Pursuant to Item  601(b)(13)(ii)  of Regulation  S-K, only those portions of the
SOS  Staffing  Services,  Inc.  1996  Annual  Report to  Shareholders  which are
incorporated by reference into the  Registrant's  Annual Report on Form 10-K are
filed in electronic format as an exhibit to such Annual Report on Form 10-K.

<TABLE>

Summary Financial and Operating Data
(Dollars in thousands, except per share data)
 
<CAPTION>


 
                                                              Fiscal Year (52/53 Weeks) Ended
                                        ----------------------------------------------------------------
                                             1996         1995          1994         1993         1992
                                        ----------------------------------------------------------------
Statement of Income Data:
<S>                                       <C>          <C>           <C>          <C>          <C>     
Service revenues                          $ 136,164    $ 87,533      $ 63,740     $ 49,433     $ 42,034
Gross profit                                 27,575      18,180        12,418        8,349        6,456
Operating income                              6,707       4,321         2,372        1,033          819
Income before pro forma compensation
  and provision for income taxes              6,511       4,406         2,427        1,113          867
Net income                                    4,029       2,940         2,427     $  1,113     $    867
                                                                                ------------------------
Pro Forma:
  Compensation adjustment(1)                      -           -           787 
  Provision for income taxes(2)                   -        (263)       (1,228)
                                          --------------------------------------
Net income                                $   4,029    $  2,677      $  1,986
                                          --------------------------------------
Net income per common share               $    0.59    $   0.43      $   0.35
                                          --------------------------------------
 
Weighted average common shares
  outstanding (in thousands)(3)               6,838       6,229         5,731
 

Operating Data:
Offices at period end                            87          48            34           22           17
Temporary personnel utilized                 56,620      41,854        32,479       27,234       22,689
Hours billed (in thousands)                  11,317       7,828         6,326        5,021        4,182
 
Balance Sheet Data:
Working capital                           $  17,012    $  9,645      $  5,057     $  4,330     $  3,400
Total assets                                 47,293      19,327        11,597        7,458        6,991
Total debt                                        -       1,450         2,780          806        1,892
Shareholders' equity                         36,834      14,668         7,098        5,171        4,058
 
</TABLE>


 
(1) Prior to 1995, the Company compensated its Chief Executive Officer at levels
sufficient  to pay income  taxes  associated  with the  Company's S  Corporation
status.  Compensation  expense  for the  fiscal  years  1994,  1993 and 1992 was
approximately $982,000, $466,000 and $340,000,  respectively.  Effective January
1995, the Company entered into a three-year  employment  contract with the Chief
Executive  Officer which provides for annual  compensation of $195,000.  The net
pro forma  adjustment  for 1994 has the effect of placing the Chief  Executive's
compensation at the $195,000 level.

(2) The Company's S Corporation  election was  terminated on June 26, 1995.  The
pro forma  provision  for income  taxes  assumes that the Company was subject to
income  taxes for the periods  presented  after  giving  effect to the pro forma
compensation adjustment described above.
 
(3) Prior to the Company's  initial  public  offering in June 1995,  the company
distributed  approximately  $8.0  million of its  accounts  receivable  to its S
Corporation   shareholders.   The  pro  forma  weighted  average  common  shares
outstanding  for fiscal  1995 and 1994  reflects  the effect of the  issuance of
1,230,769 shares at an offering price of $6.50 per share, as if the distribution
had occurred at the beginning of fiscal 1994.




       (Graph Omitted)                                 (Graph Omitted)




          REVENUE                                      OPERATING INCOME
     (Dollars in Millions)                          (Dollars in Thousands)

                                       1
<PAGE>


Management's Discussion and Analysis
 of Financial Condition and Results of Operations

The following  discussion  should be read in conjunction  with the  consolidated
financial  statements of SOS Staffing  Services,  Inc. (the "Company") and notes
thereto appearing  elsewhere in this report.  The company's fiscal year consists
of a 52- or 53-week period ending on the Sunday closest to December 31.

General - The  Company  provides a full  range of  staffing  services  through a
network of offices  in eleven  states.  Since the  completion  of the  company's
initial public  offering (the "IPO") in July 1995, the network has grown from 42
to 87 offices as of December 29, 1996.  The Company  expanded its office network
by acquiring  existing staffing service companies and opening new offices in the
Mountain States (Arizona,  Colorado,  Idaho, Montana,  Nevada, New Mexico, Utah,
and  Wyoming),  as well as other  western  states.  Generally,  the  Company has
entered key  metropolitan  areas by initially  acquiring or opening a central or
"hub"  office,  and  subsequently   developing  additional  offices  in  smaller
surrounding  markets. As offices reach certain  thresholds,  the Company divides
them  into one or more  additional  offices  resulting  in  greater  efficiency,
profitability and market penetration.

During the period from the IPO through  December 29, 1996, the Company  acquired
20 staffing  companies,  representing  28 offices.  The purchase prices of these
acquisitions have ranged from $15,000 to $4,000,000,  plus contingent  earnouts.
The Company has generally  negotiated an earnout component of the purchase price
paid for acquisitions,  which the Company believes more accurately  reflects the
appropriate value for the acquired business, aligns the interests of the Company
and the snhances the likelihood of successfully integrating the acquired company
into  SOS.ellers and enhances the  likelihood of  successfully  integrating  the
acquired company into SOS.

During the period from the IPO  through  December  29,  1996,  the Company  also
opened 17 new offices through  internal  expansion.  Capital costs of new office
openings,  excluding  working capital  requirements,  have typically ranged from
$10,000 to $25,000. To date, most of the Company's  internally developed offices
have achieved  profitability  within six to 12 months,  while offices  resulting
from the  division of an existing  larger  office are  usually  profitable  from
inception.

Results  of  Operations  - The  following  table  sets  forth,  for the  periods
indicated,  the percentage relationship to service revenues of selected items in
the Company's income statement:

                                             Fiscal Year (52/53 Weeks) Ended
                                             1996          1995        1994(1)

Service revenues                            100.0%        100.0%        100.0%
Direct cost of services                      79.7          79.3          80.5
Gross profit                                 20.3          20.7          19.5
Selling, general and
  administrative expenses                    15.4          15.8          14.5
Operating income                              4.9%          4.9%          5.0%

(1)Adjusted for CEO compensation  (see notes to Summary  Financial and Operating
Data - page 1).

Fiscal 1996 Compared to Fiscal 1995

Service Revenues - Substantially all of the Company's service revenues are based
on the time worked by its temporary staffing employees on customer  assignments.
Service  revenues are  recognized  as income at the time  staffing  services are
provided.  Service revenues for fiscal 1996 were $136.2 million,  an increase of
$48.7  million,  or 56%, from $87.5 million in fiscal 1995. Of the $48.7 million
increase,  $24.1 million was  attributable  to  acquisitions,  $20.1 million was
attributable  to  comparable  offices and $4.5 million was  attributable  to new
offices.  The increase in service  revenues of comparable  offices was generally
consistent with increases in hours billed.

Gross Profit - The Company  defines  gross profit as service  revenues  less the
cost of providing  services,  which  includes  wages of  temporary  staffing and
consulting  employees,  employer  payroll  taxes (FICA,  unemployment  and other
general payroll costs) and workers'  compensation costs. Gross profit for fiscal
1996 was $27.6  million,  an increase of $9.4 million or 52%,  compared to $18.2
million in 1995. Gross profit margin for fiscal 1996 was 20.3% compared to 20.7%
in fiscal  1995,  reflecting,  in part,  upward  pressure  on wages due to lower
unemployment  rates in the Company's  service areas.  Gross profit margin varies
depending on the types of services offered.

                                       7

<PAGE>

Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses  include  compensation  of  regular  employees,   rent,
recruitment and retention of temporary staffing employees, costs associated with
opening new offices,  depreciation and  amortization  and advertising.  Selling,
general  and  administrative  expenses  amounted to $20.9  million,  or 15.4% of
service revenues,  in fiscal 1996 compared to $13.9 million, or 15.8% of service
revenues,  in fiscal 1995.  Selling,  general and  administrative  expenses have
generally  increased  as  service  revenues  and  the  number  of  offices  have
increased.

Operating  Income - Operating  income for 1996 was $6.7 million,  an increase of
$2.4  million,  or 55%, from $4.3 million in fisca1 1995.  Operating  margin for
both fiscal 1996 and fiscal 1995 was 4.9%.

Fiscal 1995 Compared to Fiscal 1994

Service  Revenues - Service  revenues  for fiscal  1995 were $87.5  million,  an
increase  of $23.8  million,  or 37.3%,  from  $63.7  million  in  fiscal  1994.
Approximately  $14.2 million of the increase was  attributable to  acquisitions,
approximately   $6.6  million  was   attributable  to  comparable   offices  and
approximately $3.0 million was attributable to opening new offices. The increase
in service  revenues  attributable  to comparable  offices was  consistent  with
increases in hours billed, coupled with a better mix of business, resulting in a
higher average bill rate.

Gross  Profit - Gross profit for fiscal 1995 was $18.2  million,  an increase of
$5.8 million, or 46%, from $12.4 million in fiscal 1994. Gross profit margin for
fiscal 1995 was 20.7%,  compared to 19.5% in fiscal  1994.  The  improvement  in
gross profit margin was due  primarily to the  Company's  focus on higher margin
business in each segment where it provides staffing services and its emphasis on
a higher margin mix of business.  Gross margins were also positively affected by
continued  emphasis  on the use of  flexible  pricing  strategies  and  workers'
compensation loss control.

Selling,   General   and   Administrative   Expenses  -  Selling,   general  and
administrative  expenses for fiscal 1995 amounted to $13.9 million,  or 15.8% of
service revenues,  compared to $9.3 million (adjusted for CEO compensation),  or
14.5% of service revenues, for fiscal 1994. The increase in selling, general and
administrative  expenses as a percentage  of service  revenues was  attributable
largely to the addition of personnel at the Company's  headquarters and regional
office levels to support the Company's growth,  including planned future growth.
Other   increases  in  selling,   general  and   administrative   expenses  were
attributable  to initial  costs of opening  new offices  and  integrating  newly
acquired offices and costs related to becoming a public company.

Operating  Income -  Operating  income  for  fiscal  1995 was $4.3  million,  an
increase  of  $1.1  million,  or  37%,  from  $3.2  million  (adjusted  for  CEO
compensation) in fiscal 1994.  Operating margin was 4.9% in fiscal 1995 and 5.0%
in fiscal 1994.
 
Liquidity and Capital Resources

For fiscal 1996, cash used in operating  activities was $2.4 million,  primarily
as a  result  of  increases  in  accounts  receivable  due to  increased  sales,
partially  offset by  increases  in workers'  compensation  reserves and various
short-term  liabilities.  For fiscal 1995, cash used in operating activities was
$5.6  million.  The use of cash in operating  activities  during fiscal 1995 was
impacted  by the  distribution  of $8.0  million in accounts  receivable  to the
Company's S Corporation shareholders.

The Company's investing  activities during fiscal 1996 and fiscal 1995 used cash
in the amounts of $12.5 million and $1.8 million,  respectively,  principally to
purchase assets of acquired  businesses and property and equipment.  In February
1997, the Company  completed the  acquisition of Computer  Group,  Inc. for $2.7
million  in  cash  and  future  contingent  earnouts.   See  the  Notes  to  the
Consolidated  Financial  Statements of the Company  appearing  elsewhere in this
report for a description of the material terms of these acquisitions.

                                       8
<PAGE>

Cash flows from  financing  activities  during  fiscal  1996  amounted  to $18.0
million. During fiscal 1996, the Company borrowed $11.0 million on its long-term
debt  facility,  primarily  to fund  the  Company's  acquisitions  of  temporary
staffing  companies.  In December  1996,  the Company  completed  its  secondary
offering of 2.2 million  shares of the  Company's  common  stock (2.0 million in
newly   issued   shares  and   200,000   outstanding   shares  sold  by  selling
shareholders),  raising  $18.1  million in net  proceeds.  The Company  used the
proceeds of the offering to pay off its  outstanding  debt. In January 1997, the
underwriters  exercised their over-allotment option to purchase from the Company
330,000 shares of the Company's common stock, raising additional net proceeds of
approximately  $3.0 million.  Cash flows from financing  activities totaled $9.5
million in fiscal 1995,  principally  as a result of the  Company's  sale of 2.2
million shares of common stock in its initial public offering in July 1995.

The Company's primary sources of short-term and long-term  liquidity and capital
resources are its cash reserves and a secured line of credit with certain banks.
The Company's line of credit allows for maximum borrowings of $20.0 million.  At
the end of fiscal  1996,  the Company had no  outstanding  borrowings  under its
credit facility.  Borrowings under the short-term portion of the credit facility
bear  interest at the  lender's  prime rate (8.25% at December  29,  1996).  The
long-term  portion of the credit facility bears interest at LIBOR plus 1.75% (at
December 29, 1996,  7.75%). The Company had commitments for letters of credit of
$3.7 million  outstanding  at December  29,  1996,  for purposes of securing its
worker's compensation premium obligation,  which is considered as a reduction of
borrowing  availability  on the line of credit.  At  December  29,  1996,  $16.3
million  was  available  on the line of  credit.  Management  believes  that the
present  credit  facility,  together  with  cash  reserves  and cash  flow  from
operations, is sufficient to fund the Company's operations,  capital expenditure
requirements  and  acquisitions  presently  anticipated for at least the next 12
months.  However,  if the Company were to expand its  operations  significantly,
especially  through  unanticipated  acquisitions,   additional  capital  may  be
required.  There can be no  assurance  that the  Company  will be able to obtain
additional capital at acceptable rates.

Prior to the  termination of its Subchapter S election in June 1995, the Company
distributed  approximately  $8.0  million of its  accounts  receivable  to its S
Corporation  shareholders.  In  addition,  during  the first  half of 1995,  the
Company made distributions to shareholders totaling $750,000 for the anticipated
tax applicable to the S Corporation earnings.  Prior to the termination of the S
Corporation  election,  it was  determined  that the $750,000 was not needed for
such  income  taxes  and  the   shareholders   returned  the   distributions  by
contributing capital to the Company.


Seasonality

The Company's  business  follows the seasonal trends of its customers'  business
which are, in turn, affected by the climate in the states in which the customers
do  business.  The  Company  usually  experiences  higher  revenues in its third
quarter because of increased hiring of temporary  staffing  employees to replace
student workers who return to school in August and September,  favorable weather
conditions and higher overall economic activity.  Historically,  the Company has
experienced  lower  revenues  in the first  quarter due to  unfavorable  weather
conditions and lower overall economic activity;  however, as the Company expands
its office network to include  western states with more moderate  climates,  the
Company may experience less impact from unfavorable weather conditions.


Impact of Inflation

The  Company  believes  that over the past three years  inflation  has not had a
significant impact on the Company's results of operations.

                                       9



<PAGE>

<TABLE>
CONSOLIDATED BALANCE SHEETS

As of December 29, 1996 and December 31, 1995
<CAPTION>

                                                                           1996                      1995
                                                                 -----------------------------------------------
ASSETS

CURRENT ASSETS:
<S>                                                              <C>                        <C>               
         Cash and cash equivalents                               $        5,784,651         $        2,717,389
         Accounts receivable, less allowances of
            $459,000 and $142,600, respectively                          19,114,117                  9,784,022
         Current portion of workers' compensation deposit                   610,473                    568,658
         Prepaid expenses and other                                         305,151                    191,616
         Deferred tax asset                                                 661,645                     61,803
         Amounts due from related parties                                   406,376                    460,897
                                                                 -----------------------------------------------
               Total current assets                                      26,882,413                 13,784,385
                                                                 -----------------------------------------------
 

PROPERTY AND EQUIPMENT, at cost:
         Computer equipment                                               1,399,408                  1,011,363
         Office equipment                                                 1,860,421                  1,087,262
         Leasehold improvements and other                                   969,208                    789,633
                                                                 -----------------------------------------------
                                                                          4,229,037                  2,888,258
         Less accumulated depreciation and amortization                  (2,096,556)                (1,267,233)
                                                                 -----------------------------------------------
               Total property and equipment, net                          2,132,481                  1,621,025
                                                                 -----------------------------------------------
 
OTHER ASSETS:
         Workers' compensation deposit, less current portion                106,369                    142,164
         Intangible assets, less accumulated amortization of
            $457,400 and $50,800, respectively                           17,798,588                  3,582,924
         Deposits and other assets                                          372,973                    196,850
                                                                 -----------------------------------------------
               Total other assets                                        18,277,930                  3,921,938
                                                                 -----------------------------------------------
 
 
               Total assets                                      $       47,292,824        $        19,327,348
                                                                 -----------------------------------------------
</TABLE>
 

          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       10
<PAGE>


<TABLE>
<CAPTION>


 
                                                                            1996                1995
                                                                 -----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
<S>                                                             <C>                       <C>            
         Note payable                                           $            -            $     1,450,000
         Accounts payable                                              600,504                    126,349
         Accrued payroll costs                                       2,110,554                  1,275,617
         Current portion of workers' compensation reserve            1,501,669                    735,799
         Accrued liabilities                                           408,027                    134,295
         Income taxes payable                                          466,726                     74,576
         Accrued acquisition earnouts                                4,782,689                    343,066
                                                                 -----------------------------------------
                  Total current liabilities                          9,870,169                  4,139,702
                                                                 -----------------------------------------

WORKERS' COMPENSATION RESERVE,
         less current portion                                          375,418                    183,950
                                                                 -----------------------------------------
 
DEFERRED INCOME TAX LIABILITY                                          213,056                    336,155
                                                                 -----------------------------------------
 
COMMITMENTS AND CONTINGENCIES
         (Notes 2, 3, and 5)
SHAREHOLDERS' EQUITY:
         Common stock $0.01 par value; 20,000,000 shares
              authorized; 8,706,020 and 6,700,000 shares
              issued and outstanding, respectively                      87,060                     67,000
         Additional paid-in capital                                 31,216,917                 13,099,497
         Retained earnings                                           5,530,204                  1,501,044
                                                                 -----------------------------------------
                  Total shareholders' equity                        36,834,181                 14,667,541
                                                                 -----------------------------------------
 
                  Total liabilities and shareholders' equity    $   47,292,824            $    19,327,348
                                                                 -----------------------------------------
</TABLE>



 
 
          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       11
<PAGE>


<TABLE>

CONSOLIDATED STATEMENTS OF INCOME
 
For the Fiscal Years Ended December 29, 1996, December 31, 1995 and January 1, 1995
 
<CAPTION>

                                                                     Fiscal Year (52 Weeks) Ended
                                                       1996                     1995                     1994
                                             -----------------------------------------------------------------------
     
 
<S>                                          <C>                       <C>                      <C>               
SERVICE REVENUES                             $       136,163,973       $       87,532,903       $       63,739,807
DIRECT COSTS OF SERVICES                             108,589,322               69,353,212               51,322,089
                                             -----------------------------------------------------------------------
     Gross profit                                     27,574,651               18,179,691               12,417,718
 
SELLING, GENERAL AND
   ADMINISTRATIVE EXPENSES                            20,867,359               13,858,600               10,045,998
                                             -----------------------------------------------------------------------
 
INCOME FROM OPERATIONS                                 6,707,292                4,321,091                2,371,720
                                             -----------------------------------------------------------------------

OTHER INCOME (EXPENSE):
     Interest expense                                   (301,207)                (145,646)                 (35,492)
     Interest income                                      90,793                  109,684                   27,041
     Other, net                                           13,695                  120,604                   64,118
                                             -----------------------------------------------------------------------
          Total, net                                    (196,719)                  84,642                   55,667
                                             -----------------------------------------------------------------------
 
INCOME BEFORE PROVISION
   FOR INCOME TAXES                                    6,510,573                4,405,733                2,427,387

PROVISION FOR INCOME TAXES                            (2,481,413)              (1,465,791)                       - 
                                             ----------------------------------------------------------------------- 
     
NET INCOME                                   $         4,029,160       $        2,939,942       $        2,427,387
                                             -----------------------------------------------------------------------
 
UNAUDITED PRO FORMA INFORMATION (Note 8):
     Income before pro forma adjustments     $         4,029,160       $        2,939,942       $        2,427,387
     Compensation adjustment                                   -                        -                  786,840
     Income taxes adjustment                                   -                 (262,862)              (1,228,160)
                                             -----------------------------------------------------------------------
 
PRO FORMA NET INCOME                         $         4,029,160       $        2,677,080       $        1,986,067
                                             -----------------------------------------------------------------------
 
PRO FORMA NET INCOME
   PER COMMON SHARE                          $              0.59       $             0.43       $             0.35
                                             -----------------------------------------------------------------------
     
PRO FORMA WEIGHTED AVERAGE
   COMMON SHARES OUTSTANDING                           6,838,479                6,229,021                5,730,769
                                             -----------------------------------------------------------------------
</TABLE>




          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       12
<PAGE>


<TABLE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<CAPTION>
 
                                                                           Additional
                                                  Common Stock               Paid-in          Retained
                                             Shares          Amount          Capital          Earnings            Total
                                             -----------------------------------------------------------------------------
<S>                                          <C>           <C>            <C>                <C>              <C>        
BALANCE, January 2, 1994                     4,500,000     $  45,000      $          -       $  5,125,890     $ 5,170,890
          Distributions to shareholders              -             -                 -           (500,000)       (500,000)
          Net income                                 -             -                 -          2,427,387       2,427,387
                                             -----------------------------------------------------------------------------
 
BALANCE, January 1, 1995                     4,500,000        45,000                 -          7,053,277       7,098,277
          Distributions to shareholders              -             -                 -         (8,750,023)     (8,750,023)
          Contributions from shareholders            -             -                 -            750,000         750,000
          Change in tax status                       -             -           492,152           (492,152)              -
          Sale of common stock, net          2,200,000        22,000        12,607,345                  -      12,629,345
   Net income                                        -             -                 -           2,939,942      2,939,942
                                             -----------------------------------------------------------------------------

BALANCE, December 31, 1995                   6,700,000        67,000        13,099,497           1,501,044     14,667,541
          Exercise of stock options              6,020            60            39,070                   -         39,130
          Sale of common stock, net          2,000,000        20,000        18,078,350                   -     18,098,350
          Net income                                 -             -                 -           4,029,160      4,029,160
                                             -----------------------------------------------------------------------------

BALANCE, December 29, 1996                   8,706,020     $  87,060      $ 31,216,917       $   5,530,204   $ 36,834,181
                                             -----------------------------------------------------------------------------
</TABLE>















          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       13
<PAGE>




CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Fiscal Years Ended  December 29, 1996,  December 31, 1995 and January 1,
1995

Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
 
                                                                                          Fiscal Years (52/53 Weeks) Ended
                                                                                ---------------------------------------------------
                                                                                      1996              1995               1994
                                                                                
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                              <C>               <C>                <C>         
         Net income`                                                             $  4,029,160      $  2,939,942       $  2,427,387
         Adjustments to reconcile net income
           to net cash (used in) provided by operating
           activities:
                  Depreciation and amortization                                       854,902           374,114            184,652
                  Deferred income taxes                                              (825,941)          274,352                  -
                  Loss on disposition of assets                                        63,030             3,554                  -
                  Changes in operating assets and liabilities:
                           Accounts receivable, net                                (8,785,524)      (10,740,788)        (1,712,236)
                           Workers' compensation deposit                               (6,021)        1,277,178           (886,000)
                           Prepaid expenses and other                                (127,943)         (128,033)           (29,583)
                           Amounts due from related parties                            54,521          (445,881)            (2,112)
                           Deposits and other assets                                  (84,969)            7,667            (82,527)
                           Accounts payable                                           391,177            29,742             65,705
                           Accrued payroll costs                                      529,247           685,683           (200,741)
                           Workers' compensation reserve                              957,338           (35,989)           325,883
                           Accrued liabilities                                        219,439            57,650             47,109 
                           Income taxes payable                                       301,961            74,576                  -
                                                                                ---------------------------------------------------
                             Net cash (used in) provided by operating activities   (2,429,623)       (5,626,233)           137,537
                                                                                ---------------------------------------------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
         Cash paid for acquisitions of businesses                                 (10,162,026)       (1,340,707)          (125,000)
         Principal payment of note related to acquisition                          (1,450,000)                -                  -
         Purchase of property and equipment                                          (683,889)         (684,092)          (709,144)
         Payments on acquisition earnouts                                            (239,139)          (29,800)                 -
         Deposits related to acquisition of certain assets                                  -           236,078           (206,278)
         Proceeds from sale of property and equipment                                       -                 -              7,247
                                                                                ---------------------------------------------------
                             Net cash used in investing activities                (12,535,054)       (1,818,521)        (1,033,175)
                                                                                ---------------------------------------------------
</TABLE>






          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       14
<PAGE>

<TABLE>
<CAPTION>



                                                                                          Fiscal Years (52/53 Weeks) Ended
                                                                                      1996              1995               1994
                                                                                ----------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                              <C>               <C>               <C>          
                  Proceeds from issuance of common stock, net                    $ 18,098,350      $ 12,629,345      $           -
                  Proceeds from exercise of employee stock options                     39,130                 -                  -
                  Net (repayments) borrowings on line of credit                             -        (2,530,251)         1,724,150
                  Proceeds from long-term debt                                     11,000,000                 -                  -
                  Principal payments on long-term debt                            (11,105,541)         (550,000)                 -
                  Capital contribution from shareholders                                    -           750,000                  -
                  Distributions to shareholders                                             -          (750,000)          (500,000)
                                                                                ----------------------------------------------------
                           Net cash provided by financing activities               18,031,939         9,549,094          1,224,150
                                                                                ----------------------------------------------------
 
NET INCREASE IN CASH AND CASH EQUIVALENTS                                           3,067,262         2,104,340            328,512
CASH AND CASH EQUIVALENTS
     AT BEGINNING OF YEAR                                                           2,717,389           613,049            284,537
                                                                                ----------------------------------------------------
 
CASH AND CASH EQUIVALENTS
     AT END OF YEAR                                                              $  5,784,651      $  2,717,389      $     613,049
                                                                                ----------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION:
 
                  Cash paid during the year for:
                           Interest                                              $    280,018      $    134,917      $      28,636
                           Income taxes                                             2,902,393         1,117,214                  -
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
                  The following table sets forth information relating to the 
                  Company's acquisitions of certain businesses (see Note 3):
                           Fair value of assets acquired                         $ 14,980,167      $  3,433,773      $     375,000
                           Liabilities assumed                                        139,379                 -                  -
                           Notes payable issued in connection with acquisition              -         1,750,000            250,000
                           Accrued acquisition earnouts                             4,678,762           343,066                  -
 
                  During fiscal year 1995, the Company distributed approximately
                  $8.0 million of  its  accounts receivable to its S Corporation
                  shareholders (see Note 7).
</TABLE>
 


          The accompanying notes to consolidated financial statements
             are an integral part of these consolidated statements.

                                       15
<PAGE>





(1) Nature of Operations
SOS Staffing Services,  Inc. and subsidiaries  (collectively the "Company:) is a
regional  provider of temporary  staffing  services in the Western States (Utah,
Colorado, Idaho, Wyoming, Arizona, Nevada, New Mexico, California, Oregon, Texas
and Montana).  The Company  provides  clerical,  light  industrial,  industrial,
technical   and   professional   staffing   employees  to  various   businesses,
professional  and service  organizations  and  government  agencies  through its
network of 87 offices.  A majority of the  Company's  business  results from its
offices in Utah and Colorado.

(2) Summary of Significant Accounting Policies
Fiscal Year - The Company's  fiscal year ends on the Sunday  closest to December
31, which results in a 52- or 53-week year.  The fiscal years ended December 29,
1996 (fiscal 1996), December 31, 1995 (fiscal 1995), and January 1, 1995 (fiscal
1994) each contained 52 weeks.

Principles of Consolidation - The consolidated  financial statements include the
accounts of SOS Staffing Services,  Inc. and its wholly owned subsidiaries,  SOS
Collection  Services,  Inc.  (d.b.a.  National Collex  Corporation)  and Wolfe &
Associates,  Inc. All significant intercompany transactions have been eliminated
in consolidation.

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

Revenue  Recognition  - Service  revenues are  recognized  at the time  staffing
services are provided.

Cash and Cash Equivalents - The Company considers highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents. As
of December 29, 1996,  included in cash and cash  equivalents was a money market
account of approximately $4,007,000 with an investment company.

Property  and  Equipment  -  Property  and  equipment  are  stated  at cost  and
depreciated  using the  straight-line  method over their estimated useful lives.
Leasehold  improvements are amortized over the terms of the respective leases or
the  estimated  economic  lives  of  the  assets,   whichever  is  shorter.  The
depreciation and amortization periods are as follows:

         Computer equipment                          2 -   5 years
         Office equipment                            3 -   7 years
         Leasehold improvements and other            5 - 17 years
 
Upon  retirement or other  disposition of property and  equipment,  the cost and
related accumulated depreciation and amortization are removed from the accounts.
The  resulting  gain  or  loss  is  reflected  in  income.  Major  renewals  and
betterments are capitalized while minor expenditures for maintenance and repairs
are charged to expense as incurred.

Workers'  Compensation - Effective  January 1, 1996, the Company  entered into a
workers'  compensation  insurance  arrangement  with CIGNA Property and Casualty
("CIGNA").  The policy is a deductible arrangement with coverage for losses over
$200,000  per  occurrence.  Under the terms of the  agreement,  the  Company  is
required to fund into a deposit  account,  an amount for payment of claims.  The
fund is  replenished  monthly based on actual  payments made by CIGNA during the
previous month.

For the fiscal year ended  December 31, 1995,  the Company had a paid loss retro
workers'   compensation   insurance   arrangement   with  a  unit  of   American
International  Group, Inc. ("AIG"). All of the Company's business divisions were
insured by AIG for losses over $250,000 per  occurrence,  except with respect to
certain divisions which are covered by a separate policy providing  coverage for
losses over $100,000 per  occurrence.  Under the terms of the  arrangement,  the
Company was required to fund an estimated  premium amount into a deposit account
from which claims are paid.  AIG is required to refund to the Company 60 percent
of the unused deposit account balance six months  following the policy year with
the remaining balance to be refunded evenly over the succeeding four years.

The Company has established  reserve amounts based upon information  provided by
CIGNA and AIG as to the status of claims plus  development  factors for incurred
but not yet reported  claims and  anticipated  future changes in underlying case
reserves.  Such reserve amounts are only estimates and there can be no assurance
that the Company's future workers' compensation  obligations will not exceed the
amount of its reserves. However, management believes that the difference between
the amounts  recorded for its estimated  liability and the costs of settling the
actual claims, will not be material to the results of operations.

                                       16

<PAGE>

Intangible  Assets - Intangible  assets  consist of the following  amounts as of
December 29, 1996 and December 31, 1995:

                                                1996                1995
                                        -----------------------------------
         Goodwill                          $ 16,648,361       $  3,385,379
         Non-compete agreements               1,393,187            232,687
         Employee and customer lists            214,435             15,435
                                        -----------------------------------
         Total                               18,255,983          3,633,501
         Less accumulated amortization         (457,395)           (50,577)
                                        -----------------------------------
                                           $ 17,798,588       $  3,582,924
                                        -----------------------------------


Goodwill  is  amortized  using  the  straight-line  method  over 30  years.  The
non-compete  agreements and employee and customer lists and are being  amortized
using the straight-line method over three to six years.

Accounting  for the Impairment of Long-Lived  Assets - The Company  accounts for
impairment  of  long-lived  assets in  accordance  with  Statement  of Financial
Accounting  Standards  ("SFAS")  No.  121,  "Accounting  for the  Impairment  of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", which was issued
in March 1995.  SFAS No. 121  requires  that  long-lived  assets be reviewed for
impairment  whenever events or changes in  circumstances  indicate that the book
value of the asset may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of the
future  undiscounted net cash flows of the related asset over the remaining life
in measuring  whether the assets are  recoverable.  The adoption of SFAS No. 121
did not have a material  impact on the  Company's  1996  financial  position  or
results of operations.

Income Taxes - The Company  recognizes  deferred tax assets or  liabilities  for
expected  future tax  consequences  of events that have been  recognized  in the
financial statements or tax returns.  Under this method,  deferred tax assets or
liabilities are determined  based upon the difference  between the financial and
income tax bases of assets and  liabilities  using enacted tax rates expected to
apply when differences are expected to be settled or realized.

Prior to June 26, 1995, the Company had elected for federal and state income tax
purposes  to include  its taxable  income  with that of its  shareholders  (an S
Corporation  election).  Accordingly,  the Company had no  provision  for income
taxes in its financial statements.

Net Income Per Common Share - Net income per common share is computed  using the
weighted  average  number of common and  common  equivalent  shares  outstanding
during the year.  Common equivalent shares consist of the Company's common stock
issuable upon exercise of stock  options,  determined  using the treasury  stock
method.

Stock Split and  Authorized  Common  Stock - In  connection  with the  Company's
initial public  offering in July 1995,  the Board of Directors and  shareholders
approved a 225 for 1 stock split and a change in the authorized  common stock to
20,000,000  shares  at $0.01  par value per  share.  This  stock  split has been
retroactively reflected in the consolidated financial statements.

Concentrations  of  Credit  Risk  - The  Company's  financial  instruments  that
potentially  subject  the  Company  to  concentrations  of credit  risk  consist
principally of cash and trade receivables. In the normal course of business, the
Company  provides  credit  terms to its  customers.  The  Company  believes  its
portfolio  of  accounts  receivable  is well  diversified  and as a  result  its
concentrations  of credit risk are minimal.  The Company performs ongoing credit
evaluations of its customers and maintains  allowances for possible losses,  but
typically does not require collateral.

(3) Acquisitions
All of the  Company's  acquisitions  have been  accounted for using the purchase
method.  Certain acquisitions have contingent earnout components of the purchase
price.  Earnout amounts accrued  increase the amount of goodwill  related to the
acquisition.

PAMS Temporary  Employment  Service,  Inc. and National Collex  Corporation - In
December 1995, the Company purchased certain assets and substantially all of the
business  of PAMS  Temporary  Employment  Service,  Inc.,  and  National  Collex
Corporation  ("PAMS")  with  operations  in Phoenix  and  Tucson,  Arizona.  The
purchase price was $1,850,000  plus contingent  future earnout  payments up to a
maximum of  $1,650,000.  During 1995 cash of  $400,000  was paid and the Company
entered into a promissory  note of $1,450,000  which was paid in full in January
1996.  The earnout  payments  are made  monthly  based upon the  achievement  of
certain  net  operating  results.  The  excess  of the  initial  purchase  price
(excluding  earnouts)  over the  estimated  fair value of the acquired  tangible
assets  was  approximately  $1,804,000  and  $1,734,000  has been  allocated  to
goodwill and $70,000 has been allocated to other intangible assets.

                                       17
<PAGE>

Abacus  Consulting  Group,  Inc.,  Abacus  Consultants,  Inc.,  The  Performance
Professionals,  Inc. - In July 1996,  the Company  purchased  certain assets and
substantially  all  the  business  of  Abacus  Consulting  Group,  Inc.,  Abacus
Consultants,  Inc., and The Performance  Professionals,  Inc. ("The  Performance
Group") for  approximately  $3,325,000  and contingent  future  earnouts up to a
maximum of  $1,775,000.  The excess of the  initial  purchase  price  (excluding
earnouts)  over the  estimated  fair value of the acquired  tangible  assets was
approximately  $3,305,000,  of which approximately $2,983,000 has been allocated
to goodwill and  approximately  $322,000 has been allocated to other  intangible
assets.

Wolfe & Associates,  Inc. - In November 1996, the Company purchased the stock of
Wolfe & Associates,  Inc. ("Wolfe") for approximately $4,000,000 plus contingent
future  earnouts  up to a maximum  of  $6,000,000.  The  excess  of the  initial
purchase  price  (excluding  earnouts)  over  the  estimated  fair  value of the
acquired assets less liabilities assumed was approximately  $4,044,000, of which
approximately  $3,644,000  has been  allocated  to  goodwill  and  approximately
$400,000 has been allocated to other intangible assets.

Other  Businesses  Acquired - During  fiscal year 1994,  the  Company  purchased
certain assets of a company  principally  owned by the adult children of certain
shareholders  of the Company in exchange  for  $125,000 in cash and an unsecured
note  payable of $250,000  which was paid in full during  fiscal year 1995.  The
excess of the  purchase  price over the  estimated  fair  value of the  acquired
tangible assets was approximately  $286,000,  of which all has been allocated to
goodwill.

During fiscal year 1995, the Company acquired  certain assets and  substantially
all of the operations of six businesses  excluding PAMS. The aggregate  purchase
price was approximately  $1,166,000 and aggregate  contingent future earnouts up
to a maximum of  approximately  $210,000.  The excess of the  initial  aggregate
purchase  price  (excluding  earnouts)  over  the  estimated  fair  value of the
acquired tangible net assets was approximately $1,107,000, of which $929,000 has
been allocated to goodwill and $178,000 has been  allocated to other  intangible
assets.

During fiscal year 1996, the Company acquired  certain assets and  substantially
all of the operations of fourteen businesses excluding The Performance Group and
Wolfe. The aggregate  purchase price was approximately  $2,545,000 and aggregate
contingent  future  earnouts up to a maximum of  approximately  $3,030,000.  The
excess of the initial  purchase  price  (excluding  earnouts) over the estimated
fair value of the acquired tangible net assets was approximately  $2,381,000, of
which  $1,744,000 has been allocated to goodwill and $637,000 has been allocated
to other intangible assets.

Earnouts and Acquisition  Costs - During fiscal years 1996 and 1995, the Company
paid earnouts  totaling $239,139 and $29,800,  respectively.  As of December 29,
1996 and December 31, 1995, accrued acquisition  earnouts totaled $4,782,689 and
$343,066, respectively.

During fiscal years 1996 and 1995, the Company incurred direct acquisition costs
totaling  $257,932 and $19,429,  respectively,  which have been accounted for as
part of the purchase price.

Pro  Forma   Acquisition   Information-Unaudited   -  The  unaudited  pro  forma
acquisition  information  for fiscal years 1996 and 1995 presents the results of
operations as if the 1996 and 1995 acquisitions had occurred at the beginning of
fiscal  1995.  The results of  operations  give  effect to certain  adjustments,
including  amortization of intangible assets and interest expense on acquisition
debt. The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisitions
been made at the beginning of the  applicable  periods as described  above or of
the  results  which may occur in the  future.ng  of the  applicable  periods  as
described above or of the results which may occur in the future.

                    Unaudited Pro Forma Results of Operations
                      (in thousands, except per share data)

                                               1996               1995
                                             ---------------------------
         Service revenues                    $150,146           $114,416
         Income from operations                 6,703              4,698
         Net income                             3,639              2,438
         Net income per common share         $   0.53           $   0.36

                                       18

<PAGE>

(4) Line of Credit
The Company entered into a secured  revolving  credit agreement dated as of July
11, 1996 with certain banks. The agreement  provides for a maximum commitment of
$20,000,000 to be used for working capital needs and to fund  acquisitions.  The
commitment  expires in July 1999, at which time  outstanding  borrowings are due
and payable.  Borrowings under the agreement are secured by substantially all of
the  assets  of  the  Company.  The  agreement  contains  a  commitment  fee  of
three-eighths  of one percent on the unused portion which is payable  quarterly.
As of December 29, 1996,  no loans were  outstanding  under the  agreement.  The
Company also had letters of credit of $3.7 million  outstanding  at December 29,
1996 for purposes of securing its workers' compensation premium obligation.  The
aggregate  amount of such letters of credit,  which cannot  exceed $7.0 million,
reduces the  borrowing  availability  on the credit line.  At December 29, 1996,
$16.3  million  was  available  for  borrowings  or letters of credit  under the
agreement.

The agreement contains certain restrictive  covenants including maintenance of a
minimum   tangible  net  worth  and   restrictions  on  the  amount  of  capital
expenditures.  As of December 29, 1996,  the Company was in compliance  with the
covenants.

(5) Commitments and Contingencies
Noncancelable  Operating  Leases - The Company  leases office  facilities  under
noncancelable operating leases. Management expects that, in the normal course of
business,  leases that expire will be renewed or replaced by other  leases.  The
Company leases certain of these facilities from a related party (see Note 12).

Future  minimum  lease  payments  under  noncancelable  operating  leases are as
follows:

         Fiscal Years Ending
         1997         $ 1,298,200
         1998           1,046,583
         1999             791,565
         2000             456,616
         2001             162,700
         Thereafter       237,843
                     -------------
                      $ 3,993,507
                     -------------

Facility  rental  expense  for the  fiscal  years  1996,  1995 and 1994  totaled
approximately $1,110,000, $649,000 and $405,000, respectively.

Legal  Matters - In February  1996,  a former  employee  of the Company  filed a
wrongful  termination  lawsuit against the Company in Third District Court, Salt
Lake County,  State of Utah. The complainant seeks compensatory  damages of $4.5
million and punitive damages of $4.0 million.  Subsequent to year end, the court
entered a final  order  dismissing  the case.  However,  until May 5, 1997,  the
plaintiff  may appeal or ask the court to set aside the  dismissal.  The Company
does not believe there is sufficient basis for any such action to be successful.

From time to time the Company is involved in legal matters generally incident to
its business.  It is the opinion of  management,  after  discussions  with legal
counsel,  that  the  ultimate  dispositions  of  these  matters  will not have a
material impact on the financial  condition,  liquidity or results of operations
of the Company.

(6) Public Offerings
In December 1996, the Company completed a secondary public offering and issued 2
million shares of common stock. The proceeds received from the offering,  net of
underwriting commissions and offering costs, totaled approximately $18,098,000.

In July 1995, the Company  completed an initial  public  offering and issued 2.2
million shares of common stock. The proceeds received from the offering,  net of
underwriting commissions and offering costs, totaled approximately $12,629,000.

(7) Distributions to Shareholders
During fiscal year 1995, the Company  distributed  approximately $8.0 million of
its accounts  receivable to its S Corporation  shareholders.  This  distribution
increased the taxable income of the Company, the tax on which was payable by the
S  Corporation  shareholders.  In addition,  the Company made  distributions  to
shareholders  totaling  $750,000 for the  anticipated  tax  applicable  to the S
Corporation earnings. Prior to the termination of the S Corporation election, it
was  determined  that the  $750,000 was not needed for such income taxes and the
shareholders returned the distributions by contributing capital to the Company.

                                       19

<PAGE>

(8) Pro Forma Unaudited Statement of Income Information
Prior to July 1995, the Company  compensated the Chief Executive Officer ("CEO")
at levels  sufficient  to pay  income  taxes  associated  with the  Company's  S
Corporation  status.  CEO  compensation  for  fiscal  year  1994  was  $982,000.
Effective  January  1995,  the  Company  entered  into a  three-year  employment
contract with the CEO which included annual compensation of $195,000.  A net pro
forma  compensation  adjustment has been made for fiscal year 1994 which had the
effect of placing the compensation at the $195,000 annual level.

The pro forma  income taxes  adjustment  for fiscal years 1995 and 1994 has been
determined  assuming the Company had been taxed as a C  Corporation  for federal
and  state  income  tax  purposes,  after  giving  effect  to  the  compensation
adjustment as described above.

The pro forma weighted average common shares outstanding  reflects the effect of
the issuance of 1,230,769  shares at the initial public  offering price of $6.50
per share, as if the accounts receivable  distribution of $8.0 million (see Note
7) had occurred at the beginning of 1994.

(9) Income Taxes
Effective June 26, 1995, the Company's S Corporation election was terminated. In
accordance with SFAS No. 109, the Company  recorded a net deferred tax liability
and the related  deferred  tax  provision  of $445,000 for the tax effect of the
differences  between  financial  statement  and  income  tax bases of assets and
liabilities that existed at the termination date of the S Corporation election.

The  components  of the  provision for income taxes for fiscal year 1996 and the
period in fiscal 1995 since the  termination of the S Corporation  status are as
follows:

                                                   1996                1995
                                             ----------------------------------
         Current provision-
           Federal                          $    2,859,353      $    1,030,662
           State                                   448,001             160,777
                                             ----------------------------------
                                                 3,307,354           1,191,439
                                             ----------------------------------

         Deferred provision (benefit)-
           Federal                                (714,062)           (152,956)
           State                                  (111,879)            (17,692)
           Change from S Corporation status              -             445,000
                                             ----------------------------------
                                                  (825,941)            274,352
                                             ----------------------------------

         Total provision
            for income taxes                $    2,481,413      $    1,465,791
                                             ----------------------------------

The following is a reconciliation  between the statutory federal income tax rate
and the  Company's  effective  income tax rate which is derived by dividing  the
provision for income taxes by income  before  provision for income taxes for the
fiscal years 1996 and 1995:

                                                  1996             1995
                                                  ----------------------
         Statutory federal income
           tax rate                               34.0%            34.0%
         State income taxes,
           net of federal benefit                  3.4              3.3
         Change from S Corporation status            -             (4.5)
         Other                                     0.7              0.5
                                                  ----------------------
                                                  38.1%            33.3%
                                                  ----------------------

                                       20
<PAGE>


<TABLE>


The  components of the deferred tax assets and  liabilities at December 29, 1996
and December 31, 1995 are as follows:
<CAPTION>

                                                             1996                      1995
                                                       -----------------------------------------
         Deferred income tax assets
<S>                                                  <C>                        <C>            
           Workers' compensation reserves            $        713,293           $       349,505
           Allowance for doubtful accounts                    200,336                    54,203
             Other                                            148,822                     9,690
                                                       -----------------------------------------
                                                            1,062,451                   413,398
                                                       -----------------------------------------

         Deferred income tax liabilities
           Cash to accrual adjustments                       (559,360)                 (645,248)
           Depreciation                                       (37,758)                  (26,648)
           Other                                              (16,744)                  (15,854)
                                                       -----------------------------------------
                                                             (613,862)                 (687,750)
                                                       -----------------------------------------
         Net deferred income tax asset/(liability)   $        448,589           $      (274,352)
                                                       -----------------------------------------

         Balance sheet classification                        1996                      1995
                                                       -----------------------------------------
           Current asset                             $        661,645           $        61,803
           Long-term liability                               (213,056)                 (336,155)
                                                       -----------------------------------------
                                                     $        448,589           $      (274,352)
                                                       -----------------------------------------
</TABLE>



(10) Stock-Based Compensation
As of  December  29,  1996,  the  Company  has a stock  incentive  plan which is
described below. The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related  interpretations  in accounting  for its plan.  SFAS No. 123,
"Accounting  for  Stock-Based  Compensation"  was issued  during 1995.  If fully
adopted,  SFAS No.  123  changes  the method  for  recognition  of cost on plans
similar to those of the Company. Adoption of this standard is optional; however,
pro forma  disclosures  had  compensation  cost for the Company's  1995 and 1996
grants for stock-based  compensation plans been determined  consistent with SFAS
No. 123, the  Company's  net income and net income per common share for 1996 and
1995 would  approximate  the pro forma amounts  below (in  thousands  except per
share data):
 
                                              1996              1995
                                        -------------------------------
         Net income
                  As reported           $       4,029    $        2,677
                                        -------------------------------
                  Pro forma             $       3,735    $        2,563
                                        -------------------------------

         Net income per common share
                  As reported           $        0.59    $         0.43
                                        -------------------------------
                  Pro forma             $        0.55     $        0.41
                                        -------------------------------
 
Because the SFAS No. 123 method of  accounting  has not been  applied to options
granted prior to January 1, 1996, and due to the nature and timing of the option
grants,  the  resulting  pro forma  compensation  cost may not be  indicative of
future years.
 
Stock  Price - The fair value of each  option  grant has been  estimated  on the
grant  date using the  Black-Scholes  option-pricing  model  with the  following
assumptions used for grants in 1996 and 1995, in calculating  compensation cost:
expected  stock  price  volatility  of 47  percent  for both  years,  an average
risk-free  interest rate of 6.2 percent,  and an expected life of five years for
director options and seven years for employee options for both 1996 and 1995.

Stock  Incentive  Plan - The Company  established  a stock  incentive  plan (the
"Plan").  The Plan  provides for the issuance of a maximum of 400,000  shares of
common  stock to  officers,  directors,  consultants  and other  key  employees.
Subsequent  to year end,  the  Board of  Directors  of the  Company  approved  a
resolution  amending  the Stock  Option  Plan to  increase  the number of shares
available for option grants by 400,000 shares (see Note 13). The Plan allows for
the grant of incentive  or  nonqualified  options,  stock  appreciation  rights,
restricted  shares of common  stock or stock  units and is  administered  by the

                                       21
<PAGE>

Board of Directors.  Incentive  options and nonqualified  options are granted at
not less than 100  percent of the fair  market  value of the  underlying  common
stock on the date of grant. The Board of Directors  determines the number,  type
of award and terms and conditions,  including any vesting conditions. For fiscal
1996 and 1995 only incentive and nonqualified options had been granted under the
Plan.  Employee stock options generally vest 20 percent at the date of grant and
16 percent on each of the next five anniversaries  thereafter.  Director options
generally  vest 20  percent  at the date of grant and 20  percent on each of the
next four anniversaries  thereafter.  The Plan also provides for an annual grant
to non-employee directors of 1,000 options which are immediately  exercisable on
the date of grant of which a total  of  4,000  options  had been  granted  as of
December 29, 1996.  Stock options granted to employees  expire no later than ten
years from the date of grant and stock  options  granted to directors  expire no
later than five years from the date of grant.


A summary of the stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                                              Weighted
                                                                                         Avg. Exercise
                                                                                             Price Per
                                                            Employees        Directors           Share
                                                            ------------------------------------------
<S>                                                           <C>               <C>             <C>                               
         Outstanding at January 1, 1995                             -                -               -
            Granted                                           129,000           20,000           $6.50
            Exercised                                               -                -               -
            Forfeited                                               -                -               -
                                                            ------------------------------------------
         Outstanding at December 31,  1995                    129,000           20,000            6.50
            Granted                                           132,200           24,000           10.36
            Exercised                                          (5,020)          (1,000)           6.50
             Forfeited                                         (7,040)               -            6.50
                                                            ------------------------------------------
         Outstanding at December 29,  1996                    249,140           43,000           $8.68
                                                            ------------------------------------------ 
         Exercisable at December 29,  1996                     66,580           15,000           $8.37
                                                            ------------------------------------------
</TABLE>

The  weighted  average  fair  value of options  granted  was $5.91 and $3.82 for
grants made during  fiscal  years 1996 and 1995,  respectively.  At December 29,
1996,  233,140 of the 292,140 options  outstanding  have exercise prices between
$6.50 and $9.75,  with a weighted average exercise price of $7.92 and a weighted
average  remaining  contractual  life of 8.6 years;  66,580 of these options are
exercisable  with a weighted  average  exercise  price of $7.58.  The  remaining
59,000 options have exercise  prices between $10.88 and $12.50,  with a weighted
average  exercise price of $11.69 and a weighted average  remaining  contractual
life of 7.6  years;  15,000 of these  options  are  exercisable  with a weighted
average exercise price of $11.87.
 
(11) Employee Benefit Plan
The Company has a 401(k) defined  contribution plan. Employee  contributions may
be  invested  in  several  alternatives.  Company  contributions  to  the  plan,
including matching contributions,  may be made at the discretion of the Company.
The Company's contributions to the plan were approximately $48,000,  $30,000 and
$15,000 for the fiscal years 1996, 1995 and 1994, respectively.

(12) Related Party Transactions
During  fiscal years 1994,  Temporary  Services,  Inc.  ("TSI") paid the Company
$30,500 for management  services.  In addition,  the Company  received  interest
payments of  approximately  $19,600 from TSI in fiscal 1994 and guaranteed TSI's
note payable to a bank which note was paid in full by TSI during fiscal 1995.
 
TSI of Utah,  Inc.  ("TSIU"),  a  company  incorporated  by an adult  son of the
Company's majority  shareholders,  which provides industrial  temporary staffing
services has entered into a franchise  agreement with the Company to use the TSI
name.  Under the  franchise  agreement,  the Company has agreed to fund employee
costs and collect  customer  billings on behalf of TSIU. The Company  receives a
service fee based upon a percentage of TSIU's gross  profit.  As of December 29,
1996 and  December  31,  1995,  the  Company  had  receivables  due from TSIU of
approximately  $462,370  and  $460,900,   respectively,  which  are  secured  by
outstanding   receivables  of  TSIU  of  approximately  $472,000  and  $479,000,
respectively.  During  fiscal  years 1996,  1995 and 1994 the  Company  recorded
service  fee   revenues  of   approximately   $126,000,   $43,000,   and  $5,400
respectively,  relating to the agreement. The Company believes that the terms of
the  franchise  agreement are at least as favorable as the terms that could have
been obtained from an unaffiliated third party in a similar transaction.

During fiscal year 1994 and part of fiscal year 1995, the Company rented certain
office  space  on a  month-to-month  basis  from  a  limited  partnership  owned
primarily  by certain  shareholders  of the Company  and their  adult  children.
During fiscal years 1995 and 1994,  the Company paid rent of $8,400 and $14,400,
respectively.

                                       22
<PAGE>

The Company  leases its corporate  office  building  from the adult  children of
certain majority shareholders under a ten-year lease agreement with an option to
renew for ten additional years. Rental expense during fiscal 1996, 1995 and 1994
amounted to approximately  $76,800,  $64,800 and $45,900,  respectively.  Future
minimum  lease  payments  related  to this lease  will  amount to  approximately
$77,000 each fiscal year.  The Company  believes that the terms of the lease are
at least as  favorable  as the  terms  that  could  have been  obtained  from an
unaffiliated third party in a similar transaction.
 
As of December 29, 1996, the Company had a note  receivable due from an employee
and officer of one of its subsidiaries in the amount of  approximately  $91,100.
The note is unsecured,  accrues  interest at ten percent per annum and is due on
demand.  The note  receivable  is  included  in other  long-term  assets  in the
accompanying consolidated balance sheet.
 
The Company has a consulting  agreement  with a member of the Board of Directors
to assist and advise the Company  with  respect to  identifying  and  evaluating
potential acquisitions.  The agreement may be terminated by either party upon 30
days notice. Compensation under the agreement is $3,500 per month which includes
the $1,000 per Board  meeting fee otherwise  payable.  For the fiscal years 1996
and 1995, consulting expense was $42,000 and $21,000, respectively.
 
(13) Subsequent Events
Computer Group Inc. - Subsequent to year end, the Company purchased the stock of
Computer Group, Inc. (Seattle, Wash.) for approximately $2.7 million plus future
contingent  earnouts.  The Company intends to account for this  acquisition as a
purchase.

Overallotment  Option  - In  connection  with  the  Company's  secondary  public
offering   completed  in  December  1996,  the   underwriters   exercised  their
overallotment  option to purchase  330,000  common shares in January  1997.  The
Company received net proceeds of approximately $3.0 million (see Note 6).

Increase in Stock  Options -  Subsequent  to year end, the Board of Directors of
the Company approved a resolution amending the Stock Option Plan to increase the
number of shares available for option grants by 400,000 shares.  The increase in
shares  available  for option grants is subject to  shareholder  approval at the
Annual Meeting of Shareholders.

(14) Selected Quarterly Financial Data (Unaudited)
A summary of quarterly  financial  information  for fiscal years 1996,  1995 and
1994 is as follows (dollars in thousands except per share data):
<TABLE>
<CAPTION>

                                             First            Second               Third            Fourth
                                           Quarter           Quarter             Quarter           Quarter
                                         -------------------------------------------------------------------


         1996
<S>                                      <C>               <C>                 <C>               <C>      
         Service revenues                $  25,034         $  29,954           $  37,846         $  43,330
         Gross profit                        5,241             6,104               7,754             8,476
         Net income                            729               890               1,328             1,082
         Net income per common share     $    0.11         $    0.13           $    0.20         $    0.15
 
         1995
         Service revenues                $  19,573         $  20,510           $  23,251         $  24,199
         Gross profit                        4,023             4,265               4,908             4,984
         Net income                          1,080               359                 917               584
         Pro forma net income                  664               512                 917               584
         Pro forma net income
             per common share            $    0.12        $     0.09           $    0.14         $    0.09

         1994
         Service revenues                $  12,951        $   14,285           $  18,105         $  18,399
         Gross profit                        2,345             2,719               3,634             3,720
         Net income                            473               433                 979               542
         Pro forma net income                  310               391                 773               512
         Pro forma net income
             per common share            $    0.05        $     0.07           $    0.13         $    0.09
</TABLE>
                                       23
<PAGE>





To SOS Staffing Services, Inc.:


We have audited the  accompanying  consolidated  balance  sheets of SOS Staffing
Services, Inc. (a Utah Corporation) and subsidiaries as of December 29, 1996 and
December  31,  1995,  and  the  related   consolidated   statements  of  income,
shareholders' equity and cash flows for each of three fiscal years in the period
ended December 29, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position of SOS Staffing
Services,  Inc. and  subsidiaries as of December 29, 1996 and December 31, 1995,
and the results of their  operations  and their cash flows for each of the three
fiscal years in the period ended December 29, 1996 in conformity  with generally
accepted accounting principles.




ARTHUR ANDERSEN LLP


Salt Lake City, Utah
  January 28, 1997

                                       24
<PAGE>




Directors & Officers

Stanley R. de Waal(1)                   
Director
President, DeWaal Keeler & Co., P.C.
Salt Lake City, Utah

Richard D. Reinhold
Chairman of the Board
Chief Executive Officer

R. Thayne Robson(1,2)
Director
Professor of Management and 
Research & Professor of Economics, 
University of Utah
Salt Lake City, Utah

Randolph K. Rolf(2)
Director
Chief Executive Officer,
Unitog Company
Kansas City, Missouri

Howard W. Scott, Jr.
Director
President & Chief Operating Officer

Richard J. Tripp
Director
Senior Vice President,
Administration

JoAnn W. Wagner(1,2)
Director
Business Consultant
Denver, Colorado

Gary B. Crook
Vice President, Chief Financial Officer
& Treasurer

W. B. Collings
Controller & Assistant Secretary

John K. Morrison
General Counsel & Secretary

(1) Member, Audit Committee
(2) Member, Compensation Committee




Shareholder Information
Corporate Information
Shareholder inquiries should be directed to:
Investor Relations
SOS Staffing Services, Inc.
1415 South Main Street
Salt Lake City, Utah  84115
Telephone:  (801) 484-4400
www.sosstaffing.com
email: postmaster@sosstaffing.com

Transfer Agent and Registrar
First Security Bank, N.A.
Stock Transfer Services
79 South Main Street
Salt Lake City, Utah  84111
Telephone:  (801) 246-5292

Independent Accountants
Arthur Andersen LLP
36 South State Street
Suite 1260
Salt Lake City, Utah  84111
Telephone:  (801) 533-0820


Stock Listing
SOS Staffing  Services,  Inc.'s  common  stock is traded on the Nasdaq  National
Market tier of The Nasdaq Stock Market under the Symbol: "SOSS". The stock table
abbreviation is "SOS Stffg".

Common Stock Data
SOS Staffing  Services,  Inc.  completed its initial  public  offering of common
stock in July 1995.  As of March 3, 1997,  the  Company had 73  stockholders  of
record. Based upon shareholder mailings,  the Company believes that there are in
excess of 2,000 shareholders of beneficial interest.


The  following  table sets forth the high and low sales prices of the  Company's
common stock, beginning June 28, 1995, for the periods indicated:

                                              High    Low
1995
------------------------------------------------------------
   Second Quarter
     (Beginning June 28, 1995)               7 1/8     6 1/2
   Third Quarter                             8 1/2     6 5/8
   Fourth Quarter                            9 3/4     7 5/8

1996
------------------------------------------------------------
   First Quarter                            13 1/8     8 3/8
   Second Quarter                               15    10 7/8
   Third Quarter                            12 7/8     8 3/4
   Fourth Quarter                           12 7/8     9 1/4

On March 3, 1997 the closing price of the Company's common stock, as reported on
the Nasdaq National Market, was 12 1/8.

There have been no cash dividends paid. The Company  currently intends to retain
future  earnings for its  operations  and expansion of its business and does not
anticipate paying any cash dividends in the future.

Form 10-K
Copies of the Company's annual report to the Securities and Exchange  Commission
on Form  10-K may be  obtained,  without  charge,  by  contacting  the  Investor
Relations Department at SOS Staffing Services, Inc.

Annual Meeting
Shareholders  and other  interested  parties  are  invited  to attend the Annual
Meeting  of  Shareholders  on  Wednesday,  May 14,  1997 at 1:30 p.m.  (Mountain
Daylight Time). The meeting will be held at the Doubletree Hotel, located at 255
South West Temple (Seminar Theater) in Salt Lake City, Utah.
 
                                       25