,
2001 and 2000 was $472, $16,278 and $16,826, respectively. Estimated
amortization expense remaining for the succeeding fiscal years is $190 in 2003,
$6 in 2004, $3 in each of 2005 and 2006 and $1 in 2007.



                                       34


      In the fourth quarter of 2001, the Company conducted a strategic review of
its operations within each business segment. The strategic review triggered an
impairment review of the goodwill related to certain of these operations. The
Company evaluated the recoverability of the goodwill by estimating future
undiscounted cash flows that were deemed inadequate to support the carrying
value of the goodwill associated with certain operations. As a result, the
Company recorded a goodwill impairment charge of $56,779 in the fourth quarter
of 2001 based on fair value determined by discounted cash flows. The impairment
charge related to operations located principally within certain geographic
markets for which the operating performance through the fourth quarter of 2001
had substantially under-performed the broader operating segment and where
management did not anticipate recovery to profitable levels. The impairment
charges for IT Services and Commercial Staffing were $41,059 and $15,720,
respectively.

      In the fourth quarter of 2000, the Company incurred a goodwill impairment
charge of $11,021 related primarily to CareerShop.com. At the time of the
CareerShop.com acquisition, the Company expected CareerShop.com's job board and
related businesses to become cash positive by the end of 2000 and break even
from a profit standpoint during 2001. Acquired assets, consisting primarily of
$11,232 of intangibles, were recorded as a result of the acquisition (total
consideration paid, including assumption of debt, was $11,949, of which $9,365
was cash and the remainder was stock). However, CareerShop.com's separate
businesses failed to produce expected results. Due to the significance of the
change in conditions, management performed an evaluation of the recoverability
of the goodwill related to these operations and recorded the impairment charge.
CareerShop.com was sold in June 2001, resulting in a loss of $660.

8. RESTRUCTURING AND RATIONALIZATION CHARGES:

      Beginning in 2001, the Company implemented a plan to restructure and
rationalize certain operations. As a result, the Company recorded charges
totaling $8,278 and $16,134 in 2002 and 2001, respectively comprised of the
following components:




                                                      2002         2001
                                                    --------     --------
                                                           
Employee severance                                  $  1,915     $  1,678
Lease abandonment and termination costs                2,689        3,869
Professional services charges                          3,628          875
Property abandonment charges                              46        2,568
Loss on sale of business                                  --        7,683
Other                                                     --         (539)
                                                    --------     --------
Total restructuring and rationalization charges     $  8,278     $ 16,134
                                                    ========     ========



      Following is a summary of the accrued liability for cash restructuring and
rationalization charges for 2002 and 2001:




                                         EMPLOYEE     LEASE    PROFESSIONAL
                                         SEVERANCE    COSTS      SERVICES       OTHER      TOTAL
                                         ---------   -------   ------------   ---------   -------
                                                                           
Initial charges                          $   1,678   $ 3,869   $        875   $     434   $ 6,856
Cash payments                               (1,636)     (760)          (675)       (113)   (3,184)
                                         ---------   -------   ------------   ---------   -------
Accrued liability at December 30, 2001          42     3,109            200         321     3,672
2002 charges                                 1,915     2,689          3,628          --     8,232
Cash payments                               (1,398)   (1,140)        (2,782)       (237)   (5,557)
                                         ---------   -------   ------------   ---------   -------
Accrued liability at December 29, 2002   $     559   $ 4,658   $      1,046   $      84   $ 6,347
                                         =========   =======   ============   =========   =======



      Employee severance-related costs included the elimination of both
administrative and income-producing employees. Under the workforce reduction
plan, approximately 17.5% (26% in 2001) of the Company's permanent workforce, or
194 (395 in 2001) employees, was eliminated during the year. Lease abandonment
and termination costs related primarily to office closures, branch
consolidations and leased space reductions. Professional services charges
consisted primarily of legal and accounting services incurred in connection with
the financial restructuring. Property abandonment costs consisted of the
write-down of abandoned leasehold improvements and other equipment. These assets

                                       35

were written down to zero as they have been abandoned. The loss on the sale of
business relates to the sale of one of the Company's IT Services offices in
Dallas, which was completed on December 31, 2001. On the date of the sale, the
net book value of this operation was $11,508 and consideration of $3,825 was
received, resulting in the write-down of $7,683 of goodwill for the year ended
December 30, 2001. This business was included in the IT Services segment and
contributed $11,499 in revenues and $310 in net income for the year ended
December 30, 2001. Other rationalization expenses of ($539) were recorded in
2001 associated with incremental costs in downsizing the business to current
operating levels, the loss on the sale of CareerShop and changes in estimates
for previous lease terminations of $433, net of other income of $1,633 related
to favorably settling certain obligations.

      Of the remaining accrued liability at December 29, 2002, the Company
expects to pay approximately $3,115 over the next twelve months and the balance,
primarily lease payments, over the following seven years.

      Restructuring and rationalization charges of $1,960 were recorded in 2000,
related primarily to severance and other benefits related to the early
retirement of the former Chief Executive Officer.

9. ACCRUED LIABILITIES:

      Accrued liabilities consisted of the following at December 29, 2002 and
December 30, 2001:




                                                       2002        2001
                                                     --------    --------
                                                           
Accrued wages, benefits and other personnel costs     $25,364     $32,644
Accrued interest                                        4,251       5,009
Accrued workers' compensation benefits                  3,856       2,652
Accrued restructuring and rationalization charges       3,115       1,478
Income tax reserves                                    17,755       3,535
Other                                                   7,862       6,482
                                                     --------    --------
                                                      $62,203     $51,800
                                                     ========    ========



      See Note 13, "Income Taxes," for further discussion of the Company's
income tax reserves.

10. OTHER LONG-TERM LIABILITIES:

      Other long-term liabilities consisted of the following at December 29,
2002 and December 30, 2001:




                                                       2002        2001
                                                     --------    --------
                                                           
Deferred tax liabilities                              $   342     $33,068
Employee benefit obligations                            3,514       3,114
Workers' compensation reserves                          1,928       1,374
Accrued restructuring and rationalization charges       3,232       2,194
                                                     --------    --------
                                                      $ 9,016     $39,750
                                                     ========    ========



11. EMPLOYEE BENEFIT PLANS:

      The Company has 401(k) profit sharing and nonqualified profit sharing
plans, which cover substantially all of its employees. Company contributions or
allocations are made on a discretionary basis for these plans (except for
matching contributions made to certain 401(k) profit sharing plans as required
by the terms of such plans). Contributions charged to operating expenses were
$1,507, $2,288 and $2,914 in 2002, 2001 and 2000, respectively.

      The Company does not provide post-retirement health care and life
insurance benefits to retired employees or post-employment benefits to
terminated employees.

                                       36

      During 1999, the Company established a Supplemental Employee Retirement
Plan (the "SERP") for its then Chief Executive Officer. The Company announced
the retirement of such officer in February 2000, and in connection therewith the
annual benefit payable under the SERP was fixed at $150. As of December 29,
2002, the Company had accrued approximately $1,465 for the SERP.

12. CAPITAL STOCK AND STOCK OPTIONS:

      The Company repurchased 1,664,300 shares of its Common Stock at an
aggregate purchase price of $10,584 in 2000, under a stock repurchase program.

      The Company's Board of Directors adopted the 2001 Non-Qualified Employee
Stock Purchase Plan (the "2001 Stock Purchase Plan") for the purpose of
encouraging employee participation in the ownership of the Company. This plan
replaced the 1997 Employee Stock Purchase Plan (the "1997 Stock Purchase Plan"),
which terminated in the first quarter of 2001. Purchases under the 2001 Stock
Purchase Plan were made monthly at the market price on the last day of the
calendar month. Under the 1997 Stock Purchase Plan, employees could elect to
have payroll deductions made to purchase Common Stock at a discount. During 2001
and 2000, 423,856 and 798,978 shares, respectively, of Common Stock were issued
under the 1997 Stock Purchase Plan. During 2002 and 2001, 187,147 and 77,959
shares, respectively, of Common Stock were issued under the 2001 Stock Purchase
Plan. The Company terminated the 2001 Stock Purchase Plan effective December 31,
2002.

      The Company's Board of Directors adopted its 1995 Equity Participation
Plan (the "1995 Stock Option Plan") to attract and retain officers, key
employees, consultants and directors. The 1995 Stock Option Plan had reserved
for issuance 15% of the Common Stock issued and outstanding, as defined, from
time to time. The Stock Option Plan allowed for the issuance of options, stock
appreciation rights, restricted or deferred stock awards and other awards.
Incentive stock options were granted only to employees and, when granted, were
to have an exercise price equal to at least 100% of the fair market value of the
Common Stock on the grant date and a term not longer than 10 years. As of
December 29, 2002, 2,162,968 shares were reserved for the issuance of new
options under the Stock Option Plan.

      In addition, nonemployee directors (including the directors who administer
the Stock Option Plan) receive nondiscretionary grants of nonqualified stock
options ("NQSOs") under the Stock Option Plan pursuant to a formula specified in
the Plan. The NQSOs granted to nonemployee directors were fully vested and
exercisable upon grant, and the term of each such option was 10 years. NQSOs
could also be granted to an employee or consultant for any term specified by the
compensation committee of the Board and provide for the right to purchase Common
Stock at a specified price which, except with respect to NQSOs intended to
qualify as performance-based compensation, could have been less than fair market
value on the date of grant (but not less than par value), and may become
exercisable (at the discretion of the compensation committee) in one or more
installments after the grant date. A summary of stock option activity under the
1995 Stock Option Plan follows:

                                       37



                                                  WEIGHTED
                                    SHARES        AVERAGE
                                    UNDER        PRICE PER
                                    OPTION         SHARE
                                  ----------    -----------
                                          
Outstanding, January 2, 2000       3,475,305     $    11.88
   Granted in 2000                 1,461,250           2.33
   Exercised                           1,300           6.69
   Canceled                          529,958          12.32
                                  ----------    -----------
Outstanding, December 31, 2000     4,405,297           8.68
   Granted in 2001                   321,875           1.75
   Canceled                          344,160           9.07
                                  ----------    -----------
Outstanding, December 30, 2001     4,383,012           8.14
   Granted in 2002                    57,500           0.93
   Canceled                        1,602,877          10.56
                                  ----------    -----------
Outstanding, December 29, 2002     2,837,635     $     6.63
                                   =========     ==========
Exercisable, December 31, 2000     2,286,797     $    11.99
                                   =========     ==========
Exercisable, December 30, 2001     2,814,878     $    10.74
                                   =========     ==========
Exercisable, December 29, 2002     1,976,068     $     8.55
                                   =========     ==========



      The following table summarizes options outstanding and options exercisable
under the 1995 Stock Option Plan as of December 29, 2002, and the related
weighted average remaining contractual life (years) and weighted average
exercise price:




                                OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                    ----------------------------------------     ------------------------------
                                      AVERAGE
                                     REMAINING      AVERAGE
   RANGE OF           OPTIONS       CONTRACTUAL     EXERCISE       OPTIONS          AVERAGE
EXERCISE PRICES     OUTSTANDING        LIFE          PRICE       EXERCISABLE     EXERCISE PRICE
- ---------------     -----------     -----------     --------     -----------     --------------
                                                                  
$0.59 - $1.20            50,000         9.4           $ 0.89          15,000             $ 1.03
$1.21 - $2.50         1,014,625         8.0             1.56         449,527               1.54
$2.51 - $5.00           390,587         7.5             2.66         206,144               2.73
$5.01 - $8.00           280,271         5.7             5.73         229,456               5.83
$8.01 - $12.00          365,364         5.1            10.48         345,114              10.57
$12.01 - $18.00         623,488         5.3            13.75         617,527              13.75
$18.01 - $23.08         113,300         5.0            18.91         113,300              18.91
                    -----------     -----------     --------     -----------     --------------
                      2,837,635         6.7           $ 6.63       1,976,068             $ 8.55
                    ===========     ===========     ========     ===========     ==============



      On February 6, 1996, as amended in December 2001, the Company declared a
dividend of one nonvoting preferred share purchase right (a "Right") for each
outstanding share of Common Stock. This dividend was paid on February 27, 1996
to the shareholders of record on that date. In the event of an acquisition, or
the announcement of an acquisition, by a party of a beneficial interest of at
least 20% of the Common Stock, each right would become exercisable (the
"Distribution Date"). Each Right entitled the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.01 per share, of the Company at a price of $95.00
per one one-hundredth of a share of Preferred Stock, subject to adjustment. In
addition, each Right entitled the right holder to certain other rights as
specified in the Company's rights agreement. The Rights were not exercisable
prior to the Distribution Date. In March 2003, the agreement governing the
Rights was amended to permit

                                       38

the issuance of capital stock and warrants to holders of the 5.75% Notes and the
senior lenders in the Company's financial restructuring without causing the
Rights to become exercisable even though certain of such received a beneficial
interest in more than 20% of the Common Stock as a result of the transactions.

      In connection with the Company's financial restructuring, the Company
implemented a new stock option plan, terminated the 1995 Stock Option Plan,
issued stock purchase warrants to its senior lenders and amended and restated
its rights plan. For a description of these matters and of the financial
restructuring generally, see Note 1, "Subsequent Event - Comprehensive Financial
Restructuring".

13. INCOME TAXES:

      The provision (benefit) for income taxes for 2002, 2001 and 2000 consisted
of the following:




                                                      2002         2001         2000
                                                   ---------    ---------    ---------
                                                                    
Income (loss) before income taxes and cumulative
  effect of change in accounting principle         $(107,427)   $ (76,364)   $   6,803
                                                   =========    =========    =========


Provision (benefit) for income taxes:
  Current provision (benefit)
    Federal                                        $ (20,530)   $ (11,858)   $   2,443
    State                                               (235)        (169)         485
                                                   ---------    ---------    ---------
      Total current provision (benefit)              (20,765)     (12,027)       2,928
                                                   ---------    ---------    ---------
  Deferred provision
    Federal                                           21,368        2,235        4,840
    State                                                 --          106        1,210
                                                   ---------    ---------    ---------
      Total deferred provision                        21,368        2,341        6,050
                                                   ---------    ---------    ---------
      Total provision (benefit) for income taxes   $     603    $  (9,686)   $   8,978
                                                   =========    =========    =========



      The reconciliation of the effective tax rate is as follows:




                                                     2002         2001         2000
                                                   ---------    ---------    ---------
                                                                    
Federal statutory rate                                 35.0%        35.0%        35.0%
State taxes, net of federal benefit                       --          4.3         13.3
Effect of increase in valuation allowances             (34.3)       (23.1)          --
Effect of nondeductible amortization and other          (1.3)        (3.5)        83.7
                                                   ---------    ---------    ---------
Total                                                   (0.6)%       12.7%       132.0%
                                                   =========    =========    =========



                                       39

      The components of the Company's net deferred tax liability were as follows
at December 29, 2002 and December 30, 2001:




                                              2002          2001
                                            ---------     ---------
                                                    
Deferred income tax assets:
   Goodwill impairment                      $  76,428     $  15,151
   Accrued workers' compensation and other      2,557         2,193
   Allowance for doubtful accounts                964         1,041
   Accrued benefits                             1,498         1,157
   Net operating loss carryforward            101,983         2,242
   Other                                        7,409         7,773
   Valuation allowances                      (187,111)      (17,661)
                                            ---------     ---------
   Total deferred tax assets                $   3,728     $  11,896
                                            =========     =========
Deferred tax liabilities:
   Goodwill                                 $      --     $  28,445
   Property and equipment                       3,734         4,251
   Other                                          336           372
                                            ---------     ---------
   Total deferred tax liabilities           $   4,070     $  33,068
                                            =========     =========

   Net deferred tax liability               $     342     $  21,172
                                            =========     =========



      As of December 29, 2002 and December 30, 2001, the Company had deferred
income tax assets of $76,428 and $15,151, respectively, related to the goodwill
impairment charges recorded by the Company. The Company also had federal and
state net operating loss carryforwards with a tax benefit of $101,983 and
$2,242, respectively, most of which expire primarily after the year 2012. The
Company has recorded valuation allowances totaling $187,111 and $17,661 as of
December 29, 2002 and December 30, 2001, respectively, primarily related to the
goodwill impairment, net operating loss carryforwards and the loss on the sale
of one of the Company's IT Services offices in Dallas. These valuation
allowances were recorded as the Company concluded it is more likely than not
that these deferred income tax assets would not be realized. Although
realization is not assured, the Company has concluded that it is more likely
than not that the remaining deferred tax assets will be realized based on the
scheduling of deferred tax liabilities and projected taxable income. The amount
of the net deferred tax assets actually realized, however, could vary if there
are differences in the timing or amount of future reversals of existing deferred
tax liabilities or changes in the actual amounts of future taxable income.

      The Company is subject to periodic review by federal, state and local
taxing authorities in the ordinary course of business and as is the custom for
tax returns claiming significant income tax refunds has been advised by the
Internal Revenue Service that the Service is reviewing the Company's 2001 and
2000 federal income tax returns to determine whether to perform an income tax
audit for one or both of those tax years. The Company believes its tax positions
comply with applicable tax laws and would vigorously defend these positions if
challenged. The final disposition of any positions challenged by any taxing
authority could require the Company to make additional tax payments or pay
interest and penalties, and accordingly, the Company has recorded a provision
for such risks.

                                       40

14.  EARNINGS PER SHARE

      The following table reconciles net loss and weighted average shares
outstanding to the amounts used to calculate basic and diluted earnings per
share for each of 2002, 2001 and 2000:




                                                                 2002            2001            2000
                                                             ------------    ------------    ------------
                                                                                    
Basic and diluted earnings per share:
  Loss before cumulative effect of change in
    accounting principle                                     $   (108,030)   $    (66,678)   $     (2,175)
  Add: Interest expense on 5.75% Notes, net of tax                     --              --              --
                                                             ------------    ------------    ------------
  Diluted loss before cumulative effect of change in
    accounting principle                                         (108,030)        (66,678)         (2,175)
  Cumulative effect of change in accounting principle            (242,497)             --              --
                                                             ------------    ------------    ------------
  Diluted net loss                                           $   (350,527)   $    (66,678)   $     (2,175)
                                                             ============    ============    ============

Weighted average common shares outstanding                     26,755,651      26,503,412      25,090,199
  Add: Dilutive employee stock options                                 --              --              --
  Add: Assumed conversion of 5.75% Notes                               --              --              --
                                                             ------------    ------------    ------------
Diluted weighted average common shares outstanding             26,755,651      26,503,412      25,090,199
                                                             ============    ============    ============

Basic and diluted earnings per share:
  Loss before cumulative effect of change in accounting
    principle                                                $      (4.04)   $      (2.52)   $      (0.09)
  Cumulative effect of change in accounting principle               (9.06)             --              --
                                                             ------------    ------------    ------------
  Net loss                                                   $     (13.10)   $      (2.52)   $      (0.09)
                                                             ============    ============    ============



      Stock options to purchase 2,837,635, 4,383,012 and 4,405,297 shares of
Common Stock were outstanding for 2002, 2001 and 2000, respectively, but were
excluded from the computation of earnings per diluted share because their effect
was antidilutive. The conversion of the 5.75% Notes into common shares was
excluded from the computation of earnings per diluted share in 2002, 2001 and
2000 because their effect was antidilutive.

15. FINANCIAL INSTRUMENTS:


FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximated the book value
at December 29, 2002, due to the short-term nature of these instruments. The
fair value of the Company's borrowings under the revolving credit facility and
other long-term debt approximated the book value at December 29, 2002, because
of the variable rate associated with the borrowings. The 5.75% Notes had an
estimated fair value of approximately $36,500 and $48,000 at December 29, 2002
and December 30, 2001, respectively, as compared to the carrying value of
$115,000. See Note 1, "Subsequent Event - Comprehensive Financial
Restructuring."

CONCENTRATION OF CREDIT RISK

      The Company maintains cash and cash equivalents with various financial
institutions, which at times exceeds federally insured limits.

      Credit risk with respect to accounts receivable is dispersed due to the
nature of the business, the large number of customers and the diversity of
industries serviced. The Company performs credit evaluations of its customers.

                                       41

16. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES

      The Company leases facilities under operating leases, certain of which
require it to pay property taxes, insurance and maintenance costs. Total rent
expense under operating leases amounted to $8,813, $10,692 and $10,360 for 2002,
2001 and 2000, respectively. Operating leases for facilities are usually
renewable at the Company's option and include escalation clauses linked to
inflation.

      Future minimum annual rentals for the next five years are as follows:




                GROSS      SUBLEASE       NET
               RENTALS      INCOME      RENTALS
               -------     --------     -------
                               
2003           $10,025     $ (1,358)    $ 8,667
2004             7,625         (979)      6,646
2005             5,824         (898)      4,926
2006             3,605         (556)      3,049
2007             2,274         (486)      1,788
Thereafter       1,666         (803)        863
               -------     --------     -------
               $31,019     $ (5,080)    $25,939
               =======     ========     =======



INSURANCE

      The Company maintains self-insurance programs for workers' compensation
and medical and dental claims. The Company accrues liabilities under the
workers' compensation program based on the loss and loss adjustment expenses as
estimated by an outside administrator. At December 29, 2002, the Company had
standby letters of credit with a bank in connection with a portion of its
workers' compensation program. Additionally, the Company maintains certain
workers' compensation and medical catastrophic insurance coverages.

      The Company is subject to claims and legal actions in the ordinary course
of business. The Company maintains professional liability insurance for losses.

EMPLOYMENT AGREEMENTS

      The Company has agreements with several executive officers providing for
cash compensation and other benefits in the event that a change in control of
the Company occurs. See Note 1, "Subsequent Event - Comprehensive Financial
Restructuring."

LEGAL PROCEEDINGS

      The Company is involved in various legal actions and claims. In the
opinion of management, after considering appropriate legal advice, the future
resolutions of all actions and claims are not expected to have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.

17. SEGMENT INFORMATION:

      The Company is organized in two segments: IT Services and Commercial
Staffing. IT Services provides technical staffing, training and information
technology consulting services and technology tools for human capital
management. Commercial Staffing provides temporary staffing services, placement
of full-time employees and on-site management of temporary employees. The
Company evaluates segment performance based on income from operations before
corporate expenses, amortization of goodwill and intangible assets, interest and
income taxes. Because of the

                                       42

Company's substantial goodwill, management does not consider total assets by
segment an important management tool and, accordingly, the Company does not
report this information separately. The table below presents segment information
for IT Services and Commercial Staffing for 2002, 2001 and 2000:




OPERATING RESULTS

                                                           2002         2001         2000
                                                        ---------    ---------    ---------
                                                                         
Total revenues
      IT Services                                       $ 295,387    $ 447,862    $ 537,535
      Commercial Staffing                                 262,361      284,465      344,457
                                                        ---------    ---------    ---------
           Total revenues                                 557,748      732,327      881,992
Gross profit
      IT Services                                          72,007      114,524      145,268
      Commercial Staffing                                  57,794       77,144      105,282
                                                        ---------    ---------    ---------
           Total gross profit                             129,801      191,668      250,550
Operating income
      IT Services                                          13,457       28,994       38,223
      Commercial Staffing                                  11,263       18,161       33,696
                                                        ---------    ---------    ---------
           Total segment operating income, as defined      24,720       47,155       71,919

Unallocated corporate expenses                             16,161       16,050       15,201
Goodwill impairment                                        89,935       56,779       11,021
Restructuring and rationalization charges                   8,278       16,134        1,960
Amortization of goodwill and intangible assets                472       16,278       16,826
Interest expense                                           17,301       18,278       20,108
Income (loss) before income taxes and
      cumulative effect of change in                    ---------    ---------    ---------
      accounting principle                              $(107,427)   $ (76,364)   $   6,803
                                                        =========    =========    =========

OTHER FINANCIAL INFORMATION

Accounts receivable, net
      IT Services                                       $  46,318    $  59,313    $  85,344
      Commercial Staffing                                  29,860       27,775       41,398
      Corporate                                                --           --          550
                                                        ---------    ---------    ---------
           Total accounts receivable, net               $  76,178    $  87,088    $ 127,292
                                                        =========    =========    =========


                                       43

18. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

      The following table sets forth quarterly financial information for each
quarter in 2002 and 2001:




                                                                  2002
                                            ------------------------------------------------
                                              FIRST       SECOND        THIRD       FOURTH
                                            ---------    ---------    ---------    ---------
                                                                       
Revenues                                    $ 142,053    $ 141,732    $ 137,681    $ 136,282
Gross profit                                   33,761       33,349       31,716       30,975
Goodwill impairment                                --           --           --      (89,935)
Restructuring and rationalization charges        (263)      (1,348)      (1,001)      (5,666)
Operating income (loss)                         1,496        1,008        1,582      (94,212)
Cumulative effect of change in accounting
     principle, net of taxes                 (242,497)          --           --           --
Net loss                                     (249,631)      (2,721)      (2,159)     (96,016)

Diluted earnings per share                  $   (9.35)   $   (0.10)   $   (0.08)   $   (3.58)





                                                                  2001
                                            ------------------------------------------------
                                              FIRST       SECOND        THIRD       FOURTH
                                            ---------    ---------    ---------    ---------
                                                                       
Revenues                                    $ 209,624    $ 194,370    $ 173,573    $ 154,760
Gross profit                                   56,674       51,855       44,122       39,017
Goodwill impairment                                --           --           --      (56,779)
Restructuring and rationalization charges        (387)      (3,858)        (440)     (11,449)
Operating income (loss)                         6,649        1,757        2,568      (69,060)
Net loss                                          930       (1,059)      (1,170)     (65,379)

Diluted earnings per share                  $    0.04    $   (0.04)   $   (0.04)   $   (2.45)



                                       44

EX-21.1

                                                                               .
                                                                               .
                                                                               .

                                  EXHIBIT 21.1

                SUBSIDIARIES OF PERSONNEL GROUP OF AMERICA, INC.



                                             State of
Subsidiary                                Incorporation        Does Business As
- -----------------------------------     ------------------     --------------------------------------------------
                                                         
PFI Corp                                     Delaware          N/A; serves as a holding company

StaffPLUS, Inc.                              Delaware          Venturi Staffing Partners, Venturi Career Partners

Personnel Group Holdings, Inc.               Florida           N/A; serves as a holding company

InfoTech Services, LLC                    North Carolina       Venturi Technology Partners; Broughton Systems
                                        limited liability
                                             company

BAL Associates, Inc.                        California         Venturi Technology Partners

Advanced Business Consultants, Inc.           Kansas           Venturi Technology Partners

Venturi Staffing Partners, LLC          California limited     Venturi Staffing Partners, Venturi Career Partners
                                        liability company

Venturi Texas Staffing Partners, LP       Texas limited        Venturi Staffing Partners, Venturi Career Partners
                                           partnership

EX-23.1

                                  EXHIBIT 23.1

Consent of Independent Accountants

      We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 333-19541, 333-39361 and 333-66334) and Form
S-3 (File No. 333-31863) of Personnel Group of America, Inc. of our report dated
April 14, 2003 relating to the financial statements, which appears as Exhibit
13.1 in this Annual Report on Form 10-K.

 /s/  PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Charlotte, North Carolina
April 14, 2003

EX-99.1

                                  EXHIBIT 99.1

                 PERSONNEL GROUP OF AMERICA, INC. AND AFFILIATES


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



            In connection with the Annual Report of Personnel Group of America,
Inc.(the "Company"), on Form 10-K for the period ending December 29, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), and pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002, Larry L. Enterline, Chief Executive Officer of
the Company, hereby certifies that:

      (1)   The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


/s/ Larry L. Enterline
- --------------------------
Larry L. Enterline
Chief Executive Officer
April 14, 2003

EX-99.2

                                  EXHIBIT 99.2

                 PERSONNEL GROUP OF AMERICA, INC. AND AFFILIATES


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



            In connection with the Annual Report of Personnel Group of America,
Inc.(the "Company"), on Form 10-K for the period ending December 29, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), and pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002, James C. Hunt, Chief Financial Officer of the
Company, hereby certifies that:

      (1)   The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.


/s/ James C. Hunt
- --------------------------
James C. Hunt
Chief Financial Officer
April 14, 2003