Corporate Profile
-----------------

Founded in 1973, SOS Staffing Services,  Inc. offers a broad range of commercial
staffing services, as well as information technology (IT) staffing, outsourcing,
and  consulting.  In the three and  one-half  years  since SOS'  initial  public
offering, the company has more than tripled in size and scope. In July 1995, the
company had 42 offices in five  states;  as of year-end  1998,  SOS operated 149
offices located throughout the Western United States.

SOS is dedicated to the  principles of ISO 9000, an  internationally  recognized
standard  for quality  products  and  services.  Each SOS office is committed to
providing a quality system of support to SOS customers.

Contents
--------

Financial Highlights...........................................................1
Letter to Shareholders.........................................................2
Acquisition Update.............................................................4
SOS Commercial Division........................................................4
Inteliant......................................................................5
Board of Directors and Officers................................................7
Management's Discussion and Analysis 
       of Financial Condition and Results of Operations........................9
Consolidated Financial Statements and Notes...................................17
Report of Independent Public Accountants......................................35

Statements  contained in this annual Report that are not purely  historical  are
"forward-looking" statements within the meaning of Section 21E of the Securities
Exchange Act of 1934,  as amended.  The Company  assumes no obligation to update
any  such   forward-looking   statements.   Readers  are   cautioned   that  all
forward-looking  statements involve risks,  uncertainties and other factors that
could  cause the  Company's  actual  results  to differ  materially  from  those
anticipated in such statements, including but not li NASDAQ/NMS: SOSS


<PAGE>

Financial Highlights

(in thousands, except per share data)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
                                             Fiscal Year (52/53 Weeks) Ended
                                    1998        1997       1996     1995 (1)   1994 (1)
---------------------------------------------------------------------------------------
<S>                               <C>        <C>        <C>        <C>        <C>     
Statement of Income Data:
 Service revenues                 $330,327   $209,251   $136,163   $ 87,533   $ 63,740
 Gross profit                       77,196     46,711     27,574     18,180     12,418
 Operating income                   16,777     12,350      6,707      4,321      2,372
 Net income(1)                       9,858      7,526      4,030      2,940      2,427
 Earnings per share
   Basic                              0.78       0.78       0.59       0.54       0.44
   Diluted                            0.77       0.77       0.59       0.43       0.35
 Weighted average common shares
   Basic                            12,675      9,654      6,780      4,985      4,500
   Diluted(2)                       12,810      9,780      6,838      6,229      5,731

Balance Sheet Data:
 Working capital                    26,989     42,791     17,012      9,645      5,057
 Total assets                      182,909    118,290     47,293     19,327     11,597
 Total debt                         39,925       --         --        1,450      2,780
 Shareholders' equity              114,606    104,336     36,834     14,668      7,098
</TABLE>

     (1) The Company  completed its initial  public  offering (IPO) in July 1995
     and in connection  therewith  terminated  its S Corporation  election.  Net
     income for fiscal  1995 and 1994 has been  adjusted  to reflect a pro forma
     provision  for income  taxes.  In  addition,  prior to the IPO, the Company
     compensated  Richard D. Reinhold,  its former CEO, at levels  sufficient to
     pay income taxes associated with its S Corporation status. For fiscal 1995,
     the Company  entered into an  employment  contract  with Mr.  Reinhold that
     provided for annual  compensation  of $195,000.  Net income for fiscal 1994
     has been adjusted to reflect CEO compensation in such amount,  resulting in
     an increase to net income of approximately $787,000.

     (2)  Prior  to  the   completion  of  its  IPO,  the  Company   distributed
     approximately $8.0 million of its accounts  receivable to its S Corporation
     shareholders.  The weighted  average common shares  outstanding for diluted
     earnings  per share for 1995 and 1994  reflects  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 1994



<PAGE>

Dear Shareholder,

As we prepare to enter a new  millenium,  SOS is entering its own new era. Since
becoming a public company in 1995, the company has grown internally,  as well as
through  acquisitions,  increasing its market  presence  geographically  and its
service offerings. Now having achieved a solid base, with an integrated business
mix, SOS is prepared to enter a new period of  profitable  growth  driven by the
talents we have gathered,  the  relationships we have built, and lessons learned
along the way.

This past year, SOS celebrated its 25th anniversary and moved to make changes to
prepare  the  company  to  excel  in a new,  more  highly  competitive  business
environment.  The company  experienced  double-digit  revenue  and income  gains
during 1998.


Then And Now

Since SOS' initial public offering in 1995, the company has more than tripled in
size and scope, now providing services from 149 company-owned branches. While we
can  certainly be proud of this  achievement,  SOS has also come to an important
crossroads-a point in the company's development  necessitating definition of its
position in the marketplace, plans for growth, and developing our vision for the
company's future.

In the months  since my  appointment  as chief  executive  on October 29,  1998,
management has reassessed all of the company's business  segments.  As a result,
organizational changes were made in some operations. These changes, while having
resulted in lower earnings in the short term, have set the stage for the company
to move forward to the next level of growth.

As part ofthe new management  team, Mike Jones,  who joined SOS in 1997 with the
company's  acquisition of Century Group (Kansas City), has assumed the duties of
president  of the  commercial  division  and  executive  vice  president  of the
company.  Mike founded the Century Group, a leading Kansas City staffing company
and executive search enterprise.

In 1998,  SOS  consolidated  the  operations  of its 16  information  technology
acquisitions  under  the  name  Inteliant  Corporation.  The  launch  of the new
subsidiary,  along with the  integration  and development of new office systems,
accounted for additional  expenses  incurred  throughout the year, which exerted
pressure on 1998 earnings. Our system-wide  evaluation identified  opportunities
for operating  efficiencies  and  improvements,  including the relocation of its
headquarters to Salt Lake City. This has resulted in certain  personnel  changes
as well as organizational realignment,  most of the costs of which were expensed
in the fourth quarter.  We are confident that Inteliant  Corporation will play a
vital role in the company's success.

John Schaffer has been recently named president of Inteliant Corporation and has
been  appointed  senior vice  president of SOS  Staffing  Services,  Inc.  John,
previously  Inteliant's  vice president,  systems  integration and  outsourcing,
joined SOS in 1997 with the company's  acquistion of JesCo  Technical  Services,
Inc., a company he founded and operated profitably since 1992.

We are  enthusiastic in welcoming Mike and John to the SOS management  team, and
we look forward to working with them as we implement new  strategic  initiatives
in our commercial and information technology divisions to ensure SOS' success in
1999 and in the new millenium.


                                       2
<PAGE>

Financial Performance

Service  revenue  for the 53 weeks  ended  January  3, 1999 was  $330.3  million
compared to $209.3 million for the 52 weeks ended December 28, 1997, an increase
of 58 percent.  Net income for the most recent fiscal year  increased 31 percent
to $9.9  million  compared to $7.5  million for the 52 weeks ended  December 28,
1997.  Notwithstanding  a 31 percent increase in diluted weighted average shares
outstanding,  diluted  earnings  per  common  share  amounted  to $0.77 for both
periods.

During  the  fourth  quarter  ended  January  3,  1999,  the  company   incurred
organizational  realignment  costs of $0.8  million,  net of the tax effect,  or
$0.07 per diluted share,  resulting from personnel  changes and costs associated
with  realigning  and  launching  the  Inteliant   identity  for  the  company's
information technology business. In addition,  diluted earnings per common share
in the year  included  $0.04  arising  from  income tax credits  earned  through
specific  government-sponsored  hiring incentives. No credits were earned in the
comparable period of the prior year.

A Solid Company . . . A Solid Future

SOS'  commitment to employee and customer  satisfaction  continues to strengthen
the company's reputation as a high-quality provider of employment,  staffing and
consulting solutions to customers and temporary associates alike.

Over the past 26 years,  SOS has transformed  itself from a small local business
to a well-respected, multiregional provider in the staffing industry. Change has
been,  and  continues  to be,  the  major  constant  in a  business  built  upon
flexibility and alertness to today's emerging opportunities, which are likely to
become tomorrow's industry trends.

With more than $300  million in revenue  and  nearly  $17  million in  operating
income, SOS is a solid company with a solid future.

I  would  like  to  thank  our  employees,  associates  and  consultants,  whose
dedication and hard work are helping us build a company with a bright future for
the benefit of all, including our shareholders.

At the dawn of a new era,  we face the  future  with new and  better  practices,
professional and well-trained staff, and proactive leadership, primed for growth
and ready to excel in the new environment.

                                                     Sincerely,

                                                 /s/ JoAnn W. Wagner

                                            JoAnn W. Wagner, Chairman, President
                                              and Chief Executive Officer


                                       3
<PAGE>

SOS began 26 years ago as a small, independent company. Since that time, SOS has
evolved into a multifaceted service organization.

As the needs of its  customers  expand to include  new  geographic  regions  and
employee skill sets, SOS remains alert to  opportunities to enhance its position
as a full-service staffing company.

Acquisition Update

The company's 1998 acquisition  activity resulted in a number of new commercial,
IT and specialty staffing organizations.

The  business  mix of SOS often  reflects  business  trends.  The  January  1998
purchase of Texas-based  Mortgage Staffing,  which specializes in providing loan
servicing and loan  production  professionals  to the Dallas and Fort Worth area
mortgage  industry,  expanded SOS' regional  presence into the growing  mortgage
servicing industry.  This acquisition reflected the increased demand for quality
mortgage  professionals that resulted from recent legislative changes that allow
Texas consumers to borrow on home equity.

Additional  acquisitions in 1998 increased SOS' geographic  presence  throughout
the western United States. The acquisitions of Abacab,  Aquas and Neosoft formed
the base of the company's  international  recruiting capability and strengthened
its  growing  specialties,  such as  Internet  design  and  support,  Java-based
programming,  enterprise resource planning (ERP) and e-commerce solutions. While
the  acquisition  of Devon & Devon and Truex  added  considerable  expertise  in
accounting and high-end  aministrative  specialty staffing,  the company further
increased its geographic presence on the West Coast with the addition of TOPS.

Having built a solid base, SOS is focused on internal  growth and on building an
organization capable of growing aggressively over the long term.

SOS Commercial Staffing Division

In  February  1999,  Mike  Jones,  who  joined  SOS in 1997  with the  company's
acquisition  of  Century  Group  (Kansas  City),  was  named  president  of  SOS
commercial  staffing  division,  the company's  largest  business  segment.  The
commercial  division  provides  staffing  solutions  to  companies  by providing
temporary  clerical,  industrial,  light industrial,  technical and professional
services.

Operating  under  several  service-specific  names,  including  SOS,  as well as
AccountStaff (accounting and finance),  Mortgage Staffing.  (mortgage services),
SkillStaff  (construction  and  manufacturing),  and Patient Account  Management
Services (medical administrative support), the commercial division serves a wide
variety of niche markets.


                                       4
<PAGE>

While business  activities among the various areas are often  complementary  and
synergistic,  each enterprise  within the division  leverages its own recruiting
strengths and marketing expertise to most effectively service its target market.

Inteliant - Information Technology Subsidiary

Rapid evolution of information  technologies  has created a new area of emphasis
for SOS. In the information age, the ability to collect, assimilate and redeploy
information  often  determines  a  company's  success in the  marketplace.  SOS'
information  technology  division accounted for 23 percent of the company's 1998
revenue.

In  1998  we  launched  our  new  integrated   information   technology   brand,
"Inteliant." Inteliant is derived from intelligence, the capacity to acquire and
apply  knowledge,  and  reliant,  having or  demonstrating  reliance.  Inteliant
Corporation brings together, under one brand, a strong, integrated organization.
SOS expects Inteliant to achieve greater economies of scale with the integration
of IT back-office  operations.  Service offerings include staffing,  outsourcing
and consulting, which we deliver with integrity, commitment and professionalism.

John E. Schaffer, who joined SOS in 1997 with the company's acquisition of JesCo
Technical  Services,  Inc.,  a company he founded in 1992,  was  recently  named
president of Inteliant Corporation.  Previously, he was vice president,  systems
integration and outsourcing for the division.

With 22 offices  specializing in information  technology,  SOS offers businesses
the  flexibility  to  navigate  the  ever-changing  IT  environment  and to take
advantage of efficiencies that would be otherwise unachievable.

A market  presence in both the commercial  staffing and  information  technology
segments  enables  SOS  to  enhance  its  position  as a  full-service  staffing
enterprise.  With a synergistic  business mix, SOS is focused on internal growth
and on building the team and critical mass necessary for organizational  success
well into the millenium.


                                       5
<PAGE>

<TABLE>
Commercial Staffing
<CAPTION>

<S>                 <C>                 <C>                <C>                  <C>
Arizona             Colorado (cont.)    Kansas (cont.)     Oregon               Utah (cont.)
Kingman             Frisco              Topeka             Portland             West Jordan 
Phoenix-6           Ft Collins          Wyandotte                               West Valley 
Prescott            Grand Junction-3                       Texas                            
Tempe               Greeley             Missouri           Amarillo             Washington  
Tucson              Longmont            Independence       Dallas               Bellevue    
Yuma                Montrose            Joplin             Fort Worth           Renton      
                    Northglenn          Lee's Summit       Lubbock              Spokane     
California          Pueblo              Liberty            Dallas                           
Carlsbad                                North Office       San Antonio          Wyoming     
Escondido           Hawaii              Plaza                                   Evanston    
Mission Valley-3    Ala Moana                              Utah                 Jackson     
Newport Beach                           Montana            American Fork        Rock Springs
Palo Alto           Idaho               Billings           Bountiful            
San Francisco-2     Boise                                  Cedar City      
San Jose            Burley              Nevada             Layton          
Sorento Mesa        Idaho Falls         Carson City        Logan           
                    Pocatello           Elko               Murray-2        
Colorado            Twin Falls          Las Vegas-4        Ogden-3         
Aurora                                  Reno               Orem-2          
Carbondale          Kansas              Sparks             Price           
Colorado Springs-3  Coffeyville                            Provo           
Cortez              Independence        New Mexico         Richfield       
Craig               Kansas City         Albuquerque        Salt Lake City-7
Delta               Lawrence            Clovis             Spanish Fork    
Denver-7            Neodesha            Farmington         St George       
Durango             Olathe              Roswell            Valley Fair     
Eagle/Vail          Overland Park-4                        Vernal          
                                                           



Inteliant

California       Kansas                Oregon        
Cupertino        Prairie Village       Portland      
Orange                                               
Pleasanton       Massachusetts         Texas         
San Diego-2      Quincy                Dallas        
San Francisco                          Hurst         
Sunnyvale-2      New Mexico                          
Tustin           Albuquerque-2         Utah          
Venice                                 Salt Lake City
                 North Dakota                        
Colorado         Bismark               Washington    
Denver                                 Bellevue      
                                       Kirkland      
</TABLE>

<PAGE>

Board of Directors & Officers

JoAnn W. Wagner, chairman,  president and chief executive officer, has served on
the board  since 1995.  In  February  1998,  Wagner was named  chairman,  and in
October 1998, she became chief executive officer. JoAnn has 30 years of staffing
industry  experience and has added  tremendous value toward the execution of the
company's  strategy.  Throughout  her  career,  she has  served in a variety  of
executive  management  roles and on a number of boards of  directors.  JoAnn was
elected the president of the National Assoc

Richard D. Reinhold,  chairman emeritus,  founded SOS Staffing Services in 1973.
For  25  years,  Dick  served  as  chairman,  retiring  in  1998.  Prior  to his
two-and-a-half  decades with SOS, Dick held management  positions in a number of
national  temporary  staffing  service  firms,   including  Greyhound  Temporary
Services, where he served as vice president. Dick served a term as the president
of  NATSS  and two  terms as  president  of the Utah  Association  of  Temporary
Services.

Stanley  R.  deWaal  was  elected a  director  in 1995.  Stan is  currently  the
president  and a director  of DeWaal,  Keeler & Co., a  Utah-based  professional
corporation of certified  public  accountants  which Stan co-founded in 1975. He
has been a licensed  certified public accountant since 1967 and currently serves
on the board of directors for Hansen Planetarium, a not-for-profit  organization
in Salt Lake City.

Samuel C.  Freitag,  a director  since 1997,  is currently  the senior  managing
director for George K. Baum Merchant Banc,  L.L.C. Sam has served George K. Baum
& Co. in various  roles,  including  as vice  chairman,  director of  investment
banking,  vice  president  of  corporate  finance and a member of the  company's
management  committee,  where he was  responsible  for overseeing all investment
activities.

Michael A. Jones,  director,  executive  vice  president  and  president  of the
company's  commercial  division,  joined  SOS in 1997  with the  acquisition  of
Century Group (Kansas  City),  which he founded.  A seasoned  staffing  services
professional,  whose  career  spans  over 20 years in the  industry,  Jones  has
extensive experience in human resource management, outsourcing and recruitment.

R. Thayne Robson, a director since 1995,  enjoys more than 20 years' tenure as a
professor in the economics  department and management and research department of
the  University  of Utah.  In  addition  to  serving on the board of a number of
Utah-based  companies.  Thayne is  currently  the director of the Utah Bureau of
Economic and Business Research.  He is actively involved with numerous civic and
community  endeavors,  including  as a member  of the Utah  Governor's  Economic
Coordinating Committee and the executive

Randolph  K. Rolf has been a  director  since  1995.  Randy is former  chairman,
president  and chief  executive  officer  of Unitog  Company  (Kansas  City),  a
publicly  traded  company,  which was  recently  acquired by Cintas  Corporation
(Cincinnati,  Ohio),  also a public company.  Randy served as Unitog's  chairman
from 1991 until the March 1999 acquisition.

Richard J. Tripp has been with SOS since 1973. Richard is a director, as well as
senior vice  president.  In addition  to his roles as a director  and  executive
officer,  he has honed his  knowledge  of the  staffing  industry  by serving in
positions  company-wide,  including  as an office  and area  manager.  Richard's
background  includes  serving two terms as president of the Utah  Association of
Temporary Services, a position he held from 1987 to 1989.

<PAGE>

Board of Directors and Officer, continued

W. B. Collings, vice president, treasurer and assistant secretary, joined SOS in
1993 as  controller.  Prior to joining the company,  he had his own  independent
accounting practice.  From 1978 to 1991, Collings was chief financial officer of
Information Now, Inc., a Utah corporation engaged in developing,  installing and
supporting computer software.

Gary B. Crook, executive vice president, and chief financial officer, joined SOS
Staffing  Services in 1995.  Gary's  career spans more than two decades,  during
which he has served in a number of  managerial  and advisory  roles.  Such roles
have  included   tenure  as  vice   president  and   controller  of  Food-4-Less
Supermarkets,  Inc.; vice president - administration  and controller of American
Stores'  subsidiary  Alpha Beta  Company;  and  consultant  and acting CFO to Al
Azizia  - Panda  United,  Inc.,  a Saudi  Arabian-based  grocery  retailing  and
distribution company.

Dennis N. Emery, vice president and controller, who was previously controller of
Mountaineer  Gas Company in  Charleston,  West  Virginia,  joined the company in
1998.  Prior to his association  with  Mountaineer  Gas, Emery was controller of
Arthur Andersen & Co.'s Washington, D.C. office.

John K.  Morrison,  who was  appointed  vice  president in March 1999,  has been
general  counsel and secretary of the company since 1995.  Prior to joining SOS,
Morrison was employed as an attorney  with the  Anti-Discrimination  Division of
the Utah Industrial Commission.
From 1991 to 1993,  he was engaged in the  private  practice of law in Salt Lake
City, Utah.

John E. Schaffer,  senior vice president and president of Inteliant Corporation,
the company's information technology subsidiary,  has over ten years' experience
in information technology management and consulting. He joined SOS in 1997, with
the  company's  acquisition  of  JesCo  Technical  Services,  Inc.  Prior to his
appointment as its president,  Schaffer was Inteliant's vice president,  systems
integration and outsourcing.


                                  In Memoriam

Annette Strauss joined the SOS board of directors  during 1997.  Former Mayor of
Dallas, Texas, Annette served as a director, officer or trustee with a number of
business,  governmental,  educational and  philanthropic  organizations.  SOS is
fortunate to have had the benefit of Annette's counsel,  and her presence on the
board will be missed.  We extend our heartfelt  sympathy to Annette's family and
friends.


                                       8
<PAGE>



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



                                       9
<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  and  information
technology ( "IT") services  through a network of offices  located in 17 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  often  divides them into one or more  additional  offices  resulting in
greater efficiency, profitability and market penetration.

Since the completion of the Company's  initial public offering (the "IPO"),  the
Company has  acquired 46 staffing  and  consulting  companies,  representing  73
offices.  The Company's network of offices has increased from 42, at the time of
the IPO, to 149, as of January 3, 1999. The purchase prices of acquisitions have
ranged from  approximately  $15,000 to $15,000,000,  plus  contingent  earnouts;
while  capital  costs  of  new  office  openings,   excluding   working  capital
requirements,  have typically  ranged from $10,000 to $50,000.  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 existing larger
offices are usually profitable from inception.

Contingent  earnout  agreements  are  often  negotiated  as a  component  of the
purchase price of acquisitions. An earnout arrangement may be necessary when the
Company  believes  future   consideration   may  more  accurately   reflect  the
appropriate  value for the  acquired  business  and  enhance the  likelihood  of
successfully  integrating  the  acquired  company  into  SOS,  or to  align  the
interests of the Company and the sellers.

Business  Segments:  The Company's  operations are grouped into two identifiable
operating  segments:   commercial  staffing  and  information  technology.   The
commercial  staffing  segment  provides  staffing  to  companies  by  furnishing
temporary clerical, industrial, light-industrial,  engineering, and professional
services.  The IT segment  provides  solutions  for staffing,  outsourcing,  and
consulting in IT-related fields.

Results  of  Operations:  The  following  table  sets  forth,  for  the  periods
indicated,  the percentage  relationship to service  revenues of selected income
statement  items  for the  Company  on a  consolidated  basis  and by  operating
segment:

Consolidated                                     Fiscal Year (52/53 Weeks) Ended
                                                 -------------------------------
                                                       1998     1997     1996
                                                 -------------------------------
Service revenues                                      100.0%   100.0%   100.0%
Direct cost of services                                76.6     77.7     79.7
                                                 -------------------------------
Gross profit                                           23.4     22.3     20.3
                                                 -------------------------------
Operating expenses:
       Selling, general and administrative expenses    16.7     15.7     15.1
       Organization realignment                         0.4   --       --
       Intangibles amortization                         1.2      0.7      0.3
                                                 -------------------------------
             Total operating expenses                  18.3     16.4     15.4
                                                 -------------------------------

Operating income                                        5.1%     5.9%     4.9%
                                                 -------------------------------


                                       10
<PAGE>

Commercial Staffing Segment                      Fiscal Year (52/53 Weeks) Ended
                                                 -------------------------------
                                                     1998     1997     1996
                                                 -------------------------------
Service revenues                                    100.0%   100.0%   100.0%
Direct cost of services                              78.9     79.3     79.8
                                                 -------------------------------
Gross profit                                         21.1     20.7     20.2
Operating expenses:
     Selling, general and administrative expenses    15.6     13.9     13.6
     Organization realignment                         0.0   --       --
     Intangibles amortization                         0.7      0.4      0.2
                                                 -------------------------------
        Total operating expenses                     16.3     14.3     13.8
                                                 -------------------------------
Operating income                                        4.8%     6.4%     6.4%
                                                 -------------------------------

IT Segment

Service revenues                                      100.0%   100.0%
Direct cost of services                                69.1     68.5
                                                 -------------------------------
Gross profit                                           30.9     31.5
                                                 -------------------------------
Operating expenses:
     Selling, general and administrative expenses      16.9     18.9
     Organization realignment                           1.0   --
     Intangibles amortization                           2.7      2.5
                                                 -------------------------------
        Total operating expenses                       20.6     21.4
                                                 -------------------------------
Operating income                                       10.3%    10.1%
                                                 -------------------------------
Fiscal 1998 Compared to Fiscal 1997

Consolidated

The commercial staffing segment contributed approximately 76.6% of total service
revenues for fiscal 1998, compared to 84.9% of total service revenues for fiscal
1997. The IT segment  contributed 23.4% of total service revenues in fiscal 1998
compared  to 15.1% in  fiscal  1997.  This  reflects  management's  emphasis  on
acquisitions of IT related enterprises.

Service  Revenues:  Service  revenues  for fiscal 1998 were $330.3  million,  an
increase of $121.0  million,  or 57.8%,  compared to sales of $209.3  million in
fiscal 1997. Of the $121.0  million  increase,  approximately  $99.2 million was
attributable  to newly  acquired  businesses,  $18.6  million was from  internal
growth (including new offices offset by office closures), and an additional $3.2
million was realized due to fiscal 1998 containing 53 weeks compared to 52 weeks
for fiscal 1997.

Gross Profit:  Gross profit for fiscal 1998 was $77.2 million  compared to $46.7
million for fiscal  1997,  an increase of $30.5  million or 65.3%.  Gross profit
margin for fiscal 1998 was 23.4%  compared to 22.3% in fiscal  1997,  reflecting
the increased mix of higher-margin IT business.

Operating  Expenses:  Total  operating  expenses,  as a percentage  of revenues,
increased  from 16.4% in fiscal 1997 to 18.3% for fiscal 1998.  The increase was
due to organization realignment costs of approximately $1.4 million, an increase
in  intangibles  amortization,  and  acquisitions  of companies  that operate in
regions with higher staffing and facility costs.

Of the $1.4 million in organization realignment costs, $0.5 million was incurred
in establishing  and launching the Company's  Inteliant  tradename,  and another
$0.3 million was incurred by streamlining  management in the IT segment.  In the
commercial staffing segment, $0.1 million was incurred in realignment costs, and
$0.5 million was incurred as a result of corporate management changes.


                                       11
<PAGE>

Operating  Income:  Operating income increased  approximately  $4.4 million,  or
35.5%,  from $12.4  million  in fiscal  1997 to $16.8  million  in fiscal  1998.
Operating margin, as a percentage of revenues, was 5.1% in fiscal 1998, compared
to 5.9% in fiscal 1997.  The decrease in operating  margin was due  primarily to
the increase in operating expenses.

Income Taxes: The Company's effective combined federal and state income tax rate
was 37.0% in fiscal 1998  compared to 40.4% in fiscal 1997.  The decrease in the
combined  tax  rate  was due to  income  tax  credits  earned  through  specific
government-sponsored hiring incentives.  These programs are expected to continue
to decrease the Company's future effective tax rate to the extent these programs
or similar programs remain in effect.  The reduction  offered by tax credits was
partially  offset by an  increase  in  non-deductible  amortization  relating to
certain  acquisitions  and  increased  operations  in states which assess higher
state income tax rates.

Commercial Staffing Segment

Service Revenues:  Substantially all of the Company's service revenues are based
on the time worked by its temporary staffing  employees on customer  assignments
and from permanent  placement of personnel with customers.  Service revenues are
recognized as income at the time service is provided.  Service  revenues for the
commercial  staffing  segment  increased by $75.3 million,  or 42.4%,  to $252.9
million for fiscal  1998,  compared to $177.6  million for fiscal  1997.  Of the
$75.3  million  increase,  approximately  $3.0 million was  attributable  to the
additional week in the fiscal year; $1.4 million was contributed by new offices;
$58.2 million was  attributable to offices acquired during fiscal 1997 and 1998;
and $12.7  million  was  attributable  to  increased  revenues  from  comparable
offices.

Gross Profit: The Company defines gross profit as service revenues less the cost
of providing  services,  which  includes  wages,  employer  payroll taxes (FICA,
unemployment  and other general payroll costs) and workers'  compensation  costs
related to temporary staffing employees. Gross profit margin for fiscal 1998 was
21.1% compared to 20.7% in fiscal 1997,  reflecting an increase in higher-margin
specialty business contributed by some of the acquisitions.

Operating Expenses: Operating expenses include, among other things, compensation
of staff, rent, recruitment and retention of temporary staffing employees, costs
associated with opening new offices, depreciation, amortization and advertising.

Operating  expenses,  excluding  organization  realignment costs and intangibles
amortization,  as a percentage  of service  revenues for fiscal 1998 were 15.6%,
compared to 13.9% for fiscal 1997. The increase was attributable to acquisitions
of companies with higher operating cost structures.

Intangibles amortization increased from $0.7 million to $1.8 million, or 157.1%,
from fiscal 1997 to 1998.  Intangibles  amortization  as a percentage of service
revenues was 0.4% and 0.7% for fiscal 1997 and 1998, respectively.  The increase
was due to increased acquisitions and earnouts for fiscal 1997 and 1998.

During fiscal 1998, in an effort to  streamline  the reporting  process from the
different regions, a level of management was eliminated.  Costs of approximately
$0.1 million were incurred in this organization realignment. Management believes
that the new organization will allow the segment to respond to issues and events
with greater efficiency.

Operating  expenses in total as a percentage of service  revenues were 16.3% and
14.3% for fiscal 1998 and 1997, respectively.

Operating  Income:  Operating  income  for  fiscal  1998 was $12.2  million,  an
increase of $0.8 million, or 7.0%, from $11.4 million in fiscal 1997.  Operating
margin for fiscal 1998 was 4.8%,  compared to 6.4% in fiscal 1997.  The decrease
in  operating  margin was due largely to an  increase  in  selling,  general and
administrative  expenses  and  intangibles  amortization.


                                       12
<PAGE>

IT  Segment

Service  Revenues:  IT segment revenues are generally based on services provided
on customer  assignments by temporary staffing and consulting  employees or when
staff is  placed  on a  permanent  basis  with the  customer.  Service  revenues
increased  $45.7  million,  or 144.2% from $31.7 million in fiscal 1997 to $77.4
million in fiscal 1998. The change was primarily  attributable  to  acquisitions
that accounted for approximately $41.0 million. Internal growth (the development
of  new  offices  and  contributions  from  comparable  offices)  accounted  for
approximately  $4.5 million;  and an additional $0.2 million was recognized as a
result of the fiscal year  containing 53 weeks compared to 52 weeks in the prior
fiscal year. The increase in service  revenues for internal growth is consistent
with increases in billable hours.

Gross Profit: The Company defines gross profit as service revenues less the cost
of providing services.  Such costs include wages,  employer payroll taxes (FICA,
unemployment and other general payroll costs),  and workers'  compensation costs
related to temporary staffing and consulting employees; costs related to outside
consultants  and  independent  contractors  utilized by the  Company;  and other
direct costs associated with any consulting engagement.  Gross profit for fiscal
1998 was $23.9 million, an increase of $13.9 million, or 139%, compared to $10.0
million in fiscal 1997. Gross profit margin for fiscal 1998 was 30.9%,  compared
to 31.5% in fiscal 1997.

Operating Expenses:  Operating expenses,  excluding intangibles amortization and
organization  realignment,  as a percentage of service  revenues for fiscal 1998
and 1997 were 16.9% and 18.9%, respectively.

Intangibles  amortization increased from $0.8 million to $2.1 million for fiscal
1998. Intangibles amortization as a percentage of revenues was 2.5% and 2.7% for
fiscal  1997  and  1998,  respectively.   The  increase  was  due  to  increased
acquisitions and earnouts for fiscal 1998.

Organization  realignment costs of $0.8 million,  or 1.0% of revenues,  resulted
from personnel  changes and costs  associated  with realigning and launching the
Inteliant identity for the IT segment.

Total  operating  expenses as a percentage  of revenues were 20.6% and 21.4% for
fiscal 1998 and 1997, respectively.

Operating Income: Operating income for fiscal 1998 was $7.9 million, an increase
of $4.7 million, or 146.9%,  from $3.2 million in fiscal 1997.  Operating margin
for fiscal 1998 was 10.3%, compared to 10.1% in 1997.

Fiscal 1997 Compared to Fiscal 1996
Consolidated

Service  Revenues:  Service  revenues  for fiscal 1997 were $209.3  million,  an
increase of $73.1  million,  or 54%, from $136.2  million in fiscal 1996. Of the
$73.1 million  increase,  $45.7 million was attributable to acquisitions,  $19.0
million was attributable to comparable offices and $8.4 million was attributable
to new offices.

Gross  Profit:  Gross profit for fiscal 1997 was $46.7  million,  an increase of
$19.1 million,  or 69%,  compared to $27.6 million in 1996.  Gross profit margin
for fiscal 1997 was 22.3%,  compared  to 20.3% in fiscal  1996,  reflecting  the
increased mix of higher-margin IT business.

Operating  Expenses:  Operating expenses amounted to $34.4 million,  or 16.4% of
service revenues, in fiscal 1997, compared to $20.9 million, or 15.4% of service
revenues, in fiscal 1996. The increase in operating expenses, as a percentage of
service  revenues,  was a result of an increase in  amortization  of  intangible
assets due to  acquisitions  by the  Company  and the higher mix of IT  business
where selling, general and administrative expenses are higher.


                                       13
<PAGE>

Operating  Income:  Operating  income  for  fiscal  1997 was $12.4  million,  an
increase of $5.7 million,  or 85%,  from $6.7 million in fiscal 1996.  Operating
margin for fiscal 1997 and 1996 was 5.9% and 4.9%, respectively.

Income  Taxes:  The  effective  combined  federal and state income tax rates for
fiscal 1997 and 1996 were 40.4% and 38.1%,  respectively.  The  increase was due
primarily to an increased  level of  operations  in states with higher  marginal
income tax rates.

Commercial Staffing Segment

Service  Revenues:  Service  revenues  increased by $44.9 million,  or 33.8%, to
$177.6  million for fiscal 1997,  compared to $132.7 million for fiscal 1996. Of
the $44.9 million increase, new offices contributed  approximately $8.2 million;
$18.0 million was  attributable  to offices  acquired  during 1997 and 1996; and
$18.7 million was  attributable to increased  revenues from comparable  offices.
The increase in service  revenues  from  comparable  offices was also  generally
consistent  with  increases  in hours  billed,  customers  served and  temporary
staffing employees utilized.

Gross  Profit:  Gross profit for fiscal 1997 was $36.7  million,  an increase of
$9.9 million,  or 36.9%,  compared to $26.8 million in fiscal 1996. Gross profit
margin for fiscal 1997 was 20.7% compared to 20.2% in fiscal 1996, reflecting an
increased mix of higher-margin business.

Operating Expenses: Operating expenses, excluding intangibles amortization, as a
percentage  of  service  revenues  for the  fiscal  1997 and 1996 were 13.9% and
13.6%,  respectively.  The increase was due primarily to an increase in staffing
costs,  related to  increased  payroll,  and an  increase  in  facility  expense
attributable to acquisitions.

Intangibles amortization increased from $0.3 million to $0.7 million, or 133.3%,
from fiscal 1996 to 1997.  Intangibles  amortization as a percentage of revenues
was 0.2% and 0.4% for fiscal 1996 and 1997,  respectively.  The increase was due
to increased acquisitions during fiscal 1997.

Total operating  costs, as a percentage of service  revenues for fiscal 1997 and
1996, were 14.3% and 13.8%,  respectively.  Expenses have generally increased as
service revenues and the number of offices has increased.

Operating  Income:  Operating  income  for  fiscal  1997 was $11.4  million,  an
increase of $2.9 million, or 34.1%, from $8.5 million in fiscal 1996.  Operating
margin for fiscal 1997 was 6.4%, compared to 6.4% in fiscal 1996.

IT Segment

Operations of the IT segment for fiscal 1996 were  immaterial to the  operations
of the  Company,  with  service  revenues  of $3.4  million,  or  2.5% of  total
revenues. Changes for fiscal 1997 are a result of acquisitions by the Company to
strengthen its market share in this growing segment.

Liquidity and Capital Resources

For fiscal 1998 net cash  provided by  operating  activities  was $9.9  million,
compared to net cash used in  operating  activities  of $0.9  million for fiscal
1997. The increase in operating  activities  cash flow was primarily a result of
higher net income, and increased depreciation and amortization.

The  Company's  investing  activities  during  fiscal 1998 used $4.4  million to
purchase  property and equipment,  $41.1 million to purchase  assets of acquired
businesses and $18.9 million to pay earnouts on  acquisitions.  See the Notes to
the Company's Consolidated Financial Statements for a summary description of the
material terms of the  acquisitions  completed during fiscal 1998.


                                       14
<PAGE>

The Company's  primary sources of capital from financing  activities were from a
private  placement of $35 million of senior  unsecured  debt,  consisting of two
pieces.  The first piece is a series of senior  unsecured notes in the aggregate
amount of $30 million with a final ten-year  maturity and an average maturity of
seven  years at a 6.95%  coupon  rate.  The  second  piece is a series of senior
unsecured  notes in the  aggregate  amount of $5 million  with a coupon  rate of
6.72% due in a single  payment in 2003.  The Company used the proceeds  from the
private debt placement to pay off the borrowings  under the Company's  revolving
credit facility.

The Company also has an unsecured  revolving  credit facility with certain banks
that  provides for maximum  borrowings  of $40  million.  The  agreement,  which
provides for both  short-term  and long-term  borrowings,  expires in July 2001.
Short-term  borrowings bear interest at a bank's prime rate (7.75% at January 3,
1999) and  long-term  borrowings  bear  interest  at LIBOR plus  1.25%  (6.9% at
January 3,  1999).  As of  January 3, 1999,  $30.2  million  was  available  for
borrowings or additional letters of credit.

Management  believes  that the present  credit  facilities,  together  with cash
reserves and cash flow from operations, will be sufficient to fund the Company's
operations and capital expenditure requirements for at least the next 12 months.
However, if the Company were to expand its operations significantly,  especially
through  acquisitions,  additional  capital  may be  required.  There  can be no
assurance  that  the  Company  will be  able to  obtain  additional  capital  at
acceptable rates.

Seasonality

The Company's  business follows the seasonal trends of its customers'  business.
Historically,  the Company has  experienced  lower revenues in the first quarter
due to seasonal trends of its customers.

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.

Year - 2000 Compliance

Management  believes  that it is  adequately  addressing  the year 2000  ("Y2K")
problem.  In  short,  the Y2K  problem  is a result  of  information  technology
equipment and systems being  designed to recognize the year portion of a date as
two rather than four digits, which means that years coded "00" are recognized by
many systems as the year 1900, not the year 2000. As a result,  certain hardware
and software  products may not properly  function or may fail  beginning in year
2000.

As part of the Company's  internal quality system based on the principles of ISO
9002,  the Company has formed an internal task force to identify,  address,  and
remedy Y2K issues.  The Company's  information system for its primary commercial
staffing  operations  has  been  tested  and is  believed  to be Y2K  compliant.
Additionally,  the  Company  is  currently  implementing  new  financial  system
software  that has been  warranted  by the  developer to be Y2K  compliant.  The
Company is also in the process of assessing and testing the information  systems
of Inteliant  and other  independent  systems  within the  Company.  The Company
anticipates assessment and testing will be completed by mid-1999.

The Company has identified  suppliers of critical  services and products and has
sent questionnaires to each such supplier concerning Y2K compliance. The Company
will continue to monitor the  compliance of each such supplier  through 1999 and
beyond.  New vendors are also  required to provide  information  concerning  Y2K
compliance.  The Company is following a similar  process for Inteliant and other
independent   operations   within  the  Company.


                                       15
<PAGE>

The  Company  has  also  sent  questionnaires  to  each of its  major  customers
regarding the status of Y2K compliance. The Company will continue to monitor the
compliance  of each such  customer  through  1999 and  beyond.  The  Company has
amended  its  credit  application  required  for  each new  customer  requesting
disclosure  of Y2K  compliance.  The Company is following a similar  process for
Inteliant and other independent operations within the Company.

The Company is currently developing an assessment program for each of its branch
offices to assess imbedded chip technology for Y2K compliance.  Many products or
systems  contain  imbedded  computer chips that may or may not be Y2K compliant.
Examples  of such  items  include  elevators,  alarm  systems,  HVAC  units  and
thermostats,  and telephone and voicemail systems. The Company believes that its
assessment of imbedded chip technology will be complete by mid-1999.

Based on current  information,  the Company  does not believe  that its internal
systems  will fail  because of the Y2K problem or cause an  interruption  in the
delivery of services  to its  customers.  In the event such  systems  fail,  the
Company  believes  that it has  adequate  manual  systems  that would  allow for
continued  delivery  of  services  to  customers.  Management  does not  foresee
significant  liability  to third  parties if the  Company's  systems are not Y2K
compliant.  However, the Company faces two major risks related to Y2K that could
have a material  adverse affect on the business of the Company.  The first major
Y2K risk is service disruption from third-party  suppliers of critical services,
such as  telephone,  electrical  and banking  services.  As part of its critical
suppliers'  assessment,  the Company is monitoring and seeking  assurance of Y2K
compliance from such suppliers.  The second major risk is that the operations of
the  customers  of the Company  will be  disrupted  by the Y2K  problem  (either
internally or because of third-party  service providers) which could result in a
decrease in or the cessation of the need for the Company's services.

The Company has not yet approved a formal  contingency plan for Y2K issues.  The
Company expects to have a formal contingency plan in place during fiscal 1999.

The Company estimates that approximately  $150,000 will be incurred in verifying
its Y2K  compliance.  The  majority  of costs will be  directed  to  independent
sources for testing of the  procedures  the Company has  implemented.  The costs
related  to the  Company's  Y2K  compliance  program  have not had,  and are not
expected to have, a material impact on the Company's  financial  condition,  the
results of operations or cash flows.


                                       16
<PAGE>


                  Consolidated Financial Statements and Notes


                                       17
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
                  As of January 3, 1999 and December 28, 1997

                                     ASSETS
                                    (000's)
<CAPTION>
                                                             January 3,   December 28,
                                                                1999          1997
CURRENT ASSETS                                              --------------------------
<S>                                                          <C>          <C>      
       Cash and cash equivalents                             $   5,315    $  20,463
       Accounts receivable, less allowances of
              $762 and $678, respectively                       44,627       32,982
       Current portion of workers' compensation deposit            462          476
       Prepaid expenses and other                                1,054          730
       Deferred income tax asset                                 1,849        1,239
       Income tax receivable                                       571         --
                                                            --------------------------
               Total current assets                             53,878       55,890
                                                            --------------------------
PROPERTY AND EQUIPMENT, at cost
       Computer equipment                                        5,977        2,852
       Office equipment                                          2,917        2,241
       Leasehold improvements and other                          1,553        1,286
                                                            --------------------------
                                                                10,447        6,379
       Less accumulated depreciation and amortization           (3,103)      (2,353)
                                                            --------------------------
                Total property and equipment, net                7,344        4,026
                                                            --------------------------
OTHER ASSETS
       Workers' compensation deposit, less current portion         106          106
       Intangible assets, less accumulated amortization
               of $5,872 and $1,941, respectively              119,709       57,456
       Deposits and other assets                                 1,872          812
                                                            --------------------------
               Total other assets                              121,687       58,374
                                                            --------------------------
               Total assets                                  $ 182,909    $ 118,290
                                                            --------------------------
</TABLE>

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


                                       18
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
                  As of January 3, 1999 and December 28, 1997


                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                    (000's)
<CAPTION>
                                                             January 3,  December 28,
                                                                1999        1997
                                                            -------------------------
<S>                                                           <C>        <C>     
CURRENT LIABILITIES
      Accounts payable                                        $  3,350   $    971
      Accrued payroll costs                                      6,805      3,567
      Current portion
             of workers' compensation reserve                    2,358      2,538
      Accrued liabilities                                        2,163        663
      Currrent portion of notes payable                            313       --
      Income taxes payable                                        --          947
      Accrued acquisition costs and earnouts                    11,900      4,413
                                                            -------------------------
                Total current liabilities                       26,889     13,099
                                                            -------------------------
LONG-TERM LIABILITIES
      Notes payable, less current portion                       39,612       --
      Workers' compensation reserve,
             less current portion                                  478        535
      Deferred income tax liability                                927        194
      Deferred compensation liabilities                            397        126
                                                            -------------------------
                Total long-term liabilities                     41,414        855
                                                            -------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 5)
SHAREHOLDERS' EQUITY
     Common stock $0.01 par value 20,000 shares
             authorized; 12,689 and 12,653 shares
             issued and outstanding, respectively                  127        127
      Additional paid-in capital                                91,564     91,152
      Retained earnings                                         22,915     13,057
                                                            -------------------------
                Total shareholders' equity                     114,606    104,336
                                                            -------------------------

                Total liabilities and shareholders' equity    $182,909   $118,290
                                                            -------------------------
</TABLE>


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


                                       19
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                  For the Fiscal Years Ended January 3, 1999,
                    December 28, 1997 and December 29, 1996

                         (000's, except per share data)
<CAPTION>
                                                               Fiscal Year (53/52 Weeks)
                                                    --------------------------------------------
                                                       1998                1997            1996
                                                    --------------------------------------------
<S>                                                 <C>                 <C>            <C>      
SERVICE REVENUES                                    $ 330,327           $ 209,251      $ 136,163
DIRECT COST OF SERVICES                               253,131             162,540        108,589
                                                    --------------------------------------------
            Gross Profit                               77,196              46,711         27,574
                                                    --------------------------------------------

OPERATING EXPENSES:
            Selling, general and administrative        55,078              32,868         20,397
            Organization realignment                    1,395                --             --
            Intangibles amortization                    3,946               1,493            470
                                                    --------------------------------------------
                      Total operating expenses         60,419              34,361         20,867
                                                    --------------------------------------------

INCOME FROM OPERATIONS                                 16,777              12,350          6,707
                                                    --------------------------------------------

OTHER INCOME (EXPENSE):
            Interest expense                           (1,660)               (301)
            Interest income                               229                 498             91
            Other, net                                    299                 145             14
                                                    --------------------------------------------
                      Total, net                       (1,132)                275           (196)
                                                    --------------------------------------------

INCOME BEFORE PROVISION
      FOR INCOME TAXES                                 15,645              12,625          6,511

PROVISION FOR INCOME TAXES                             (5,787)             (5,099)        (2,481)
                                                    --------------------------------------------

NET INCOME                                          $   9,858           $   7,526      $   4,030
                                                    --------------------------------------------

NET INCOME PER COMMON SHARE:
            Basic                                   $    0.78           $    0.78      $    0.59
            Diluted                                      0.77                0.77           0.59

WEIGHTED AVERAGE COMMON SHARES:
            Basic                                      12,675               9,654          6,780
            Diluted                                    12,810               9,780          6,838
</TABLE>


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


                                       20
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                                    (000's)
<CAPTION>

                                                                 Additional
                                            Common Stock          Paid-in      Retained
                                          Shares     Amount       Capital      Earnings      Total
                                         ----------------------------------------------------------
<S>                                       <C>       <C>          <C>          <C>          <C>     
BALANCE, December 31, 1995                6,700     $     67     $ 13,099     $  1,501     $ 14,667
      Exercise of stock options               6         --             39         --             39
      Sale of common stock, net           2,000           20       18,078         --         18,098
      Net income                           --           --           --          4,030        4,030
                                         ----------------------------------------------------------
BALANCE, December 29, 1996                8,706           87       31,216        5,531       36,834
         Exercise of stock options           17            1          143         --            144
      Sale of common stock, net           3,930           39       59,793         --         59,832
      Net income                           --           --           --          7,526        7,526
                                         ----------------------------------------------------------
BALANCE, December 28, 1997               12,653          127       91,152       13,057      104,336
      Exercise of stock options              36         --            412         --            412
      Net income                           --           --           --          9,858        9,858
                                         ----------------------------------------------------------
BALANCE, January 3, 1999                 12,689     $    127     $ 91,564     $ 22,915     $114,606
                                         ----------------------------------------------------------
</TABLE>


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


                                       21
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  For the Fiscal Years Ended January 3, 1999,
                    December 28, 1997 and December 29, 1996
                Increase (Decrease) in Cash and Cash Equivalents

                                    (000's)
<CAPTION>
                                                               Fiscal Year (53/52 Weeks)
                                                         ------------------------------------
                                                            1998          1997          1996
                                                         ------------------------------------
<S>                                                      <C>           <C>           <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                               $  9,858      $  7,526      $  4,030
Adjustments to reconcile net income
     to net cash provided by operating activities:
       Depreciation and amortization                        5,360         2,157           855
       Deferred income taxes                                  123          (596)         (825)
       Loss on disposition of assets                           50            27            63
       Changes in operating assets and liabilities:
           Accounts receivable, net                        (8,864)      (12,449)       (8,786)
           Workers' compensation deposit                       14           135            (6)
           Prepaid expenses and other                        (228)         (289)         (128)
           Amounts due from related parties                  --             (18)           55
           Deposits and other assets                         (789)         (312)          (85)
           Accounts payable                                 2,378           371           391
           Accrued payroll costs                            3,239         1,456           529
           Workers' compensation reserve                     (238)        1,196           957
           Accrued liabilities                                484          (625)          219
           Income taxes payable/receivable                 (1,518)          480           302
                                                         ------------------------------------
               Net cash provided by (used in)
                   operating activities                     9,869          (941)       (2,429)
                                                         ------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions of businesses                  (41,080)      (38,575)      (10,162)
Purchases of property and equipment                        (4,431)       (1,830)         (684)
Principal payment of note related to acquisition             --            --          (1,450)
Payments on acquisition earnouts                          (18,903)       (3,955)         (239)
Proceeds from sale of property and equipment                   60             3          --
                                                         ------------------------------------
               Net cash used in investing activities      (64,354)      (44,357)      (12,535)
                                                         ------------------------------------
</TABLE>


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


                                       22
<PAGE>

<TABLE>
                          SOS STAFFING SERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  For the Fiscal Years Ended January 3, 1999,
                    December 28, 1997 and December 29, 1996
                Increase (Decrease) in Cash and Cash Equivalents

                                    (000's)
<CAPTION>
                                                            Fiscal Year (53/52 Weeks)
                                                     --------------------------------------
                                                       1998           1997           1996
                                                     --------------------------------------
<S>                                                  <C>             <C>          <C>     
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net          $   --          59,832       $ 18,098
Proceeds from exercise of employee stock options          412           144             40
Proceeds from  long-term borrowings                    62,000        13,000         11,000
Payment on long-term borrowings                       (23,075)      (13,000)       (11,106)
                                                     --------------------------------------
  Net cash provided by financing activities            39,337        59,976         18,032
                                                     --------------------------------------

NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS                               (15,148)       14,678          3,068

CASH AND CASH EQUIVALENTS AT
   BEGINNING OF PERIOD                                 20,463         5,785          2,717
                                                     --------------------------------------

CASH AND CASH EQUIVALENTS AT
   END OF PERIOD                                     $  5,315      $ 20,463       $  5,785
                                                     --------------------------------------

SUPPLEMENTAL  CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest                                         $  1,223      $    226       $    280
    Income taxes                                        7,322         5,169          2,902
</TABLE>



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):

<TABLE>
<CAPTION>
<S>                                                     <C>         <C>         <C>    
Fair value of assets acquired                           $45,247     $40,443     $14,980
Liabilities assumed                                       1,016         880         139
Notes payable issued in connection with acquisition       2,935         798        --
Accrued acquisition costs and earnouts                   11,900       3,413       4,679
</TABLE>

During fiscal year 1997,  amounts  receivable from TSI,  totaling  approximately
$0.6 million, were offset against the acquisition note payable (see Note 11).


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


                                       23
<PAGE>

                          SOS STAFFING SERVICES, INC.
                   Notes to Consolidated Financial Statements

(1)  Nature of Operations

SOS Staffing Services,  Inc. and subsidiaries  (collectively the "Company") is a
provider of temporary  staffing and consulting  services through offices located
in 17  states of the U.S.  The  Company  provides  a broad  range of  commercial
staffing  and  information  technology  ("IT")  services.   Commercial  staffing
services include light  industrial,  clerical,  industrial,  technical and other
professional   services.  IT  services  consist  of  staffing,   consulting  and
outsourcing  services such as system  design,  programming,  network and systems
management  and  business  consulting.

(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.  Fiscal year ended January 3, 1999
("fiscal 1998")  contained 53 weeks.  The fiscal years ended December 28, 1997 (
"fiscal 1997") and December 29, 1996 ("fiscal 1996") each contained 52 weeks.

Principles of Consolidation - The consolidated  financial statements include the
accounts of SOS  Staffing  Services,  Inc.  and its wholly  owned  subsidiaries,
Computer Professional Resources,  Inc., Devon & Devon Personnel Services,  Inc.,
ServCom Staff Management,  Inc., SOS Collection Services,  Inc. (d.b.a. National
Collex ), and Inteliant Corporation.  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 - Revenues are recognized at the time 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.
Cash and cash  equivalents  consist of various  money  market  accounts  and are
recorded at cost, which approximates market value.

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
improvements  are  capitalized  while minor  expenditures  for  maintenance  and
repairs are charged to expense as incurred.

Workers'  Compensation  - For  fiscal  1998 and  1997,  the  Company  maintained
workers'  compensation  insurance with CIGNA Property and Casualty ("CIGNA") for
claims  in  excess  of a  loss  cap  of  $250,000  and  $200,000  per  incident,
respectively,  except  with  respect to certain  divisions  which are covered by
state insurance funds in states where private insurance is not permitted.  Under
the terms of the CIGNA 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.

The Company has established  reserve amounts based upon information  provided by
the insurance  companies 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.


                                       24
<PAGE>

Intangible  Assets - Intangible  assets  consist of the following  amounts as of
fiscal 1998 and 1997 (in 000's):

                                     1998           1997
                                  ------------------------
Goodwill                          $ 121,529      $  56,551
Non-compete agreements                2,996          2,013
Employee and customer lists           1,056            833
                                  ------------------------
Total                               125,581         59,397
Less accumulated amortization        (5,872)        (1,941)
                                  ------------------------
                                  $ 119,709      $  57,456
                                  ------------------------

Goodwill  is  amortized  using  the  straight-line  method  over 30  years.  The
non-compete agreements and employee and customer lists 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." SFAS No. 121
requires that long-lived assets,  including goodwill, 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.

Income Taxes - The Company recognizes  deferred income 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  income tax
assets or  liabilities  are  determined  based upon the  difference  between the
financial and income tax basis of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.

Net Income Per Common  Stock - Basic net income per common share  ("Basic  EPS")
excludes dilution and is computed by dividing net income by the weighted-average
number of common  shares  outstanding  during the year.  Diluted  net income per
common share ("Diluted EPS") reflects the potential dilution that could occur if
stock options or other common stock equivalents were exercised or converted into
common  stock.  The  computation  of  Diluted  EPS does not assume  exercise  or
conversion of securities  that would have an  antidilutive  effect on net income
per common  share.  Net income per common share amounts and share data have been
restated for all years presented to reflect Basic and Diluted EPS.

Following is a  reconciliation  of the numerator and denominator of Basic EPS to
the numerator and  denominator of Diluted EPS for all years  presented (in 000's
except per share amounts):

<TABLE>
<CAPTION>
                                                 Net Income          Share      Per-Share
                                                (Numerator)      (Denominator)    Amount
                                                -----------------------------------------
<S>                                              <C>                <C>        <C>       
              Fiscal 1998
                 Basic EPS                       $  9,858           12,675     $     0.78
                     Effect of stock options                           135
                                                 -------------------------
                 Diluted EPS                     $  9,858           12,810     $     0.77
                                                 -------------------------
              Fiscal 1997
                 Basic EPS                       $  7,526            9,654     $     0.78
                     Effect of stock options                           126
                                                 -------------------------
                 Diluted EPS                     $  7,526            9,780     $     0.77
                                                 -------------------------
              Fiscal 1996
                 Basic EPS                       $  4,030            6,780     $     0.59
                     Effect of stock options                            58
                                                 -------------------------
                 Diluted EPS                     $  4,030            6,838     $     0.59
                                                 -------------------------
</TABLE>


                                       25
<PAGE>

At the end of fiscal  1998,  1997 and 1996,  there were  outstanding  options to
purchase 375,000, 284,000, and 39,000 shares of common stock, respectively, that
were not  included  in the  computation  of Diluted  EPS  because  the  options'
exercise prices were greater than the average market price of the common shares.

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.

Fair  Value of  Financial  Instruments  - The  Company's  financial  instruments
consist primarily of cash and cash equivalents and debt obligations.  Management
believes  that  these  financial   instruments   bear  interest  at  rates  that
approximate    prevailing    market   rates   for   instruments   with   similar
characteristics.  Accordingly,  the carrying  values for these  instruments  are
reasonable estimates of fair value.

(3)  Acquisitions 

All of the  Company's  acquisitions  have been  accounted for using the purchase
method,  and the excess of the purchase  price over the estimated  fair value of
the acquired assets less liabilities  assumed has been allocated to goodwill and
other intangible assets. Certain acquisitions have contingent earnout components
of the purchase price.  Earnout amounts accrued  increase the amount of goodwill
related to the  acquisition.  The following is a summary of acquisitions  during
fiscal 1998, 1997, and 1996 (in 000's):

<TABLE>
<CAPTION>
                                                                                  Max. Earnout
                                                                                    Remaining    Amt. Allocated
                                                      Date             Purchase       As of      to Intangible
                                                    Acquired           Price (1)     1/03/99         Assets
                                                   ------------------------------------------------------------
<S>                                                <C>                 <C>           <C>          <C>     
1998 Acquisitions:
    Mortgage Staffing, Inc. (3)                    January             $  3,754      $   --       $  3,714
    Hutton, Graber & Assoc., Inc. (4)              January                1,803          --          1,770
    Computer Professional Resources, Inc (2,4)     February 2,706         2,300         2,204
    TOPS Staffing Services, Inc. (3)               March                  6,143          --          5,944
    Aquas, Inc. (4)                                May                    6,489         8,251        6,469
    Abacab Software, Inc. (4)                      May                    6,001         8,900        5,377
    NeoSoft, Inc. (4)                              July                   5,752         9,000        5,225
    Sterling* Truex, Inc. (3)
       Truex Temporary Staffing                    September              7,514          --          7,283
    Devon & Devon
       Personnel  Services, Inc. (2,3)             September              4,208          --          3,763
    Others (3,4)                                   Various                1,512          --          1,498
                                                                       -----------------------------------
                                                                       $ 45,882      $ 28,451     $ 43,247
                                                                       -----------------------------------
1997 Acquisitions:
    Computer Group, Inc. (2,4)                     January             $  2,747      $   --       $  2,647
    Bedford Consultants, Inc. (2,4)                July                   5,028          --          4,409
    Telecom Project Assistance, Inc. (4)           July                   5,377          --          5,283
    Execusoft, Inc. (4)                            August                 7,805          --          7,747
    JesCo Technical Services, Inc. (4)             October                8,482         3,369        8,447
    Century Personnel, Inc. (3)
        M. A.  Jones Enterprises, Inc.             October               24,863           167       24,761
    Others  (3,4)                                  Various                6,113          --          5,170
                                                                       -----------------------------------
                                                                       $ 60,415      $  3,536     $ 58,464
                                                                       -----------------------------------
</TABLE>


                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                   Max. Earnout
                                                                     Remaining    Amt. Allocated
                                       Date             Purchase       As of      to Intangible
                                     Acquired           Price (1)     1/03/99         Assets
                                    ------------------------------------------------------------
<S>                                 <C>         <C>         <C>                <C>    
1996 Acquisitions:
Abacus Consulting Group, Inc., (4)
  Abacus Consultants, Inc.,
  The Performance Professionals     July        $ 5,063     $         --       $ 5,043
Wolfe & Associates, Inc. (2,4)      November      8,189               --         8,232
Others (3,4)                        Various       4,367               --         4,203
                                                $17,619     $         --       $17,478
</TABLE>

(1)  Includes  earnout  amounts paid or accrued as of January 3, 1999 and direct
acquisition costs.
(2) Stock acquisitions.
(3) Commercial division acquisition.
(4) Information technology division acquisition.

Pro  Forma  Acquisition  Information  -  The  unaudited  pro  forma  acquisition
information  for fiscal 1998 and 1997  presents the results of  operations as if
the 1998 and 1997 acquisitions had occurred at the beginning of fiscal 1997. The
results of operations give effect to certain adjustments, including amortization
of intangible  assets,  interest  expense on acquisition  debt, the reduction in
expenses for the  difference  between  compensation  of  employees  prior to the
acquisition and their compensation  following the acquisition,  income taxes and
the  additional  common  shares  deemed to be  outstanding  as the result of the
Company's  public  offerings.  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 years
as described above or of the results that may occur in the future.

                 Unaudited Pro Forma Results of Operations
                     (in 000's, except per share data)
                 -----------------------------------------
                              1998         1997
Service Revenues           $348,388     $309,815
Income from operations       20,118       20,295
Net income                   11,288       11,128
Diluted EPS                    0.88         0.87

(4) Credit Facilities

The Company has an unsecured  revolving  credit facility with certain banks that
provides for maximum  borrowings of $40 million.  The agreement,  which provides
for both short-term and long-term  borrowings,  expires in July 2001. Short-term
borrowings  bear  interest at a bank's prime rate (7.75% at January 3, 1999) and
long-term  borrowings  bear  interest  at LIBOR plus  1.25%  (6.9% at January 3,
1999). The rate related to the amount over LIBOR may increase based upon certain
financial   ratios.   The  agreement   contains  an  annual  commitment  fee  of
three-eighths of one percent on the unused portion payable quarterly. At January
3, 1999, the Company had $4.0 million in long-term borrowings  outstanding.  The
Company also had letters of credit of $5.8 million  outstanding  for purposes of
securing its workers'  compensation premium obligation.  The aggregate amount of
such letters of credit reduces the borrowing availability on the line of credit.
At January 3, 1999,  $30.2 million was  available  for  borrowings or additional
letters of credit.


                                       27
<PAGE>

In September 1998, the Company made a private placement of $35 million of senior
unsecured  debt  consisting  of two pieces.  The first piece  consists of senior
unsecured  notes in the  aggregate  amount of $30 million with a final  ten-year
maturity  and an average  maturity of seven years at a 6.95%  coupon  rate.  The
second piece consists of senior  unsecured  notes in the aggregate  amount of $5
million with a coupon rate of 6.72% due in a single payment in 2003. The Company
used the proceeds from the debt placement to pay off long-term  borrowings under
the Company's revolving credit facility.

The Company's  unsecured revolving credit facility and its senior unsecured note
agreement contain certain  restrictive  covenants including certain debt ratios,
maintenance  of a  minimum  net worth and  restrictions  on the sale of  capital
assets. As of January 3, 1999, the Company was in compliance with the covenants.

In  connection  with the terms and  conditions  of an  acquisition,  the Company
entered into a promissory note payable for $1.0 million. The note bears interest
at an  annual  rate of 8%.  The  principal  amount of the  note,  together  with
interest is due and payable in twelve equal quarterly  installments beginning in
December 1998. The note is subject to set-off for any indemnification claims the
Company may have against the bearer.

The maturities on outstanding long-term debt are as follows (in 000's):

                   Fiscal Year Ending
                          1999          $     313
                          2000                339
                          2001              4,273
                          2002               --
                          2003              9,286
                    Thereafter             25,714
                                        ---------
                                        $  39,925
                                        ---------

(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 various related  parties.  (See
Note 10.)

Future  minimum lease  payments  under  non-cancelable  operating  leases are as
follows (in 000's):

                    Fiscal Year Ending
                           1999       $   4,247
                           2000           3,309
                           2001           2,359
                           2002           1,638
                           2003             816
                     Thereafter             275
                                       --------
                                       $ 12,644
                                       --------

Facility rental expense for the fiscal 1998, 1997 and 1996 totaled approximately
$4,120,000,  $2,154,000,  and $1,110,000,  respectively.

Legal  Matters  - In  the  ordinary  course  of its  business,  the  Company  is
periodically  threatened  with or named as a  defendant  in various  lawsuits or
administrative proceedings.  The Company maintains insurance in such amounts and
with such coverages and deductibles as management  believes to be reasonable and
prudent; however, there can be no assurance that such insurance will be adequate
to cover all risks to which the  Company  may be exposed.  The  principal  risks
covered by insurance  include workers'  compensation,  personal  injury,  bodily
injury,  property  damage,  errors  and  omissions,  fidelity  losses,  employer
practices liability, and general liability.

There is no pending litigation that the Company currently  anticipates will have
a material  adverse  effect on the Company's  financial  condition or results of
operations.


                                       28
<PAGE>

(6)  Public  Offerings

In October 1997, the Company completed a secondary public offering of its common
stock and issued  3,000,000  shares of common stock.  In addition,  at this same
time, the  underwriters  exercised  their  over-allotment  option to purchase an
additional  600,000 common shares.  The proceeds  received from the offering and
the exercise of the over-allotment  option, net of underwriting  commissions and
offering costs, totaled approximately $56,832,000.

In December 1996, the Company  completed a secondary  public offering and issued
2,000,000 shares of common stock. The proceeds received from the offering net of
underwriting  commissions and offering costs totaled approximately  $18,098,000.
In  connection  with the December  1996  secondary  offering,  the  underwriters
exercised  their  over-allotment  option to purchase  330,000  common  shares in
January 1997. The Company received net proceeds of approximately $3,000,000 from
the exercise of the over-allotment option.


(7) Income Taxes

The components of the provision for income taxes for fiscal 1998, 1997, and 1996
are as follows (in 000's):

                                       1998         1997         1996
                                     ----------------------------------
Current provision 
   Federal                           $ 4,881      $ 4,797      $ 2,859
   State                                 783          899          448
                                     ----------------------------------
                                       5,664        5,696        3,307
                                     ----------------------------------
Deferred provision (benefit) -
   Federal                               103         (503)        (714)
   State                                  20          (94)        (112)
                                     ----------------------------------
                                         123         (597)        (826)
                                     ----------------------------------

Total provision for income taxes     $ 5,787      $ 5,099      $ 2,481
                                     ----------------------------------


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 1998, 1997, and 1996:

                                                       1998       1997      1996
                                                      --------------------------
Statutory federal income tax rate                     34.4%      34.3%     34.0%
State income taxes, net of federal benefit             4.3        3.9       3.4
Government sponsored hiring incentives                (4.1)        --        --
Other                                                  2.4        2.2       0.7
                                                      --------------------------
                                                      37.0%      40.4%     38.1%
                                                      --------------------------


                                       29
<PAGE>

The components of the deferred  income tax assets and liabilities at fiscal year
end 1998 and 1997 are as follows (in 000's):

                                        1998         1997
                                      ---------------------
Deferred income tax assets -
  Workers' compensation reserves      $ 1,112      $ 1,160
  Allowance for doubtful accounts         325          283
  Other                                   661          208
                                      ---------------------
                                        2,098        1,651
                                      ---------------------
Deferred income tax liabilities -
  Cash to accrual adjustments             (44)        (301)
  Depreciation                           (106)        (106)
  Other                                (1,026)        (199)
                                      ---------------------
                                       (1,176)        (606)
                                      ---------------------
Net deferred income tax asset         $   922      $ 1,045
                                      ---------------------

Balance sheet classification -
  Current asset                       $ 1,849      $ 1,239
  Long-term liability                    (927)        (194)
                                      ---------------------
                                      $   922      $ 1,045
                                      ---------------------


(8) Stock Based Compensation

As of  January  3,  1999,  the  Company  had 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 under which no
compensation  cost has been recognized.  Had  compensation  cost been determined
consistent with SFAS No. 123,  "Accounting for  Stock-Based  Compensation,"  the
Company's net income and earnings per share for fiscal 1998, 1997 and 1996 would
approximate the pro forma amounts below (in 000's, except per share data):

                                  1998          1997          1996
                              -------------------------------------
   Net income
   As reported                $   9,858     $   7,526     $   4,030
   Pro forma                      7,849         6,081         3,735
Diluted EPS
   As reported                     0.77          0.77          0.59
   Pro forma                       0.62          0.62          0.55

Stock Price Assumptions - 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  fiscal  1998,  1997 and  1996,  in
calculating compensation cost: expected stock price volatility of 64 percent for
fiscal  1998,  56 percent for fiscal 1997,  and 47 percent for fiscal  1996;  an
average  risk-free  interest rate of 5.3 percent for fiscal 1998 and 6.2 percent
for  fiscal  1997 and 1996;  and an  expected  life of five  years for  director
options and seven years for employee  options for fiscal 1998,  1997,  and 1996.

Stock  Incentive  Plan - The Company  established  a stock  incentive  plan (the
"Plan")  which  allows for the  issuance of a maximum of 1.8  million  shares of
common stock to officers,  directors,  consultants and other key employees.  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 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.  At January 3, 1999, the plan had
approximately  595,000  options  available  to  grant.


                                       30
<PAGE>

The  Board of  Directors  determines  the  number,  type of award  and terms and
conditions,  including any vesting  conditions.  For fiscal 1998, 1997, and 1996
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  thereof.  The Plan also provides
formula award grants to non-employee  directors.  Under the formula award,  each
non-employee  director is granted  5,000  options at the time of the  director's
appointment  to the board.  Such options are vested 20% at the time of grant and
vest 20% on each of the next four anniversaries  thereof. The formula award also
provides for an annual grant to non-employee  directors of 1,000 options,  which
are  immediately  exercisable  on the date of grant.  Stock  options  granted to
employees  expire  no later  than ten  years  from the date of grant  and  stock
options granted to non-employee  directors  expire no later than five years from
the date of grant.

A summary of the stock option activity is as follows (in 000's, except per share
data):

                                                             Weighted Avg.
                                                              Exercise
                                                              Price Per
                                     Employees    Directors     Share
                                     -------------------------------------
Outstanding at December 31, 1995        129          20      $    6.50
  Granted                               132          24          10.36
  Exercised                              (5)         (1)          6.50
  Forfeited                              (7)       --             6.50
                                     -------------------------------------
Outstanding at December 29, 1996        249          43           8.68
  Granted                               270          14          16.95
  Exercised                             (17)       --             8.41
  Forfeited                              (5)       --             9.69
                                     -------------------------------------
Outstanding at December 28, 1997        497          57          12.92
  Granted                               681          60          12.57
  Exercised                             (36)       --            11.59
  Forfeited                            (116)         (9)         17.06
                                     -------------------------------------
Outstanding at January 3, 1999        1,026         108          12.29
                                     -------------------------------------
Exercisable at January 3, 1999          331          46      $   12.18
                                     -------------------------------------

The weighted average fair value of options granted was $7.53,  $10.73, and $5.91
for grants made during fiscal 1998, 1997 and 1996,  respectively.  The following
is additional information with respect to the stock options (shares in 000's):
<TABLE>
<CAPTION>
                                       Weighted-
                   Outstanding          Average
                      as of            Remaining     Weighted-     Exercisable        Weighted
   Exercise         January 3,        Contractual     Average       At January         Average
 Price Range          1999                Life     Exercise Price    3, 1999       Exercise Price
-------------------------------------------------------------------------------------------------
<S>     <C>             <C>               <C>        <C>               <C>          <C>      
$6.45 - $11.45          614               8.7        $    7.41         202          $    7.58
11.46 -  16.45           58               7.6            13.13          27              12.90
16.46 -  21.50          462               8.9            18.89         148              18.47
                      ---------------------------------------------------------------------------
                      1,134               8.7        $   12.38         377          $   12.23
                      ---------------------------------------------------------------------------
</TABLE>

(9)  Employee Benefit Plans

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  $348,000,  $60,000,
and $48,000 for fiscal 1998, 1997, and 1996, respectively.


                                       31
<PAGE>

During 1997, the Company  established a deferred  compensation  plan for certain
key officers and employees  that provide the  opportunity  to defer a portion of
their compensation. Amounts deferred are held in a Rabbi Trust, which invests in
various  mutual  funds as directed  by the  participants.  The trust  assets are
recorded as a long-term  other asset on the  accompanying  consolidated  balance
sheet because such amounts are subject to the claim of creditors.  The Company's
deferred compensation liability represents amounts deferred by participants plus
any earnings on the trust assets. This amount totaled approximately  $397,000 at
January 3, 1999.

(10) Related  Party  Transactions

In December 1997, the Company  purchased certain assets and substantially all of
the business of TSI of Utah, Inc. ("TSIU"),  a company that provides  industrial
temporary  staffing  services  and was  incorporated  by an adult son of certain
significant shareholders of the Company, for approximately  $1,285,000; of which
$600,000 was paid in cash with the remaining  $685,000 in a note payable.  As of
the date of acquisition,  the Company had receivables of approximately  $625,000
due from TSIU that were used to reduce the note payable to TSIU;  the balance of
the note was paid in fiscal 1998. The excess of the initial  purchase price over
the  estimated  fair value of the  acquired  tangible  assets was  approximately
$1,270,000 of which $1,190,000 has been allocated to goodwill and  approximately
$80,000 has been allocated to other intangible assets.

Prior to the acquisition,  TSIU had entered into a franchise  agreement with the
Company to use the TSI name. Under the franchise agreement the Company agreed to
fund employee costs and collect customer billings on behalf of TSIU. The Company
received a service fee based upon a percentage of TSIU's gross profit. Under the
agreement the Company recorded  service fee revenues of approximately  $133,000,
and $126,000 for fiscal 1997 and 1996,  respectively.  The Company believes that
the terms of the  franchise  agreement  were at least as  favorable as the terms
that could have been  obtained  from an  unaffiliated  third  party in a similar
transaction.

The Company  leases its corporate  office  building  from the adult  children of
certain significant shareholders of the Company under a ten-year lease agreement
with an option to renew for ten additional  years.  Rental expense during fiscal
1998, 1997 and 1996 amounted to  approximately  $87,000,  $86,000,  and $77,000,
respectively.  Future minimum lease payments  related to this lease will average
approximately  $97,000 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.

During fiscal 1997, the Company entered into an employment agreement with one of
its directors to assist and advise the Company with respect to  identifying  and
evaluating potential  acquisitions.  Prior to her employment,  the Company had a
consulting   agreement  with  this  director  to  perform  the  same  functions.
Compensation under the consulting agreement was $3,500 per month, which included
the $1,000 per board  meeting fee otherwise  payable.  For fiscal 1997 and 1996,
consulting expense was $24,500 and $42,000, respectively.

During  fiscal  1998,  companies  owned by two of the adult  children of certain
significant  shareholders  leased employees from ServCom Staff Management,  Inc.
("ServCom"),  a  wholly  owned  subsidiary  of the  Company.  ServCom  generated
revenues  totaling  approximately  $270,500 related to leasing  employees to the
three  companies  owned by these  adult  children.  Outstanding  receivables  at
year-end related to these agreements totaled approximately  $38,000. The Company
believes that the terms of this  relationship are similar to those that would be
given to an unaffiliated third party in a similar agreement.

(11) Segment

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise  and Related  Information,"  effective  for periods  beginning  after
December 15, 1997.  Pursuant to SFAS No. 131 an operating  segment is defined as
"a component of an enterprise: 1) that engages in business activities from which
it may earn  revenues  and  incur  expenses,  2) for  which  discrete  financial
information is available,  and 3) that is regularly reviewed by the enterprise's
chief operating decision maker to make decisions about allocation of resources."

Based on the types of services offered to customers,  the Company has identified
two  reportable   operating   segments:   commercial  staffing  and  information
technology  ("IT") segments.  The commercial  staffing segment provides staffing
solutions  to   companies  by   furnishing   temporary   clerical,   industrial,
light-industrial,  technical, and professional services. The IT segment provides
staffing, outsourcing, and consulting services in IT related fields.


                                       32
<PAGE>

The  accounting  policies  of the  operating  segments  are the  same  as  those
described in the summary of significant accounting policies (Note 2).

Information  concerning  continuing  operations by operating segment for each of
the three fiscal years is as follows (in 000's):

<TABLE>
<CAPTION>
                                               1998                1997                1996
                                            -------------------------------------------------
<S>                                         <C>                 <C>                 <C>      
Revenues
   Commercial                               $ 252,916           $ 177,551           $ 132,715
    IT                                         77,411              31,700               3,448
                                            -------------------------------------------------
                                            $ 330,327           $ 209,251           $ 136,163
                                            -------------------------------------------------
Operating Profit
   Commercial                               $  12,177           $  11,438           $   8,523
    IT                                          7,901               3,183                  64
   Other (unallocated)                         (3,301)             (2,271)             (1,880)
                                            -------------------------------------------------
                                            $  16,777           $  12,350           $   6,707
                                            -------------------------------------------------

Depreciation and Amortization
   Commercial                               $   2,826           $   1,195           $     675
    IT                                          2,534                 962                 180
                                            -------------------------------------------------
                                            $   5,360           $   2,157           $     855
                                            -------------------------------------------------

Identifiable Assets
   Commercial                               $  97,339           $  81,114           $  33,064
    IT                                         82,552              35,356              12,444
    Other (unallocated)                         3,018               1,820               1,785
                                            -------------------------------------------------
                                            $ 182,909           $ 118,290           $  47,293
                                            -------------------------------------------------

Additions to Long-Lived Assets (1)
   Commercial                               $   1,681           $  20,482           $   7,026
   IT                                          27,993              19,475              11,665
                                            -------------------------------------------------
                                            $  59,674           $  39,957           $  18,691
                                            -------------------------------------------------
</TABLE>

(1)      Includes property & equipment and intangible asset additions


                                       33
<PAGE>

(12) Selected Quarterly Financial Data (Unaudited)

A summary of  quarterly  financial  information  for fiscal  1998 and 1997 is as
follows (in 000's, except per share data):

<TABLE>
<CAPTION>
                                       First           Second            Third           Fourth
                                      Quarter          Quarter          Quarter          Quarter
                                      ----------------------------------------------------------
<S>                                   <C>              <C>              <C>              <C>    
     1998:
Service revenues                      $70,158          $82,414          $87,385          $90,370
Gross profit                           16,006           19,256           20,496           21,438
Net income                              2,397            3,035            3,404            1,022
Net income per common share:
    Basic                                0.19             0.24             0.27             0.08
    Diluted                              0.19             0.24             0.27             0.08

1997:

Service revenues                      $40,846          $46,518          $54,389          $67,498
Gross profit                            8,707           10,210           12,353           15,441
Net income                              1,318            1,639            2,115            2,454
Net income per common share:
    Basic                                0.15             0.18             0.23             0.21
    Diluted                              0.15             0.18             0.23             0.21
</TABLE>


                                       34
<PAGE>

                    Report of Independent Public Accountants



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 January 3, 1999 and
December  28,  1997,  and  the  related   consolidated   statements  of  income,
shareholders' equity and cash flows for each of three fiscal years in the period
ended January 3, 1999. 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 January 3, 1999 and December 28, 1997, and
the  results  of their  operations  and their  cash  flows for each of the three
fiscal years in the period ended  January 3, 1999 in conformity  with  generally
accepted accounting principles.


/s/ Atthur Anderson LLp

ARTHUR ANDERSEN LLP


Salt Lake City, Utah
February 8, 1999


                                       35
<PAGE>


SOS Staffing Services,  Inc. is dedicated to quality service.  We commit each of
our  offices  and the special  talents of each  employee to  providing a quality
system  of  support  to  our  clients.  Our,  goal  is to  meet  or  exceed  the
requirements and expectations of our customers,  staff, temporary associates and
consulting professionals.


                                       36
<PAGE>

Corporate Information
---------------------

Shareholder inquiries should be directed to: 
Investor Relations
SOS Staffing Services, Inc.
1415 South Main Street
Salt Lake City, UT 84115
Telephone: (801) 484-4400
www.sosstaffing.com
e-mail: webmaster@sosstaffing.com

Transfer Agent and Registrar
----------------------------

Zions First National Bank, N.A.
Stock Transfer Services
1 South Main Street
Salt Lake City, Utah 84101
Telephone: (801) 524-4812

Independent Accountants
-----------------------

Arthur Andersen LLP
15 West South Temple
Suite 700
Salt Lake City, Utah 84101-1533
Telephone: (801) 533-0820

Investor Relations
------------------

Jordan Richard Assoc.
1846 South 1200 East
PO Box 52210
Salt Lake City, Utah 84111
Telephone: (801) 268-8610

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".

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.


                                       37
<PAGE>

Common Stock Data
-----------------

As of March 8, 1999,  the Company had 76
stockholders   of  record.   Based  upon
shareholder   mailings,    the   Company
believes  that  there  are in  excess of
4,000    shareholders    of   beneficial
interest.

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

                High    Low
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
                
1997            
First Quarter   13 3/8  10
Second Quarter  15 3/4  10 7/8
Third Quarter   19 1/2  14 5/8
Fourth Quarter  24      16 1/2
                
1998            
First Quarter   26 3/8  17 1/4
Second Quarter  27      17 1/8
Third Quarter   21 5/8  12
Fourth Quarter  14 1/2    6 1/2

On March 8, 1999,  the closing  price of
the Company's  common stock, as reported
on the NASDAQ National Market was 8 3/4.

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.

Annual Meeting
--------------

Shareholders    and   other   interested
parties are invited to attend the Annual
Meeting of  Shareholders on May 19, 1999
at 1:30 p.m.  (Mountain  Daylight Time).
The meeting  will be held at the Wyndham
Hotel,  located at 215 South West Temple
in Salt Lake City, Utah.


                                       38
<PAGE>

Directors and Officers
----------------------

JoAnn W. Wagner
Chairman of the Board, President and
Chief Executive Officer

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

Samuel C. Freitag(1,2)
Director
Senior Managing Director
George K. Baum Merchant Banc, L.L.C.
Kansas City, Missouri

Michael A. Jones
Director
Executive Vice President

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

Randolph K. Rolf(2)
Director
Kansas City, Missouri

Richard J. Tripp
Director
Senior Vice President

W.B. Collings
Vice President, Treasurer and
Assistant Secretary

Gary B. Crook
Executive Vice President
Chief Financial Officer

Dennis N. Emery
Vice President
Controller

John K. Morrison
Vice President, General Counsel and
Secretary

John E. Schaffer
Senior Vice President


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


                                       39