U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997

             [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
       For the transition period from _______________ to _________________

                         Commission file number: 0-22600

                            EMPLOYEE SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)

                  Arizona                                      86-0676898
     (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                         Identification No.)


                   6225 N. 24th Street, Phoenix, Arizona 85016
                    (Address of principal executive offices)

                    Issuer's telephone number: (602) 955-5556

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

             Title of each class:     Name of each exchange on which registered:
                     None                                N/A
                     ----                                ---

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

                            No Par Value Common Stock
   Rights to Purchase Shares of Series A Junior Participating Preferred Stock

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  report(s)),  and (2) has been  subject  to such  filing
requirements for the past 90 days.

                    Yes X                              No
                       ---                               ---

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based upon the $ 4.906  closing  price of the  Registrant's  Common
Stock as  reported  on the  NASDAQ  National  Market  on  March  25,  1998,  was
approximately  $130.1  million.  Shares of Common  Stock held by each  executive
officer and director and by each person who owns 10% or more of the  outstanding
Common  Stock  have  been  excluded  in that  such  persons  may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
for other purposes.

The number of outstanding  shares of the  Registrant's  Common Stock as of March
25, 1998, was 31,731,945.

                       DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the Registrant's  Proxy Statement for the Registrant's  1998 Annual
Meeting of Shareholders are incorporated by reference in Part III hereof.
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                             FORM 10-K ANNUAL REPORT
                          YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS


                                     PART I

ITEM 1.       -   BUSINESS

ITEM 2.       -   PROPERTIES

ITEM 3.       -   LEGAL PROCEEDINGS

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

ITEM 4A.      -   EXECUTIVE OFFICERS OF THE REGISTRANT

                                     PART II

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

ITEM 6.       -   SELECTED CONSOLIDATED FINANCIAL DATA

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

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


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                    PART III

ITEM 10.      -   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.      -   EXECUTIVE COMPENSATION

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

ITEM 13.      -   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                     PART IV

ITEM 14.      -   EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES
                                                                               2
<PAGE>
                                     PART I

Except for the historical  information  contained herein, the discussion in this
Form  10-K  contains  or  may  contain  forward-looking   statements  (including
statements  in the  future  tense and  statements  using  the  terms  "believe,"
"anticipate,"  expect,"  "intend" or similar  terms) which are made  pursuant to
safe harbor provisions of the Private Securities  Litigation Reform Act of 1995.
These  forward-looking  statements  involve risks and  uncertainties  that could
cause the Company's  actual results to differ  materially  from those  discussed
herein.  Factors that could cause or contribute to such differences include, but
are not limited  to,  those  discussed  in "Item 1 --  Business"  and "Item 7 --
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" (particularly "Outlook: Issues and Risks" therein), as well as those
factors  discussed  elsewhere herein or in any document  incorporated  herein by
reference.

Unless otherwise indicated,  all share and per share information herein has been
restated to reflect the  Company's  two-for-one  stock splits which  occurred in
1996.

ITEM 1. BUSINESS
----------------

The Company

Employee Solutions,  Inc. (together with its subsidiaries ESI or the Company) is
one of the largest  professional  employer  organizations  (PEO) and is the most
geographically  diverse PEO in the United  States,  specializing  in  integrated
employment  outsourcing  solutions  for small and  mid-sized  businesses.  As of
December 31,  1997,  the Company  served  approximately  1,700 client  companies
representing 45,200 worksite employees in 47 states.

The  Company  offers a broad array of  integrated  outsourcing  solutions  which
provide businesses  throughout the United States with comprehensive and flexible
outsourcing  services to meet their payroll,  benefits and human resources needs
while  helping  manage their overall  costs.  The Company  provides  significant
benefits to its client companies and their worksite  employees,  including:  (i)
managing  escalating  costs  associated  with  workers'   compensation,   health
insurance,   workplace  safety  and  employment  policies  and  practices;  (ii)
enhancing employee  recruiting and retention by providing  employees with access
to a menu of  healthcare  and other  benefits  that are more  characteristic  of
larger employers;  (iii) providing expertise in transportation  personnel and in
labor relations;  and (iv) reducing the time and effort required by the employer
to deal  with an  increasingly  complex  administrative,  legal  and  regulatory
environment.

As a PEO, ESI and its "client company"  typically agree that ESI will become the
"employer of record" for the client company's  employees.  ESI generally assumes
designated obligations for payroll processing and reporting,  payment of payroll
taxes,  human resources  management and the provision of employee  benefit plans
and  risk  management/workers'  compensation  services.  Additionally,  ESI  may
provide  other  products and services  directly to worksite  employees,  such as
employee  payroll  deduction   programs  for  disability  and  specialty  health
insurance,  prepaid telephone cards and other personal financial  services.  The
client company generally retains management  control of the worksite  employees,
including hiring, supervision and termination and determining the employees' job
descriptions and salaries.


Industry Overview

The PEO industry has undergone  rapid growth in recent  years.  According to the
National  Association  of  Professional  Employer   Organizations  (NAPEO),  the
industry  has  grown  at a  compound  rate of 29% from  1991 to  1996.  Industry
analysts  expect  the  PEO  industry  to  continue  to grow  rapidly  due to the
increased  regulatory  and  administrative   burden  being  experienced  by  all
employers  and the ongoing  requirements  of  businesses to manage their overall
employee  related costs.  For example,  recent tax legislation  will require all
companies  with annual  payroll tax deposits in excess of $50,000 to settle such
taxes   electronically  or  suffer  monetary   penalties.   The  Small  Business
Administration  estimated  that in 1994 there were  nearly 6 million  businesses
with fewer than 500  employees  which employ over 51 million  employees  with an
aggregate  payroll of  approximately  $1.2  trillion.  It is estimated  that the
entire  PEO  industry  currently  has  between  two and three  million  worksite
employees  with  annual  payrolls  of over $17  billion.  The large  size of the
potential client market leaves room for substantial  continued growth of the PEO
industry.
                                                                               3
<PAGE>
The PEO  industry  began to evolve in the 1980s,  primarily  in  response to the
increasing burdens on small to medium-sized  employers  resulting from a complex
regulatory and legal environment. While various service providers assisted these
businesses  with  specific  tasks,  PEOs began to emerge as  providers of a more
comprehensive range of employment-related services. As the industry has evolved,
the term  "professional  employer  organization"  came to be used to describe an
entity which  establishes  a  three-party  relationship  among the PEO, a client
business, and the employees of that client business. For client employers,  PEOs
can  perform  the   functions   of  human   resources,   payroll  and   benefits
administration  departments of larger companies.  The PEO offers employers a one
stop shop with a menu of choices  for the client  company to bundle the  payroll
and benefit related services into one contract.  The primary services  performed
by PEOs are payroll  administration,  workers' compensation  insurance,  medical
benefits and 401(k) retirement plans. The growth of the PEO industry results, in
significant  part, from the demand by relatively small businesses for assistance
in administrative  aspects of the employer/employee  relationship,  as well as a
means to allow  participation of their employees in attractive  employee benefit
programs.  By having  their  employees  become part of a larger  employee  pool,
employers  often  can  provide  access to  enhanced  benefits,  such as  medical
insurance,  which  would  not be  economically  available  to  relatively  small
employers.

The Company  believes that an important aspect of the growth of the PEO industry
has  been  the  increased   recognition   and   acceptance  of  PEOs,   and  the
employer/employee  relationships  they create, by federal and state governmental
authorities.  The  concept of PEO  services  has  become  better  understood  by
regulatory  authorities,  as legitimate industry  participants have overcome the
well-publicized  earlier  failures of some PEOs.  The Company  believes that the
regulatory  environment has begun to shift to one of regulatory cooperation with
the industry,  although  significant issues  (particularly  tax-related)  remain
unresolved.  Through  NAPEO,  the Company and other  industry  leaders work with
government entities for the establishment of appropriate  regulatory  frameworks
to protect  clients and employees and thereby promote the acceptance and further
development of the PEO industry. See "Industry Regulation."


Clients

As of December 31, 1997, the Company's full-service PEO client base consisted of
approximately  1,700  client  companies,   representing   approximately   45,200
employees in 47 states.  At that date, the Company had customers in more than 12
specific industries,  based on Standard Industrial Classification ("SIC") codes,
and no more than 33% of the Company's  customers were  classified in any one SIC
code. The Company's  approximate  client company  distribution by major industry
grouping as of December 31, 1997 is set forth below:

                                                             Percent of
         Industry Group                                         Clients
         --------------                                      ----------

         Transportation:
                Private carriage/driver leasing                       7%
                For hire/standard PEO                                26
                                                            -----------
                Total                                                33

         Services:
                Professional                                         13
                Light Industrial                                      7
                Real Estate                                           3
                                                            -----------
                Total                                                23

                Manufacturing                                         8
                Construction                                         11
                Retail Trade                                          8
                Entertainment                                         8
                Wholesale Trade                                       5
                Agriculture and Fishing                               1
                Other                                                 3
                                                                               4
<PAGE>
As part of its business  strategy,  the Company targets a nationwide client base
composed primarily of the above categories.  Although the Company has identified
certain  industries  such as  transportation,  which  it  believes  particularly
benefit from its services and  expertise,  the Company also seeks to maintain an
overall  diversity of clients,  in both industries and geographical  scope. This
diverse base enables the Company to minimize its exposure to cyclical  downturns
in specific industries and geographic regions.

The Company's average  full-service PEO client had approximately 20 employees as
of December 31, 1997 (excluding TEAM Services which employs a substantial number
of worksite  employees in the entertainment  industry on a part-time or periodic
basis),  while the average  client added through  internally-generated  sales in
1997 (excluding US Xpress  discussed  below) exceeded 17 employees.  The Company
focuses  primarily  on employers  with fewer than 500  employees.  However,  the
Company believes that the benefits of PEO services remain  attractive for larger
employers in many circumstances.

Effective  January 1, 1997, the Company has entered into a PEO arrangement  with
US Xpress, a publicly-held  transportation company, currently with approximately
5,000  employees  who became  Company  worksite  employees.  The addition of the
worksite  employees of US Xpress,  which has become the Company's largest single
client,  increased the average  number of worksite  employees per client and the
percentage of the Company's worksite  employees in the transportation  industry.
US Xpress  accounted for $183.3 million or 20% of the Company's total revenue in
1997.

The  Company  generally  has  benefited  from a high level of client  retention,
resulting  in a  significant  recurring  revenue  stream.  NAPEO's  standard for
measuring  attrition  is computed by dividing  the number of clients lost during
the period by the sum of the number of  clients at the  beginning  of the period
plus the number of clients  added  during the period  (Client  Attrition  Rate).
Based on this standard,  the Company's Client  Attrition Rate was  approximately
25%, 21%, and 25%,  respectively,  for the years ended December 31, 1997,  1996,
and 1995. The Company's  Client  Attrition Rate is  attributable to a variety of
factors,  including (i)  termination  by the Company  because the client did not
make timely payments or failed to meet the Company's  client risk profile,  (ii)
client  nonrenewal  due to repricing,  or service or price  dissatisfaction  and
(iii) client business failure, downsizing, or sale or acquisition of the client.

The general division of  responsibilities  between the Company and its client as
co-employers under the Company's standard forms of subscriber agreements for PEO
services is as follows:

                  The Company:
                  ------------

         *        Payroll preparation and reporting
         *        Tax  reporting  and payment  (state and  federal  withholding,
                  FICA, FUTA, state unemployment)
         *        Workers'  compensation  compliance,  procurement,  management,
                  reporting
         *        Employment benefit procurement, administration and payment
         *        Monitoring   changes  in  certain   governmental   regulations
                  governing the employer/employee  relationship and updating the
                  client when necessary

                  The Client:
                  -----------

         *        Supervision  and  direction  of job  specific  activities  and
                  designation of job description and duties
         *        Hiring, firing and disciplining of employees
         *        Determination of salaries and wages
         *        Selection  of  fringe  benefits,   including   employee  leave
                  policies
         *        Professional  and business  licensing  and permits
         *        Compliance with immigration laws
                                                                               5
<PAGE>
         *        Compliance with health, safety and work laws and regulations

                  Joint:
                  ------

         *        Implementation  of  policies  and  practices  relating  to the
                  employer/employee relationship
         *        Employer liability under workers' compensation laws


The Company varies its standard contractual terms, including the apportioning of
responsibilities, when necessary to meet various states' regulatory requirements
or other  circumstances.  For example,  Texas and Florida require the Company to
retain certain  additional control rights over worksite employees as compared to
the Company's standard arrangements.

The Company's standard subscriber agreement may be canceled by either party upon
30 days  written  notice and also may be  canceled  more  quickly by the Company
under certain  circumstances  such as nonpayment of fees by the client.  The fee
paid by the client to the Company  includes  amounts for gross payroll and wages
and a service fee (from which the Company must pay employment taxes and benefits
and workers' compensation  coverage).  The specific service fee varies by client
based  on  factors  including  market  conditions,  client  needs  and  services
required, the clients' workers' compensation and benefit plan experience and the
administrative  resources required.  The service fee generally is expressed as a
fixed percentage of the client's gross salaries and wages.

As a result of an acquisition in August 1996, the Company began providing driver
leasing  services in which the  Company  acts as sole  employer of the  worksite
employee.  In such cases,  the Company  contracts with certain of its clients to
provide  transportation workers who are sole employees of the Company. For these
workers,  the Company makes hiring,  termination  and placement  decisions,  and
assumes more related  obligations than in the general  "co-employer"  situation.
The Company may also  contract  to provide  additional  services on a fee basis,
such as negotiating  collective  bargaining agreements on behalf of its clients,
maintaining  department of  transportation  requirements  and drug testing.  The
Company expects that for certain  industries this type of all-inclusive  program
will  become a more  significant  part of its  business,  which may  expose  the
Company to greater risk of liability for its employees'  actions both because of
the  nature of the  employment  relationship  and  because of the  incidence  of
injuries  inherent  in a  transportation  program  (such as those  from  vehicle
accidents).

In addition  to its  full-service  PEO client  customers,  the Company  also has
provided  stand-alone  risk  management/workers'  compensation  services.  These
services were provided to  approximately  83 employers,  covering  approximately
11,100  employees  as of December  31,  1997.  The  Company's  stand-alone  risk
management/workers'  compensation  clients and  employees  are  primarily in the
manufacturing,  construction,  transportation and temporary services industries.
Under the Company's new guaranteed cost  arrangements,  the Company expects that
recent  reductions in its stand-alone  workers'  compensation  insurance program
will continue. See "Risk Management/Workers' Compensation Program -- Stand-alone
Workers' Compensation".

Services and Products

The Company  provides its clients with a  comprehensive  offering of  employment
related  services and  products.  The  Company's  flexible  approach  allows its
clients to select  packages  best suited for their  needs.  These  services  and
products   generally   cover   five   categories:   payroll,   human   resources
administration,  regulatory compliance,  risk management/workers'  compensation,
and benefits programs.

Payroll

As the employer of record, the Company assumes responsibility for making payroll
payments to the worksite  employees  and for payroll tax  deposits,  payroll tax
reporting,  employee file maintenance,  unemployment  claims, and monitoring and
responding to changing laws and regulations relating to payroll taxes.  Although
the Company typically bills a client company in advance of each payroll date and
reserves the right to terminate its agreement  with the client if payment is not
received within two days of the billing date, limited extended payment terms are
offered in certain cases  subject to local  competitive  conditions.  In certain
industry  segments  where such  practices  are  customary  (such as those in the
entertainment  industry and in certain parts of the  transportation  industries)
the Company extends to its clients payment terms
                                                                               6
<PAGE>
ranging from 15 to 45 days. See " Item 7 -- Management's Discussion and Analysis
of  Financial  Condition  and Results of  Operations  --  Liquidity  and Capital
Resources."

Human Resources Administration

The   Company's    comprehensive    human   resources    services   reduce   the
employment-related   administrative  burdens  faced  by  its  clients.  Worksite
employer  supervisors are provided with consulting  services,  which can include
employee  handbook  preparation,  policy and procedure  review,  job description
development,   and  an  analysis  of   performance   review   processes   and/or
employment-related   documentation  procedures.   The  Company  is  a  party  to
collective  bargaining  agreements  in  its  driver  leasing  programs,  and  is
available to provide other clients with assistance in collective bargaining upon
request.  In certain  market  segments,  the  Company  also  provides  placement
services.

Employer Regulatory Compliance

The  Company,  upon  request,  helps its  clients  understand  and  comply  with
employment-related  requirements.  Laws and regulations  applicable to employers
include state and federal tax laws, state  unemployment  laws, federal and state
job security/plant closing laws, workers' compensation laws, occupational safety
and  health  laws,  laws  governing  benefits  plans  such as ERISA  and  COBRA,
immigration  laws, the Americans with Disabilities Act, family and medical leave
laws, and discrimination, sexual harassment and other civil rights laws.

Risk Management/Workers' Compensation

The Company offers its clients a fully-insured,  first-dollar  coverage workers'
compensation  insurance  program.  Effective  January 1, 1998,  this  program is
provided through third party insurers, on a fully-insured, guaranteed cost basis
to the Company.  The Company's  risk  management/workers'  compensation  program
provides  its clients  with  access to safety  programs  through  the  Company's
experienced  safety  professionals,  early return to work programs and access to
managed  care  networks for  workers'  compensation  services as part of the PEO
package.  The  Company  also  offers its fully  insured,  first-dollar  coverage
workers'  compensation  insurance  program  on a  stand-alone  basis.  Under the
Company's new  guaranteed  cost  arrangements,  the Company  expects that recent
reductions  in its  stand-alone  workers'  compensation  insurance  program will
continue.  Many aspects of the Company's risk  management/workers'  compensation
program were developed prior to 1998, during a period when the Company partially
self-insured for certain workers'  compensation risks. The Company believes many
of these structures and programs will continue to assist the Company in managing
workers' compensation premium expense.

Benefits Programs

The Company believes it generally can obtain employee benefits, negotiate annual
plan  arrangements,  and  administer  the  plans  and  related  claims  at rates
generally  not  available  to  small  and  medium-sized  firms  (depending  upon
geographic  location,  plan design and census  demographics  of the group).  The
Company's  benefits  programs  include (i) major  medical  indemnity,  preferred
provider and health  maintenance  organization  plans;  (ii) group term life and
accidental  death  and  dismemberment  insurance;  (iii)  dental  indemnity  and
preferred provider insurance;  (iv) vision care discount programs; (v) long term
disability  insurance;  and (vi) short term  disability  and other  supplemental
insurance programs.  Except for one self-insured health care program, the health
care  programs of the Company are fully  insured by  third-party  insurers.  See
"Medical  Programs"  below. In addition,  the Company offers pre-tax health care
spending plans,  pre-tax  premium  conversion and dependent care spending plans,
and  qualified  retirement  plans,  such as  401(k)  plans,  in  which  worksite
employees  may  participate,  and  assists  the  client by helping  explain  the
advantages and mechanics of such programs to employees.

In June 1997, the Company  entered into a strategic  relationship  with Aetna US
Healthcare (Aetna), a national  managed-care company, and the Company now offers
Aetna's  high-quality,  competitively  priced  medical  and dental  plans to the
Company's  full-time  corporate  and worksite  employees in areas of the country
where Aetna maintains  preferred  provider networks in addition to the Company's
other medical programs  including a self-insured  program.  The Company believes
that the value and  comprehensiveness of Aetna's health benefit plans will allow
the Company to  consolidate  and simplify its benefit  plan  offerings,  improve
service and reduce costs. The Company has negotiated  competitive  premium rates
by geographic  regions with all of its third party health care insurers that are
generally  effective through December 31, 1998, at which time renewal provisions
would apply.

Worksite Employee Services
                                                                               7
<PAGE>
The Company  also  provides  benefits  and  services  directly  to its  worksite
employees.  The Company  provides  national and regional  bank  affiliations  to
expedite  payroll check  cashing and direct  deposit  services,  and also offers
credit union access to employees.  The Company also provides discount passes for
a variety of recreational,  entertainment,  social and cultural items across the
United States,  and for certain types of services.  The Company has introduced a
payroll  deduction  program under which the Company currently offers to worksite
employees  the  ability to purchase  pre-paid  telephone  cards and  specialized
insurance  at  competitive  prices.  The Company  intends to offer in the future
other  goods and  services  such as  homeowners,  automobile  and other types of
personal insurance and travel services.

Sales and Marketing

Although the PEO industry has grown  significantly  since its inception,  it has
not yet achieved widespread  customer  familiarity in many markets. As a result,
the Company  generally  must first explain to potential  clients what a PEO does
and the  benefits  a PEO  generally  offers  before  the  Company  can  sell its
particular services to the potential client. The Company therefore believes that
its  services  can  best be sold by  experienced  sales  agents  at  individual,
face-to-face  meetings  with  potential  clients.  The Company has  developed an
internal sales and marketing  capacity,  and has entered into several  strategic
marketing alliances to promote the Company's services.

Sales

The Company has recently  adopted a consolidated,  centralized  sales management
structure, located at its Phoenix headquarters. In implementing this operational
restructure,  the Company has  recruited  additional  management,  and hired key
sales  training and  administrative  personnel as part of an ongoing  process to
increase internal sales.

The Company's national  telemarketing  operations  generate new leads, which are
supported by a nationwide network of sales  representatives.  Headquarters sales
management  provides  continuous training and sales support to all Company sales
agents,  assists them in new client  pricing,  and manages new case flow between
the field and Company corporate offices in Phoenix.

The Company's field sales operations are coordinated by Regional Vice Presidents
of sales  ("RVPs")  located in various  cities.  These RVPs  manage a network of
full-time  sales agents and part-time sales brokers.  In certain  circumstances,
the Company  appoints  general  agents who  supervise  several sales agents whom
report to an RVP.  To assure a  significant  nationwide  selling  presence,  the
Company  believes it is appropriate to maintain a large sales force. At December
31, 1997, the Company's  sales force included 72 RVPs,  general agents and sales
agents.

The RVPs,  general agents and sales agents  currently are compensated  primarily
via  commissions,  subject to certain vesting and production  requirements.  The
RVPs and general agents also receive an override  commission on sales  generated
by sales agents which report to them. Each RVP, general agent and sales agent is
responsible for his or her own operating  expenses such as rent,  hiring outside
salespersons,   permanent  staff  salaries,  telephone,  travel,  entertainment,
training  and other  expenses,  although  the Company  defrays a portion of such
expenses for the RVPs.  Commissions may be payable after  termination in certain
circumstances.

The Company recently began executing its plan to place employee  salespersons in
key markets.  Employee-salespersons will be compensated through a combination of
base salary and  commissions,  and will be  eligible  for  participation  in the
Company's stock option programs.

The  Company's  stand-alone  risk   management/workers'   compensation  services
generally have been placed through ESI Risk  Management  Agency,  Inc., a wholly
owned  subsidiary  of the  Company  (RMA).  The Company  established  RMA as its
professional  brokerage  division  to act  as  the  Company's  conduit  for  its
marketing  alliance  relationships  with  insurance   wholesalers.   Independent
agencies  and  sales  representatives  receive  compensation  from RMA  based on
production.

Marketing

The Company's marketing operations provide  comprehensive  marketing support for
all  of  the  Company's  operations.  This  support  focuses  on  communications
strategies,  market  research and analysis,  product  development  and strategic
alliances.   The  marketing   department   also  provides   empirical  data  for
salespersons  to assist in  prospecting  activities in targeted  industries  and
regions.
                                                                               8
<PAGE>
The  marketing  department  has developed a  communications  strategy to provide
continuity and consistency of the Company's message. This strategy also seeks to
expand the Company's contacts through new relationships and expand relationships
with current clients.

Marketing Alliances

The Company has entered into several  strategic  alliances which it believes may
enhance the  marketing  of its  products  and  services by  leveraging  from the
experience, industry expertise, geographical reach and customer contacts of such
alliances.  These  alliances  may provide the Company with  profitable  business
opportunities  to either  expand its  customer  base or expand the  services and
products which the Company may offer.

The  Company's   current   alliances   include:   cross  selling   arrangements;
arrangements to offer prepaid telephone cards and specialty  insurance  products
to  worksite  employees;  benefits  education  for  worksite  employees,  and  a
nationwide check-cashing program for worksite employees.

Competition

The market for many of the services provided by the Company is highly fragmented
with over 2,300 PEOs  currently  competing in the United  States.  Many of these
PEOs have limited  operations  and relatively  few worksite  employees,  but the
Company  believes  that several are larger than or  comparable to the Company in
size.  As the PEO concept  becomes  better  known and  achieves  greater  market
penetration,  the Company  expects the PEO market to become  substantially  more
competitive.  In areas of the country  where PEOs have achieved  greater  market
recognition and penetration,  competition has become intense. While price is the
principal  competitive factor,  service and the coverage and quality of benefits
programs are  important  ancillary  competitive  considerations.  The  Company's
subscriber  agreements  with its clients  generally may be canceled upon 30 days
written  notice of termination  by either party.  The short-term  nature of most
customer  agreements means that a substantial  portion of the Company's business
could be terminated upon short notice.

The  Company  believes  that  currently  its  greatest  competition  is with the
traditional model in which clients provide employment-related  services in-house
together with the use of independent insurance brokers.  Further,  certain large
insurance  companies have become more  aggressive in workers'  compensation  and
have reduced pricing in order to obtain market share, and price competition from
state workers' compensation  insurance funds has intensified in certain markets.
The Company also incurs direct  competition  from numerous  PEOs,  some of which
have greater  resources,  greater  assets and larger  marketing  staffs than the
Company.  The Company also competes  with payroll  processing  firms,  temporary
personnel  companies  and human  resource  consulting  firms.  In addition,  the
Company expects that as the PEO industry becomes better established, competition
will increase because existing PEO firms will likely  consolidate into fewer and
better  competitors and well organized new entrants with greater  resources than
the Company, including some of the non-PEO companies described above, will enter
the PEO market.

Information Systems

The  Company  utilizes  integrated  payroll  processing,  billing  and  benefits
management  information  and processing  systems.  The Company also has recently
converted an advanced  management system which allows for real time reporting of
worksite  accidents  and injuries and assists the Company in executing  its risk
management  program.  Effective  January  1998,  the Company has  completed  the
transition  of  all  PEO  processing  to  a  unified  software  platform  and  a
centralized client server at its Phoenix  headquarters,  and expects to complete
the  installation of a new  Company-wide  accounting  software  package in April
1998.  While the Company expects improved  performance from these  developments,
there can be no assurance  that the Company will not  encounter  delays or other
difficulties  as new systems are  implemented,  which may  materially  adversely
affect its performance.  See also "Item 7 - Management's Discussion and Analysis
- Outlook: Issues and Risks, Year 2000 Compliance" herein.

The  Company  has  acquired  various  products  installed  at certain PEO client
locations to facilitate the transmission of payroll-related  data. These include
a PC-based software product, electronic time clocks and direct dial-in modems.



Investment Policy

The basic  objectives  of the  Company's  investment  policy  are the safety and
preservation  of the invested  funds,  the liquidity of investments to meet cash
flow requirements (including future claims payments and related requirements for
its risk  management/workers'  compensation
                                                                               9
<PAGE>
program),  and the  realization  of a  maximum  rate of  return  on  investments
consistent with capital  preservation.  The investment  policy defines  eligible
investments,  investment limits and investment  maturities as guidelines to meet
the policy's  objectives.  The Company has appointed outside investment managers
to assist in  portfolio  management.  The Company  invests its  available  funds
primarily in commercial  paper,  U.S.  government  and agency  securities  rated
A-2/P-2 or better and other short- term liquid investments.

Risk Management/Workers' Compensation Program

Recent  Developments

The Company recently changed its business  strategy with respect to its workers'
compensation  program in response to the changing  profile of, and greater risks
associated with, its worksite employee base,  increased  competition and reduced
margin opportunities, and in an effort to reduce the uncertainty associated with
its quarterly workers'  compensation expense. As part of the Company's change in
business strategy, the Company obtained  fully-insured  guaranteed cost workers'
compensation  coverage  effective  January 1, 1998,  thereby  eliminating,  with
limited exceptions, the Company's risk retention on workers' compensation claims
arising after that date. The coverage was obtained  through  Stirling Cooke Risk
Management Services, Inc. under a three-year  arrangement,  with pricing subject
to annual  review.  The Company will retain risk up to $250,000  per  occurrence
with respect to a defined portfolio of stand-alone  policies which were in place
at December 31, 1997,  which  policies  expire at various dates during 1998. The
Company  also will  retain risk up to $50,000 per  occurrence  for claims  under
Ohio's monopolistic workers' compensation structure, with an aggregate liability
limitation  based on a percentage  of Ohio manual  premium.  The Company also is
pursuing  aggressively a loss  portfolio  transfer or similar  reinsurance,  for
pre-1998  claims.  However,  there can be no  assurance  that the  Company  will
successfully  complete  such a  transaction,  or of the  terms on  which  such a
transaction could be completed.

Because many of the Company's programs and structures will remain in effect as a
means of managing  risks in the  future,  and  because  they may  continue to be
utilized by the Company in managing its pre-1998  claims,  a description  of the
Company's pre-1998 partially self-insured program is included below.

Background

Workers' compensation is a statutory system which requires employers to purchase
insurance or to  self-insure  in order to provide their  employees  with medical
care and other  specified  benefits  for  work-related  injuries  or  illnesses.
Compensation  is  payable  regardless  of  who  is at  fault  and  the  workers'
compensation  policy  generally is the employee's sole source of recovery.  Four
types of benefits  typically are payable under workers'  compensation  policies:
medical benefits, indemnity payments for lost wages, payments for job retraining
and payments for permanent  disabilities or death. The amounts of disability and
death  benefits  payable for claims are  established  by statute,  but no dollar
limitation is set forth for medical  benefits.  Regulations  governing  workers'
compensation vary by state.

As the employer of record for its worksite employees, the Company is required to
provide  workers'  compensation  insurance to its leased  employees unless other
arrangements are made by the client.

In June 1995 the Company began providing workers' compensation insurance through
Camelback  Insurance,  Ltd.  (Camelback),  its  wholly-owned  insurance  company
chartered in Bermuda,  in coordination  with its servicing  insurers  (primarily
Reliance  National  Indemnity  Company  ("Reliance"))  which provided full first
dollar insurance coverage for workers' compensation losses.  Camelback reinsured
the  servicing  insurers'  obligation  for losses up to $250,000  ($350,000  for
certain  transportation  programs and $500,000 in two states with "monopolistic"
workers' compensation  insurance structures) for each occurrence.  The servicing
insurer  arrangements  are subject to certain  standard  exceptions  and exclude
coverage of certain high risk employees;  the Company  typically does not accept
clients with those types of employees although  exceptions may exist. To further
reduce  its  potential  liability,  the  Company  secured  accidental  death and
dismemberment  insurance  that covers losses of up to $500,000  (increased  from
$250,000 in July 1996 to obtain a net reduction in excess reinsurance costs) for
certain  types of serious  claims and  maintains  umbrella  coverage for certain
liabilities (other than losses resulting from workers'  compensation claims) the
Company  may  incur  in  connection   with  its   administration   of  its  risk
management/workers'  compensation program. The Company terminated its accidental
death and  dismemberment  policy effective  February 1, 1998 in conjunction with
the transition to a guaranteed cost environment.
                                                                              10
<PAGE>
The Company has utilized its selective  evaluation process,  safety programs and
active claims  management to manage its loss  experience.  While the Company has
entered into a guaranteed cost, fully-insured program effective January 1, 1998,
the Company  remains  subject to liabilities for losses and claims arising prior
to that time,  and there may exist  further  liability for claims which have not
yet been reported.  Changes in workers' compensation experience could affect the
Company's  future costs.  Factors such as weakened  underwriting  standards as a
result of internal  growth,  loss  experience of recently  acquired  operations,
changes  in the  risk  profile  of the  Company's  worksite  employee  base,  or
increased  competition  could affect workers'  compensation  experience,  and an
increase in the Company's loss experience could materially  adversely affect the
Company's results of operations, business and financial performance. See "Item 7
- Management's Discussion and Analysis -- Outlook: Issues and Risks, Adequacy of
Loss Reserves; Loss and Claims Experience" herein.

Underwriting

The Company works to control the  Company's  exposure to losses by ensuring that
prospective   clients  present   acceptable  risks.  The  Company  reviews  most
prospective  clients' prior loss  experience  and safety  record,  the extent to
which such losses can be prevented, job and industry classifications and current
workers'  compensation  premium rates. The Company's nationwide presence permits
it to select those  industries  and clients that present risk  profiles  that it
believes it can manage  effectively.  The  Company  carefully  scrutinizes  each
prospective  client's risk profile.  Many prospective  clients  submitted to the
Company are rejected and do not become  clients of the Company.  Once a prospect
is accepted, the Company periodically reviews the client's claims experience and
costs to determine  whether fee  adjustments  or other  changes are needed.  The
Company  generally may terminate  its  relationship  with PEO clients on 30 days
notice,  and  thereby  quickly  reduce any  unacceptable  exposure  to  workers'
compensation claims.

Safety Control

The Company  provides  continuing  assistance to its clients in  developing  and
maintaining  safety programs and procedures.  The Company reviews  periodic loss
reports,  attempts to identify  weaknesses in the client  company's loss control
procedures and assists the client in correcting  those  weaknesses.  The Company
can mandate that its PEO clients  implement  recommended  safety procedures as a
condition to receiving PEO services or workers' compensation coverage.

Claims Management

The Company seeks through active claims management to resolve claims quickly and
at the lowest possible cost. The Company emphasizes prompt attention to injuries
and claims,  striving to achieve immediate reporting of injuries and with a goal
of  contacting  the  employee,  the client  employer and the treating  physician
within 24 hours of the time an injury is reported.  The Company  follows up with
an injured employee on a regular basis,  and emphasizes  return to work programs
to minimize lost productivity. The Company makes available managed care programs
to treat employees and audits medical bills.

The Company and the Third Party Claims  Administrator  ("TPA") work  together to
administer each claim, maintaining contacts with the claimant employees, medical
providers and client  companies,  investigating  claims reports and  controlling
medical,  rehabilitation and other claims settlement costs. In addition, the TPA
cannot  settle any claim  without  the  Company's  prior  approval.  The Company
believes  its  proactive  claims  management  approach  permits  it to close its
claims, on average, more quickly than ordinary workers' compensation insurers.


Stand-Alone Workers' Compensation

The Company has provided its workers'  compensation program to non-PEO customers
on a  stand-alone  basis.  The  stand-alone  program  primarily  was intended to
provide an opportunity to establish  relationships with companies which were not
currently  seeking PEO services but were  believed to be  candidates  for future
conversion into a comprehensive  PEO  relationship,  and further was intended to
permit the Company to leverage its workers' compensation expertise.  The Company
does not intend to actively  market its  stand-alone  program in 1998 because it
has  determined to emphasize  other PEO marketing  strategies and because of the
decreased profit opportunities resulting from increased price competition in the
overall workers' compensation market. The decision also is based on the terms of
the  Company's  guaranteed  cost  program,  which  limit  the  Company's  profit
potential on  stand-alone  cases  written  after  January 1, 1998 to  commission
income.
                                                                              11
<PAGE>
Medical Programs

In addition to its medical  insurance  plans which are fully  insured by several
third party  providers,  the Company  offers a self-insured  program  through an
arrangement  with  Provident  Life & Accident  Company  (Provident).  (Two prior
partially  self-insured  arrangements  were terminated on December 31, 1997, and
the administrators of those arrangements are presently handling claim run-off in
accordance with the applicable programs.) As of December 31, 1997, approximately
933  employees  were insured under the  Provident  program.  Under the Provident
program,  the maximum  policy  coverage is $100,000 per covered  individual  per
year, for which the Company is responsible.  Working with Provident, the Company
seeks to limit its risk by  performing a review of loss  factors,  and carefully
monitoring claims experience.  The Company establishes  reserves for anticipated
liabilities;  however,  there  can be no  assurance  that the  reserves  will be
adequate due to such factors as unanticipated  loss development on known claims,
increases in the number and  severeity of new claims,  and a lack of  historical
claims experience with new clients.

In June 1997, the Company  entered into a strategic  relationship  with Aetna US
Healthcare,  and the  Company  now offers  Aetna's  high-quality,  competitively
priced  medical  and  dental  plans to the  Company's  full-time  corporate  and
worksite  employees  in areas of the  country  where Aetna  maintains  preferred
provider networks.  The Company believes that the value and comprehensiveness of
Aetna's health benefit plans will allow the Company to consolidate  and simplify
its benefit plan offerings,  improve  service and reduce costs.  The Company has
negotiated competitive premium rates by geographic regions with all of its third
party health care  insurers that are generally  effective  through  December 31,
1998, at which time renewal provisions would apply.


Employees

At December 31, 1997, the Company employed 332 full-time  corporate employees in
addition to the worksite employees. The Company considers its employee relations
to be very good.


Industry Regulation

Federal Regulation

Employers in general are  regulated by numerous  federal laws relating to labor,
tax and  employment  matters.  Generally,  these laws prohibit  race,  age, sex,
disability  and religious  discrimination,  mandate  safety  regulations  in the
workplace,  set minimum wage rates and regulate employee benefits.  Because many
of  these  laws  were  enacted  prior  to  the  development  of  non-traditional
employment  relationships,  such  as PEO  services,  many of  these  laws do not
specifically  address the obligations and  responsibilities  of  non-traditional
employers.  As a result,  interpretive  issues  concerning the definition of the
term "employer" in various federal laws have arisen pertaining to the employment
relationship.  Unfavorable  resolution  of these  issues  could  have a material
adverse  effect on the Company's  results of operations or financial  condition.
Compliance with these laws and regulations is time consuming and expensive.  The
Company's standard forms of agreement provide that the client is responsible for
compliance with certain  employment-related  laws and regulations,  and that the
client is obligated to indemnify the Company against  breaches of the agreement.
However,  some legal  uncertainty  exists with respect to the potential scope of
the Company's liability in the event of violations by its clients of employment,
discrimination and other laws.

Taxes

As  employer  of  record  for  its  clients'  employees,   the  Company  assumes
responsibility  for the  payment  of  federal  and state  employment  taxes with
respect  to  wages  and  salaries  paid to its  worksite  employees.  There  are
essentially  three  types of  federal  employment  tax  obligations:  income tax
withholding  requirements,  social security obligations under the Federal Income
Contribution  Act  ("FICA")  and  unemployment  obligations  under  the  Federal
Unemployment  Tax Act  ("FUTA").  Under the Internal  Revenue  Code of 1986,  as
amended (the  "Code"),  the employer  has the  obligation  to remit the employer
portion and, where applicable,  withhold and remit the employee portion of these
taxes. In addition, the Company is obligated to pay state unemployment taxes and
withhold state income taxes.
                                                                              12
<PAGE>
The Internal  Revenue Service ("IRS") has formed a Market Segment Study Group to
examine  whether PEOs such as the Company are for certain  employee  benefit and
tax purposes the  "employers" of worksite  employees  under the Code. If the IRS
were to determine that the Company is not an "employer" under certain provisions
of the Code, it could  materially  adversely affect the Company in several ways.
With respect to benefit plans,  the tax qualified status of the Company's 401(k)
plans could be revoked,  and the Company's  cafeteria and medical  reimbursement
plans may lose their  favorable  tax status  (resulting  in employer  liability,
including  penalties for failure to withhold applicable taxes in connection with
the cafeteria  and medical  reimbursement  plans).  The Company  cannot  predict
either the timing or the nature of any final decision that may be reached by the
IRS with respect to the Market  Segment  Study Group or the ultimate  outcome of
any such decision,  nor can the Company predict whether the Treasury  Department
will issue a policy  statement  with respect to its position on these issues or,
if issued,  whether such  statement  would be favorable  or  unfavorable  to the
Company.  Effective  as of January 1, 1997,  the Company has  implemented  a new
401(k)  retirement  plan  which  involves  both the  client  and the  Company as
co-sponsors  of the plan and is intended to be a "multiple  employer" plan under
Code Section 413(c).  The Company  believes that this multiple  employer plan is
less likely to be adversely  affected by any IRS determination  that no employer
relationship  exists  between  the  Company and  worksite  employees.  While the
Company does sponsor some sole employer plans covering worksite  employees which
the Company  assumed in connection  with other acquired PEO operations and which
could be adversely  affected by any unfavorable IRS  determination,  the Company
intends to convert  the  majority  of the sole  employer  plans into one or more
multiple  employer  plans,  and the Company  believes that any  unfavorable  IRS
determination,  if applied  prospectively  (that is,  applicable only to periods
after  such a  determination  is  reached),  probably  would not have a material
adverse  effect on the Company's  financial  position or results of  operations.
However,  if  an  adverse  IRS  determination  were  applied   retroactively  to
disqualify benefit plans,  employees' vested account balances under 401(k) plans
would become taxable, an administrative  employer such as the Company would lose
its tax deductions to the extent its matching  contributions  were not vested, a
401(k) plan's trust could become a taxable trust and the administrative employer
could be subject to liability with respect to its failure to withhold applicable
taxes and with  respect to certain  contributions  and trust  earnings.  In such
event,  the  Company  also  would  face the risk of client  dissatisfaction  and
potential claims by clients or worksite employees.

A determination  by the IRS that the Company is not an "employer"  under certain
provisions  of the Code also could lead the IRS to conclude  that federal  taxes
were  not paid by the  proper  party,  because  such  taxes  must be paid by the
employer.  This  conclusion  could lead to actions by the IRS against clients of
the Company seeking direct payment of taxes,  plus penalties and interest,  even
though the taxes were  previously paid by the Company.  Further,  if the Company
were  required  to report and pay such taxes on account of its  clients,  rather
than on its own  account as the  employer,  the Company  could  incur  increased
administrative burdens and costs.

In light of the IRS Market  Segment Study Group and the general  uncertainty  in
this area,  certain  legislation has been drafted to clarify the employer status
of PEOs in the context of the Code and benefit plans.  However,  there can be no
assurance that such legislation will be proposed and adopted and even if it were
adopted, the Company may need to change aspects of its operations or programs to
comply with any requirements which may ultimately be adopted. In particular, the
Company  may need to retain  increased  sole or  shared  control  over  worksite
employees if the legislation is passed in its current form.

In addition to the employer/employee  relationship  requirement described above,
pension and profit  sharing  plans  including  the  Company's  401(k) plans must
satisfy certain other  requirements under the Code. These other requirements are
generally  designed  to prevent  discrimination  in favor of highly  compensated
employees to the detriment of non-highly  compensated  employees with respect to
both the  availability  of and the  benefits  rights  and  features  offered  in
qualified  employee  benefit plans. The Company has made a good faith attempt to
apply the  non-discrimination  requirements of the Code in an effort to maintain
its 401(k) plans in compliance with the requirements of the Code.

Employee pension welfare benefit plans are also governed by ERISA. ERISA defines
an employer as "any person acting directly as an employer,  or indirectly in the
interest of an employer, in relation to an employee benefit plan." ERISA defines
the term employee as "any individual employed by an employer." The United States
Supreme Court has held that the common law test of employment must be applied to
determine  whether an  individual  is an employee or an  independent  contractor
under ERISA.

A  definitive  judicial  interpretation  of an  employer  in  the  context  of a
full-service PEO arrangement has not been established. If the Company were found
not to be an employer for ERISA purposes,  its plans would not comply with ERISA
and the level of services the Company  could offer may be  materially  adversely
affected.  Further, as a result of such finding, the Company and its plans would
not enjoy the  pre-emption
                                                                              13
<PAGE>
of state laws  provided by ERISA and could be subject to varying  state laws and
regulations as well as to claims based upon state common law.

While the Department of Labor has issued advisory  opinions to one or more staff
leasing  companies  indicating  that their welfare  plans,  which cover worksite
employees,  are  multiple  employer  welfare  arrangements  rather  than  single
employer  plans,  the  Company  has not been the  subject  of any such  advisory
opinion.  If,  however,  the  Company's  welfare  benefit plans were found to be
multiple employer welfare arrangements, ERISA would not pre-empt the application
of certain state insurance laws to the plans.

Certain  company  clients  maintain their own retirement  and/or welfare benefit
plans covering worksite employees.  The Company's  involvement in these plans is
limited to forwarding payroll amounts to the client as directed by the client to
fund such plans and the Company has assumed no obligation in connection with the
sponsorship or administration of such plans.  While the Company believes that it
has no liability in connection with any of these client plans,  due to the legal
uncertainty  that exists in this area, the Company cannot guarantee that such is
the case.

Workers' Compensation

Camelback is subject to the insurance laws and regulations of Bermuda. Such laws
and   regulations   generally   are   designed  to  protect  the   interests  of
policyholders,  as opposed to the interests of shareholders such as the Company.
Such laws and  regulations,  among other  things,  relate to capital and surplus
levels,  levels of dividends  payable by subsidiaries to their parent companies,
financial disclosure,  reserve  requirements,  investment parameters and premium
rates.  In  general,  the  regulatory   authorities  have  broad  administrative
authority  over  insurers   domiciled  in  their   jurisdictions.   Among  other
requirements and limitations,  Bermuda law requires that Camelback must maintain
statutory capital and surplus based primarily on premium volume.  The Company is
subject to additional  requirements  pursuant to its arrangements with Reliance.
See "Item 7 --  Management's  Discussion  and Analysis -- Liquidity  and Capital
Resources." The laws of Bermuda also place certain limitations upon the transfer
of statutory  capital and surplus from an insurer to its parent company (whether
via  dividend or  otherwise),  and  regulate  the  circumstances  under which an
insurer is permitted to loan funds to its parent company.

From June 1994 through  December  1997 the  Company's  risk  management/workers'
compensation   services   program   primarily  was   conducted  via   "fronting"
arrangements  with  insurers,  under which  another  insurer  issues a policy on
behalf  of  Camelback.  The  National  Association  of  Insurance  Commissioners
("NAIC") recently adopted a model act concerning  "fronting"  arrangements.  The
model act requires  reporting  and prior  approval of  reinsurance  transactions
relating to these  arrangements,  and limits the amount of premiums  that can be
written under certain circumstances. No determination can be made as to whether,
or in what form,  such act may  ultimately  be  adopted  by any state  and,  the
Company is  therefore  unable to predict  whether  the model act will affect its
relationships  with its  insurers  in the  future  should it wish to resume  its
self-insured program.

State regulation  requires  licensing of persons soliciting the sale of workers'
compensation  insurance  within  that state.  In certain  states,  licenses  are
obtained by individual  agents rather than a corporate entity.  The Company,  or
one of its employees,  is licensed in most states. Although the Company does not
believe that its activities  require such licenses  because it solicits  through
other  licensed  entities,  it is a risk  that the  Company  may be deemed to be
making sales without a license in  jurisdictions  where it is not  licensed,  or
that it would cease to maintain  necessary  licenses  upon the  departure of the
employee who holds certain of such licenses.

Health Care Reform

Various  proposals for national health care reform have been under discussion in
recent years,  including proposals to extend mandatory health insurance benefits
to virtually all classes of  employees.  Any health care reform  proposal  which
mandated health insurance  benefits based on the number of employees employed by
an  entity  could  adversely  affect  PEOs such as the  Company,  which for some
purposes are deemed to employ all their clients' employees. In addition, certain
reform proposals have sought to include medical costs for workers'  compensation
in the reform package.  If such proposals increased the cost of medical payments
or limited the Company's ability to control its workers' compensation costs, the
Company's ability to offer  competitively-priced  workers' compensation coverage
to its  clients  could be  adversely  affected.  While the  Company is unable to
predict  whether or in what form health care reform will be enacted,  aspects of
such reform,  if enacted,  may have an adverse effect upon the Company's medical
and workers' compensation insurance programs.
                                                                              14
<PAGE>
State and Local Regulation

The Company is subject to regulation by local and state agencies pertaining to a
wide variety of labor  related  laws.  As is the case with  federal  regulations
discussed above, many of these regulations were developed prior to the emergence
of the PEO industry and do not specifically address  non-traditional  employers.
While many states do not explicitly  regulate PEOs,  eighteen states have passed
laws that have  licensing or  registration  requirements  and several others are
considering such regulation.  Further, a number of other states have passed laws
defining PEOs for purposes of addressing,  in particular contexts,  whether PEOs
constitute employers under certain state laws applicable to employers generally.
The Company believes it is licensed where required. Such laws vary from state to
state but generally  provide for monitoring the fiscal  responsibility  of PEOs.
Some states also specify contractual arrangements between the PEO and the client
company, and the PEO and the worksite employee. For example, some states require
an  employment  relationship  under which the Company must retain sole or shared
control over  worksite  employees,  thereby  requiring  the Company to bear more
responsibility  than under its  standard  co-employer  model.  Because  existing
regulations  are relatively  new, there is limited  interpretive  or enforcement
advice available.  The development of additional  regulations and interpretation
of existing regulations can be expected to evolve over time.

The Company has formed  Camelback in part to avail itself of the  favorable  tax
treatment  of insurance  companies,  which pay state  premium  taxes rather than
income taxes and which may tax deduct reserves when booked. Although the Company
believes that it has structured its Camelback  arrangements  to qualify for such
tax treatment,  any disallowance of this tax treatment could  materially  affect
the Company's results of operations.


ITEM 2. PROPERTIES
------------------

The Company leases all of its offices.

The  Company's  headquarters  office space at 6225 North 24th  Street,  Phoenix,
Arizona is leased for a term expiring in 2004. The lease took effect on April 1,
1997, and increased the useable space for the Company's  home office  operations
from  approximately  18,000  square feet to 58,000  square  feet,  allowing  the
Company  to  consolidate  various  Phoenix  operations  and  maintain  space for
expansion.

The Company also leases smaller amounts of office space at various  locations in
a number of other  cities  for its sales and  operations  offices.  The  Company
believes  that  these  facilities  are  adequate  for its  existing  operations,
although  further  acquisitions  or  expansion  could  increase its office space
needs.

Substantially  all of the  Company's  assets are pledged to secure the Company's
revolving bank line of credit.
                                                                              15
<PAGE>
ITEM 3. - LEGAL PROCEEDINGS
---------------------------

Securities Class Actions

As  previously  reported,  the  Company  and  certain of its  present and former
directors  and  executive  officers have been named as defendants in ten actions
filed  between March 1997 and May 1997.  While the exact claims and  allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act,  and Rule 10b-5  promulgated  thereunder,  with  respect to the accuracy of
statements  regarding Company reserves and other disclosures made by the Company
and certain  directors and officers.  These suits were filed after a significant
drop in the trading price of the Company's  Common Stock in March 1997.  Each of
the  actions  seeks  certification  of  a  class  consisting  of  purchasers  of
securities of the Company over specified periods of time. Each of the complaints
seeks the award of  compensatory  damages in amounts to be  determined at trial,
including interest thereon,  and costs of the action,  including attorneys fees.
The suits  have been  consolidated  before a single  judge of the U.S.  District
Court in Phoenix,  Arizona.  The Court has  appointed  lead  plaintiffs  for the
putative  class,   approved  plaintiffs'   selection  of  counsel,  and  ordered
plaintiffs to file a consolidated,  amended complaint on or about April 6, 1998.
The Company  believes  the  actions are without  merit and intends to defend the
cases vigorously. However, the ultimate resolution of these actions could have a
material  adverse  effect on the Company's  results of operations  and financial
condition.

Other

There are many legal uncertainties about employee relationships created by PEOs,
such as the extent of the PEO's  liability  for  violations  of  employment  and
discrimination  laws.  The Company may be subject to liability for violations of
these or other  laws even if it does not  participate  in such  violations.  The
Company's  standard form of client service  agreement  establish the contractual
division  of  responsibilities  between  the Company and its clients for various
personnel  management  matters,  including  compliance  with and liability under
various  governmental  regulations.  However,  because  the  Company  acts  as a
co-employer,  and in some instances  acts as sole  employer,  the Company may be
subject  to  liability  for  violations  of these or other  laws  despite  these
contractual  provisions and even if it does not participate in such  violations.
The  circumstances  in which the Company  acts as sole  employer  may expose the
Company to increased risk of such  liabilities  for an employees'  actions.  The
Company has been sued in actions  alleging  responsibility  for employee actions
(which it considers to be incidental to its  business).  Although it believes it
has meritorious  defenses,  and maintains insurance (and requires its clients to
maintain  insurance)  covering  certain  of such  liabilities,  there  can be no
assurances  that the  Company  will not be found to be liable for damages in any
such suit, or that such liability would not have a materially  adverse effect on
the Company.  Although the client generally is required to indemnify the Company
for any liability attributable to the conduct of the client, the Company may not
be able to collect on such a contractual  indemnification  claim and thus may be
responsible  for  satisfying  such  liabilities.  In addition,  employees of the
client  may be deemed to be agents of the  Company,  subjecting  the  Company to
liability for the actions of such employees.

The Company was named as a defendant in an action filed by Ladenburg  Thalmann &
Co., Inc. in the United States  District Court,  Southern  District of New York,
No.  97-CIV-4685  (TPG),  in May 1997 alleging  breach of contract under certain
stock  warrants.  The  plaintiff  seeks  damages of at least $2.5  million.  The
Company  believes  the  action is without  merit and  intends to defend the case
vigorously.

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

No matters were  submitted to a vote of the  Company's  shareholders  during the
fourth quarter of 1997.
                                                                              16
<PAGE>
ITEM 4A. - EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------

The names of the Company's  executive  officers,  and certain  information about
them, are set forth below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                                                     Officer/Director
Name                                Age        Position(s) with Company                                         Since
-----------------------             ---        -----------------------------------------------------            -----

<S>                                 <C>        <C>                                                              <C>
Marvin D. Brody                     54         Chairman of the Board, President,                                1993
                                               Chief Executive Officer and Director

Roy A. Flegenheimer                 50         Chief Operating Officer                                          1993

Morris C. Aaron                     33         Chief Financial Officer and Treasurer                            1996

Paul M. Gales                       42         Senior Vice President, General Counsel and Secretary             1996

Mark J. Gambill                     38         Senior Vice President Sales and Marketing                        1997


--------------------------------------------------------------------------------------------------------------------
</TABLE>

Marvin D. Brody  co-founded  the Company in 1991.  He has been a Director of the
Company since 1993 and became the Company's Chief Executive  Officer in November
1994 and President in June 1996. Prior to becoming the Company's Chief Executive
Officer, Mr. Brody was engaged in the private practice of law since 1973.

Roy A.  Flegenheimer  has been the Chief Operating  Officer of the Company since
July 12, 1995. Mr. Flegenheimer was the Company's Treasurer from June 1994 until
November  1996.  Mr.  Flegenheimer  joined the Company as its Vice  President of
Finance in February  1993 and was Chief  Financial  Officer from June 1994 until
January 1996 and the Company's  Secretary  from December 1995 to July 1997. From
1988 until 1993, he was Executive Vice President and Chief Financial  Officer of
Avesis  Incorporated,  a publicly  held  marketer and  administrator  of dental,
vision and hearing benefit plans. From 1980 until 1988, Mr.  Flegenheimer was an
audit partner in the accounting firm of Arthur Andersen LLP.

Morris C. Aaron  joined the  Company as its Chief  Financial  Officer in January
1996, and became its Treasurer in November 1996.  From September 1986 to January
1996,  Mr.  Aaron  served in various  professional  positions  in the  Financial
Consulting Services Group of Arthur Andersen LLP.

Paul M. Gales joined the Company as its Vice  President  and General  Counsel in
October 1996 and has been the Company's Secretary since July 1997. Mr. Gales was
a partner at Quarles & Brady, Phoenix,  Arizona from 1992 to 1996. Prior to that
time, he practiced as an attorney since 1982.

Mark J. Gambill  joined the Company as its Vice  President of Marketing in March
1997,  and was named  Senior Vice  President - Sales and  Marketing  in December
1997.  From 1994 to 1997,  Mr.  Gambill was  Director of National  Accounts  and
Strategic Alliances for Paychex,  Inc., a payroll processing  company.  Prior to
that time,  Mr. Gambill was a senior manager in sales and marketing for Ceridian
Corporation, a payroll processing and human resources company.

The  Company  has  announced  that it intends to hire a new  President,  and has
commenced an executive search to identify qualified  candidates.  It is expected
that the person identified will assume significant operational  responsibilities
for the Company, although the exact nature of those responsibilities will likely
depend upon the experience and  qualifications of the person  identified.  There
can be no assurance as to when, or if, a qualified candidate will be identified,
or the  conditions  under which the Company will be able to obtain that person's
services.
                                                                              17
<PAGE>
                                     PART II

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

The Company's Common Stock began trading on the NASDAQ National Market under the
symbol "ESOL" in January 1996. Previously,  the Company's Common Stock traded on
the NASDAQ  Smallcap  Market under the symbol "ESOL" from August 1993 to January
1996.

The following table sets forth for the quarters  indicated the range of high and
low  sales  prices of the  Company's  Common  Stock as  reported  by the  NASDAQ
National  Market since January  1996. As of March 25, 1998,  the Company had 230
shareholders of record and over 15,000 beneficial holders.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                Quarter Ended                                           High                   Low
       ----------------------                                     ----------            ----------
       <S>                                                        <C>                   <C>
       December 31, 1997                                          $ 7 15/16             $ 4  1/16
       September 30, 1997                                         $ 6  1/8              $ 5
       June 30, 1997                                              $ 7  3/8              $ 3 15/16
       March 31, 1997                                             $28  3/8              $ 5  5/8
       December 31, 1996                                          $24  5/8              $16  5/8
       September 30, 1996                                         $18  7/8              $12  7/8
       June 30, 1996                                              $21  5/8              $12  1/4
       March 31, 1996                                             $19                   $ 7  1/4

--------------------------------------------------------------------------------------------------------------------
</TABLE>

Dividend Policy

The Company  has never paid cash  dividends  on its Common  Stock and intends to
retain earnings, if any, for use in the operation and expansion of its business.
The Company's  revolving line of credit,  and the Indenture  relating to its 10%
Senior  Notes due 2004 (the  "Notes"),  limit the  payment of  dividends  by the
Company. The amount of future dividends, if any, will be determined by the Board
of Directors based upon the Company's  earnings,  financial  condition,  capital
requirements and other conditions.

Miscellaneous

The Company has issued securities in private placement  transactions pursuant to
Section 4(2) of the  Securities Act of 1933 (the "1933 Act") as described in the
following paragraphs.

As part of the September 1997  acquisition of Phoenix Capital  Management,  Inc.
and several related PEO companies  designated as "ERC," as previously  reported,
the Company  issued  752,587  restricted  unregistered  shares of the  Company's
Common Stock to one individual, who owned the acquired companies.  Additionally,
the Company  agreed to issue  additional  restricted  shares,  if earned,  to be
determined based upon ERC earnings after the acquisition. The shares were valued
at the average  closing price on the NASDAQ  National Market for a 30-day period
tied to closing, less a 35% discount for lack of marketability.

In an  October  1997  institutional  placement  pursuant  to Rule 144A under the
Securities Act of 1933, as previously  reported,  the Company issued $85 million
of Notes for cash.
                                                                              18
<PAGE>
ITEM 6. - SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------

The following selected consolidated financial data should be read in conjunction
with the Company's  Consolidated Financial Statements and the Notes thereto, and
"Item 7 -  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations"  appearing  elsewhere herein.  The selected  consolidated
financial data presented below as of December 31, 1997,  1996, 1995 and 1994 and
for the years then ended are derived from the consolidated  financial statements
of the Company,  which  consolidated  financial  statements have been audited by
Arthur Andersen LLP, independent public accountants.  The selected  consolidated
financial  data  presented  below as of December  31, 1993 and for the year then
ended are derived from the  consolidated  financial  statements  of the Company,
which  consolidated  financial  statements have been audited by Semple & Cooper,
P.L.C.,  independent public accountants.  Except for 1994 and 1993, the earnings
per share  amounts  for all prior years have been  restated to conform  with the
presentation  requirements  of Statement of Financial  Accounting  Standards No.
128, "Earnings per Share". Management does not believe the impact of restatement
for 1994 and 1993 would be material.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                                   Years Ended December 31,
                                          -----------------------------------------------------------------
(In thousands of dollars)                        1997         1996          1995         1994         1993
                                          -----------  -----------   -----------  -----------  -----------

Consolidated Statements of Earnings Data:
<S>                                       <C>          <C>           <C>          <C>          <C>
Revenues                                  $   933,817  $   439,016   $   164,455  $    74,334  $    48,571

Cost of revenues                              903,255      400,862       150,675       71,068       46,501

Gross profit                                   30,562       38,154        13,780        3,266        2,070

Selling, general and
 administrative expenses                       33,411       17,310         7,183        2,297        1,471

Depreciation & amortization                     4,617        2,073           426          269          128

Income (loss) from operations                  (7,466)      18,771         6,171          700          471

Non-operating income (expense), net            (3,849)        (364)          510          129         (263)

Income before provision for taxes             (11,315)      18,407         6,681          829          208

Income tax provision (benefit)                 (2,819)       6,381         2,846          450           98

Net income (loss)                              (8,496)      12,026         3,835          379          110

--------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                              19
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                 As of and for the Years Ended December 31,
                                          -----------------------------------------------------------------
(In thousands, except per share data)            1997         1996          1995         1994         1993
                                          -----------  -----------   -----------  -----------  -----------

Consolidated Balance Sheet Data:
<S>                                       <C>          <C>           <C>          <C>          <C>
Working capital (deficit)                 $    58,329  $    30,449   $     8,589  $     2,394  $       (36)

Total assets                                  207,217      125,969        36,840        9,310        6,399

Long-term debt                                 85,000       42,800            --           --           --

Stockholders' equity                           42,389       46,507        19,943        6,401        3,451

Common Stock Data

Earnings (loss) per share

         Basic                                  (.27)          .40           .17          .02          .01
         Diluted                                (.27)          .37           .16          .02          .01

Weighted average common and
equivalent shares outstanding

         Basic                                 31,193       30,224        22,392       20,145       11,414

         Diluted                               31,193       32,168        23,507       20,145       15,716

Growth Percentages

Revenues                                         113%         167%          121%          53%         334%

Net income                                      (171)%        214%          912%         246%         129%

At period end:
         Worksite employees                    45,200       30,000        11,000        3,600        2,200
         Client companies                       1,700        1,200           920          450          250
         States with worksite employees            47           46            40           20           15

--------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                              20
<PAGE>
ITEM 7. -  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's  Consolidated  Financial Statements and the Notes
thereto  appearing  elsewhere  herein.  Historical  results are not  necessarily
indicative of trends in operating results for any future period.

Except for the historical  information  contained herein, the discussion in this
Form 10-K  contains or may contain  forward-looking  statements  (which  include
statements  in  the  future  tense,   statements   using  the  terms  "believe,"
"anticipate,"  "expect,"  "intend" or similar  terms and the  discussions  under
"1998  Outlook")  that involve risks and  uncertainties.  The  Company's  actual
results could differ  materially from those  discussed here.  Factors that could
cause or contribute to such differences  include,  but are not limited to, those
discussed herein particularly in "Outlook: Issues and Risks" below, and in "Item
1 -- Business," as well as those factors  discussed  elsewhere  herein or in any
document incorporated herein by reference.


Results of Operations -- Overview

The following is a summary of certain factors which affect results of operations
and which have generally applied to the Company in all periods presented.

Revenues

The most significant  components of the Company's revenues are payments received
from customers for gross  salaries and wages paid to PEO worksite  employees and
the  Company's   service  fee.  The  Company   negotiates   service  fees  on  a
client-by-client basis based on factors such as market conditions,  client needs
and services  requested,  the clients'  workers'  compensation  and benefit plan
experience,  Company  administrative  resources  required,  expected profit, and
other  factors.  These are  generally  expressed  as a fixed  percentage  of the
client's gross salaries and wages except for certain costs, primarily employer's
health  care  contributions,  which are billed to  clients  on an add-on  basis.
Because the service  fees are  negotiated  separately  with each client and vary
according to circumstances,  the Company's service fees, and therefore its gross
margin, will fluctuate based on the Company's client mix.

Revenues from stand-alone risk management/workers' compensation services consist
primarily of gross premiums charged to clients for such services.

Costs of Revenues

The  Company's  direct  costs of  revenues  include  salaries  and wages paid to
worksite  employees,  employment  related  taxes,  costs of health  and  welfare
benefit plans, and workers' compensation insurance costs.

The  largest  component  of  direct  costs is  salaries  and  wages to  worksite
employees.  Although this cost is generally  directly passed through to clients,
the Company may be responsible for payment of these costs even if not reimbursed
by its clients.

Employment  related  taxes  consist of the  employer's  portion of payroll taxes
required under FICA,  which includes Social  Security and Medicare;  and federal
and  state  unemployment  taxes.  The  federal  tax  rates  are  defined  by the
appropriate federal regulations.  State unemployment rates are subject to change
each year based on claims histories and vary from state to state.

Prior to January 1, 1998, workers'  compensation costs,  whether relating to PEO
worksite  employees  or  the  Company's  stand-alone  risk   management/workers'
compensation  program,  include the costs of claims up to the  retention  limits
relating to the Company's workers' compensation  program,  administrative costs,
premium taxes,  and excess  reinsurance and accidental  death and  dismemberment
insurance premiums. The Company retained workers' compensation liabilities up to
certain  specified  amounts under its pre 1998 workers'  compensation  insurance
agreements.  Accrued  workers'  compensation  claims  liability  is  based  upon
estimates of reported and  unreported  claims and the related  claims and claims
settlement  expenses in an amount equal to the retained  portion of the expected
total incurred claim. The Company's accrued workers'  compensation  reserves are
primarily  based on  industry-wide  data, and to a lesser extent,  the Company's
                                                                              21
<PAGE>
past claims experience up to the retained limits.  The liability recorded may be
more or less than the actual  amount of the claims when they are  submitted  and
paid.  Changes in the  liability  are charged or credited to  operations  as the
estimates are revised.  Administrative  costs include fees paid to the Company's
insurers and costs of claims management by third party  administrators.  Premium
taxes  include  taxes and related fees paid to various  states based on premiums
written.  Premium for excess  reinsurance and accidental death and dismemberment
relate to premium payments to the Company's  insurers for the retention of risks
above specified limits.

In periods from and after January 1, 1998, workers' compensation liabilities are
fully  insured  under a guaranteed  cost policy,  subject to limited  exceptions
described  below.  Accordingly,  workers'  compensation  expense  would  include
premiums  paid to the  Company's  third party  insurance  carriers  for workers'
compensation  insurance.  Workers'  compensation  expense  during 1998 also will
include  the cost of a defined  portfolio  of  stand-alone  policies in place at
December 31, 1997 which  policies  expire at various dates during 1998 and as to
which the Company  retains  liability  of $250,000 per  occurrence  plus fees as
described above; and costs under the Company's  self-insurance  program in Ohio,
with respect to which the Company  retains  liability of $50,000 per  occurrence
with an aggregate liability  limitation based on a percentage of the Ohio manual
premium.

Health  care and other  employee  benefits  costs  consist of medical and dental
insurance  premiums,  payments of and reserves for claims subject to deductibles
and the costs of vision  care,  disability,  life  insurance  and other  similar
benefit plans.  The Company's  health care benefit plans consist of a mixture of
fully-insured programs and partially self-insured programs with specific and, in
one program,  aggregate stop-loss insurance.  The Company recognizes a liability
for  partially  self-insured  health  insurance  claims  at the  time a claim is
reported  to the  Company  by the third  party  claims  administrator,  and also
provides for claims incurred,  but not reported based on industry-wide  data and
the Company's past claims experience. The liability recorded may be more or less
than the actual amount of ultimate  claims.  While the Company believes that its
reserves for healthcare and workers' compensation claims are adequate for future
claims payments, there can be no assurance that this will be the case.
See "Outlook: Issues and Risks" herein.

Selling, General and Administrative Expenses

The Company's primary operating expenses are personnel  expenses,  other general
and  administrative  expenses,  and  sales  and  marketing  expenses.  Personnel
expenses  include  compensation,  fringe benefits and other  personnel  expenses
related to the Company's  internal  employees.  Other general and administrative
expenses include rent, office supplies and expenses,  legal and accounting fees,
bad debt expenses,  insurance and other operating expenses.  Sales and marketing
expenses include commissions to sales personnel and related expenses.

Depreciation and Amortization

Depreciation and amortization consists primarily of the amortization of goodwill
and  acquisition  costs  from the  Company's  prior  acquisitions.  The  Company
amortizes  goodwill and acquisition costs over periods of three to thirty years,
depending on the assets acquired,  using the straight-line method.  Acquisitions
generally  result in considerable  goodwill  because PEOs generally  require few
fixed assets to conduct their operations.

Acquisitions

Period-to-period  comparisons are substantially affected by the Company's recent
substantial  growth  through   acquisition  of  other  companies  providing  PEO
services.  The Company has accounted for its  acquisitions  using the "purchase"
method of  accounting,  whereby  the  results  of such  acquired  companies  are
reflected in the Company's financial  statements  prospectively from the date of
acquisition. In addition to increasing revenues, acquisition activity can affect
gross profits and margins because the industry mix of the acquired companies may
differ from that of the Company.  Further during the transition  period after an
acquisition the Company may act to implement  pricing changes where  appropriate
and to eliminate  client  relationships  which do not meet the Company's risk or
profitability  profiles.  Acquisition  activity  historically  has increased the
Company's workers' compensation expense, primarily by accelerating the Company's
overall  growth rate and  accelerating  its  exposure  in  specific  higher-risk
segments,  such as  transportation.  The Company also seeks to eliminate certain
general and administrative costs of acquired companies although such results may
not be achieved.

Company PEO  acquisitions  which have affected  recent periods have included the
following:  Hazar, Inc. and affiliates  ("Hazar") in October 1995; TEAM Services
in  June  1996;  Leaseway  Personnel  Corporation  and  Leaseway  Administrative
Personnel, Inc.
                                                                              22
<PAGE>
(collectively,  "Leaseway") in August 1996; the McClary-Trapp group of companies
("McClary-Trapp")  in November 1996;  ETIC  Corporation  d/b/a  Employers  Trust
("ETIC") in February 1997; CMGR Inc. and Humasys, Inc. (collectively, "CMGR") in
February 1997; and four related PEO companies referred to as "Employee Resources
Corporation" (collectively,  "ERC") in September 1997. In addition, in September
1997, the Company  acquired  Phoenix Capital  Management,  Inc.  ("PCM"),  a PEO
service provider.

Operating Results

Margin  comparisons  are  affected  by  the  relative  mix of  stand-alone  risk
management/workers'  compensation  services,  full PEO  services,  TEAM Services
services,  and driver  leasing  services  acquired in the  Leaseway  acquisition
("LPC") in any particular period.

Certain  employment-related  taxes  are  based  on the  cumulative  earnings  of
individual  employees up to a specified  wage level.  Therefore,  these expenses
tend to decline over the course of a year.  Since the Company's  revenues for an
individual  client are generally  earned and collected at a relatively  constant
rate  throughout  each  year,  payment  of  such  unemployment  tax  obligations
positively impacts on the Company's working capital and results of operations as
the year progresses.  Also,  fourth quarter revenues are typically  increased by
year-end  bonuses and  distributions  paid to worksite  employees,  historically
resulting in little to no revenue growth from fourth to first quarter (excluding
acquisitions).  In addition,  the Company's  first  quarter  revenues tend to be
adversely  affected  by  decreased  activity  by various  of its  transportation
clients due to seasonal factors.

Results of  Operations--Year  Ended  December  31,  1997  Compared to Year Ended
December 31, 1996
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                               Percent
(In thousands)                                                1997              Change                1996
                                                     -------------       -------------       -------------

<S>                                                  <C>                           <C>       <C>
Revenues                                             $     933,817                 113%      $     439,016

Cost of revenues                                           903,255                 125             400,862

Gross profit                                                30,562                 (20)             38,154

Selling, general and administrative                         33,411                  93              17,310

Depreciation and amortization                                4,617                 123               2,073

Interest income                                              1,303                  56                 833

Interest expense                                             5,102                 327               1,196

Net (loss) income                                           (8,496)               (171)             12,026


--------------------------------------------------------------------------------------------------------------------
</TABLE>

Revenues

Revenues  increased to $933.8  million for the year ended December 31, 1997 from
$439.0  million  for the year ended  December  31,  1996,  an  increase of 113%.
Acquisitions,  and the addition of US Xpress, Inc. and affiliates (US Xpress) as
a PEO client,  primarily  accounted  for the  increase  in revenues  between the
periods.  Growth was in part offset by factors  such as attrition of clients and
competitive  pressures  in the PEO and  workers'  compensation  industries.  The
number  of  worksite  employees  increased  to  approximately   45,200  covering
approximately  1,700 client  companies  at December 31, 1997 from  approximately
30,000 covering 1,200 client companies at December 31, 1996.

Revenues related to stand-alone risk  management/workers'  compensation services
were  $10.3  million  for the year  ended  December  31,  1997  (which  included
non-recurring  revenue of  approximately  $1.0  million  related to  stand-alone
workers'  compensation  premiums that were
                                                                              23
<PAGE>
under-billed  for policies  written in the previous year) compared with revenues
of  $16.1  million  for the  year  ended  December  31,  1996.  The  decline  in
stand-alone  revenues primarily is attributable to increased  competition in the
workers'  compensation  market.  Stand-alone  revenues in 1997 and 1996  include
significant  amounts from a former client with which  disputes have arisen.  The
Company has initiated litigation against the former client seeking,  among other
remedies,  collection of a receivable for unpaid premium of  approximately  $2.9
million.  While the Company  believes  that it will  prevail in the  litigation,
there can be no  assurance  that this  will be the case and an  adverse  outcome
could result in the write-off of all or a substantial portion of the receivable.
The Company does not intend to actively market its  stand-alone  program in 1998
because it has  determined  to  emphasize  other PEO  marketing  strategies  and
because of the decreased  profit  opportunities  resulting from increased  price
competition in the overall workers'  compensation  market.  The decision also is
based on the terms of the Company's  guaranteed  cost  program,  which limit the
Company's profit potential on stand-alone cases written after January 1, 1998 to
commission revenue. See "Liquidity and Capital Resources."

Cost of revenues

Cost of revenues  increased  125%, to $903.3  million in the year ended December
31, 1997 from $400.9 million for the year ended December 31, 1996. This increase
is  primarily  due to the  increase  in the  Company's  business  as  previously
described and as described below.

Workers'  compensation  expense for the year ended  December  31, 1997 was $30.4
million  compared to $10.0 million in the prior year. The increase  primarily is
due to the rapid growth in the Company's overall  business,  as discussed above,
accelerated by acquisition  activity and the addition of US Xpress, all of which
have increased  exposure in higher-risk  market segments such as transportation.
The increase is also due to an  unexpected  and  significant  increase in claims
activity, particularly in the fourth quarter of 1997, including loss development
on prior period claims.  This increase led in turn to a significant  increase in
the Company's workers'  compensation reserves as established via the independent
actuarial  review upon which the Company's  workers'  compensation  reserves are
based (see discussion below). In light of the unanticipated increased claims and
reserve requirements,  and taking into account prior unanticipated  increases in
actuarial reserve requirements (in particular,  an unanticipated  increase taken
at December  31,  1996),  the Company has  implemented  a change in its business
strategy  whereby the Company seeks to minimize  future  uncertainty  associated
with its  worker's  compensation  expense.  The change in  strategy  is based on
competitive market conditions which provide an opportunity to obtain third-party
insurance at a favorable cost and which limit  opportunities  for the Company to
profit from risk  retention  and the changing  profile of its worksite  employee
base.  Consistent  with  this  strategy,  the  Company  increased  its  workers'
compensation  reserves  at  December  31,  1997  approximately  $6.0  million to
establish  its  reserves  at a level  intended to  eliminate  any risk of future
workers' compensation loss development expense related to pre-1998 occurrences.

Consistent with Company policy,  the Company  commissioned an independent  third
party actuarial review of the Company's workers'  compensation  reserves at year
end  1997,  as it had in 1996 and  1995.  The  Company's  workers'  compensation
reserves at December 31, 1997 are based on a review by that independent actuary,
which was the same  actuary that  provided  the report upon which the  Company's
December 31, 1996 reserves were based. The Company consistently  established its
workers'  compensation  reserves on a quarterly  basis  throughout 1997 based on
reviews  by that same  independent  actuary.  The  actuary  relied  on  industry
standards,  while taking into account the Company's  specific risk structure and
philosophy, in determining its findings.

As part of the  Company's  change in business  strategy,  the  Company  obtained
fully-insured  guaranteed cost workers'  compensation coverage effective January
1,  1998,   thereby   eliminating  the  Company's  risk  retention  on  workers'
compensation  claims  arising after that date except for costs  associated  with
certain  stand-alone  cases  and Ohio  claims.  Consistent  with the  change  in
business  strategy,  the Company also is pursuing  aggressively a loss portfolio
transfer  for pre-1998  claims  although  there can be no assurance  that such a
transaction can be completed on satisfactory terms.

The Company  believes that the  transition to a guaranteed  cost program and the
increase in reserves at December 31, 1997 will reduce the uncertainty associated
with quarterly workers'  compensation costs while providing a cost structure for
1998 which compares  favorably with historical  costs. The Company also believes
that its workers'  compensation  reserves have been established at a level which
is consistent with its change in business  strategy  described above  (including
expense  associated  with a loss  portfolio  transfer  should such a transfer be
completed),  though  there  can be no  assurance  that  this  is the  case.  See
"Outlook:  Issues  and  Risks -  Adequacy  of Loss  Reserves-  Loss  and  Claims
Experience."

The following table provides an analysis of the Company's workers'  compensation
reserves  associated  with its partially  self-insured  programs for the periods
presented.  Effective  July 1, 1997,  and  included  in the 1997  reserve,  is a
provision for losses and payments for self insurance programs in Ohio.
                                                                              24
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
(In thousands)                                                1997                1996                1995
                                                     -------------       -------------       -------------
<S>                                                 <C>                  <C>                 <C>
Reserve - Beginning of period                       $        5,154       $       1,052       $          45

Losses                                                      30,407              10,034               2,230

Payments                                                   (14,043)             (5,932)             (1,223)
                                                     -------------       -------------       -------------

Reserve - End of period                             $       21,518       $       5,154       $       1,052
                                                    ==============       =============       =============

End of Period

Worksite employees                                          45,200              30,000              11,000

Stand-alone employees                                       11,100              13,500               3,500
                                                     -------------       -------------       -------------
Total employees                                             56,300              43,500              14,500
                                                    ==============       =============       =============
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Gross profit

The Company's gross profit margin decreased from 8.7% in the year ended December
31,  1996 to 3.3% in the  year  ended  December  31,  1997.  This  decrease  was
attributable to several factors  including higher workers'  compensation  costs,
the impact of repricing existing clients due to competitive  factors,  and lower
margins on new business.  The proportion of TEAM Services  revenues,  which have
lower margins,  increased during 1997. In addition,  while a significant portion
of the  Company's  total 1997 revenue was derived  from US Xpress,  as discussed
previously,  the gross profit on that revenue was  negligible for the year ended
December 31, 1997. The Company generally has earned a higher gross profit margin
on revenues derived from its stand-alone risk  management/workers'  compensation
services than on revenues derived from the Company's  full-service PEO business,
as PEO revenues  generally include  significant (and  substantially  offsetting)
revenue and expense items for payroll and payroll-related costs for the worksite
employees.  Stand-alone revenues represented a significantly  smaller percentage
of 1997 revenues as compared to prior periods, thereby reducing margin.

Selling, general and administrative

Selling,  general and  administrative  expenses for the year ended  December 31,
1997 increased by  approximately  $16.1 million to $33.4  million,  or 93%, from
$17.3 million for the year ended December 31, 1996. Factors  contributing to the
increase in selling,  general and administrative  expenses in 1997 over 1996 are
the inclusion of the  operations of various  acquisitions,  an increase from 216
corporate  employees  at  December  31, 1996 to 332 at December  31,  1997,  the
relocation of the  Company's  office space to a larger  facility to  accommodate
growth,  increased bad debt expense and increased professional services fees due
in part to litigation commenced against the Company in early 1997. These factors
which  caused  increases  in selling,  general and  administrative  expense were
partially  mitigated  by improved  systems  utilization  and  economies of scale
achieved  within the Company's  operations.  The Company's  insurance costs have
increased due primarily to the Company's growth.  Commission  expenses increased
in the year ended  December 31, 1997 compared to the same periods in 1996 due to
the increase in revenues  discussed above.  Selling,  general and administrative
expenses are expected to continue to increase to meet the needs of new business,
though the Company has initiated efforts to improve  efficiencies.  As discussed
under "1998 Outlook," below, the Company anticipates that it will incur costs in
connection  with the  expansion  of its sales force and the  addition of account
executives during 1998.

Depreciation and amortization

Depreciation and amortization  represents depreciation of property and equipment
and amortization of organizational costs,  customer lists and goodwill.  For the
year ended December 31, 1997, depreciation and amortization expense totaled $4.6
million  compared to $2.1  million for the year ended  December  31,  1996.  The
increase was due primarily to depreciation of communication and computer systems
and  goodwill  amortization  resulting  from  acquisitions,  with  Leaseway  and
McClary-Trapp  in 1996 and ETIC and  CMGR in 1997  being  the most  significant.
Goodwill  amortization  of these  acquisitions  was recognized  from the date of
acquisition. See "Liquidity and Capital Resources" below regarding the Company's
issuance of $85 million in 10% Senior Notes due 2004,  in  particular  as to the
approximately $3.3 million in offering expenses which will be amortized over the
term of the Notes.

Interest

Interest  expense for the year ended  December  31, 1997  totaled  $5.1  million
compared to $1.2 million for the year ended  December 31, 1996.  The increase in
interest  expense is primarily due to increased  borrowings.  For the year ended
December 31, 1997 interest income totaled $1.3 million  compared to $833,000 for
the year ended December 31, 1996.  The increase in interest  income is primarily
due to interest earned on both the restricted cash and investments  held for the
future  payment of workers'  compensation  claims at the Company's  wholly owned
insurance subsidiary, Camelback and cash held at the corporate level.
                                                                              25
<PAGE>
On October  21,  1997,  the  Company  issued  $85  million of Notes in a private
placement  transaction.  The  increase  in  borrowings  pursuant to the Notes as
compared to prior borrowings under the revolving credit facility can be expected
to increase  interest  expense in future  periods.  See  "Liquidity  and Capital
Resources" below.

Effective tax rate

The Company's  effective  tax rate provides for federal,  state and local income
taxes. The effective tax rate for the year ended December 31, 1997 was a benefit
of 25% as compared to a provision of 34.7% for the year ended December 31, 1996.
The tax rate used in each quarterly  reporting  period generally was an estimate
of the  Company's  effective  tax  rate  for  the  calendar  year.  The  Company
recognized a tax benefit in 1997 as a result of its loss. The effective tax rate
for  1997  and  1996  reflects  the  operations  of the  Company's  wholly-owned
subsidiary,  Camelback,  which pays state  premium tax rather than state  income
tax.  Although  the  Company  believes  that  it has  structured  its  Camelback
arrangements  to qualify for such tax treatment,  any  disallowance  of this tax
treatment could  materially  affect the Company's  results of operations for the
current  fiscal year and future fiscal years.  The Company's  effective tax rate
will vary from time to time  depending  primarily on the mix of profits  derived
from the Company's various profit centers,  the magnitude of nondeductible items
relative to overall  profitability  and other factors.  The Company's  estimated
effective  tax rate for financial  reporting  purposes for 1997 is also based on
estimates of the following  items that are not deductible  for tax  purposes:(a)
amortization  of certain  goodwill,  and (b) one-half of the per diem  allowance
relating  to meals  paid to truck  drivers  under a Company  sponsored  program.
Additional  factors which may impact the Company's future operations and results
are discussed below under "Outlook: Issues and Risks."

1998 Outlook

The Company  firmly  established  itself as one of the  country's  leading  PEOs
following rapid internal growth and the completion of numerous acquisitions from
1995 through 1997.  Beginning in late 1996,  the Company began to experience the
effects  of  increased  competition  and a  general  weakening  in the  workers'
compensation and employee benefits markets,  which developments have reduced the
Company's  operating  margins.  These  factors  also have  slowed the  Company's
internally-generated  revenue  growth,  though  overall  revenues  continued  to
increase  rapidly during this period due to acquisitions  and the addition of US
Xpress as a client.  Due primarily to reduced  internally-generated  growth, the
absence of new  acquisition  activity and seasonal  client turnover at year-end,
the total number of worksite  employees  has been  relatively  flat from October
1997 through February 1998.

In view of these  developments,  the Company has developed  and is  implementing
specific  action plans intended to leverage the Company's  extensive  nationwide
platform  and  core  PEO  strengths  and  take  advantage  of  the   significant
opportunities  available  in the rapidly  growing PEO  marketplace.  The primary
plans are summarized below.

As  discussed  above,  in October  1997,  the Company  completed  an $85 million
offering of its 10% Senior Notes due 2004.  This  transaction has resulted in an
enhanced  financial  foundation  for the Company,  including cash and marketable
securities of approximately $40.1 million at December 31, 1997.

In recent months, the Company consolidated its sales management functions at its
Phoenix headquarters under new leadership.  Programs have been initiated to spur
internal  sales  growth by  increasing  the size of the  Company's  sales force,
including  the  addition  of   employee-salespersons  to  the  current  base  of
independent  sales  agents,  and by the  planned  entry into new markets via the
acquisition of local PEOs or the  establishment  of new sales offices.  Further,
the  Company  has  initiated  programs  intended  to improve  client  retention,
including the addition of account  executives at key  locations  throughout  the
country during 1998 with specific client service and retention responsibilties.
                                                                              26
<PAGE>
The Company has taken  specific  steps to position  itself to manage  costs more
effectively and improve overall operating efficiencies.  Effective January 1998,
the Company has  completed  the  transition  of all PEO  processing to a unified
software platform and a centralized  client server at its Phoenix  headquarters,
which is expected to improve  consistency  and efficiency  while  simultaneously
affording  better local client  service.  In April 1998, the Company  expects to
complete the installation of a new  Company-wide  accounting  software  package,
which will improve significantly the quality and detail of information available
to management while simultaneously  speeding its delivery.  The Company has also
retained a team of  independent  consultants  who are  charged  with  developing
detailed  recommendations  to improve  the  Company's  internal  structures  and
processes  at corporate  headquarters  and  throughout  the  Company's  regional
offices.   The  Company  has  consolidated   certain  facilities   obtained  via
acquisitions.  The Company  expects to gain  greater  control  over its workers'
compensation costs via the transition to fully-insured, guaranteed cost coverage
from third-party insurers effective January 1, 1998.

The Company also is taking specific  actions to focus its resources more tightly
on its core PEO competencies. All existing programs are under careful review. As
a result of this  review,  the Company  already has  determined  to  discontinue
altogether  writing new stand-alone  workers'  compensation  cases effective May
1998,  primarily  due to the  desire to focus  corporate  resources  on core PEO
activities,   increased   competition  and  the  reduced  profit   potential  on
stand-alone cases under the Company's new guaranteed cost workers'  compensation
arrangements.

The  Company  has taken  specific  actions  to  improve  the depth of its senior
management  team in  light  of  recent  rapid  growth.  As  noted  above,  sales
management  has been  consolidated  at the Company's  Phoenix  headquarters  and
significant  additions have been made to the sales  management team. The Company
recently  announced  the  addition of two  independent  directors to improve the
quality of the strategic  direction and assistance  provided at the Board level.
The Company also has  announced  the  retention  of an executive  search firm to
identify  candidates  for the  position of corporate  President,  and intends to
retain an individual who will bring to the position  proven  operational  skills
and the highest  possible  leadership  potential.  The Company will  continue to
evaluate and act upon management needs.

The  Company  also is pursuing  diligently  the  transfer  of pre-1998  workers'
compensation   claims   pursuant  to  a  loss  portfolio   transfer  or  similar
transaction.  The Company  believes that such a transaction  can be accomplished
without a charge to  earnings in future  periods  based on the level of workers'
compensation  reserves at December 31,  1997,  and further  believes  that funds
currently held as restricted cash will be sufficient to fund the transfer.

As  discussed  above,  the  Company  believes  that  it  has  identified  and is
implementing  appropriate  specific  actions  which,  over time,  will result in
significant revenue and margin enhancement and overall  operational  improvement
from the extensive  national PEO platform which has been  successfully  built in
prior years.  However,  the Company also  anticipates that many of these actions
will require a period of time to  implement  properly,  and further  anticipates
that the  benefits  of these  actions  will be realized  incrementally  over the
course of 1998 and beyond.  In addition,  certain costs will be incurred  before
results can be achieved or evaluated.

Factors  which could affect the Company's  intended  results  include  delays in
implementing  sales  force  or  systems  improvements,   increased  competition,
unfavorable regulatory developments,  general market acceptance of the Company's
PEO services,  cancellation or renegotiation of contracts, failure to conclude a
loss portfolio  transfer or similar  transaction,  increases in the  anticipated
pricing or  changes  in the  anticipated  terms of a loss  portfolio  or similar
transaction,  failure  to  conclude  acquisition  transactions  or  successfully
integrate  completed  acquisitions,   fluctuations  in  margins,  the  financial
condition of the Company's  clients,  demand  fluctuations,  and other risks set
forth  herein.  The  Company  therefore  further  cautions  that there can be no
assurance of the success of any or all of the specific actions described above.
                                                                              27
<PAGE>
Results of  Operations--Year  Ended  December  31,  1996  Compared to Year Ended
December 31, 1995
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------

                                                                               Percent
(In thousands)                                                1996              Change                1995
                                                     -------------       -------------       -------------
<S>                                                  <C>                           <C>       <C>
Revenues                                             $     439,016                 167%      $     164,455

Cost of revenues                                           400,862                 166             150,675

Gross profit                                                38,154                 177              13,780

Selling, general and administrative                         17,310                 141               7,183

Depreciation and amortization                                2,073                 387                 426

Interest income                                                833                 181                 296

Interest expense                                             1,196               4,684                  25

Net income                                                  12,026                 214               3,835


--------------------------------------------------------------------------------------------------------------------
</TABLE>

Net income for the year ended December 31, 1996, was $12.0 million,  or $.37 per
diluted  share,  reflecting  significant  growth  from  1995 net  income of $3.8
million,  or $.14 per diluted  share.  Revenues  of $439.0  million for the year
ended  December 31, 1996,  were 167% higher than 1995. The growth was the result
of  integration  of  several  acquisitions;  the  growth in the  Company's  risk
management/workers'   compensation  program;  direct  PEO  sales  and  marketing
efforts; and the efficient administration of existing business.

Revenues

Revenues  increased from $164.5 million for the year ended December 31, 1995, to
$439.0  million for the year ended  December  31,  1996,  a 167%  increase.  The
increase in revenues was partially due to sales from the Company's  expanded PEO
sales  force.  Acquisitions  accounted  for a  significant  increase in revenues
between  the  periods.   The  number  of  worksite   employees   increased  from
approximately  11,000 at December 31, 1995, to approximately  30,000 at December
31,  1996.  In 1995,  the Company  commenced  placing  risk  management/workers'
compensation  services to clients which are not  full-service PEO clients of the
Company. As of December 31, 1996, the Company provided risk  management/workers'
compensation  services to  approximately  13,500 workers as compared to 3,500 at
December  31,  1995.  Revenues  related to stand alone risk  management/workers'
compensation were $16.1 million in 1996 compared with $3.6 million for 1995.

Cost of Revenues

Cost of revenues  increased 166% from $150.7 million for the year ended December
31, 1995, to $400.9 million in the year ended  December 31, 1996.  This increase
is primarily due to the increase in the  Company's  business as explained in the
section above and in increased workers' compensation expense.

Workers' compensation expenses increased  approximately 355% to $10.0 million in
1996 from $2.2 million in 1995, due primarily to the increase in earned premiums
on the stand-alone risk  management/workers'  compensation program and growth in
the  core  PEO  business,  including  acquisitions.  See  discussion  of cost of
revenues under "Results of Operations - Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996" for further information.
                                                                              28
<PAGE>
Gross Profit

The Company's gross profit margin increased from 8.4% in the year ended December
31, 1995 to 8.7% in the year ended  December 31, 1996.  This increase  primarily
was  attributable  to  the  Company's   stand-alone   risk   management/workers'
compensation  program  which was in place for the full year ended  December  31,
1996,  versus  only  eight  months  in 1995.  The  eight-month  period  included
approximately   5,600  Hazar  employees  who  were  provided   stand-alone  risk
management/workers'  compensation from May 1995 through September 1995, when the
Hazar assets became  included in the Company's PEO business upon the acquisition
of certain Hazar assets by the Company.

The Company  also  received the  benefits of reduced  administrative  costs with
Camelback for the entire year ended  December 31, 1996 as compared with the same
period in 1995 which only included seven months of benefit because Camelback was
not  operative  until June 1995.  The Company also has  increased  the number of
claims managers to 37 at December 31, 1996 compared to 7 at December 31, 1995.

Selling, General and Administrative

Selling,  general and administrative expenses increased by $10.1 million or 141%
from $7.2 million for the year ended  December 31, 1995 to $17.3 million for the
year ended December 31, 1996. As a percent of gross profit, selling, general and
administrative expenses decreased from 52% to 45% during the year ended December
31,  1995 and  1996,  respectively.  Factors  contributing  to the  increase  in
selling,  general  and  administrative  expenses  in  1996  over  1995  are  the
integration of the operations of various acquisitions including an increase from
60  corporate  employees  at  December  31, 1995 to 216 at  December  31,  1996,
resulting in a significant increase in personnel costs, and the expansion of the
Company's  office  space.  Additionally,  the  Company's  results  for the  year
reflected  six months of expenses  for TEAM  Services and five months of expense
for Leaseway,  both recent  acquisitions  which  historically  have maintained a
higher ratio of selling, general and administrative expense to gross profit than
the  Company.  These  factors  which caused  increases  in selling,  general and
administrative  expense were partially mitigated by improved systems utilization
and  economies of scale  achieved  within the  Company's  operations,  including
consolidation  of certain  acquired  companies'  administration.  The  Company's
general  liability  insurance  costs  have  increased  due in part to the  added
corporate  staff and increased  costs for  directors'  and  officers'  liability
insurance.  Commission  expenses  increased in the year ended  December 31, 1996
compared to 1995 due to the increase in revenues discussed above.

Depreciation and Amortization

Depreciation and amortization represented depreciation of property and equipment
and  amortization of  organizational  costs,  customer lists and goodwill in the
year ended  December  31,  1996 and 1995.  The  increase  was due  primarily  to
depreciation  of new  phone  and  computer  systems  and  goodwill  amortization
resulting from acquisitions,  with Hazar,  Leaseway, and McClary-Trapp being the
most significant.

Interest

Interest income  increased from $296,000 for the year ended December 31, 1995 to
$833,000 for the year ended December 31, 1996,  primarily due to interest earned
on both the restricted cash held for the future payment of workers' compensation
claims at Camelback  and cash held at the  corporate  level  raised  through the
exercise of common  stock  purchase  warrants and through  operations.  Interest
expense  increased  from  $25,000 for the year ended  December  31, 1995 to $1.2
million for the year ended December 31, 1996,  primarily due to interest accrued
on the Company's revolving line of credit. The line was first utilized in August
1996 and had an average  outstanding  balance of $34 million for the five months
ended December 31, 1996. See "Liquidity and Capital Resources."

Effective Tax Rate

The Company's  effective  tax rate provides for federal,  state and local income
taxes.  The effective tax rate for fiscal 1996 is 34.7% as compared to 42.6% for
the year ended December 31, 1995. The effective tax rate for 1996 was positively
impacted by a state tax benefit in the amount of approximately $430,000 relating
to 1995. The effective tax rate would have been  approximately  37% without this
benefit. This downward year-to-year revision reflects a reduction resulting from
the increased operations of the Company's  wholly-owned  subsidiary,  Camelback,
which pays state premium tax rather than state income tax.
                                                                              29
<PAGE>
Liquidity and Capital Resources

The Company defines liquidity as the ability to mobilize cash to meet operating,
capital and acquisition financing needs. The Company's primary source of cash in
1997 was from financing activities and operations.

Cash provided by operating activities was $7.2 million during 1997 compared to a
use of $3.3 million  during 1996, and cash provided of $6.3 million during 1995.
Operating cash flows are derived from  customers for full PEO services  rendered
by  the  Company  and  for  stand-alone  risk  management/workers'  compensation
services.  Payments from PEO customers typically are received on or within a few
days of the date on which payroll  checks are delivered to customers,  and cover
the cost of the payroll,  payroll taxes, insurance,  other benefit costs and the
Company's  administration  fee. The acquisitions of TEAM Services,  Leaseway and
McClary-Trapp,  and the Company's  stand-alone  program  adversely  affected the
Company's  operating cash flows in 1996 as these operations  extend credit terms
generally  from  15 to 45  days  as is  customary  in  their  respective  market
segments. Stand-alone risk management/workers'  compensation services are billed
in accordance  with individual  policies.  The Company also extends credit terms
for certain of its stand-alone risk management/workers'  compensation clients by
billing less than the expected premium over the policy term, with the difference
paid on a deferred basis after the end of a policy year. If the Company  expands
in these market segments or enters into new market  segments,  or extends credit
terms to additional clients, its working capital requirements may increase.

Cash used in investing  activities  was $15.0  million,  $46.9  million and $2.2
million  in 1997,  1996,  and 1995,  respectively.  The  Company  expects to use
certain of the net proceeds from the Note Offering (see below) to finance future
acquisitions.  Future acquisitions are expected to be a significant use of cash.
See "Outlook:  Issues and  Risk-Management of Rapid Growth".  In addition,  cash
purchase  price  payments  are due in the  second  quarter  of 1998 for two 1997
acquisitions.  The  amounts  of the  payments  are  based  on the  terms  of the
applicable purchase agreements and have not yet been determined.  For 1997, 1996
and 1995, capital  expenditures were $2.5 million,  $.7 million and $.2 million,
respectively. Capital expenditures in 1997 consisted primarily of communications
and computer equipment to enhance the Company's ability to support the Company's
increased client base and the centralization of payroll processing. In addition,
in April 1997, the Company  relocated its Phoenix  operations to a new facility.
The leaseholds and  improvements  will be financed by the landlord as a buildout
allowance,  and  subsequently  reflected  in rental  payments.  Moving costs and
office  furniture  represented  cash outlays in the first and second quarters of
1997 of approximately $1.0 million. During 1998, the Company expects to continue
to invest in  additional  computer  and  technological  equipment.  Although the
Company continuously  reviews its capital expenditure needs,  management expects
that 1998 capital  expenditures  will  continue,  and may  significantly  exceed
amounts  spent in 1997,  in order  to meet the  needs of the  Company's  base of
worksite employees.

Cash  provided by financing  activities  was $36.9  million for 1997 compared to
$47.2  million  for 1996 and $8.0  million for 1995.  Cash flows from  financing
activities during 1997 resulted  primarily from the issuance of the Notes offset
by the repayment of existing long-term debt.

At December  31, 1997 and 1996,  the  Company had cash and cash  equivalents  of
$40.1 million and $11.0 million, respectively. Cash and cash equivalents
                                                                              30
<PAGE>
are generally  invested in high investment grade  instruments with maturities of
less than 90 days.  Certain  amounts of  restricted  cash and  investments  (see
below) may have  maturities  beyond 90 days but are highly  liquid.  The Company
generally  maintains  large cash  balances to meet its daily payroll and payroll
tax  obligations.  The Company is  implementing  a  nationwide  cash  management
program to minimize  the  requirement  for cash on hand,  though as the business
continues to grow, cash  requirements to meet daily  obligations  will increase.
The  Company is required  through its  fronting  arrangements  with  Reliance to
maintain  restricted  cash and  investments  to secure  the  future  payment  of
workers' compensation losses arising under its pre-1998 program. Such restricted
cash and investments  have been calculated based on estimates of ultimate losses
under its workers' compensation  program. For this purpose,  ultimate losses are
actuarially determined by the fronting carriers utilizing industry-wide data and
regulatory  requirements  which may not  reflect  the  Company's  historical  or
expected  ultimate  losses.  Restricted cash and investments are classified as a
current asset as the Company settles and pays most workers'  compensation claims
within one year from occurrence.  The Company cannot access  restricted cash and
investments without the agreement of Reliance. At December 31, 1997, $19 million
was on deposit at Camelback as restricted cash and  investments,  as compared to
$11.5  million at December  31,  1996.  In the event the Company  effects a loss
portfolio transfer,  the Company will be required to make a cash payment,  which
may (but is not expected to) exceed the amount of the  restricted  cash, to fund
the transfer of liabilities to a third party.

At December 31, 1997 and 1996, the Company had working  capital of $58.4 million
and $30.4 million, respectively.

Under Bermuda law,  Camelback must maintain  statutory capital and surplus in an
amount  based  primarily  on premium  volume.  Bermuda  law also  regulates  the
circumstances  under which  Camelback may loan funds to its parent  company.  In
1997,  the  Company  paid to  Reliance  approximately  $25.0  million  of  which
approximately  $19.9  million was ceded to the trust  account at  Camelback  for
payment of claims and approximately $2.1 million was ceded directly to Camelback
as  unrestricted.  For the same period the Company also paid to Legion Insurance
Company  approximately $2.6 million of which  approximately $2.3 million in loss
funds is expected to be ceded to Camelback upon the  establishment of a separate
trust  account  for the  program.  In the  future,  these  factors may limit the
ability of  Camelback  to  transfer  funds to its parent  company  (whether  via
dividend or otherwise).

Prior Credit Facility

In August 1996,  the Company  established  a revolving  line of credit  facility
("Prior Credit Facility") for acquisition  financing,  working capital and other
general  corporate  purposes.  The original credit facility was a three year $35
million  revolving  line of  credit.  The line was  expanded  to $45  million in
October  1996 and to $60 million in February  1997.  The Prior  Credit  Facility
provided for various borrowing rate options including borrowing rates based on a
fixed spread of 25 basis points over the prime rate or 250 basis points over the
London Interbank Offered Rate (LIBOR),  as adjusted upward to reflect applicable
reserve requirements.  The Company paid a commitment fee of 37.5 basis points on
the unused  portion of the line.  Since the Company  obtained  its Prior  Credit
Facility in August 1996,  the $49.7  million drawn under the line at October 21,
1997 had been used primarily for acquisition  financing  including $24.0 million
for  the   acquisition  of  Leaseway,   $9.4  million  for  the  acquisition  of
McClary-Trapp,  $3.0  million for CMGR,  $.9 million for ETIC and  approximately
$10.0 million to finance accounts  receivable on such acquisitions.  The Company
repaid  outstanding  indebtedness  under  the  Prior  Credit  Facility  with net
proceeds  of the sale of the  Notes  and  replaced  it with the  Amended  Credit
Facility. See "Amended Credit Facility" below.

Note Offering

On October 21, 1997, the Company issued $85 million of Notes in an Offering (the
"Offering")  effected  under Rule 144A of the  Securities Act of 1933 as amended
("Securities  Act").  Approximately  $50  million  of the  net  proceeds  of the
Offering was used to repay certain indebtedness,  and the remaining balance will
be used for additional  capital  expenditures  and general  corporate  purposes.
Interest under the Notes is payable semi-annually commencing April 15, 1998, and
the Notes are not callable  until  October 2001 subject to the terms of the Note
Agreement.   The  Company   incurred   expenses   related  to  the  Offering  of
approximately  $3.3  million and will  amortize  such costs over the life of the
Notes.  The  Company  agreed to file under the  Securities  Act, a  registration
statement  relating to an exchange offer for these Notes.  If this  registration
was not  declared  effective  prior to the 120th  day  after  the issue  date of
October 21,  1997 (which it was not),  the  interest  rate can  increase up to a
maximum of 12% per annum of the  principal  amount of such Notes,  increasing by
1/2% every 90 days.  The  indenture  under which the Notes were issued  includes
certain  restrictions  on use of cash,  and other  expenditures,  by the Company
including limitations on dividends and repurchases of Company shares.

Amended Credit Facility

In  connection  with the  Offering,  the  Company  entered  into an amended  and
restated credit facility (the "Amended  Credit  Facility")  which provided for a
revolving  line of credit of $20.0  million,  including  letters of credit drawn
thereunder.  The Amended Credit Facility includes various borrowing rate options
including  borrowing  rates at the prime rate or 175 basis  points  over  London
Interbank  Offered Rate  (LIBOR).  The Company  will pay a commitment  fee of 25
basis  points on the unused  portion of the line and letter of credit fees of 75
to 175 basis points per annum. The Amended Credit Facility will mature on August
1, 1999.  The principal  loan  covenants in the Amended  Credit  Facility are as
follows:  current  ratio of at least 1.3 to 1; minimum net worth of at least $45
million as of June 30,  1997,  adjusted  by 75% of net income and other  factors
each and every fiscal year  thereafter;  senior debt to earnings  before  income
taxes,  interest expense and depreciation and amortization  (EBITDA), as defined
therein for the preceding  four fiscal  quarters of not more than 2.0 to 1 as of
the end of each calendar year and maximum debt to EBITDA as reduced by a portion
of available  cash of 4.0 to 1. The Amended  Credit  Facility  includes  certain
other customary  covenants and is secured by substantially  all of the Company's
assets. As a result of 1997  performance,  the Company is not in compliance with
certain  financial  covenants  under the Amended  Credit  Facility,  and may not
borrow under the Amended Credit  Facility  unless it returns to compliance or is
able to agree with the bank to the new  covenants,  as to which  there can be no
assurance.  Because of the Company's  current cash status,  the Company does not
believe that the current  unavailability  of the Amended  Credit  Facility  will
materially  affect its  liquidity,  although there can be no assurance this will
remain the case if cash needs significantly increase in the future.
                                                                              31
<PAGE>
Outlook:  Issues and Risks

The  following  issues  and  risks,  among  others  (including  those  discussed
elsewhere  herein),  should  also be  considered  in  evaluating  the  Company's
outlook.

Management of Rapid Growth

The Company's  success depends,  in part, upon its ability to achieve growth and
manage this growth effectively. Since its formation, the Company has experienced
rapid growth which has challenged the Company's management, personnel, resources
and systems.  As part of its business  strategy,  the Company  intends to pursue
continued growth through its sales and marketing capabilities,  acquisitions and
marketing   alliances.   Although  the  Company  has  expanded  its  management,
personnel,  resources  and  systems to manage  future  growth and to  assimilate
acquired operations,  there can be no assurance that the Company will be able to
maintain  or  accelerate  its  growth  in  the  future  or  manage  this  growth
effectively.  Failure to do so could  materially  adversely affect the Company's
business  and  financial  performance.  To  accommodate  growth,  the Company is
centralizing  certain operations,  which may result in temporary  disruptions in
operations. See also "1998 Outlook," above.

The Company has grown  substantially  in recent years through the acquisition of
other PEO and similar  companies.  Although the Company has recently  focused on
further  integrating  prior  acquisitions into the Company's  operations,  a key
component of the Company's  long-term  growth  strategy is to continue to pursue
selective attractive acquisition  opportunities.  There can be no assurance that
the Company will be able to find attractive acquisition candidates at reasonable
prices  or,  if it  does,  that  other  potential  acquirers  will  not  compete
successfully with the Company for these candidates.  Any significant increase in
the number of companies  competing with the Company to acquire PEOs would likely
increase the cost of  acquisitions  and thereby limit the  Company's  ability to
grow profitably through acquisitions. In addition, although the Company attempts
to evaluate each acquisition candidate thoroughly prior to an acquisition, there
can also be no  assurance  that,  once  acquired,  the  Company  will be able to
achieve  acceptable  levels of revenues,  profitability or productivity from the
acquired company.

A  portion  of the  Company's  historical  growth  is  attributable  to its risk
management/workers'  compensation  services  program.  The risks associated with
rapid growth in this area include the potential for inadequate  underwriting due
to a lack of experience  with new geographic  markets and industries  served,  a
shortage of experienced and trained  personnel,  and the need for  sophisticated
operating systems to help manage these risks. The Company recently converted its
risk  management  information  system to a new operating  system to support this
growth;  there can be no assurance that this conversion will ultimately prove to
be  successful,  or that other future  changes in systems or procedures  will be
successfully   completed.   Any   failure   to   manage   growth   in  the  risk
management/workers'  compensation  program could adversely  affect the Company's
ability to underwrite  profitable risks and efficiently resolve claims, which in
turn  could  have a  material  adverse  effect  on the  Company's  business  and
financial  performance.  The pricing of the Company's  guaranteed  cost and Ohio
reinsurance  policies  in place as of  January  1,  1998 are  subject  to annual
negotiation, and the above factors could materially increase the Company's costs
under such policies.


Adequacy of Loss Reserves; Loss and Claims Experience

Under its partially  self-insured workers'  compensation  arrangements in effect
until  January  1,  1998,  the  Company is  responsible  for the first  $250,000
($350,000  for certain  transportation  programs and $500,000 in two states with
"monopolistic"  workers'  compensation  insurance structures) of each occurrence
with no  aggregate  limit to the number of losses for which the  Company  may be
liable. The Company's reserves for losses and loss adjustment expenses under its
workers'  compensation  are  estimates  of amounts  needed to pay  reported  and
unreported claims and related loss adjustment  expenses.  Reserves are estimates
based on industry data and historical  experience,  and include judgments of the
effects  that  future  economic  and  social  forces  are  likely to have on the
Company's experience with the type of risk involved,  circumstances  surrounding
individual  claims and trends that may affect the probable  number and nature of
claims  arising from losses not yet  reported.  Consequently,  loss reserves are
inherently  uncertain  and are  subject  to a number of  circumstances  that are
highly variable and difficult to predict.  This uncertainty is compounded in the
Company's  case by its rapid growth and limited  experience.  For these reasons,
there  can be no  assurance  that  the  Company's  ultimate  liability  will not
materially  exceed  its  loss  and  loss  adjustment  expense  reserves.  If the
                                                                              32
<PAGE>
Company's  reserves  prove to be  inadequate,  the  Company  will be required to
increase reserves or corresponding loss payments with a corresponding reduction,
which may be material, to the Company's operating results in the period in which
the deficiency is identified.

The Company recently changed its business  strategy with respect to its workers'
compensation program and related workers'  compensation  reserves in response to
the changing risk profile of its worksite employee base,  increased  competition
and reduced margin  opportunities,  the availability of third party insurance at
attractive rates, and in an effort to reduce the uncertainty associated with its
quarterly  workers'  compensation  expense.  As part of the Company's  change in
business strategy, the Company obtained  fully-insured  guaranteed cost workers'
compensation  coverage  effective  January 1, 1998,  thereby  eliminating,  with
limited exceptions, the Company's risk retention on workers' compensation claims
arising after that date. The coverage was obtained  through  Stirling Cooke Risk
Management Services, Inc. under a three-year  arrangement,  with pricing subject
to annual  review.  The Company will retain risk up to $250,000  per  occurrence
with respect to a defined portfolio of stand-alone  policies which were in place
at December 31, 1997,  which  policies  expire at various dates during 1998. The
Company  also will  retain risk up to $50,000 per  occurrence  for claims  under
Ohio's monopolistic workers' compensation structure, with an aggregate liability
limitation  based on a percentage of Ohio manual  premium.  Consistent  with the
change in  strategy,  the  Company  also  increased  its  workers'  compensation
reserves at December 31, 1997 to reflect a one-time charge of approximately $6.0
million to establish  its reserves at a level  intended to eliminate any risk of
future workers'  compensation  charges for pre-1998 claims.  The Company also is
pursuing  aggressively a loss  portfolio  transfer or similar  reinsurance,  for
pre-1998  claims.  However,  there can be no  assurance  that the  Company  will
successfully  complete  such a  transaction,  or of the  terms on  which  such a
transaction could be completed.

The Company  believes that the  transition to a guaranteed  cost program and the
increase in reserves at December 31, 1997 will reduce the uncertainty associated
with the quarterly  calculation of workers' compensation costs while providing a
premium cost structure for 1998 which compares  favorably with historical costs.
The  availability  of coverages and premium costs in future years are subject to
change (including possible material upward adjustment of premium costs) based on
loss experience and competitive  conditions in the overall workers' compensation
market. The Company also believes that its workers'  compensation  reserves have
been  established  at a level  which is  consistent  with its change in business
strategy  described above  (including  expense  associated with a loss portfolio
transfer  should  such  a  transfer  be  completed),  although  there  can be no
assurance that this is the case.

State unemployment taxes are, in part, determined by the Company's  unemployment
claims experience.  Medical claims experience also greatly impacts the Company's
health  insurance rates and claims cost from year to year, and directly  impacts
the  Company  under  its  self  insured  medical  program.  Should  the  Company
experience  a large  increase  in claims  activity  for  unemployment,  workers'
compensation  and/or health care,  then its costs in these areas would increase.
In such a case,  the Company may not be able to pass these  higher  costs to its
clients  and would  therefore  have  difficulty  competing  with PEOs with lower
claims  rates  that  may  offer  lower  rates to  clients.  The  Company  has an
arrangement with its largest client under which the Company remains  responsible
for medical  claims  above an agreed  limit.  While the Company does not believe
that it will incur material liabilities under this arrangement,  there can be no
assurance that this will be the case.

Tax Treatment

The attractiveness to clients of a full-service PEO arrangement  depends in part
upon the tax treatment of payments for  particular  services and products  under
the Code (for example,  the opportunity of employees to pay for certain benefits
under a cafeteria  plan using pre-tax  dollars).  The Internal  Revenue  Service
("IRS") has formed a Market Segment Study Group to examine whether PEOs, such as
the Company,  are for certain  employee benefit and tax purposes the "employers"
of worksite  employees  under the Code.  The Company  cannot  predict either the
timing or the nature of any final  decision  that may be reached by the IRS with
respect to the Market  Segment  Study Group or the ultimate  outcome of any such
decision, nor can the Company predict whether the Treasury Department will issue
a policy  statement  with respect to its position on these issues or, if issued,
whether such statement would be favorable or unfavorable to the Company.  If the
IRS were to  determine  that the  Company  is not an  "employer"  under  certain
provisions  of the Code,  it could  materially  adversely  affect the Company in
several ways.  With respect to benefit  plans,  the tax qualified  status of the
Company's 401(k) plans could be revoked, and the Company's cafeteria and medical
reimbursement  plans may lose their  favorable  tax  status.  If an adverse  IRS
determination were applied retroactively to disqualify benefit plans, employees'
vested   account   balances  under  401(k)  plans  would  become   taxable,   an
administrative employer such as the Company would lose its tax deductions to the
extent its matching  contributions  were not vested, a 401(k) plan's trust could
become a taxable  trust and the  administrative  employer  could be  subject  to
liability  with  respect to its  failure to withhold  applicable  taxes and with
respect to certain  contributions and trust earnings. In such event, the Company
also would face the risk of client  dissatisfaction and potential  litigation by
clients or worksite employees.
                                                                              33
<PAGE>
As the  employer  of  record  for  many  client  companies  and  their  worksite
employees,  the Company must  account for and remit  payroll,  unemployment  and
other  employment-related  taxes to numerous federal, state and local tax, labor
and  unemployment  authorities,  and is subject  to  substantial  penalties  for
failure  to do so.  From time to time,  the  Company  has  received  notices  or
challenges  which may adversely  affect its tax rates and payments.  In light of
the IRS Market  Segment  Study Group and the general  uncertainty  in this area,
certain proposed  legislation has been drafted to clarify the employer status of
PEOs in the  context of the Code and  benefit  plans.  However,  there can be no
assurance that such  legislation will be proposed and adopted or in what form it
would be  adopted.  Even if it were  adopted,  the  Company  may need to  change
aspects of its operations or programs to comply with any requirements  which may
ultimately be adopted.  In particular,  the Company may need to retain increased
sole or shared control over worksite  employees if the  legislation is passed in
its current form.

Credit Risks

As the employer of record for its worksite  employees,  the Company is obligated
to pay their wages, benefit costs and payroll taxes. The Company typically bills
a client  company for these amounts in advance of or at each payroll  date,  and
reserves the right to terminate its agreement  with the client,  and thereby the
Company's liability for future payrolls to the client's worksite  employees,  if
payment is not received  within two days of the invoice date.  Limited  extended
payment  terms  are  offered  in  certain  cases  subject  to local  competitive
conditions.  The rapid turnaround necessary to process and make payroll payments
leaves the Company  vulnerable to client credit risks,  some of which may not be
identified  prior  to the  time  payroll  payments  are  made.  There  can be no
assurance  that the  Company  will be able to timely  terminate  any  delinquent
accounts or that its contractual termination rights will be judicially enforced.

In addition,  the Company has recently  entered several market segments  through
acquisitions  in which PEOs typically  advance wages,  benefit costs and payroll
taxes to their clients.  The Company  intends to continue this practice  despite
the  potentially  greater  credit  risk posed by such  practices.  Also,  in its
stand-alone  risk  management/worker's  compensation  program,  the  Company has
structured  certain of its clients'  premium payments so that less than the full
premium is billed  periodically  through the policy year, with the difference to
be paid by the client on a  deferred  basis  after the end of the  policy  year.
Following the  completion of the Company's  first series of policy  audits,  the
Company  determined in late 1997 that collection  rates from these clients would
be lower than expected, due in part to the Company's non-renewal of the affected
policies as part of the overall  de-emphasis  of its  stand-alone  program.  The
Company conducts a limited credit review before accepting new clients.  However,
the nature of the  Company's  business and pricing  margins is such that a small
number of client credit  failures  could have an adverse  effect on its business
and financial performance.
                                                                              34
<PAGE>
Litigation

As  previously  reported,  the  Company  and  certain of its  present and former
directors  and  executive  officers have been named as defendants in ten actions
filed  between March 1997 and May 1997.  While the exact claims and  allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act,  and Rule 10b-5  promulgated  thereunder,  with  respect to the accuracy of
statements  regarding Company reserves and other disclosures made by the Company
and certain  directors and officers.  These suits were filed after a significant
drop in the trading price of the Company's  Common Stock in March 1997.  Each of
the  actions  seeks  certification  of  a  class  consisting  of  purchasers  of
securities of the Company over specified periods of time. Each of the complaints
seeks the award of  compensatory  damages in amounts to be  determined at trial,
including interest thereon,  and costs of the action,  including attorneys fees.
The suits  have been  consolidated  before a single  judge of the U.S.  District
Court in Phoenix,  Arizona.  The Court has  appointed  lead  plaintiffs  for the
putative  class,   approved  plaintiffs'   selection  of  counsel,  and  ordered
plaintiffs to file a consolidated,  amended complaint on or about April 6, 1998.
The Company  believes  the  actions are without  merit and intends to defend the
cases vigorously. However, the ultimate resolution of these actions could have a
material  adverse  effect on the Company's  results of operations  and financial
condition.

Client Relationships

The Company's  subscriber  agreements with its clients generally may be canceled
upon 30 days written notice of  termination  by either party.  While the Company
believes that it has experienced  favorable  client retention in the past, there
can be no assurance that those  relationships  will continue or that  historical
rates of retention will continue to be achieved.  The short-term  nature of most
customer  agreements means that clients could terminate a substantial portion of
the Company's business upon short notice.

Through recent acquisitions and internal growth, the percentage of the Company's
clients in the  transportation  industry  has  increased.  While the Company has
targeted this industry,  which it believes  could benefit from Company  services
and  expertise,  increased  concentration  in a single  industry  could make the
Company subject to risks and trends of that industry.  Also,  certain aspects of
the transportation industry may be subject to particular risks, such as the risk
of property damage, injury and death from accidents inherent in the operation of
a motor vehicle.  In addition,  the Company is providing driver leasing services
through LPC, in which the Company acts as sole employer, which may increase risk
to the Company as a result of the direct nature of the employment relationship.

Substantial Leverage

The Company has  incurred  significant  debt  primarily in  connection  with its
expansion  through  acquisitions  and its  October  1997  issuance of the Senior
Notes. As of December 31, 1997, the Company had outstanding senior  indebtedness
of approximately  $85 million and  stockholders'  equity of approximately  $42.4
million.

The Company's ability to make scheduled  principal payments in respect of, or to
pay the interest or liquidated damages, if any, on, or to refinance,  any of its
indebtedness (including the Notes) will depend on its future performance, which,
to a certain extent,  is subject to general  economic,  financial,  competitive,
regulatory  and other  factors  beyond its  control.  Based  upon the  Company's
current level of operations,  management believes that cash flow from operations
and other  available  cash,  will be adequate to meet the Company's  anticipated
future requirements for working capital  expenditures,  scheduled lease payments
and scheduled payments of interest on its indebtedness, including the Notes, for
the foreseeable  future.  Due to financial covenant  violations,  the Company is
currently not able to borrow under the Amended Credit  Facility,  which had been
another source of liquidity.  The Company may, however, need to refinance all or
a portion of the principal of the Notes at or prior to maturity. There can be no
assurance that the Company's  business will generate  sufficient  cash flow from
operations, that anticipated growth will occur or that future borrowings will be
available under the Amended Credit Facility or otherwise in an amount sufficient
to enable the Company to service or refinance  its  indebtedness,  including the
Notes, or make anticipated capital expenditures and lease payments. In addition,
there can be no  assurance  that the  Company  will be able to  effect  any such
refinancing  on  commercially  reasonable  terms.  See  "Liquidity  and  Capital
Resources."

The degree to which the Company is leveraged could have important  consequences,
including,  but not limited to, the following:  (i) a substantial portion of the
Company's cash flow from  operations  will be dedicated to debt service and will
not be  available  for other  purposes;  (ii) the  Company's  ability  to obtain
additional  financing  in the  future  could be  limited;  and  (iii)  the Notes
indenture and the Amended  Credit  Facility  contain  financial and  restrictive
covenants  that limit the ability of the Company to, among other things,  borrow
additional  funds.
                                                                              35
<PAGE>
Failure by the Company to comply with such covenants could result in an event of
default which, if not cured or waived,  could have a material  adverse effect on
the Company's business and financial performance.

Uncertainty of Extent of PEO's Liability; Government Regulation of PEOs

Employers  are  regulated by numerous  federal and state laws relating to labor,
tax and  employment  matters.  Generally,  these laws prohibit  race,  age, sex,
disability  and religious  discrimination,  mandate  safety  regulations  in the
workplace,  set minimum wage rates and regulate employee benefits.  Because many
of  these  laws  were  enacted  prior  to  the  development  of  non-traditional
employment  relationships,  such  as PEO  services,  many of  these  laws do not
specifically  address the obligations and  responsibilities  of  non-traditional
"co-employers" such as the Company, and there are many legal uncertainties about
employee  relationships  created  by  PEOs,  such  as the  extent  of the  PEO's
liability for violations of employment and discrimination  laws. The Company may
be subject to liability  for  violations  of these or other laws even if it does
not participate in such violations. As a result,  interpretive issues concerning
the  definition  of the term  "employer"  in various  federal  laws have  arisen
pertaining  to the  employment  relationship.  Unfavorable  resolution  of these
issues  could  have a  material  adverse  effect  on the  Company's  results  of
operations  or  financial  condition.  The  Company's  standard  forms of client
service agreement establish the contractual division of responsibilities between
the Company and its clients for various personnel management matters,  including
compliance with and liability under various governmental  regulations.  However,
because the Company acts as a  co-employer,  and in some  instances acts as sole
employer (such as in the driver leasing program),  the Company may be subject to
liability  for  violations  of these or other  laws  despite  these  contractual
provisions,   even  if  it  does  not  participate  in  such   violations.   The
circumstances  in which the Company acts as sole employer may expose the Company
to increased risk of such liabilities for an employee's actions. The Company has
been sued in tort actions alleging responsibility for employee actions (which it
considers  to be  incidental  to its  business).  Although  it  believes  it has
meritorious  defenses,  and  maintains  insurance  (and  requires its clients to
maintain  insurance)  covering  certain  of such  liabilities,  there  can be no
assurances  that the  Company  will not be found to be liable for damages in any
such suit, or that such  liability  would not have a material  adverse effect on
the Company.  Although the client generally is required to indemnify the Company
for any  liability  attributable  to the conduct of the client or employee,  the
Company may not be able to collect on such a contractual  indemnification  claim
and thus may be  responsible  for  satisfying  such  liabilities.  In  addition,
employees  of the client may be deemed to be agents of the  Company,  subjecting
the Company to liability for the actions of such employees.

While many states do not explicitly  regulate  PEOs,  various states have passed
laws that have  licensing  or  registration  requirements  and other  states are
considering  such  regulation.  Such laws vary from state to state but generally
provide  for  monitoring  the  fiscal  responsibility  of PEOs.  There can be no
assurance  that the Company will be able to satisfy  licensing  requirements  or
other applicable regulations of any particular state from time to time.

Government Regulation Relating to Workers' Compensation Program

As part of its risk  management/workers'  compensation programs, the Company has
utilized  Camelback,  a wholly-owned  insurance  company  subsidiary.  Insurance
companies such as Camelback are subject to the insurance laws and regulations of
the  jurisdictions  in  which  they are  chartered;  such  laws and  regulations
generally are designed to protect the interests of policyholders rather than the
interests of shareholders such as the Company. In general,  insurance regulatory
authorities have broad administrative authority over insurers domiciled in their
respective jurisdictions, including authority over insurers' capital and surplus
levels,   dividend  payments,   financial   disclosure,   reserve  requirements,
investment  parameters  and  premium  rates.  The  jurisdictions  also limit the
ability of an insurer to  transfer or loan  statutory  capital or surplus to its
affiliates.  The regulation of Camelback could  materially  adversely affect the
Company's operations and results.

Competition

The  market  for  many  of the  services  provided  by  the  Company  is  highly
fragmented,  with over 2,300 PEOs currently competing in the United States. Many
of these PEOs have limited  operations with  relatively few worksite  employees,
but the Company  believes  that  several are larger  than or  comparable  to the
Company  in size.  The  Company  also  competes  with  non-PEO  companies  whose
offerings  overlap  with  some  of the  Company's  services,  including  payroll
processing firms,  insurance companies,  temporary personnel companies and human
resource  consulting  firms.  In addition,  as the PEO industry  becomes  better
established,  the Company expects that  competition will continue to increase as
existing  PEO  firms   consolidate   into  fewer  and  better   competitors  and
well-organized new entrants with potentially greater
                                                                              36
<PAGE>
resources than the Company,  including some of the non-PEO  companies  described
above,  continue to enter the PEO market.  The Company's  subscriber  agreements
with its  clients  generally  may be  canceled  upon 30 days  written  notice of
termination by either party. The short-term  nature of most customer  agreements
means that a substantial  portion of the Company's  business could be terminated
upon short notice.  In the  stand-alone  risk  management/workers'  compensation
services area, the Company  considers  state  insurance  funds and other private
insurance carriers to be its primary competition.

Year 2000 Compliance

Many computer  programs process  transactions  based on using two digits for the
year of the  transaction  rather  than a full four year  digits  (e.g.  "98" for
1998).  Systems  that  process  Year  2000  transactions  with the year "00" may
encounter significant processing  inaccuracies or inoperability.  Management has
determined  that,  like most other  companies,  it will be required to modify or
replace  significant  portions of its software so that its  information  systems
will be able to properly utilize dates subsequent to December 31, 1999. The Year
2000  issue  will be  addressed  through  either the  modification  of  existing
software or  conversion  to new  software.  However,  if such  transition is not
completed on a timely basis, the Year 2000 issue could have a material impact on
the Company's operations.

The Company  began  developing  its plan to address Year 2000 in 1997.  The plan
includes  hardware,  software,  electronic  equipment and building systems,  and
evaluates risk associated with vendor readiness.  Based on developments to date,
the Company expects that the plan will be completed in a timely fashion and that
Year 2000 issues  will not have a material  effect on the  Company's  results of
operations.  The  Company's  expectation  in this regard is based upon  numerous
assumptions of future events  including the  availability of certain  resources,
third party modifications and other factors,  and there can be no assurance that
the Company's current expectations will be met.

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

These requirements are not yet applicable to the Company.

ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------

Financial  statements  required  by Form 10-K are set forth at pages F-1 through
F-32 hereof.

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


Not applicable.
                                                                              37
<PAGE>
                                    PART III

ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------------------------------------------------------------

The biographical  information relating to the Company's directors included under
the caption "Election of Directors" in the Company's  definitive Proxy Statement
for  its  1998  Annual  Meeting  of  Shareholders  (the  "Proxy  Statement")  is
incorporated  herein by  reference.  The  Company  anticipates  filing the Proxy
Statement  within  120 days  after  December  31,  1997.  Information  as to the
Company's executive officers is set forth in Item 4A above.

ITEM 11. - EXECUTIVE COMPENSATION
---------------------------------

The information under the heading "Executive  Compensation" and "Compensation of
Directors" in the Proxy Statement is incorporated herein by reference.

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

The  information  under the heading "Voting  Securities and Principal  Holders -
Security  Ownership of Certain  Beneficial  Owners and  Management" in the Proxy
Statement is incorporated herein by reference.

ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
---------------------------------------------------------

The information under the heading "Certain  Transactions" in the Proxy Statement
is incorporated herein by reference.


                                     PART IV

ITEM 14. - EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------

(a) Exhibits

See attached Exhibit Index, which is incorporated herein by reference.

(b) Reports on Form 8-K for last year

The Company filed a report on Form 8-K dated October 21, 1997 which reported the
Company's  sale of $85  million  in 10%  Senior  Notes  due  2004  in a  private
placement transaction, and entry into the Amended Credit Facility.
Financial statements were not required or filed.

Additionally,  the Company  filed a report on Form 8-K dated  February  20, 1998
which  reported  the  Company's  issuance  by means of a  dividend  of Rights to
Purchase  Shares of Series A Junior  Participating  Preferred  Stock.  Financial
statements were not required or filed.
                                                                              38
<PAGE>
SIGNATURES

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

Dated this 30th day of March, 1998

                                        EMPLOYEE SOLUTIONS, INC.


                                        By /s/ Marvin D. Brody
                                          -----------------------------------
                                          Marvin D. Brody
                                          Chief Executive Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
                                 Signature                                  Title                     Date
------------------------------------------         ------------------------------           --------------
<S>                                                <C>                                      <C>
/s/ Marvin D. Brody                                Chairman of the Board, Chief             March 30, 1998
------------------------------------------         Executive Officer, President
Marvin D. Brody                                    And Director

/s/ Harvey A. Belfer                               Director                                 March 30, 1998
------------------------------------------
Harvey A. Belfer


/s/ Sara R. Dial                                   Director                                 March 30, 1998
------------------------------------------
Sara R. Dial

                                                   Director                                       --
------------------------------------------
Edward L. Cain, Jr.

/s/ Jeffrey A. Colby                               Director                                 March 30, 1998
------------------------------------------
Jeffrey A. Colby


/s/ Robert L. Mueller                              Director                                 March 30, 1998
------------------------------------------
Robert L. Mueller

/s/ Quentin P. Smith, Jr.                          Director                                 March 30, 1998
------------------------------------------
Quentin P. Smith, Jr.

/s/ Morris C. Aaron                                Chief Financial Officer                  March 30, 1998
------------------------------------------
Morris C. Aaron

/s/ John V. Prince                                 Chief Accounting Officer                 March 30, 1998
------------------------------------------
John V. Prince
</TABLE>
                                                                              39
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                               (the "Registrant")

                                  EXHIBIT INDEX
                                       TO
                               REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Exhibit                                                          Incorporated Herein                  Filed
Number     Description                                           By Reference To                      Herewith
------     ---------------------------------------               ------------------------------------ --------
<S>        <C>                                                   <C>                                     <C>
3(i)       Registrant's composite Articles of                    Registrant's Report on Form 10-K
           Incorporation, as amended                             for the year ended December 31, 1996
                                                                 ("1996 10-K") (See also Exhibit A
                                                                 included in Exhibit 4.5 below)

3(ii)      Registrant's Amended and Restated Bylaws,             Registrant's Form 10-Q for the year
           as amended through April 30, 1997                     ended March 31, 1997 ("March 1997
                                                                 10-Q")

4.1        Indenture dated October 15, 1997 among the            Registrant's Current Report on Form
           Registrant, the Guarantor Subsidiaries (as            8-K dated October 21, 1997 ("10/21/97
           defined therein) and The Huntington National          8-K")
           Bank

4.2        Purchase Agreement dated October 16, 1997             10/21/97 8-K
           among the Registrant, the Guarantor
           Subsidiaries and First Chicago Capital
           Markets, Inc. ("FCMM")

4.3        Registration Rights Agreement dated                   10/21/97 8-K
           October 21, 1997 among the Registrant,
           the Guarantor Subsidiaries and FCCM

4.4        Amended and Restated  Loan  Agreement                 10/21/97 8-K
           dated October 21, 1997 between the Company
           and Bank One Arizona, NA ("Bank One")

4.5        Rights Agreement dated as of February 4, 1998         Registrant's Form 8-A registration
           between the Company and American Securities           statement dated February 19, 1998
           Transfer and Trust, Inc. which includes, as
           Exhibit A thereto, the Certificate of Designation
           of Junior Participating Preferred Stock, Series A,
           of the Company, as Exhibit B thereto the Form
           of Rights Certificate and as Exhibit C thereto the
           Summary of Rights to Purchase Preferred Shares

10.1*      Registrant's 1993 Employee Incentive Stock            Registrant's Form 10-KSB for the
           Option Plan, as amended                               fiscal year ended December 31, 1994
                                                                 ("1994 Form 10-KSB")

10.2*      Employee Solutions, Inc. 1995 Stock Option                                                    X
           Plan, as amended through January 25, 1998
</TABLE>
                                                                              40
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                          Incorporated Herein                  Filed
Number     Description                                           By Reference To                      Herewith
------     ---------------------------------------               ------------------------------------ --------
<S>        <C>                                                   <C>                                     <C>
10.3       Employment Agreement with Harvey  A.                  Form SB-2
           Belfer, as amended

10.4       Employment Agreements dated March 18, 1997
           Between Registrant and:

10.4.1*    Morris C. Aaron                                       1996 10-K

10.4.2*    Paul M. Gales                                         1996 10-K

10.4.3*    Roy Flegenheimer                                      1996 10-K

10.5       Joint Venture Agreement among Registrant,             Registrant's Form 10-QSB for the
           Edward L. Cain, Jr., and Employee Solutions -         year ended September 30, 1994
           East, Inc.                                            ("September 1994 10-QSB")

10.5.1     Extension of Joint Venture Agreement among            1995 10-K
           Registrant, Edward L. Cain, Jr., and
           Employee Solutions - East, Inc.

10.5.2     Supplement Agreement to Joint Venture                 September 1994 10-QSB
           Agreement among Registrant, Edward L. Cain,
           Jr., and Employee Solutions, inc.

10.6       Agreement and Plan of Reorganization among            1995 10-K
           Registrant, Edward L. Cain, Jr., and Employee
           Solutions - East, Inc.**

10.7*      Amended and Restated Employment Agreement             1995 10-K
           among Registrant, Edward L. Cain, Jr., and
           Employee Solutions - East, Inc.

10.8       Guarantee of Payment and Performance by               September 1994 10-QSB
           Employee Solutions, Inc. to and in favor of
           Edward L. Cain, Jr.

10.9       Letter Agreement dated March 27, 1997 (and            March 1997 10-Q
           signed March 30, 1997) between the Company
           and Edward L. Cain, Jr.

10.10      Letter Agreement dated March 27, 1997 (and            March 1997 10-Q
           signed March 31, 1997) between the Company
           and Professional Employers Resource
           Corporation


10.11      Asset Purchase Agreement dated July 5, 1996           Registrant's Current Report on Form
           by and among Leaseway Transportation Corp.,           8-K dated August 1, 1996 ("8/1/96
           Leaseway Personnel Corp., Leaseway Admin-             8-K")
           istrative Personnel, Inc. and Employee Solutions,
           Inc.**
</TABLE>
                                                                              41
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                          Incorporated Herein                  Filed
Number     Description                                           By Reference To                      Herewith
------     ---------------------------------------               ------------------------------------ --------
<S>        <C>                                                   <C>                                     <C>
10.11.1    First Amendment to Asset Purchase Agreement           8/1/96 8-K
           Dated August 1, 1996 by and among Leaseway
           Transportation Corp., Leaseway Administrative
           Personnel, Inc. Employee Solutions, Inc., and
           Logistics Personnel Corp.

10.12      Purchase Agreement between Registrant, GCK            Registrant's 10-Q for the year ended
           Entertainment Services I, Inc., Talent Entertainment  June 30, 1996
           and Media Services, Inc. (collectively "TEAM
           Services") and the shareholders of TEAM Services

10.12.1    Amendment No. 1 to Purchase Agreement between         Registrant's 8-K dated June 22,
           Registrant, TEAM Services and the shareholders of     1996 ("6/22/96 8-K")
           TEAM Services**

10.13*     Employment Agreement between Registrant and           6/22/96 8-K
           Jeffery Colby*

10.14      Asset Purchase Agreement between the Registrant       Registrant's Form 10-Q for the year
           And the McClary-Trapp Companies dated as of           ended September 30, 1996
           November 1, 1996**                                    ("September 1996 10-Q")

10.15      Security Agreement dated  August 1, 1996              8/1/96  8-K
           between Bank One Arizona, Inc. and Registrant
           and certain of its subsidiaries

10.16      Loan Agreement dated August 1, 1996 between           8/1/96 8-K
           the Registrant and Bank One Arizona, Inc.
           [superseded]**

10.16.1    Amendment No. One thereto, dated October 15,          September 1996 10-Q
           1996 [superseded]

10.16.2    Second Modification Agreement dated February          1996 10-K
           19, 1997 [superseded]

10.16.3    Third Modification Agreement effective as of          Registrant's 10-Q for the year
           June 30, 1997 [superseded]                            ended June 30, 1997

10.17      Indemnification Agreements between the
           Registrant and:

10.17.1*   Marvin D. Brody                                       1996 10-K

10.17.2*   Edward L. Cain                                        1996 10-K

10.17.3*   Jeffrey A. Colby                                      1996 10-K

10.17.4*   Morris C. Aaron (Agreements in this form were         1996 10-K
           also entered into between the Company and each
           of Roy A. Flegenheimer, and Paul M. Gales.
</TABLE>
                                                                              42
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                          Incorporated Herein                  Filed
Number     Description                                           By Reference To                      Herewith
------     ---------------------------------------               ------------------------------------ --------
<S>        <C>                                                   <C>                                     <C>
10.17.5*   Henry G. Walker (Agreements in this form were also    1996 10-K
           entered into between the Company and each of
           Quentin P. Smith, Jr. and Sara R. Dial)

10.18      Reinsurance Agreement effective as of May 1,          March 1997 10-Q
           1995 between Reliance National Indemnity
           Company and Reliance Insurance Company
           And Camelback Insurance, Ltd., including
           Addendum Number One thereto



10.19      Letter Agreement dated February 27, 1998                                                      X
           between the Company and Ward Phelan



21.1       Subsidiaries of Registrant                                                                    X

23.1       Consent of Arthur Anderson LLP                                                                X

27         Financial Data Schedule                                                                       X
</TABLE>

         *Designates management or compensatory agreements

       **Excluding  exhibits  or  schedules,  which  will  be  furnished  to the
         Commission on request.
                                                                              43
<PAGE>
Item 8.  FINANCIAL STATEMENTS

                                      INDEX

                                                                            Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                     F-2

FINANCIAL STATEMENTS
Consolidated  Balance  Sheets -  December  31,  1997  and 1996               F-3
Consolidated Statements of Operations - For the Years
     Ended December 31, 1997, 1996 and 1995                                  F-4
Consolidated Statements of Stockholders' Equity - For the
     Years Ended December 31, 1997, 1996 and 1995                            F-5
Consolidated Statements of Cash Flows - For the Years
     Ended December 31, 1997, 1996 and 1995                                  F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                   F-8
                                      F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Employee Solutions, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  EMPLOYEE
SOLUTIONS,  INC. (an Arizona  corporation)  and  subsidiaries as of December 31,
1997  and  1996,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1997. 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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Employee Solutions,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

                                         Arthur Andersen LLP

Phoenix, Arizona,
  March 11, 1998.
                                      F-2
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
(In thousands of dollars, except share data)                                   1997       1996
                                                                           --------   --------

                                            ASSETS
<S>                                                                        <C>        <C>
CURRENT ASSETS:
Cash and cash equivalents                                                  $ 40,110   $ 10,980
Restricted cash and investments                                              19,000     11,500
Accounts receivable, net                                                     57,467     34,839
Receivables from insurance companies                                          7,070      5,918
Prepaid expenses and deposits                                                 4,562      1,258
Income taxes receivable                                                       4,080       --
Deferred income taxes                                                         4,138      1,156
                                                                           --------   --------

                    Total current assets                                    136,427     65,651

Property and equipment, net                                                   3,159      1,084
Deferred income taxes                                                           485        539
Goodwill and other assets, net                                               67,146     58,695
                                                                           --------   --------

                    Total assets                                           $207,217   $125,969
                                                                           ========   ========

                             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft                                                             $   --     $  2,477
Accrued salaries, wages and payroll taxes                                    43,263     17,586
Accounts payable                                                              4,363      4,078
Accrued workers' compensation and health insurance                           24,586      6,927
Income taxes payable                                                           --          720
Other accrued expenses                                                        5,886      3,414
                                                                           --------   --------

                    Total current liabilities                                78,098     35,202
                                                                           --------   --------

Deferred income taxes                                                           517        111
                                                                           --------   --------

Long-term debt                                                               85,000     42,800
                                                                           --------   --------

Other long-term liabilities                                                   1,213      1,349
                                                                           --------   --------
Commitments and contingencies

Stockholders' equity
Class A convertible preferred stock, nonvoting, no par value, 10,000,000
    shares authorized, no shares issued and outstanding                        --         --
Common stock, no par value, 75,000,000 shares authorized, 31,683,120
     shares issued and outstanding in 1997, and 30,729,433 shares issued
     and outstanding in 1996                                                 34,420     30,145
Retained earnings                                                             7,866     16,362
Unrealized gain on investment securities                                        103       --
                                                                           --------   --------

                    Total stockholders' equity                               42,389     46,507
                                                                           --------   --------

                    Total liabilities and stockholders' equity             $207,217   $125,969
                                                                           ========   ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-3
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
(In thousands of dollars, except share and per share data)            1997            1996            1995
                                                              ------------    ------------    ------------

<S>                                                           <C>             <C>             <C>
Revenues                                                      $    933,817    $    439,016    $    164,455
                                                              ------------    ------------    ------------

Cost of revenues:
   Salaries and wages of worksite employees                        765,047         341,988         132,379
   Healthcare and workers' compensation                             75,595          30,234           7,591
   Payroll and employment taxes                                     62,613          28,640          10,705
                                                              ------------    ------------    ------------

                  Cost of revenues                                 903,255         400,862         150,675
                                                              ------------    ------------    ------------

Gross profit                                                        30,562          38,154          13,780

Selling, general and administrative expenses                        33,411          17,310           7,183
Depreciation and amortization                                        4,617           2,073             426
                                                              ------------    ------------    ------------

                  Income (loss) from operations                     (7,466)         18,771           6,171

Other income (expense):
    Interest income                                                  1,303             833             296
    Interest expense                                                (5,102)         (1,196)            (25)
    Other                                                              (50)             (1)            239
                                                              ------------    ------------    ------------

Income (loss) before provision for income taxes                    (11,315)         18,407           6,681

Income tax provision (benefit)                                      (2,819)          6,381           2,846
                                                              ------------    ------------    ------------

                  Net income (loss)                           $     (8,496)   $     12,026    $      3,835
                                                              ============    ============    ============


Net income (loss) per common and
    common equivalent share:
                  Basic                                       $       (.27)   $        .40    $        .17
                                                              ============    ============    ============
                  Diluted                                     $       (.27)   $        .37    $        .16
                                                              ============    ============    ============


Weighted average number of common and
    common equivalent shares outstanding:
                  Basic                                         31,193,367      30,224,357      22,391,616
                                                              ============    ============    ============
                  Diluted                                       31,193,367      32,167,777      23,506,782
                                                              ============    ============    ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-4
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                                                                            Unrealized          Total
(In thousands of dollars,                  Preferred      Common    Retained    Treasury       gain on   Stockholders'
 except share data)                            Stock       Stock    Earnings       Stock   Investments         Equity
                                           ---------    --------    --------    --------   -----------   ------------

<S>                                         <C>         <C>         <C>         <C>           <C>            <C>
BALANCE, December 31, 1994                  $      6    $  5,929    $    501    $    (35)     $   --         $  6,401
Issuance of 3,887,200 shares of
  common stock in connection
  with exercise of underwriter and
  IPO warrants                                  --         7,142        --          --            --            7,142
Issuance of 5,060,000 shares of
  common stock in connection with
  conversion of preferred stock                   (6)          6        --          --            --             --
Issuance of 1,305,308 shares of
  common stock in  connection with
  exercise of other warrants and
  stock options                                 --           981        --          --            --              981
Acquisition of 78,924 shares of
  treasury stock through collection
  of receivables from officers/directors        --          --          --          (296)         --             (296)
Issuance of 799,448 shares of common
  stock in connection with acquisitions         --         1,613        --          --            --            1,613
Tax benefit related to the exercise of
  stock options                                 --           267        --          --            --              267
Net income                                      --          --         3,835        --            --            3,835
                                            --------    --------    --------    --------      --------       --------

BALANCE, December 31, 1995                      --        15,938       4,336        (331)         --           19,943

Cancellation of Treasury Stock                  --          (331)       --           331          --             --
Issuance of 701,000 shares of common
  stock in connection with acquisitions         --         4,274        --          --            --            4,274
Issuance of 1,968,161 shares of common
  stock in connection with exercise of
  other warrants and stock options              --         7,786        --          --            --            7,786
Acquisition of 7,850 shares of common
  stock through collection of receivables
  from officers/directors                       --          (157)       --          --            --             (157)
Tax benefit related to the exercise of
  stock options                                 --         2,635        --          --            --            2,635
Net income                                      --          --        12,026        --            --           12,026
                                            --------    --------    --------    --------      --------       --------

BALANCE, December 31, 1996                      --        30,145      16,362        --            --           46,507

Issuance of 752,587 shares of common
  stock in connection with acquisitions         --         2,585        --          --            --            2,585
Issuance of 201,100 shares of common
  stock in connection with exercise of
  common stock options                          --           502        --          --            --              502
Tax benefit related to the exercise of
  stock options                                 --         1,188        --          --            --            1,188
Change in unrealized net gains,
  net of applicable taxes                       --          --          --          --             103            103
Net loss                                        --          --        (8,496)       --            --           (8,496)
                                            --------    --------    --------    --------     --------        --------

BALANCE, December 31, 1997                  $   --      $ 34,420    $  7,866    $   --        $    103       $ 42,389
                                            ========    ========    ========    ========      ========       ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-5
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
(In thousands of dollars)                                           1997         1996         1995
                                                               ---------    ---------    ---------

<S>                                                            <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers                                   $ 911,189    $ 414,256    $ 162,137
Cash paid to suppliers and employees                            (896,812)    (411,438)    (155,066)
Interest received                                                  1,303          833          279
Interest paid                                                     (5,152)      (1,196)         (25)
Income taxes paid, net of refunds                                 (3,315)      (5,772)      (1,046)
                                                               ---------    ---------    ---------

         Net cash provided by (used in) operating activities       7,213       (3,317)       6,279
                                                               ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                (2,499)        (702)        (238)
Business acquisitions                                             (5,024)     (37,251)        (961)
Cash invested in restricted cash and investments                  (7,500)      (8,757)      (1,372)
Issuance of notes receivable and other, net                         --           (189)         386
                                                               ---------    ---------    ---------

         Net cash used in investing activities                   (15,023)     (46,899)      (2,185)
                                                               ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt                           6,905       42,800         --
Repayment of long-term debt                                      (49,705)        --           --
Proceeds from issuance of long-term senior notes                  85,000         --           --
Payment of deferred loan costs                                    (3,285)        (515)        --
Proceeds from issuance of common stock                               502        7,786        8,123
Decrease in bank overdraft and other                              (2,477)      (2,904)        (136)
                                                               ---------    ---------    ---------

         Net cash provided by financing activities                36,940       47,167        7,987
                                                               ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents              29,130       (3,049)      12,081

CASH AND CASH  EQUIVALENTS, beginning of year                     10,980       14,029        1,948
                                                               ---------    ---------    ---------

CASH AND CASH  EQUIVALENTS, end of year                        $  40,110    $  10,980    $  14,029
                                                               =========    =========    =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-6
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                   (CONTINUED)


<TABLE>
<CAPTION>
                                                                   1997        1996        1995
                                                               --------    --------    --------

<S>                                                            <C>         <C>         <C>
RECONCILIATION  OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)                                              $ (8,496)   $ 12,026    $  3,835
                                                               --------    --------    --------

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Depreciation and amortization                                     4,617       2,073         426
Miscellaneous non-cash charges                                       58        --          (193)
Increase in accounts receivable, net                            (22,628)    (24,760)     (2,249)
Increase in insurance company receivables                        (1,152)     (5,832)        (86)
Increase in prepaid expenses and deposits                        (3,304)       (736)       (183)
Increase in deferred income taxes, net                           (2,522)       (539)       (256)
Increase in other assets                                           (805)     (2,532)        (17)
Increase in accrued salaries,
      wages and payroll taxes                                    25,677      10,905       1,319
Increase in accrued workers' compensation
      and health insurance                                       17,659       4,464         676
(Decrease) increase in other long-term liabilities                 (136)      1,349         (39)
Increase (decrease) in accounts payable                             285      (2,038)        599
Increase (decrease) in income taxes payable/receivable           (3,612)      1,148       2,043
Increase in other accrued expenses                                1,572       1,155         404
                                                               --------    --------    --------
                                                                 15,709     (15,343)      2,444
                                                               --------    --------    --------

         Net cash provided by (used in) operating activities   $  7,213    $ (3,317)   $  6,279
                                                               ========    ========    ========
</TABLE>


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the years ended December 31, 1996 and 1995, certain notes receivable from
officers/directors  were repaid with the  Company's  common stock owned by these
individuals in the amount of $157,000 and $296,000,  respectively. There were no
activities of this type in 1997.

In connection with business acquisitions during 1997, 1996 and 1995, the Company
assumed net liabilities of $.9 million, $5.5 million and $5.4 million and issued
$2.6 million, $4.3 million and $1.6 million of common stock, respectively.

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-7
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1996 AND 1995

(1)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature of Corporation

Employee  Solutions,  Inc.  (together  with  its  subsidiaries,   "ESI"  or  the
"Company")  is a leading  professional  employer  organization  (PEO)  providing
employers  throughout  the United States with  comprehensive  employee  payroll,
human  resources and benefits  outsourcing  services.  The Company's  integrated
outsourcing  services include payroll processing and reporting,  human resources
administration,    employment    regulatory    compliance    management,    risk
management/workers'  compensation services, retirement and health care programs,
and other  products and services  provided  directly to worksite  employees.  At
December  31, 1997,  ESI serviced  approximately  1,700  client  companies  with
approximately 45,200 worksite employees in 47 states.

The   Company   began   in   1995   to   offer   employers    stand-alone   risk
management/workers'  compensation  services.  At December 31, 1997, this program
serves approximately 83 additional employers.

The Company conducts its business on a national scale across many industries and
is not  concentrated  to any  material  extent  within a single  local market or
industry, although the transportation industry, at approximately 33%, represents
the largest  concentration  of  clients,  including  one client  that  generated
approximately 20% of total revenues in 1997.

Principles of Consolidation

The  consolidated  financial  statements  include  the  activities  of  Employee
Solutions,  Inc.  and  its  wholly  owned  subsidiaries  from  their  respective
acquisition  dates.  All  acquisitions  were  accounted  for as  purchases.  All
significant intercompany accounts and transactions have been eliminated.

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 reporting  period.  The
nature of the Company's  business requires  significant  estimates to be made in
the  areas  of  workers'   compensation  reserves  and  revenue  recognized  for
retrospectively rated insurance policies.  The actual results of these estimates
may be unknown for a period of years.  Actual  results  could  differ from those
estimates.

Cash and Cash Equivalents

Cash and cash  equivalents  consist of cash and highly liquid  investments  with
original  maturities of three months or less. All cash  equivalents are invested
in high quality  investment  grade  instruments,  such as commercial  paper,  at
December 31, 1997 and 1996,  and are stated at fair market value.  Substantially
all cash and cash equivalents,  including  restricted cash and investments,  are
not insured at December 31, 1997.

Restricted Cash and Investments

Prior to January 1, 1998,  the Company was  partially  self insured for workers'
compensation  risks.  Under such programs,  its "fronting"  carriers required an
estimated  $19  million  and  $11.5  million  at  December  31,  1997 and  1996,
respectively,  to be held in a  restricted  bank  account  for payment of future
claims, and future capitalization of Camelback Insurance, Ltd. (Camelback),  the
Company's wholly owned off-shore captive insurance company. Such restricted cash
and  investments  have  been  calculated  by the  Company's  carriers  based  on
estimates of the future growth in the Company's  business and ultimate losses on
such business.  For this purpose,  ultimate losses are actuarially determined by
the carriers  utilizing  industry-wide  data that may not reflect the  Company's
historical or expected ultimate losses.  Restricted  investments consist of U.S.
Treasury and other short term corporate debt securities, purchased in accordance
with the Company's  investment  policy  guidelines,  with varying  maturities to
coincide with expected liquidity requirements to meet future anticipated claims,
and are  accounted  for in  accordance  with  Statement of Financial  Accounting
Standards  No.  115,  Accounting  for  Investments  in  Certain  Debt and Equity
Securities.
                                      F-8
<PAGE>
At December 31, 1997,  the Company  maintained  approximately  $22.6  million of
investments in its cash and cash  equivalents and restricted cash and investment
accounts.  These securities are considered  available-for-sale and, accordingly,
are recorded at market value.  Securities with original maturities of 90 days or
less  consisted of  commercial  paper and totaled $8.4 million and had estimated
unrealized  gains of  $58,000,  resulting  in an  estimated  fair  value of $8.5
million at December 31, 1997.  Securities with original  maturities greater than
90 days  consisted of $5.9 million in commercial  paper and $8.1 million in U.S.
Treasury securities and agencies and had estimated unrealized gains of $114,000,
resulting in an estimated fair value of $14.1 million at December 31, 1997.

Insurance Company Receivables

Prior to January 1, 1998,  the Company's risk  management/workers'  compensation
services  program was  conducted via fronting  arrangements  with  insurers.  At
December  31,  1997 and 1996,  the  Company had  receivables  from its  fronting
companies of $7.1 million and $5.9 million,  respectively.  Such amounts consist
of the  difference  between  cash  contractually  required to be advanced to the
insurance  companies for loss funds,  administrative  fees,  excess  reinsurance
premiums and premium  taxes and the  Company's  estimate of the actual  expenses
incurred.  The amount of the  receivable is subject to  reconciliation  with the
insurers upon final audit of the various policy periods.

Accounts Receivable/Revenue Recognition

Revenue is  recognized  as services are  performed.  Customers  cash payments on
stand-alone workers'  compensation policies are generally less than the expected
annual policy premium, resulting in unbilled revenues.  Unbilled revenues become
billed upon  completion of final policy audits.  The following  table presents a
summary of the Company's accounts receivable.

-------------------------------------------------------------------------------

                                                                   December 31,
(In thousands of dollars)                                 1997            1996
                                                    ----------      ----------

         Trade accounts receivable                  $   23,015      $   17,306
         Unbilled salary
           and wage accruals                            31,513          14,544
         Unbilled stand alone premium revenue              657             618
         Other                                           3,386           3,001
         Allowance for estimated
           uncollectible receivables                    (1,104)           (630)
                                                    ----------      ----------

              Total accounts receivable, net        $   57,467      $   34,839
                                                    ==========      ==========

-------------------------------------------------------------------------------

At December 31, 1997 and 1996,  receivables from affiliated  parties included in
the above totals were $2.9 million and $3.3 million, respectively.

Credit Risk

The Company conducts only a limited credit investigation prior to accepting most
new clients and thus may encounter  collection  problems  which could  adversely
affect its cash flow. The nature of the Company's  business is such that a small
number of client credit  failures  could have an adverse  effect on its business
and financial condition.

Property and Equipment

Property and equipment  primarily  consists of software  purchased and developed
for internal use and office  furniture  and  equipment  and is recorded at cost.
Depreciation is recorded on the  straight-line  method over the estimated useful
lives of the  assets  which  range  from three to five  years.  Maintenance  and
repairs  that  neither  materially  add  to  the  value  of  the  property,  nor
appreciably prolong its life, are charged to expense as incurred. Betterments or
renewals  are  capitalized  when  incurred.  Property  and  equipment  is net of
accumulated depreciation of $861,000 and $440,000 at December 31, 1997 and 1996,
respectively.
                                      F-9
<PAGE>
Goodwill and Other Assets

Included  in goodwill  and other  assets is $64.1  million and $55.8  million at
December 31, 1997 and 1996,  respectively,  representing the unamortized cost of
goodwill.  Goodwill  represents  the excess of the purchase  price paid over the
fair market value of the net assets for all acquired  companies.  As of December
31,  1997,  goodwill  of $24.9  million is being  amortized  over 30 years,  $39
million  over  15  years  and  $200,000  over  shorter   periods.   The  Company
periodically  assesses  goodwill for  impairment  using the criteria of SFAS No.
121,  Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed of.

Goodwill and other assets are net of  accumulated  amortization  of $6.5 million
and $2.5 million at December 31, 1997 and 1996, respectively.

Also included in goodwill and other assets at December 31, 1997 and 1996 is $2.9
million  representing the net receivable after reserves for stand-alone workers'
compensation premium due from one customer for a two-year program ended December
31, 1997. The Company  believes this to be collectible and has begun  litigation
proceedings to collect the outstanding premium.

Bank Overdraft

Bank overdraft  represents  outstanding  checks in excess of cash on hand at the
applicable  bank.  Historically,  these  checks are covered when  presented  for
payment through collection of accounts receivable.

Accrued Workers' Compensation and Health Insurance

Prior to January 1, 1998,  the Company  offered  partially  self-insured  health
programs   through   arrangements   with  Nationwide   Life  Insurance   Company
(Nationwide) and John Alden Life Insurance  Company (Alden),  and a self-insured
program through an arrangement with Provident Life & Accident  Insurance Company
("Provident"),  in addition to its fully insured medical plans.  Pursuant to the
arrangements   with  Nationwide  and  Alden,  the  Company  is  responsible  for
deductibles   of  $100,000  and  $75,000  per  covered   individual   per  year,
respectively.  Under the  Provident  program  the  maximum  policy  coverage  is
$100,000 per covered  individual per year, for which the Company is responsible.
Effective  January  1, 1997,  the  deductible  for the  Nationwide  program  was
decreased  to  $75,000.  The  Company's  aggregate  liability  limit  under  the
Nationwide program is based upon covered lives as of the beginning of each month
during the calendar  year,  and is  calculated  at 125% of the  expected  claims
amount. The Alden plan has no stop-loss claim limit.  Effective January 1, 1998,
the Nationwide and Alden plans have been  discontinued and the covered employees
moved to fully insured programs.

Prior  to  June  1,  1994  the  Company  covered  its  risk  management/workers'
compensation   obligations  with  fully  insured  policies  issued  by  multiple
carriers.  From June 1, 1994,  to May 31, 1995,  coverage  was provided  through
policies issued by the American  International Group (AIG) and Reliance National
Indemnity  Company  (Reliance).  The Company  received  approval in 1994 to form
Camelback.  Camelback was  activated in May 1995.  Effective  June 1, 1995,  the
Company  began  conducting  substantially  all of its  risk  management/workers'
compensation  program  through  Camelback in coordination  with Reliance.  Under
these  policies,  which  provide  first dollar  coverage to the employees of the
Company,  its subsidiaries and the Company's clients, the Company is responsible
for the first $250,000 per occurrence,  with no aggregate to limit the Company's
liability.

Individual risk  management/workers'  compensation  claims in excess of $250,000
and up to the statutory  limits of the states where the Company operates are the
responsibility  of Reliance.  The  Company's  prior  arrangements  with AIG were
structured in a manner similar to its current arrangements with Reliance.  While
the retention of the first $250,000 of individual  workers'  compensation claims
and the capital  requirements  resulting from the establishment of Camelback are
intended  to  enhance  profitability,  these  actions  increased  the  Company's
exposure to risk from workers' compensation claims.

To meet growing  needs of the  Company's  business on August 1, 1996 the Company
entered  into  an  arrangement  with  Legion  Insurance  Company  (Legion),   on
substantially  the same terms as the Reliance program except that the Company is
responsible for the first $350,000 per occurrence with no aggregate to limit the
Company's  liability.  Loss funds,  recorded as restricted  cash and investments
under the Reliance program, are held by Legion for the Company's benefit and are
included in receivables from insurance  companies in the amount of $3.6 and $3.1
million at December 31, 1997 and 1996, respectively.
                                      F-10
<PAGE>
To further reduce its potential  liability,  the Company has secured  Accidental
Death and Dismemberment insurance from an insurance affiliate of the Chubb Group
of Insurance Companies (Chubb) that covers losses up to $500,000 (increased from
$250,000 in July 1996,  to obtain a net reduction in excess  reinsurance  costs)
for certain types of serious claims and maintains  umbrella coverage for certain
liabilities  (other than losses  resulting  from workers'  compensation  claims)
which the Company may incur in connection  with its  administration  of its risk
management/workers'  compensation  program.  The Chubb policy was  terminated in
February  1998 in  connection  with the  Company's  decision  to  obtain a fully
insured guaranteed cost program for 1998. Effective January 1, 1998, the Company
obtained workers' compensation insurance coverage on a fully-insured, guaranteed
cost basis.  This  guaranteed  cost program  eliminates  ESI's risk retention on
workers'  compensation  claims  arising after that date with limited  exceptions
related  to the  stand-alone  policies  expiring  throughout  1998 and Ohio self
insurance as described below.

Effective  July  1,  1997,  the  Company   became   self-insured   for  workers'
compensation  in the State of Ohio.  The  Company is  responsible  for the first
$500,000 per occurrence  through December 31, 1997.  Beginning  January 1, 1998,
the Company has  purchased  excess  reinsurance  for Ohio claims,  limiting such
claims to $50,000 per occurrence with an aggregate liability limitation based on
a percentage of Ohio manual premium.

The Company  recognizes a liability for partially  self-insured and self-insured
health insurance and workers' compensation  insurance claims at the time a claim
is reported to the  Company by the third  party  administrator.  The third party
administrator  establishes  the  initial  claim  reserve  based  on  information
relating to the nature,  severity  and the cost of similar  claims.  The Company
provides for claims incurred, but not reported,  based on industry-wide data and
the  Company's  past claims  experience  through  consultation  with third party
actuaries.  The liability recorded may be more or less than the actual amount of
the  claims  when they are  submitted  and paid.  Changes in the  liability  are
charged or credited to  operations  as the  estimates  are  revised.  During the
fourth  quarter  of 1997,  significant  changes  in  estimates  were made to the
estimated workers'  compensation  liabilities in connection with a change in the
business  strategy  and,  accordingly,  a charge of $6.0  million was  recorded.

Income Taxes

The Company files a  consolidated  federal  income tax return.  Consolidated  or
combined state tax returns are filed in certain states.

Deferred  income taxes arise from temporary  differences  resulting from certain
revenue and expense items  reported for financial  accounting  and tax reporting
purposes in  different  periods.  Reductions  in current  income  taxes  payable
related  to  disqualifying  dispositions  of  qualified  stock  options  and the
exercise of non-qualified stock options are credited to common stock.
                                      F-11
<PAGE>
Net Income Per Common and Common Equivalent Share

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128 (SFAS No. 128), Earnings per Share. The
earnings  per share  amounts for 1996 and 1995 have been  restated to conform to
the 1997  presentation  as required by SFAS No. 128. The computation of adjusted
net income and weighted average common and common  equivalent shares used in the
calculation of net income per common share is as follows:


--------------------------------------------------------------------------------

(In thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
                                                     1997                           1996                          1995
                             ----------------------------    ---------------------------   ---------------------------

                                    Basic         Diluted           Basic        Diluted          Basic        Diluted
                             ----------------------------    ---------------------------   ---------------------------
<S>                            <C>             <C>             <C>            <C>            <C>            <C>
Weighted average of
common shares outstanding      31,193,367      31,193,367      30,224,357     30,224,357     22,391,616     22,391,616

Dilutive effect of options
and warrants outstanding             --              --              --        1,943,420           --        1,115,166
                             ------------    ------------    ------------   ------------   ------------   ------------

Weighted average of
Common and common
Equivalent shares              31,193,367      31,193,367      30,224,357     32,167,777     22,391,616     23,506,782
                             ============    ============    ============   ============   ============   ============

Net income (loss)            $     (8,496)   $     (8,496)   $     12,026   $     12,026   $      3,835   $      3,835

Adjustments to net income            --              --              --             --             --             (135)
                             ------------    ------------    ------------   ------------   ------------   ------------

Adjusted net income for
purposes of the income per
common share calculation     $     (8,496)   $     (8,496)   $     12,026   $     12,026   $      3,835   $      3,700
                             ============    ============    ============   ============   ============   ============

Net income per common and
common equivalent share      $      (0.27)   $      (0.27)   $       0.40   $       0.37   $       0.17   $       0.16
                             ============    ============    ============   ============   ============   ============
</TABLE>

--------------------------------------------------------------------------------

Adjustments to 1995 net income in the calculation of diluted  earnings per share
reflect the  amortization of contingent  goodwill related to the acquisitions of
Employment Services of Michigan, Inc. and Hazar, Inc. (see Note 8).

The  calculation  of weighted  average common and common  equivalent  shares for
purposes  of  calculating  the  1997  diluted   earnings  per  share,   excludes
approximately  1,951,049  weighted  average  shares of  options,  warrants,  and
contingently  issuable shares computed under the treasury stock method, as their
effects would be anti-dilutive.

Fair Value of Financial Instruments

Statement  of Financial  Accounting  Standards  No. 107 (SFAS 107),  Disclosures
about Fair Value of Financial  Instruments,  requires that the Company  disclose
estimated  fair  values for its  financial  instruments.  Fair value  estimates,
methods  and  assumptions  are  set  forth  below  for the  Company's  financial
instruments.

These calculations are subjective in nature,  involve  uncertainties and matters
of significant  judgment and do not include tax  ramifications;  therefore,  the
results  cannot be determined  with  precision,  substantiated  by comparison to
independent  markets  and may not be  realized  in an actual  sale or  immediate
settlement  of  the  instruments.  There  may  be  inherent  weaknesses  in  any
calculation  technique,  and changes in the  underlying  assumptions  used could
significantly  affect the results.  For all of these reasons, the aggregation of
the fair value calculations presented herein does not represent,  and should not
be construed to represent, the underlying value of the Company.
                                      F-12
<PAGE>
The following table presents a summary of the Company's  financial  instruments,
as defined by SFAS 107:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------

                                                                                  December 31,
                                            --------------------------------------------------

(In thousands of dollars)                                     1997                        1996
                                            ----------------------      ----------------------

                                            Carrying     Estimated      Carrying     Estimated
                                              amount    fair value        amount    fair value
                                            --------    ----------      --------    ----------
<S>                                          <C>           <C>           <C>           <C>
Financial Assets
Cash and cash equivalents                    $40,110       $40,110       $10,980       $10,980
Restricted cash and investments               19,000        19,000        11,500        11,500
Other financial assets, primarily
accounts receivable                           67,550        67,550        43,696        43,696

Financial Liabilities

Bank overdraft                                  --            --           2,477         2,477
Long-term debt                                85,000        82,025        42,800        42,800
Other financial liabilities, primarily
accrued liabilities                           79,311        79,311        33,354        33,354

----------------------------------------------------------------------------------------------
</TABLE>

Financial  instruments  other than long-term debt approximate fair value because
of their short-term  duration.  In 1996,  long-term debt approximates fair value
because of the variable interest rate.


(2)   COMMON STOCK SPLITS:

On  December  18,  1995,  and June 26,  1996 the Board of  Directors  authorized
two-for-one  common stock splits,  effected in the form of 100% stock dividends,
effective on January 16, 1996 and July 26, 1996 respectively, to shareholders of
record at the close of  business on January 2, 1996 and July 12,  1996.  In this
report,  all per share  amounts  and  numbers of shares,  including  options and
warrants, have been restated to reflect these stock splits.

(3)   LEASE COMMITMENTS:

The Company leases office space under non-cancelable operating lease agreements.
Future minimum lease payments due under such agreements are as follows:

--------------------------------------------------------------------------------

(In thousands of dollars)
                                             Years Ending
                                              December 31,                Amount
                                     --------------------              ---------
                                                     1998              $   1,845
                                                     1999                  1,624
                                                     2000                  1,507
                                                     2001                  1,466
                                                     2002                  1,436
                                     Greater than 5 years                  1,800
                                                                       ---------

                                                    Total              $   9,678
                                                                       =========

--------------------------------------------------------------------------------

Rental  expense  under all leases was $1.9  million,  $734,000,  and $162,000 in
1997, 1996 and 1995, respectively.
                                      F-13
<PAGE>
(4)   INCOME TAXES:

The  components of the  provision for income taxes for the years ended  December
31, 1997, 1996 and 1995 were as follows:

--------------------------------------------------------------------------------

(In thousands of dollars)                    1997           1996           1995
                                          -------        -------        -------

     Current                              $  (297)       $ 6,935        $ 3,102
     Deferred                              (2,522)          (554)          (256)
                                          -------        -------        -------

     Income tax provision (benefit)       $(2,819)       $ 6,381        $ 2,846
                                          =======        =======        =======

--------------------------------------------------------------------------------


Income tax expense differs from the amount computed using the statutory  federal
income tax rate due to the following:

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(In thousands of dollars)                             1997         1996         1995
                                                   -------      -------      -------

<S>                                                <C>          <C>          <C>
Income tax expense (benefit) at statutory rate     $(3,847)     $ 6,442      $ 2,272
Non-deductible goodwill amortization                   271          197           73
Non-deductible per diem and other expenses             336           41           85
State taxes, net of federal benefit                    451          179          429
Change in estimate related to 1995 state taxes        --           (430)        --
Other                                                  (30)         (48)         (13)
                                                   -------      -------      -------

Income tax provision (benefit)                     $(2,819)     $ 6,381      $ 2,846
                                                   =======      =======      =======
</TABLE>
--------------------------------------------------------------------------------


Deferred tax assets and  liabilities  are comprised of the  following  temporary
differences at December 31:

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                       1997                           1996
                                    -----------------------        -----------------------
                                                  Long-term                      Long-term
                                    Current          Assets        Current          Assets
(In thousands of dollars)            Assets   (Liabilities)         Assets   (Liabilities)
                                    -------   -------------        -------   -------------
<S>                                 <C>             <C>            <C>             <C>
Depreciation and amortization       $  --           $  (517)       $  --           $  (111)
Reserves not deductible
    for tax purposes                  4,138             485          1,130             539
Other, net                             --              --               26            --
                                    -------         -------        -------         -------

                                    $ 4,138         $   (32)       $ 1,156         $   428
                                    =======         =======        =======         =======

</TABLE>

--------------------------------------------------------------------------------
                                      F-14
<PAGE>
(5)   LONG-TERM DEBT:

On August 1, 1996, the Company  entered into a three year $35 million  revolving
credit  facility  (Prior Credit  Facility) for  acquisition  financing,  working
capital  and other  general  corporate  purposes.  The line was  expanded to $45
million on October 15, 1996 and to $60 million on February 19, 1997. Total costs
incurred in  obtaining  this  facility  and the  expansions  were  approximately
$676,000.

Since the Company  obtained its Prior Credit  Facility in August 1996, the $49.7
million  drawn under the line at October 21,  1997 had been used  primarily  for
acquisition  financing  including $24.0 million for the acquisition of Leaseway,
$9.4 million for the  acquisition of  McClary-Trapp,  $3.0 million for CMGR, $.9
million for ETIC and approximately  $10.0 million to finance accounts receivable
on such acquisitions.  The Company repaid the outstanding indebtedness under the
Prior Credit  Facility  from the net proceeds of a note offering (see below) and
replaced the facility  with the Amended  Credit  Facility.  See "Amended  Credit
Facility"  below.   Unamortized   deferred  financing  costs  of  $252,000  were
written-off in connection with the repayment of the Prior Credit Facility.

Amended Credit Facility

In connection  with the Offering,  the Company  entered into the Amended  Credit
Facility  which  provided  for a  revolving  line of  credit  of $20.0  million,
including  letters of credit  drawn  thereunder.  The  Amended  Credit  Facility
includes various borrowing rate options  including  borrowing rates at the prime
rate or 175 basis points over London Interbank Offered Rate (LIBOR). The Company
will pay a commitment  fee of 25 basis points on the unused  portion of the line
and  letter of credit  fees of 75 to 175 basis  points per  annum.  The  Amended
Credit  Facility will mature on August 1, 1999.  The principal loan covenants in
the Amended Credit Facility are as follows:  current ratio of at least 1.3 to 1;
minimum net worth of at least $45 million as of June 30,  1997,  adjusted by 75%
of net income and other factors each and every fiscal quarter thereafter; senior
debt to earnings  before income taxes,  interest  expense and  depreciation  and
amortization (EBITDA), as defined therein for the preceding four quarters of not
more than 2.0 to 1 as of the end of each  calendar  quarter and maximum  debt to
EBITDA as reduced by a portion of available cash of 4.0 to 1. The Amended Credit
Facility   includes  certain  other  customary   covenants  and  is  secured  by
substantially  all  of the  Company's  assets.  Currently,  the  Company  is not
entitled to additional borrowings under the Amended Credit Facility.

Note Offering

On October 21, 1997, the Company issued $85 million of 10% Senior Notes due 2004
(the  Notes) in an  Offering  (the  Offering)  effected  under  Rule 144A of the
Securities Act of 1933 as amended  (Securities Act). Interest under the Notes is
payable semi-annually  commencing April 15, 1998, and the Notes are not callable
until October 2001 subject to the terms of the  Indenture  under which the Notes
were  issued.  (The  Company  incurred  expenses  related  to  the  offering  of
approximately $3.3 million, which is included in other assets, and will amortize
such  costs  over the life of the  Notes.)  The  Company  has  agreed  to file a
registration  statement under the Securities Act,  relating to an exchange offer
for these Notes. Since this registration was not declared effective prior to the
120th day after the issue date of October 21, 1997,  the interest rate increased
by .5%. It can be further increased by an additional 1.5% up to a maximum of 12%
per annum of the  principal  amount of such Notes if the  exchange  offer is not
completed.  In connection with the issuance of the Notes,  the Company  modified
its revolving  credit facility  whereby the total  commitment was reduced to $20
million.  The Notes contain certain  covenants which limit the Company's ability
to incur any future indebtedness.


The  Notes  are   general   unsecured   obligations   of  the  Company  and  are
unconditionally  guaranteed  on a joint  and  several  basis by  certain  of the
Company's   wholly-owned   current  and  future   subsidiaries.   The  Company's
wholly-owned  insurance  subsidiary,  which is a  non-guarantor  subsidiary,  is
subject to certain  statutory  and  contractual  restrictions  which,  limit its
ability to pay dividends or make loans to the Company or other subsidiaries. The
financial  statements presented below include the separate or combined financial
position  for the years ended  December  31,  1997 and 1996,  and the results of
operations  and cash  flows  for each of the  three  years in the  period  ended
December  31,  1997,  of  Employee  Solutions,   Inc.  (Parent),  the  guarantor
subsidiaries   (Guarantors)  and  the  subsidiaries  which  are  not  guarantors
(Non-guarantors).
                                      F-15
<PAGE>
<TABLE>
<CAPTION>
BALANCE  SHEETS
-----------------------------------------------------------------------------------------------------------------

                                                                             For the Year Ended December 31, 1997
-----------------------------------------------------------------------------------------------------------------
                                                                              Non-
(Dollars in thousands)                           Parent   Guarantors    Guarantors    Eliminating    Consolidated
                                               --------   ----------    ----------    -----------    ------------
<S>                                            <C>          <C>           <C>            <C>             <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                      $ 22,692     $ 11,848      $  5,570       $   --          $ 40,110
Restricted cash and
    investments                                    --           --          19,000           --            19,000
Accounts receivable, net                         20,822       34,360         2,285           --            57,467
Receivable from insurance
    companies                                      --          5,430         1,640           --             7,070
Prepaid expenses and deposits                     2,822        1,465           275           --             4,562
Income taxes receivable                           4,080         --            --             --             4,080
Deferred income taxes                             4,138         --            --             --             4,138
Due from affiliates                              30,346       (1,122)       12,855        (42,079)           --
                                               --------     --------      --------       --------        --------
        Total current                            84,900       51,981        41,625        (42,079)        136,427

Property and equipment, net                       2,857          276            26           --             3,159
Deferred income taxes                               485         --            --             --               485
Goodwill and other assets, net                   32,105       34,625           416           --            67,146
Investment in subsidiaries                       46,477         --            --          (46,477)           --
                                               --------     --------      --------       --------        --------
        Total assets                           $166,824     $ 86,882      $ 42,067       $(88,556)       $207,217
                                               ========     ========      ========       ========        ========

LIABILITIES
CURRENT LIABILITIES:
Bank overdraft                                 $   --       $   --        $   --         $   --          $   --
Accrued salaries, wages and
    payroll taxes                                20,253       21,422         1,588           --            43,263
Accounts payable                                  1,082        2,318           963           --             4,363
Accrued workers' compensation
    and benefits                                  1,612        2,211        20,763           --            24,586
Other accrued expenses                            2,612        2,541           733           --             5,886
Due to affiliates                                13,359       22,243         6,477        (42,079)           --
                                               --------     --------      --------       --------        --------
        Total current liabilities                38,918       50,735        30,524        (42,079)         78,098
                                               --------     --------      --------       --------        --------

Deferred income taxes                               517         --            --             --               517
                                               --------     --------      --------       --------        --------
Long-term debt                                   85,000         --            --             --            85,000
                                               --------     --------      --------       --------        --------
Other long-term liabilities                        --          1,213          --             --             1,213
                                               --------     --------      --------       --------        --------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Class A convertible preferred stock                --           --            --             --              --
Common stock, no par value                       34,420        2,622           771         (3,393)         34,420
Additional paid in capital                         --         26,342            50        (26,392)           --
Retained earnings                                 7,866        5,970        10,722        (16,692)          7,866
Unrealized gain on
    investment securities                           103         --            --             --               103
                                               --------     --------      --------       --------        --------

Total stockholders' equity                       42,389       34,934        11,543        (46,477)         42,389
                                               --------     --------      --------       --------        --------
Total liabilities and stockholders' equity     $166,824     $ 86,882      $ 42,067       $(88,556)       $207,217
                                               ========     ========      ========       ========        ========
-----------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-16
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------

                                                                            For the Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------------
                                                                             Non-
(Dollars in thousands)                           Parent   Guarantors   Guarantors    Eliminating    Consolidated
                                               --------   ----------   ----------    -----------    ------------
<S>                                            <C>          <C>          <C>            <C>             <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                      $  2,435     $  6,747     $  1,798       $   --          $ 10,980
Restricted cash and
    investments                                    --           --         11,500           --            11,500
Accounts receivable, net                         10,912       23,585          342           --            34,839
Receivable from insurance
    companies                                      --          3,157        2,761           --             5,918
Prepaid expenses and deposits                       743          394          121           --             1,258
Deferred income taxes                             1,156         --           --             --             1,156
Due from affiliates                              30,279        3,680       12,900        (46,859)           --
                                               --------     --------     --------       --------        --------
        Total current                            45,525       37,563       29,422        (46,859)         65,651

Property and equipment, net                         731          317           36           --             1,084
Deferred income taxes                               539         --           --             --               539
Goodwill and other assets, net                   17,546       40,870          279           --            58,695
Investment in subsidiaries                       39,113         --           --          (39,113)           --
                                               --------     --------     --------       --------        --------
        Total assets                           $103,454     $ 78,750     $ 29,737       $(85,972)       $125,969
                                               ========     ========     ========       ========        ========

LIABILITIES
CURRENT LIABILITIES:
Bank overdraft                                 $   --       $  2,477     $   --         $   --          $  2,477
Accrued salaries, wages and
    payroll taxes                                 9,890        7,180          516           --            17,586
Accounts payable                                    189        3,285          604           --             4,078
Accrued workers' compensation
    and benefits                                    232        2,219        4,476           --             6,927
Income taxes payable                                720         --           --             --               720
Other accrued expenses                            1,313        2,069           32           --             3,414
Due to affiliates                                 1,692       31,909       13,258        (46,859)           --
                                               --------     --------     --------       --------        --------
        Total current liabilities                14,036       49,139       18,886        (46,859)         35,202
                                               --------     --------     --------       --------        --------

Deferred income taxes                               111         --           --             --               111
                                               --------     --------     --------       --------        --------
Long-term debt                                   42,800         --           --             --            42,800
                                               --------     --------     --------       --------        --------
Other long-term liabilities                        --          1,349         --             --             1,349
                                               --------     --------     --------       --------        --------

Commitments and contingencies

STOCKHOLDERS' EQUITY
Class A convertible preferred stock                --           --           --             --              --
Common stock, no par value                       30,145           22          771           (793)         30,145
Additional paid in capital                         --         26,175         --          (26,175)           --
Retained earnings                                16,362        2,065       10,080        (12,145)         16,362
                                               --------     --------     --------       --------        --------

Total stockholders' equity                       46,507       28,262       10,851        (39,113)         46,507
                                               --------     --------     --------       --------        --------
Total liabilities and stockholders' equity     $103,454     $ 78,750     $ 29,737       $(85,972)       $125,969
                                               ========     ========     ========       ========        ========

----------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-17
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------

                                                                    For the Year Ended December 31, 1997
--------------------------------------------------------------------------------------------------------
                                                                      Non-
(Dollars in thousands)                Parent     Guarantors     Guarantors    Eliminating   Consolidated
                                   ---------     ----------     ----------    -----------   ------------
<S>                                <C>            <C>            <C>            <C>            <C>
Revenues                           $ 465,847      $ 426,058      $  74,815      $ (32,903)     $ 933,817
                                   ---------      ---------      ---------      ---------      ---------

Cost of revenues:
Salaries and wages of
    worksite employees               404,316        351,899         36,591        (27,759)       765,047
Healthcare and workers'
    compensation                      15,134         26,216         34,245           --           75,595
Payroll and employment taxes          32,814         26,741          3,058           --           62,613
                                   ---------      ---------      ---------      ---------      ---------

    Cost of revenues                 452,264        404,856         73,894        (27,759)       903,255
                                   ---------      ---------      ---------      ---------      ---------

    Gross profit                      13,583         21,202            921         (5,144)        30,562

Selling, general and
    administrative expenses           22,347         10,577            487           --           33,411
Intercompany selling, general
    and administrative expense           770          3,778            596         (5,144)          --
Depreciation and amortization          2,863          1,722             32           --            4,617
                                   ---------      ---------      ---------      ---------      ---------

Income (loss) from operations        (12,397)         5,125           (194)          --           (7,466)

Other income (expense):
Interest income                          320             90            893           --            1,303
Interest expense and other            (5,320)           (14)           182           --           (5,152)
                                   ---------      ---------      ---------      ---------      ---------

Income (loss) before provision
    for income taxes                 (17,397)         5,201            881           --          (11,315)

Income tax provision (benefit)        (4,354)         1,295            240           --           (2,819)
                                   ---------      ---------      ---------      ---------      ---------

                                     (13,043)         3,906            641           --           (8,496)
Income from wholly-owned
    subsidiaries                       4,547           --             --           (4,547)          --
                                   ---------      ---------      ---------      ---------      ---------

Net income (loss)                  $  (8,496)     $   3,906      $     641      $  (4,547)     $  (8,496)
                                   =========      =========      =========      =========      =========

--------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-18
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------

                                                                    For the Year Ended December 31, 1996
--------------------------------------------------------------------------------------------------------
                                                                      Non-
(Dollars in thousands)                Parent     Guarantors     Guarantors    Eliminating   Consolidated
                                   ---------     ----------     ----------    -----------   ------------
<S>                                <C>            <C>            <C>            <C>            <C>
Revenues                           $ 128,185      $ 293,874      $  36,313      $ (19,356)     $ 439,016
                                   ---------      ---------      ---------      ---------      ---------

Cost of revenues:
Salaries and wages of
    worksite employees               103,873        230,469          7,646           --          341,988
Healthcare and workers'
    compensation                       4,751         29,585         12,768        (16,870)        30,234
Payroll and employment taxes           8,146         19,721            773           --           28,640
                                   ---------      ---------      ---------      ---------      ---------

    Cost of revenues                 116,770        279,775         21,187        (16,870)       400,862
                                   ---------      ---------      ---------      ---------      ---------

    Gross profit                      11,415         14,099         15,126         (2,486)        38,154

Selling, general and
    administrative expenses            7,963          8,876            471           --           17,310
Intercompany selling, general
    and administrative expense           811          1,486            189         (2,486)          --
Depreciation and amortization            983          1,074             16           --            2,073
                                   ---------      ---------      ---------      ---------      ---------

Income (loss) from operations          1,658          2,663         14,450           --           18,771

Other income (expense):
Interest income                          227             92            514           --              833
Interest expense and other            (1,185)           (11)            (1)          --           (1,197)
                                   ---------      ---------      ---------      ---------      ---------

Income (loss) before provision
    for income taxes                     700          2,744         14,963           --           18,407

Income tax (provision) benefit          (506)         1,067          5,820           --            6,381
                                   ---------      ---------      ---------      ---------      ---------

                                       1,206          1,677          9,143           --           12,026
Income from wholly-owned
    subsidiaries                      10,820           --             --          (10,820)          --
                                   ---------      ---------      ---------      ---------      ---------

Net income (loss)                  $  12,026      $   1,677      $   9,143      $ (10,820)     $  12,026
                                   =========      =========      =========      =========      =========

--------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-19
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------

                                                                  For the Year Ended December 31, 1995
------------------------------------------------------------------------------------------------------
                                                                     Non-
(Dollars in thousands)                Parent     Guarantors    Guarantors   Eliminating   Consolidated
                                   ---------     ----------    ----------   -----------   ------------
<S>                                <C>            <C>           <C>           <C>            <C>
Revenues                           $ 108,324      $  57,099     $   5,127     $  (6,095)     $ 164,455
                                   ---------      ---------     ---------     ---------      ---------

Cost of revenues                      99,109         53,439         3,464        (5,337)       150,675
                                   ---------      ---------     ---------     ---------      ---------

    Gross profit                       9,215          3,660         1,663          (758)        13,780

Selling, general and
    administrative expenses            4,769          3,125            70          (781)         7,183
Depreciation and amortization            338             88          --            --              426
                                   ---------      ---------     ---------     ---------      ---------

Income (loss) from operations          4,108            447         1,593            23          6,171

Other income (expense):
Interest income                          205             19            95           (23)           296
Interest expense and other               (19)           233          --            --              214
                                   ---------      ---------     ---------     ---------      ---------

Income (loss) before provision
    for income taxes                   4,294            699         1,688          --            6,681

Income tax (provision)                 1,784            311           751          --            2,846
                                   ---------      ---------     ---------     ---------      ---------

                                       2,510            388           937          --            3,835
Income from wholly-owned
    subsidiaries                       1,325           --            --          (1,325)          --
                                   ---------      ---------     ---------     ---------      ---------

Net income (loss)                  $   3,835      $     388     $     937     $  (1,325)     $   3,835
                                   =========      =========     =========     =========      =========

------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-20
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------

                                                                              For the Year Ended December 31, 1997
------------------------------------------------------------------------------------------------------------------
                                                                                Non-
(Dollars in thousands)                            Parent    Guarantors    Guarantors   Eliminating    Consolidated
                                                --------    ----------    ----------   -----------    ------------
<S>                                             <C>              <C>             <C>        <C>             <C>
RECONCILIATION OF NET INCOME
    TO NET CASH PROVIDED BY (USED
    IN) OPERATING ACTIVITIES:
Net income (loss)                               $ (8,496)        3,906           641        (4,547)         (8,496)
                                                --------      --------      --------      --------        --------

ADJUSTMENTS TO RECONCILE
    NET INCOME TO NET CASH
    PROVIDED BY (USED IN)
    OPERATING ACTIVITIES:
Depreciation and amortization                      2,863         1,722            32          --             4,617
Increase in accounts receivable,  net             (9,910)      (10,775)       (1,943)         --           (22,628)
(Increase) decrease in insurance
    company receivable                              --          (2,273)        1,121          --            (1,152)
Increase in prepaid expenses and deposits         (2,021)       (1,071)         (154)         --            (3,246)
Increase in deferred income taxes, net            (2,522)         --            --            --            (2,522)
(Increase) Decrease in other assets               (1,023)          324          (106)         --              (805)
(Decrease) increase from inter-
    company transactions                            (733)        2,870        (6,684)        4,547            --
Increase in accrued salaries,
    wages, and payroll taxes                      10,363        14,242         1,072          --            25,677
Increase (decrease) in accrued workers'
    compensation and health insurance              1,381            (8)       16,286          --            17,659
Increase in other long-term liabilities             --            (136)         --            --              (136)
Increase (decrease) in accounts payable              893          (967)          359          --               285
Decrease in income taxes payable/receivable       (3,612)         --            --            --            (3,612)
Increase in other accrued expenses                   399           472           701          --             1,572
                                                --------      --------      --------      --------        --------
                                                  (3,922)        4,400        10,684         4,547          15,709
                                                --------      --------      --------      --------        --------
        Net cash provided by (used in)
           operating activities                  (12,418)        8,306        11,325          --             7,213
                                                --------      --------      --------      --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                (2,446)          (53)         --            --            (2,499)
Business acquisitions                             (4,296)         (675)          (53)         --            (5,024)
Cash invested in restricted cash
    and  investments                                --            --          (7,500)         --            (7,500)
                                                --------      --------      --------      --------        --------
        Net cash used in investing
           activities                             (6,742)         (728)       (7,553)         --           (15,023)
                                                --------      --------      --------      --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net     42,200          --            --            --            42,200
Proceeds from issuance of common stock               502          --            --            --               502
Disbursements for deferred loan
    costs                                         (3,285)         --            --            --            (3,285)
Decrease in bank overdraft and other                --          (2,477)         --            --            (2,477)
                                                --------      --------      --------      --------        --------
        Net cash provided by (used
           in) financing activities               39,417        (2,477)         --            --            36,940
                                                --------      --------      --------      --------        --------
Net increase in cash and cash
    equivalents                                   20,257         5,101         3,772          --            29,130
CASH AND CASH EQUIVALENTS,
    beginning of period                            2,435         6,747         1,798          --            10,980
                                                --------      --------      --------      --------        --------
CASH AND CASH EQUIVALENTS,
    end of period                               $ 22,692      $ 11,848      $  5,570      $   --          $ 40,110
                                                ========      ========      ========      ========        ========

-------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-21
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                               For the Year Ended December 31, 1996
-------------------------------------------------------------------------------------------------------------------
                                                                                  Non-
(Dollars in thousands)                              Parent    Guarantors    Guarantors   Eliminating   Consolidated
                                                  --------    ----------    ----------   -----------   ------------
<S>                                               <C>           <C>           <C>           <C>            <C>
RECONCILIATION OF NET INCOME
    TO NET CASH (USED IN) PROVIDED
    BY OPERATING ACTIVITIES:
Net income (loss)                                 $ 12,026      $  1,677      $  9,143      $(10,820)      $ 12,026
                                                  --------      --------      --------      --------       --------

ADJUSTMENTS TO RECONCILE
    NET INCOME TO NET CASH
    (USED IN) PROVIDED BY
    OPERATING ACTIVITIES:
Depreciation and amortization                          983         1,074            16          --            2,073
Increase in accounts receivable,  net               (5,464)      (18,963)         (333)         --          (24,760)
Decrease (increase)  in insurance
    company receivable                                  86        (3,157)       (2,761)         --           (5,832)
Increase in prepaid expenses and deposits             (486)         (129)         (121)         --             (736)
(Increase) decrease in deferred
    income tax asset, net                           (1,299)          760          --            --             (539)
Increase in other assets                              --          (2,253)         (279)         --           (2,532)
(Decrease) increase from inter-
    company transactions                           (62,735)       52,846          (931)       10,820           --
Increase in accrued salaries,
    wages, and payroll taxes                         6,724         3,665           516          --           10,905
(Decrease) increase in accrued workers'
    compensation and health insurance                  (50)        1,090         3,424          --            4,464
Increase in other long term liabilities               --           1,349          --            --            1,349
Increase (decrease) in accounts payable               (406)       (1,753)          121          --           (2,038)
Increase in income taxes payable                     1,148          --            --            --            1,148
(Decrease) increase in other accrued expenses          (65)        1,188            32          --            1,155
                                                  --------      --------      --------      --------       --------

                                                   (61,564)       35,717          (316)       10,820        (15,343)
                                                  --------      --------      --------      --------       --------
        Net cash (used in)  provided by
           operating activities                    (49,538)       37,394         8,827          --           (3,317)
                                                  --------      --------      --------      --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                    (573)          (92)          (37)         --             (702)
Business acquisitions                              (10,225)      (27,026)         --            --          (37,251)
Cash invested in restricted cash
    and  investments                                  --            --          (8,757)         --           (8,757)
Issuance of notes receivable, and other, net          --            (189)         --            --             (189)
                                                  --------      --------      --------      --------       --------
        Net cash used in investing
           activities                              (10,798)      (27,307)       (8,794)         --          (46,899)
                                                  --------      --------      --------      --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt            42,800          --            --            --           42,800
Proceeds from issuance of common stock               7,786          --            --            --            7,786
Decrease in bank overdraft and other                  --          (3,419)         --            --           (3,419)
                                                  --------      --------      --------      --------       --------
        Net cash provided by (used
           in) financing activities                 50,586        (3,419)         --            --           47,167
                                                  --------      --------      --------      --------       --------
Net (decrease) increase in cash and cash
    equivalents                                     (9,750)        6,668            33          --           (3,049)
CASH AND CASH EQUIVALENTS,
    beginning of period                             12,185            79         1,765          --           14,029
                                                  --------      --------      --------      --------       --------
CASH AND CASH EQUIVALENTS,
    end of period                                 $  2,435      $  6,747      $  1,798      $   --         $ 10,980
                                                  ========      ========      ========      ========       ========

-------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-22
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------

                                                                              For the Year Ended December 31, 1995
------------------------------------------------------------------------------------------------------------------
                                                                                 Non-
(Dollars in thousands)                             Parent    Guarantors    Guarantors   Eliminating   Consolidated
                                                 --------    ----------    ----------   -----------   ------------
<S>                                              <C>           <C>           <C>           <C>            <C>
RECONCILIATION OF NET INCOME
    TO NET CASH PROVIDED BY
    OPERATING ACTIVITIES:
Net income (loss)                                $  3,835      $    388      $    937      $ (1,325)      $  3,835
                                                 --------      --------      --------      --------       --------

ADJUSTMENTS TO RECONCILE
    NET INCOME TO NET CASH
    PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization                         338            88          --            --              426
(Increase) decrease in
    accounts receivable,  net                      (3,415)        1,089            (9)         --           (2,335)
Increase in prepaid expenses and deposits            (253)         (123)         --            --             (376)
Increase in deferred income tax asset, net           (256)         --            --            --             (256)
Decrease (increase) in other assets                   366          (383)         --            --              (17)
(Decrease) increase from inter-
    company transactions                           (2,657)         (597)        1,929         1,325           --
Increase (decrease) in accrued salaries,
    wages, and payroll taxes                        1,405           (86)         --            --            1,319
(Decrease) increase  in accrued workers'
    compensation and health insurance                  (5)         (371)        1,052          --              676
Decrease in other long term liabilities              --             (39)         --            --              (39)
Increase in accounts payable                           18           104           477          --              599
Increase (decrease) in income taxes payable         2,056           (13)         --            --            2,043
Increase in other accrued expenses                    169           235          --            --              404
                                                 --------      --------      --------      --------       --------

                                                   (2,234)          (96)        3,449         1,325          2,444
                                                 --------      --------      --------      --------       --------
        Net cash provided by
           operating activities                     1,601           292         4,386          --            6,279
                                                 --------      --------      --------      --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                   (152)          (86)         --            --             (238)
Business acquisitions                                (961)         --            --            --             (961)
Cash invested in restricted cash
    and  investments                                1,361             9        (2,742)         --           (1,372)
Issuance of notes receivable, and other, net          386          --            --            --              386
                                                 --------      --------      --------      --------       --------

        Net cash provided by used in
           investing activities                       634           (77)       (2,742)         --           (2,185)
                                                 --------      --------      --------      --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock              8,002          --             121          --            8,123
Decrease in bank overdraft and other                 --            (136)         --            --             (136)
                                                 --------      --------      --------      --------       --------
        Net cash provided by (used
           in) financing activities                 8,002          (136)          121          --            7,987
                                                 --------      --------      --------      --------       --------
Net increase (decrease) in cash and cash
    equivalents                                    10,237            79         1,765          --           12,081
CASH AND CASH EQUIVALENTS
    beginning of period                             1,948          --            --            --            1,948
                                                 --------      --------      --------      --------       --------
CASH AND CASH EQUIVALENTS
    end of period                                $ 12,185      $     79      $  1,765      $   --         $ 14,029
                                                 ========      ========      ========      ========       ========

------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      F-23
<PAGE>
(7)  STOCKHOLDERS' EQUITY:

Shareholders Rights Plan

On February 9, 1998,  the Company's  Board of Directors  adopted a  shareholders
rights plan.  Initially,  the rights are attached to the Company's  common stock
and are not  exercisable.  They become detached from the common stock and become
immediately  exercisable  after any person or group becomes the beneficial owner
of 15 percent or more of the Company's  common stock or 10 days after any person
or group  announces  a tender or exchange  offer that would  result in that same
beneficial ownership level, subject to certain exceptions.

If a buyer becomes a 15 percent owner in the Company, all rights holders, except
the buyer and certain  related  persons,  will be entitled to purchase  Series A
Junior  Participating  Preferred Stock in the Company at a price discounted from
the then market price. In addition, if the Company is acquired in a merger after
such an acquisition,  all rights  holders,  except the buyer and certain related
persons,  will also be entitled to purchase  stock in the buyer at a discount in
accordance with the plan.

The distribution of rights was made to common stockholders of record on February
20,  1998,  and shares of common  stock issued after that date also carry rights
until they  become  detached  from the common  stock.  The rights will expire on
February 19, 2008. The Company may redeem the rights for $0.001 each at any time
before a buyer acquires a 15 percent position in the Company,  and under certain
other circumstances.

Warrants

Warrant activity in 1995, 1996 and 1997 was as follows:

--------------------------------------------------------------------------------

                                                                  Weighted-
                                                                    average
                                                       Number      Exercise
                                                  of Warrants         Price
                                                  -----------     ---------

      Outstanding at December 31, 1995              2,936,000      $   2.32

                    Exercised                      (2,816,000)         2.33
                                                   ----------

      Outstanding at December 31, 1996                120,000          1.88
                                                   ==========

      Outstanding at December 31, 1997                120,000          1.88
                                                   ==========

--------------------------------------------------------------------------------

All warrants  outstanding at the  respective  year-ends  were  exercisable.  The
remaining outstanding warrants expire on January 2, 1999.

Stock Option Plans

The Company has a 1993 Stock Option Plan and a 1995 Stock Option Plan. The plans
are  administered  by the  Compensation  Committee  of the  Company's  Board  of
Directors,  and certain  employees are eligible to  participate in the plans and
receive incentive stock options and/or non-qualified  options. In addition,  all
consultants  are eligible to participate in the plans and receive  non-qualified
options.  Options granted may be either  "incentive  stock options,"  within the
meaning of Section 422A of the Internal  Revenue  Code,  or  nonqualified  stock
options.

The total number of options made  available and reserved for issuance  under the
1993 and 1995 Plans are 1,200,000 and 3,500,000,  respectively.  The Company has
granted options on 1,106,659 shares and 3,261,159 shares under the 1993 and 1995
plans,  respectively,  through  December 31,  1997.  Under both plans the option
exercise  price  equals  the  stock's  market  price  on the date of  grant.  No
compensation  expense was recorded for the stock  options under the 1993 or 1995
Plans in the  accompanying  financial  statements  as the Company has elected to
retain the accounting  prescribed under Accounting  Principles Board Opinion No.
25 (APB 25). Employee stock options generally become fully exercisable
                                      F-24
<PAGE>
over three years from the grant date and  generally  have terms from five to ten
years. Upon termination of employment,  the option exercise period is reduced or
the options are canceled.

The  following  table is a summary of the  Company's  1993 and 1995 Stock Option
Plan  activity and related  information  for the three years ended  December 31,
1997:

--------------------------------------------------------------------------------
                                                                  Weighted-
                                                                    average
                                                      Number       Exercise
                                                  of Options          Price
                                                  ----------      ---------

        Outstanding at December 31, 1994             930,000      $    1.61

             Granted                               2,405,000           2.74
             Exercised                              (213,308)           .84
             Canceled                               (400,004)          2.35
                                                   ---------

        Outstanding at December 31, 1995           2,721,688           2.56

             Granted                                 982,579          15.38
             Exercised                              (560,161)          2.22
             Canceled                                (30,336)         10.07
                                                   ---------

        Outstanding at December 31, 1996           3,113,770           6.59

             Granted                               1,070,157           6.08
             Exercised                              (201,100)          2.50
             Canceled                               (589,578)         15.32
                                                   ---------

        Outstanding at December 31, 1997           3,393,249           5.16
                                                   =========

         Exercisable options as of:
              December 31, 1995                      859,160
              December 31, 1996                      791,843
              December 31, 1997                    1,204,088

         Available for future grants
           at December 31, 1997                      332,182

--------------------------------------------------------------------------------
                                      F-25
<PAGE>
The  following  table is a summary of  selected  information  for the  Company's
compensatory stock option plans:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------

December 31, 1997
                                    Weighted-
                                      average                                   Weighted-
                                    Remaining                                     average
                                  Contractual                                    Exercise
                              Life (yrs.mths)                Number                 Price
                              ---------------             ---------         -------------

<S>                                       <C>             <C>               <C>
RANGE OF EXERCISE PRICES
1993 Stock Option Plan
$1.24 - $3.31
Options outstanding                       2.0               379,082         $        2.29
Options exercisable                                         325,748                  2.12

$7.56
Options outstanding                       2.1                40,000         $        7.56
Options exercisable                                          26,666                  7.56

1995 Stock Option Plan
$2.13 - $5.16
Options outstanding                       4.5             1,538,674                  2.69
Options exercisable                                         686,339                  2.83

$5.41 - $6.94
Options outstanding                       9.6               964,493                  5.54
Options exercisable                                              --                    --

$10.50 - $21.88
Options outstanding                       3.9               471,000                 14.56
Options exercisable                                         165,335                 13.71

-----------------------------------------------------------------------------------------
</TABLE>

The weighted average fair value of options granted under the 1993 and 1995 Stock
Option  Plans  was  $4.46  and  $6.10,  and  $1.07  for  1997,  1996  and  1995,
respectively.

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards No. 123 (SFAS 123),  Accounting for Stock-Based
Compensation.  This  Statement  establishes  a new fair value  based  accounting
method for stock-based  compensation plans and encourages (but does not require)
employers  to  adopt  the new  method  in  place  of the  provisions  of APB 25.
Companies  may  continue  to  apply  the  accounting  provisions  of  APB  25 in
determining net income;  however, they must apply the disclosure requirements of
SFAS 123 for all grants  issued after 1994.  The Company  elected to continue to
apply the provisions of APB 25 in accounting for the employee stock option plans
described.  Accordingly,  no  compensation  cost has been  recognized  for stock
options granted under the 1993 or 1995 Stock Option Plans.
                                      F-26
<PAGE>
Had  compensation  cost for these employee stock plans been determined  based on
the new fair value method under SFAS 123, the  Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------

(In thousands of dollars, except per share data)                              Year ended December 31,
                                                           ------------------------------------------

                                                                1997           1996              1995
                                                           ---------       --------         ---------
<S>                                                        <C>             <C>              <C>
         Net income (loss):
              As reported                                  $  (8,496)      $ 12,026         $ 3,835
              Pro forma                                      (10,569)        13,233           3,256

         Basic earnings (loss) per share:
              As reported                                      (.27)            .40             .17
              Pro forma                                        (.34)            .44             .15

         Diluted earnings (loss) per share:
              As reported                                      (.27)            .37             .16
              Pro forma                                        (.34)            .41             .14

------------------------------------------------------------------------------------------------------
</TABLE>

The pro forma  amounts  noted  above only  reflect  the  effects of  stock-based
compensation grants made after 1994. Because stock options are granted each year
and generally vest over three years, these pro forma amounts may not reflect the
full effect of applying the (optional) fair value method established by SFAS 123
that would be expected if all outstanding stock option grants were accounted for
under this method and may not be representative of amounts in future years.

The fair  value of each  option  grant is  estimated  based on the date of grant
using the  Black-Scholes  options pricing model. The following  weighted average
assumptions  were used for  grants in 1997:  risk-free  interest  rate of 5.92%;
expected dividend yield of 0%; expected lives of 2 years; expected volatility of
98%. The following weighted-average assumptions were used for grants in 1996 and
1995: risk-free interest rate of 5.98%;  expected dividend yield of 0%; expected
lives of 2 years; expected volatility of 67%.
                                      F-27
<PAGE>
(7)    QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

The following table presents summary unaudited quarterly financial data from the
Company's  consolidated   statements  of  operations  (all  earnings  per  share
calculations have been restated to conform SFAS No.
128):

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------

Quarter ended                                    March 31,       June 30,  September 30,   December 31,
                                             ------------   ------------   ------------    -----------
(Dollars in thousands, except share data)

<S>                                          <C>            <C>            <C>            <C>
1997
Revenues                                     $    195,966   $    226,058   $    233,093   $    278,700
Gross profit                                       10,268         11,885         10,535         (2,126)

Basic
   Net income (loss)                                  686            824            231        (10,237)
   Weighted average shares                     30,877,101     30,888,061     31,394,532     31,676,095
   Net income (loss) per share                        .02            .03            .01           (.32)
Diluted
   Net income (loss)                                  673            804            211        (10,237)
   Weighted average shares                     32,983,120     32,003,224     32,513,699     31,676,095
   Net income (loss) per share                        .02            .03            .01           (.32)


1996
Revenues                                     $     73,934   $     91,007   $    125,238   $    148,836
Gross profit                                        7,669          8,826         12,374          9,285

Basic
   Net income                                       2,352          3,116          4,246          2,312
   Weighted average shares                     29,936,830     30,413,227     30,515,334     30,623,493
   Net income per share                               .08            .10            .14            .08
Diluted
   Net income                                       2,346          3,110          4,238          2,312
   Weighted average shares                     32,048,552     32,564,993     33,020,742     32,831,079
   Net income per share                               .07            .10            .13            .07

-------------------------------------------------------------------------------------------------------
</TABLE>

(8)   ACQUISITIONS:

Acquisition of Phoenix Capital Management, Inc. and affiliated companies

Effective  September 1, 1997, the Company acquired  Phoenix Capital  Management,
Inc.  (PCM),  a PEO  services  company and four  affiliated  PEOs  (collectively
referred to as Employee  Resources  Corporation or ERC), for 752,587  restricted
shares of Company  common stock plus  additional  restricted  common stock to be
determined  based upon ERC earnings  from October 1, 1997 through  September 30,
1998.  The  Company's  unregistered  common  shares  were  valued at the average
closing price on the NASDAQ National Market for a 30 day period tied to closing,
less a 35% discount for lack of  marketability.  The initial  purchase price was
valued at $3.4 million  including  $2.6 million of common stock plus $.8 million
in assumed liabilities.  Since 1995, the Company has operated under an agreement
whereby PCM provided  certain  check  processing  services for the Company.  The
acquisition of ERC adds approximately 150 clients with 1,800 worksite employees,
primarily in the transportation industry.

Acquisition of Prompt Pay, Inc.

Effective  September  1, 1997,  the Company  acquired  Prompt Pay,  Inc.,  a PEO
located in Phoenix,  Arizona,  for  $250,000 in cash.  Prior to the purchase ESI
provided payroll processing  services for Prompt Pay, Inc. The acquisition added
approximately 350 worksite employees in six southwestern states.

Acquisition of CMGR Companies
                                      F-28
<PAGE>
On February 17, 1997,  the Company  completed the  acquisition  of the principal
assets of CMGR,  Inc.,  and Humasys  (collectively,  CMGR) for $3.9 million.  At
closing $2.3 million was paid in cash. At December 31, 1997  approximately  $3.1
million has been recorded as goodwill. An interim payment of $500,000 toward the
final  purchase  price was paid nine months after the closing.  Final payment is
due on or before  April 18,  1998 and is  subject to  certain  client  retention
factors.  CMGR is a New Jersey based PEO with a client base consisting primarily
of professional,  service and light industrial companies,  with approximately 75
clients and 1,700 worksite employees.

Acquisition of ETIC Corporation

On February 1, 1997,  the Company  completed  the  acquisition  of the principal
assets of ETIC Corporation, d/b/a Employers Trust (ETIC). The purchase price was
$30,000  plus five times  ETIC's total  pre-tax  income for the 12-month  period
ending  January  31,  1998.  At closing  $855,000  was paid in cash.  The excess
purchase price over net assets acquired was approximately $1.0 million which has
been  recorded as  goodwill.  The final  payment of purchase  price is due on or
before  April 30, 1998,  and will be paid in cash.  ETIC is a  Cincinnati,  Ohio
based  PEO  with  a  client  base  consisting  primarily  of  light  industrial,
transportation  and construction  companies,  with approximately 150 clients and
2,000 worksite employees.

Acquisition of The McClary-Trapp Companies

On November 1, 1996,  the Company  completed  the  acquisition  of the principal
assets of the  McClary-Trapp  Companies for  approximately  $10.6  million.  The
purchase price has been paid in the form of cash, assumed  liabilities,  and the
Company's  unregistered common stock, valued at the average closing price on the
NASDAQ  National Market for the month ended October 31, 1996, less a discount of
35% for  lack of  marketability  of the  unregistered  shares.  Pursuant  to the
purchase agreement,  the consideration for the assets of McClary-Trapp  included
53,000 shares of the Company's  unregistered common stock (which carries certain
registration  rights) valued at an average price of $13.09 per share ($20.14 per
share less the 35% discount) plus cash in the amount of $9.4 million and assumed
liabilities.  The excess of purchase  price over net assets  acquired  was $10.9
million of which $10.6  million has been  recorded  as  goodwill.  McClary-Trapp
Companies  lease  approximately  2,000  worksite  employees  with a client  base
consisting primarily of light industrial, transportation and service companies.

Acquisition of Leaseway Personnel Corporation

On August 1, 1996, the Company completed the acquisition of the principal assets
of Leaseway Personnel Corporation and Leaseway  Administrative  Personnel,  Inc.
(collectively,  "Leaseway") for approximately $24 million in cash, plus deferred
acquisition costs of approximately  $250,000. The Company acquired the assets of
Leaseway through Logistics Personnel Corp. ("LPC", formerly,  Employee Solutions
of Florida,  Inc.), a wholly owned subsidiary.  Logistics  Personnel Corp. is an
employee  leasing company  providing  permanent and temporary  private  carriage
truck drivers,  as well as non-driver  employees,  including  warehouse workers,
mechanics,  dispatchers,  and  administrative  personnel  to  approximately  180
clients in 41 states.

Acquisition of TEAM Services

On June 22, 1996, the Company  completed the purchase of all of the  outstanding
capital stock of GCK Entertainment Services, Inc. and Talent,  Entertainment and
Media  Services,  Inc.  (collectively,  "TEAM  Services").  TEAM  Services  is a
Burbank,  California based company  specializing in leasing  commercial  talent,
musicians and recording  engineers to the music and advertising  segments of the
entertainment industry. In connection with the acquisition,  the Company assumed
net  liabilities of  approximately  $825,000 which were recorded as goodwill and
are being  amortized  over a 15 year life. The purchase price will be the sum of
the net liabilities assumed at closing plus four times (4X) total TEAM Services'
pre-tax  income for the twelve  month period  ending June 30,  1999.  Additional
purchase price,  if any, will be paid in the form of the Company's  unregistered
common  stock.  The  unregistered  shares are entitled to certain  piggyback and
demand registration rights.

Ashlin Transportation Services, Inc.

On June 1, 1996, the Company  completed the acquisition of the principal  assets
of Ashlin  Transportation  Services,  Inc.  (Ashlin),  an Indiana based employee
leasing  company  specializing  in  the  transportation  industry.  The  Company
acquired the assets of Ashlin through  ESI-Midwest,  Inc. For approximately five
months prior to the  purchase,  the Company  provided  risk  management/workers'
compensation coverage to Ashlin. The purchase price was paid in cash and assumed
liabilities for a total purchase price of approximately $1.4 million.
                                      F-29
<PAGE>
Acquisition of Employee Solutions-East, Inc. (ESEI)

Effective  January 1, 1996, the Company  completed its  acquisition of ESEI. The
base purchase  price  consists of 648,000  shares of the Company's  unregistered
common stock,  including certain registration rights as to these shares,  valued
as of the effective date of the transaction at $5.53 per share ($8.50 less a 35%
discount for the lack of marketability  of the unregistered  shares) for a total
purchase  price of $3.6 million plus  acquisition  costs of $94,000.  The excess
purchase price over net assets acquired,  was $3,674,000 which has been recorded
as goodwill.

Acquisition of Hazar, Inc.

On October 2, 1995,  the Company  completed  the  acquisition  of the  principal
assets of Hazar, Inc. and certain of its subsidiaries  (collectively  Hazar) for
$7.0 million plus $50,000 for fixed assets.  The purchase price was paid in cash
and by the  assumption of certain  liabilities.  For several months prior to the
purchase, the Company provided workers' compensation coverage to Hazar.

In conjunction  with the Hazar  acquisition,  the Company  received an option to
purchase a related entity for $400,000 which was exercised on May 20, 1996. This
acquisition was for the principal  assets of Employer  Sources,  Inc.  (formerly
known as LMS),  a  California  based PEO.  Prior to the  purchase,  the  Company
provided  management  and  risk  management/workers'  compensation  services  to
Employer Sources.

In 1996, the Company  completed its purchase  accounting and quantified  certain
assumed  liabilities  previously thought to be the responsibility of the seller.
The total purchase price for all Hazar related entities  including  acquisitions
costs is $9.6 million.

Acquisition of Employment Services of Michigan, Inc.

The  Company  purchased  all of the  outstanding  capital  stock  of  Employment
Services of Michigan,  Inc.,  effective  January 1, 1995.  Once  acquired by the
Company,  Employment Services of Michigan, Inc. was renamed Employee Solutions -
Midwest,  Inc.  (ESM).  The  purchase  price  has  been  paid in the form of the
Company's  unregistered  common stock, valued at the average of the NASDAQ daily
closing  prices during the 1995 calendar year less a discount of 35% for lack of
marketability of the unregistered shares. Pursuant to the purchase agreement, as
amended,  the  consideration for the stock of ESM included 799,448 shares of the
Company's  common stock valued at an average price of $2.01 per share ($3.10 per
share  less  the 35%  discount)  for a total  purchase  price  of  approximately
$1,612,000, plus acquisition costs of $22,000. The excess of purchase price over
net assets  acquired was  $1,634,000  of which  $1,584,000  has been recorded as
goodwill.
                                      F-30
<PAGE>
Unaudited Pro Forma Financial Information

The following  unaudited pro forma  combined  financial data gives effect to the
combined historical results of operations of the Company,  TEAM Services and LPC
for the year ended December 31, 1996, and assumes that the acquisitions had been
effective as of the beginning of 1996.

The pro forma  information  is not  indicative of the actual results which would
have occurred had the  acquisitions  been  consummated  at the beginning of such
periods  or of future  consolidated  operations  of the  Company.  The pro forma
financial information is based on the purchase method of accounting and reflects
adjustments  to  eliminate   nonrecurring  general,   administrative  and  other
expenses, to amortize the excess purchase price over the underlying value of net
assets acquired and to adjust income taxes for the pro forma adjustments.

--------------------------------------------------------------------------------

(In thousands of dollars, except share data)                                1996
                                                                     -----------

Total revenues                                                       $   522,286
Net income                                                                12,758

Net income per common and common
equivalent share
              Basic                                                          .42
              Diluted                                                        .40

Weighted average number of common and
common equivalent shares outstanding
              Basic                                                   30,224,357
              Diluted                                                 32,167,777

--------------------------------------------------------------------------------

(9)  CONTINGENCIES:

The  Company  has  received a letter  from the  Arizona  Department  of Economic
Security   indicating  that  the  Company  has  been  assigned  a  higher  state
unemployment  tax rate for  calendar  year 1994 than the Company  believes it is
entitled.  In consultation with legal counsel the Company believes that based on
Arizona Revised  Statutes it is entitled to the lower rate. If it was ultimately
determined that the higher rate applies,  the Company would owe $500,000 (before
interest  and the income tax effect)  more than is  reflected  in the  Company's
financial  statements.  As of December 31, 1997, the compounded interest totaled
approximately $193,000.

As  previously  reported,  the  Company  and  certain of its  present and former
directors  and  executive  officers have been named as defendants in ten actions
filed  between March 1997 and May 1997.  While the exact claims and  allegations
vary, they all allege violations by the Company of Section 10(b) of the Exchange
Act,  and Rule 10b-5  promulgated  thereunder,  with  respect to the accuracy of
statements  regarding Company reserves and other disclosures made by the Company
and certain  directors and officers.  These suits were filed after a significant
drop in the trading price of the Company's  Common Stock in March 1997.  Each of
the  actions  seeks  certification  of  a  class  consisting  of  purchasers  of
securities of the Company over specified periods of time. Each of the complaints
seeks the award of  compensatory  damages in amounts to be  determined at trial,
including interest thereon,  and costs of the action,  including attorneys fees.
The suits  have been  consolidated  before a single  judge of the U.S.  District
Court in Phoenix,  Arizona.  The Court has  appointed  lead  plaintiffs  for the
putative  class,   approved  plaintiffs'   selection  of  counsel,  and  ordered
plaintiffs to file a consolidated,  amended complaint on or about April 6, 1998.
The Company  believes  the  actions are without  merit and intends to defend the
cases vigorously. However, the ultimate resolution of these actions could have a
material  adverse  effect on the Company's  results of operations  and financial
condition.

The Company was named as a defendant in an action filed by Ladenburg  Thalmann &
Co., Inc. in the United States  District Court,  Southern  District of New York,
No.  97-CIV-4685  (TPG),  in May 1997 alleging  breach of contract under certain
stock  warrants.  The  plaintiff  seeks  damages of at least $2.5  million.  The
Company  believes  the  action is without  merit and  intends to defend the case
vigorously.

From time to time,  the  Company  is named as a  defendant  in  lawsuits  in the
ordinary course of business.  These lawsuits are not expected to have a material
impact on the Company's financial position or results of operations.
                                      F-31
<PAGE>
The Company believes that it has meritorious defenses to the lawsuits facing it,
including those mentioned above, and intends to assert such defenses vigorously.
However,   it  is  not  possible  to  predict  whether  such  defenses  will  be
successfully  asserted in all cases.  The Company would be required to record an
expense and liability as to any matter if, at any time in the future,  it became
probable that the Company would not prevail in such matter.


(11) RELATED PARTY TRANSACTIONS:

Related party transactions not mentioned  elsewhere in the financial  statements
are summarized as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------

(in thousands of dollars)                                           1997        1996         1995
                                                                --------     -------     --------

<S>                                                             <C>          <C>         <C>
Legal services provided by officer/director                     $     --     $    --     $     60
Processing fees paid to company owned by shareholder               1,030         805          820
Risk management/workers' compensation services to a company
   owned by a shareholder                                             --          --          205
Non-compete agreement settlements with two shareholders               --         543           --
Relocation costs for Executive Officer                                40          --           --

-------------------------------------------------------------------------------------------------
</TABLE>

Additionally, the Company provides services to companies affiliated with certain
directors  and  officers.  Revenues  were  insignificant.  The Company also pays
commissions to related parties in the ordinary course of business.
                                      F-32