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, 1996

             |_| 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.)

                2929 East Camelback Road, 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
                                (Title of Class)

        Indicate by check mark whether the  Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or 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 $6.0625 closing price of the
Registrant's Common Stock as reported on the NASDAQ National Market on March 27,
1997,  was  approximately  $155  million.  Shares of Common  Stock  held by each
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 27, 1997, was 30,857,101.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's  Proxy Statement for the Registrant's  1997
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, 1996

                                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 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
<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 in
1996.


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

Introduction

                 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, 1996,  ESI serviced  approximately  1,200  client  companies  with
approximately   30,000  worksite   employees  in  46  states.  The  Company  has
implemented an aggressive  growth  strategy since its initial public offering in
August  1993.  Through  internal  growth and  acquisitions,  ESI  revenues  have
increased  167% to $439  million for the fiscal  year 1996 from $164  million in
1995. ESI's net income for 1996 was $12.0 million,  an increase of 214% from net
income of $3.8 million in 1995.

                 The Company seeks to strengthen its leadership  position in the
PEO industry by  providing  client  companies  with  comprehensive  and flexible
outsourcing  services to meet their human  resources  needs while helping manage
their  overall  costs.  The Company  believes  its size,  full range of employee
outsourcing    solutions,    nationwide    presence   and   sophisticated   risk
management/workers' compensation programs give it a competitive advantage. Under
ESI's primary contractual  arrangement with its clients,  ESI assumes designated
obligations  for payroll  preparation  and reporting,  payment of payroll taxes,
human resources management and the provision of employee benefit plans. Although
the Company is the "employer of record," the client generally retains management
control of the employees,  including  supervision,  hiring and termination,  and
determining the employees' job descriptions and salaries. Through its integrated
services,  the Company provides  significant  benefits to its client  companies,
including  managing  escalating  costs  associated  with workers'  compensation,
health  insurance,  workplace  safety and  employment  policies  and  practices;
enhancing employee  recruiting and retention by providing  employees with access
to  health  care and  other  benefits  that are more  characteristic  of  larger
employers;  and  reducing  the time and effort  required by the employer to deal
with the increasingly complex legal and regulatory employment  environment.  The
Company  intends  to expand  the  services  it  provides  directly  to  worksite
employees to include employee payroll  deduction  programs for life,  disability
and special health insurance,  automobile insurance, prepaid telephone cards and
other personal  financial  services and benefits which the employee may purchase
at competitive rates.

                 In part as a marketing  strategy to  introduce  its services to
potential clients not currently  seeking a full PEO solution,  the Company began
in 1995 to offer employers  stand-alone  risk  management/workers'  compensation
services. At December 31, 1996, this program covered an additional approximately
13,500  workers  employed by  approximately  64  employers.  ESI  targets  these
stand-alone risk  management/workers'  compensation  clients for conversion into
full-service PEO clients over the long term,  although there can be no assurance
that such conversions will occur.
                                        3
<PAGE>
                 In addition,  to leverage the Company's  transportation  market
expertise,  the Company entered the full-service  driver leasing market in 1996.
Through this program,  ESI hires and places  drivers with  companies  wishing to
obtain transportation services on a contract basis.

                 The Company is an Arizona corporation incorporated in 1991.

Acquisitions

                 The Company  believes  that  strategic  acquisitions  present a
practical, effective and economical means of growth. Because the Company intends
to focus in the short term on further  integrating  prior  acquisitions into the
Company's  operations,  the Company  currently does not expect 1997  acquisition
activity to be as extensive as in 1996.

                 The Company  analyzes  the  economic  advantages  of  potential
acquisition  opportunities  principally  by focusing upon  multiples of expected
overall  profitability  and also  examining  other  opportunities  which  may be
presented to the Company such as the ability to enter into attractive new market
segments,  extend its geographical reach, and/or achieve potential costs savings
and  economies of scale. The Company does not believe that revenues per worksite
employee or other per-employee  measurements are generally relevant criteria for
evaluating acquisitions.
                                        4
<PAGE>
                 The Company believes that the following table  illustrates both
the execution of its acquisition strategy and the diversity of its acquisitions,
which results from its case by case analysis of acquisition  opportunities.  The
Company's recent acquisitions of PEOs include:

<TABLE>
<CAPTION>
                                              Estimated            Approx.
                                              Annualized          Number of          Approx.        Primary
    Acquired Company            Date         Revenues at          Worksite          Number of    Industry(ies)
      or Operations           Acquired        Closing(1)          Employees          Clients     of Operations        Region(s)
      -------------           --------        ----------        -------------      -----------   -------------        ---------
<S>                         <C>              <C>                <C>                 <C>        <C>                  <C>
Pokagon Office               1/96             $17 million            800               58         Transportation       Ohio
Services, Inc.

Renhill Group                4/96             $7 million             400               34         Transportation       Midwest
                                                                                                  and light
                                                                                                  industrial

Employer Sources,            5/96             $8 million           1,100               55         Apparel              Southern
Inc.                                                                                              manufacturing        California

Ashlin Transportation        6/96             $35 million          1,100               82         Transportation       Midwest
Services, Inc.

TEAM Services                6/96             $61 million         11,000               74         Entertainment        Nationwide

Leaseway(2)                  8/96             $97 million          1,900               77         Private carriage     Nationwide
                                                                                                  and driver
                                                                                                  leasing

McClary-Trapp groups        11/96             $55 million          2,000              130         Manufacturing,       Southeast
of companies                                                                                      light industrial
("McClary-Trapp                                                                                   and
Group")                                                                                           transportation

ETIC Corporation             2/97             $50 million          2,000              150         Light industrial,    Ohio and
d/b/a Employer's Trust                                                                            transportation       surrounding
("ETIC")                                                                                          and construction     states


CMGR, Inc. and               2/97             $55 million          1,700               75         Professional,        Northeast
Humasys, Inc.                                                                                     service and light
("CMGR Companies")                                                                                industrial
</TABLE>

------------------
1                Estimated  revenues are determined by annualizing  the acquired
                 business revenues for the first month following the acquisition
                 (except  in the case of ETIC and the CMGR  Companies,  in which
                 case the estimate is based upon historical information from the
                 acquired  companies, and Employer  Sources  where  amounts were
                 adjusted to reflect the seasonal  nature of the  business). The
                 data  have  not  been   adjusted  to  reflect   the   Company's
                 post-acquisition  actions  to  terminate  client  relationships
                 which do not fit the Company's standard client or risk profiles
                 or  other  post-acquisition  changes  in  payroll,  numbers  of
                 worksite employees or number of clients.

2                Excludes temporary drivers and clients.

                 Beginning in 1993, the Company determined that it would need to
increase  its size to obtain  operating  efficiencies,  strengthen  its  overall
presence and achieve other corporate goals, such as becoming  sufficiently large
to permit its initial  public  offering.  To further  these  goals,  the Company
acquired The Prescott Group and Pro Pay,  which expanded the Company's  presence
in service  businesses in the southwestern  United States.  After  consolidating
these acquisitions,  the Company continued its acquisition  strategy in order to
expand further the  geographical  reach of its operations and the breadth of the
industry  segments which it served.  By expanding its presence  nationally,  the
Company believed it would be better positioned to provide outsourcing  solutions
to multistate employers and assimilate  additional  strategic  acquisitions with
multi-state  operations.  The Company also identified the transportation segment
as a market which would  particularly  benefit from the  Company's  services and
enhance the Company's operations and profitability.
                                        5
<PAGE>
                 In  furtherance  of these  strategies,  in  January  1995,  the
Company  acquired  ESM, a  transportation  PEO. The Company  then  significantly
increased its  nationwide  presence in October 1995 through its  acquisition  of
Hazar which expanded the Company's  geographic reach to many areas in the United
States, including California, New York, New Jersey, Massachusetts, and Illinois.

                 Other acquisitions with a significant  transportation  emphasis
include the 1996 acquisitions of Pokagon,  Renhill, Ashlin, and six companies in
the McClary-Trapp Group.

                 In order to leverage its expertise gained in the transportation
market in August 1996 the Company entered the full-service driver leasing market
through its acquisition of Leaseway,  a company which provided clients permanent
and temporary private carriage truck drivers,  as well as non-driver  employees,
including  warehouse  workers,   mechanics,   dispatchers,   and  administrative
personnel.  In this  market,  the Company  itself  hires and places  drivers and
provides  them to  companies  requiring  transportation  services  on a contract
basis.

                 The Company has also identified the  entertainment  industry as
an  industry  that  lacks  significant  market  penetration  by  PEO  companies.
Accordingly,  the Company  acquired TEAM Services in June 1996.  TEAM  Services'
current business  generally  involves  temporary and part-time  employees in the
entertainment  industry,  although the Company  believes the acquisition of TEAM
Services may assist the Company in entering other segments of the  entertainment
industry, such as production.

                 Four of the acquisitions in 1996 were particularly substantial,
and are described in greater detail below:

                 Employee  Solutions-East,  Inc.  Effective January 1, 1996, the
Company,  which had held a 1% equity interest in Employee  Solutions-East,  Inc.
("ESEI")  since its  formation in June 1994,  acquired the  remaining 99% equity
interest in ESEI from Edward L. Cain,  Jr., a director  and  executive  officer.
ESEI was a joint  venture  based in Atlanta,  Georgia  through which the Company
conducted substantially all of its sales and marketing activities in relation to
its employee  leasing  business.  The base purchase  price  consisted of 648,000
shares of the  Company's  unregistered  Common  Stock.  In  connection  with his
employment  agreement,  Mr.  Cain had  previously  received  options  to acquire
400,000  shares of the Company's  Common Stock at an exercise price of $2.13 per
share (the fair market value of the Company's Common Stock on the date of grant)
which  expire  through  November  10,  2004 and  which,  among  other  terms and
conditions, become exercisable in November 1999 subject to continued employment.
Mr. Cain was elected to the Company's  Board of Directors in 1995 and has served
as its vice president of sales since April 1995. Mr. Cain has continued to serve
the Company in these capacities following completion of the acquisition.

                 The Company has provided certain support services and financial
support to ESEI  since its  formation.  During  the period in which the  Company
owned a minority  equity  position in the venture,  the  venture's  results were
consolidated with those of the Company for financial  reporting purposes because
the Company held a controlling interest in ESEI's operations.

                 TEAM Services.  On June 22, 1996, the Company  purchased all of
the outstanding capital stock of GCK Entertainment  Services I, 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.  At  the  time  of  the
acquisition, TEAM Services had approximately 3,800 active worksite employees and
approximately  an  additional  7,200  employees  representing  employees who are
expected to receive payments in future periods, most of whom work on a temporary
or part-time basis. In connection with the acquisition,  the Company assumed net
liabilities of approximately  $825,000 (representing the minimum purchase price)
which has been recorded as goodwill, and is being amortized over a 15 year life.
The final purchase price will be four times total TEAM Services'  pre-tax income
for the  year  ending  June  30,  1999,  to be paid in the  form of net  assumed
liabilities and the Company's  unregistered  Common Stock.  Although there is no
stated  maximum  purchase  price,  the  Company  believed  this  arrangement  is
attractive  because the  purchase  price is  ultimately  dependent on the future
success of the  acquired  business.  The  unregistered  shares are  entitled  to
certain piggyback and demand registration rights.

                 Jeffery Colby, a member of the Company's Board of Directors and
a principal shareholder of TEAM Services,  has served as Chief Executive Officer
of TEAM Services since 1993. Mr. Colby entered into an employment agreement with
the Company pursuant to which he will provide, among other services, certain
                                        6
<PAGE>
marketing  services.   The  purchase  price  payable  under  the  TEAM  Services
acquisition  agreement  will be  increased  by an amount equal to four times the
gross profit on Company PEO sales  generated by Mr. Colby during the year ending
June 30, 1999.

                 Leaseway  Personnel  Corporation  and  Leaseway  Administrative
Personnel,  Inc. 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. The Company  acquired the assets of Leaseway through  Logistics  Personnel
Corp.  ("LPC"),  a wholly owned  subsidiary.  LPC provides  approximately  2,000
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.

                 McClary-Trapp  Group. On November 1, 1996, the Company acquired
the principal  assets of the  McClary-Trapp  Companies for  approximately  $10.6
million paid in the form of cash, assumed  liabilities,  and 53,000 unregistered
shares of the Company's common stock. The Company's  unregistered  common shares
were  valued at the  average  closing  price on the NASDAQ  National  Market for
October 1996,  less a 35% discount for lack of  marketability,  and have certain
registration  rights.  McClary-Trapp  Group together leased  approximately 2,000
employees  to  a  client  base   consisting   primarily  of  light   industrial,
transportation and service companies.

                 To  date in  1997,  the  Company  has  acquired  two  PEOs,  in
transactions described below.

                 ETIC. On February 1, 1997,  the Company  acquired the principal
assets of ETIC  Corporation,  dba Employers Trust ("ETIC"),  a Cincinnati,  Ohio
based PEO.  The purchase  price will be $30,000  plus five times ETIC's  pre-tax
income as defined for the 12-month  period ending  January 31, 1998. At closing,
$855,000 of the purchase  price was paid in cash. An interim  payment toward the
purchase  price may be due on or before  April 30, 1997,  if ETIC meets  certain
earnings  thresholds.  The final  payment of purchase  price is due on or before
April 30,  1998.  The  purchase  price  will be paid in cash.  ETIC has  current
annualized revenue of approximately $50 million and approximately 2,000 worksite
employees at approximately 150 clients.

                 CMGR Companies.  On February 17, 1997, the Company acquired the
principal assets of CMGR, Inc., and Humasys, Inc. (the "CMGR Companies"),  based
in the New York metropolitan area, for approximately $3.9 million,  payable $3.0
million in cash and $850,000 through the assumption of certain  liabilities.  At
closing, $1.5 million of the purchase price was paid in cash. An interim payment
toward the remaining  purchase price of $500,000 in cash is due six months after
the closing.  The final  payment  toward the purchase  price is due on or before
April 18, 1998. ETIC has current annualized revenue of approximately $55 million
and approximately 1,700 worksite employees at approximately 75 clients.

                 The Company  reviews  acquisition  opportunities  on an ongoing
basis.  While  growth  through  acquisition  is a  significant  element  of  the
Company's  overall long term growth plan, the Company  expects 1997  acquisition
activity  to be  reduced  from  1996  and  there  can be no  assurance  that any
additional acquisitions will be completed.

Current Operations

                 The  Company is engaged in the  business  of  employee  leasing
wherein the Company and the Company's  "client  company"  agree that the Company
will become the "employer of record" for the client company's employees. In most
cases,  the  Company  acts  as  a  "co-employer"  although  it  assumes  certain
additional obligations in certain situations,  including where required by state
regulation.  As the employer of record,  the Company assumes  designated payroll
and  personnel  obligations,  such as  payroll  preparation,  payment of payroll
taxes, preparation and filing of payroll tax reports and maintenance of employee
health  insurance  and  related  plans,  including  group  term  life  insurance
programs,  pension  plans,  401(k)  plans,  accidental  death and  dismemberment
insurance and risk management/workers' compensation services, while allowing the
client in most cases to retain  management  control of the employees,  including
supervision,  hiring and firing, job description and salary determinations.  The
Company also provides risk management/workers'  compensation services to clients
which are not employee-leasing clients of the Company.

                 Employee  leasing is a value-added  service that provides small
to mid-sized  companies  real economic  benefits.  Since the Company has a large
number of employees on its payroll, exposure relating to workers'
                                        7
<PAGE>
compensation  insurance,  health  insurance  and  unemployment  insurance may be
spread  over a  large  pool  of  employees,  thereby  potentially  reducing  the
Company's  rates  below  rates which might  otherwise  be  available  to smaller
companies.  In  addition,  employee  leasing may  relieve the client  company of
liability  for late  payments of payroll  and  withholding  taxes and  resulting
penalties.

                 The  Company  has  entered  into PEO  arrangements  with a wide
variety of client companies.  As a marketing  strategy to introduce its services
to potential  clients not  currently  seeking a full PEO  solution,  the Company
began in 1995 to  offer  employers  with  stand-alone  risk  management/workers'
compensation  services. At December 31, 1996, this program covered an additional
approximately 13,500 workers employed by approximately 64 employers. ESI targets
these stand-alone risk  management/workers'  compensation clients for conversion
into  full-service PEO clients.  The Company  competitively  prices its services
taking into account the various needs of its clients.

                 The Company  generally  enters into subscriber  agreements with
its clients.  These  agreements  generally  may be canceled upon 30 days written
notice of termination by either party and also may be canceled without notice by
the Company under certain circumstances such as nonpayment of fees.

Industry Overview

                 According to the U.S.  Small Business  Administration,  in 1993
there were  approximately 5.2 million businesses in the United States with fewer
than 500 employees; these businesses together employed over 50 million employees
and had  annual  payrolls  exceeding  $1.1  trillion.  Due to trends in the U.S.
economy,  these smaller  businesses,  with fewer internal resources to cope with
these  administrative  burdens  and  benefits  challenges,   are  becoming  more
numerous.  The prime target market for PEO  organizations  generally is small or
medium sized  employers who seek cost savings and assistance in dealing with the
increased complexity of the employment relationship. The Company believes larger
organizations also can benefit from PEO services.

                 The professional employer organization 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.  Whi
le 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"  is  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.

                 According to the National Association of Professional  Employer
Organizations  ("NAPEO"),  the number of employees under PEO arrangements in the
United States has grown from  approximately  10,000 in 1984 to approximately 2.0
million in 1995. Although industry data is somewhat incomplete, the PEO industry
market is highly fragmented;  it is estimated that there are approximately 2,300
PEOs in  operation  in the United  States,  none of which has a dominant  market
share  nationwide.  Industry  revenues  grew from $5.0  billion in 1991 to $13.8
billion in 1995,  representing a compounded annual growth of approximately  29%,
according to data from Staffing  Industry  Analysts,  Inc. The large size of the
potential client market leaves room for substantial  continued growth of the PEO
industry. Estimates of current PEO market penetration are only approximately two
percent of the target small to medium-sized employer group.

                 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
                                        8
<PAGE>
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 "Government Regulation"

Clients

                 As of December 31, 1996, the Company's  full-service PEO client
base   consisted  of   approximately   1,200  client   companies,   representing
approximately  30,000  employees  in 46 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, 1996 is set forth
below:

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

Transportation:
                 Private carriage/driver leasing     10%
                 For hire/standard PEO               23
                 --------                            --
                   Total                             33

Services:
                 Professional                        14
                 Light Industrial                     5
                 Entertainment                       11
                 ---------------                     --
                   Total                             30

Manufacturing                                        11

Construction                                          7

Retail Trade                                          6

Real Estate                                           5

Wholesale Trade                                       3

Agriculture and Fishing                               2

Other                                                 3


                 As  part  of its  business  strategy,  the  Company  targets  a
nationwide client base composed primarily of  transportation,  light industrial,
and  blue  collar  businesses,   and  to  a  lesser  extent,  white  collar  and
professional.  Although  the Company has  targeted  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
17  employees  as of December  31, 1996  (excluding  TEAM  Services),  while the
average  client added  through  internally-generated  sales in 1996  exceeded 40
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,  with
approximately  3,800  employees  who  became  Company  worksite  employees.  The
addition of the worksite employees of US Xpress,  which has become the Company's
largest  single client,  will increase the average number of worksite  employees
per  client  and the  percentage  of the  Company's  worksite  employees  in the
transportation industry.

                 The  Company  has  benefitted  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 21%, 25% and 22%,  respectively,  for the years ended December 31,
1996, 1995 and 1994.
                                      9
<PAGE>
                 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 continue 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 Company's  standard forms of subscriber  agreements for PEO
services establish the division of responsibilities  between the Company and the
client as  co-employers.  Pursuant to the  agreement,  the Company  generally is
responsible  for personnel  administration  and is liable for payment of related
payroll  taxes  and  compliance  with  payroll  and  benefit-related  government
regulation.  The client  generally  retains the employee's  services and remains
liable for government regulations which require control of the worksite or daily
supervisory  responsibility.  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 more control over those worksite employees
than under its standard arrangements.

                 The general  division of  responsibilities  under the Company's
standard forms of subscriber agreements is as follows:

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

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

                 Client:
                 -------

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

                 Joint:
                 ------

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

                 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 the  Leaseway  acquisition,  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
                                       10
<PAGE>
certain of its clients to provide  truck  drivers who are sole  employees of the
Company. For these drivers, 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 provides stand-alone risk management/workers' compensation services
to approximately  64 employers,  covering  approximately  13,500 employees as of
December  31,  1996.   The  Company's   stand-alone   risk   management/workers'
compensation  clients and employees  are located in 38 states,  primarily in the
manufacturing,  construction,  transportation and temporary services industries.
See "Services and Products: Stand-Alone Risk Management/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. In addition, the Company offers risk  management/workers'
compensation  services as a stand-alone  product to clients to which the Company
does not provide PEO services,  and makes certain additional  services available
directly to worksite employees.

                 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.  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.  In certain
industry  segments where such practices are customary (such as those serviced by
TEAM Services and LPC) the Company  extends to its clients payment terms ranging
from 15 to 30 days.  See "Outlook:  Issues and Risks" and "Liquidity and Capital
Resources" in Management's Discussion and Analysis.

                 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,  through its relationships with the Reliance Group
of Insurance  Companies  ("Reliance") and Legion Insurance  Company  ("Legion"),
offers a fully insured,  first-dollar coverage workers'  compensation  insurance
program   as   part  of  its   PEO   benefit   package.   The   Company's   risk
management/workers'  compensation  program  provides  its clients with access to
safety programs through the Company's experienced safety
                                       11
<PAGE>
professionals, early return to work programs and access to managed care networks
for workers' compensation services as part of the PEO package.

                 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  several  partially  self-insured  health  care
programs,   these  benefits  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.

                 Stand-Alone Risk Management/Workers' Compensation

                 The  Company  also  offers  its  fully  insured,   first-dollar
coverage workers'  compensation  insurance program on a stand-alone  basis. This
stand-alone program permits the Company to leverage its risk/management workers'
compensation  expertise  and provide the  benefits of the program to clients for
which the  Company  does not provide  full PEO  services.  The Company  provides
coverage  on either a  guaranteed  cost basis or on a  "retrospective"  basis in
which  premiums  are  adjusted  after the end of the policy term to reflect loss
experience.

                 Although  profitable,  the Company  also views the  stand-alone
program as an opportunity to establish  relationships  with companies  which are
not currently seeking PEO services but may be converted into more  comprehensive
PEO service  arrangements in the future.  The Company  believes that clients can
benefit  from the  Company's  goal to provide low cost risk  management/workers'
compensation products through careful client selection, active claims management
and safety programs.

                 Worksite Employee Services

                 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 also is evaluating
a payroll deduction program under which the Company intends to offer to worksite
employees at competitive  prices discount goods and services such as homeowners,
automobile and other types of personal  insurance,  pre-paid telephone cards and
travel services.

Sales, Marketing and Strategic Alliances

                 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 what  benefits  they  generally  offer  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 and Marketing

                 The Company's  national  sales  operation is  headquartered  in
Atlanta,   Georgia.   This  operation   generates  new  business  leads  through
telemarketing operations. These leads are then supported by a nationwide network
of sales  representatives.  The operation 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.
                                       12
<PAGE>
                 The Company's field sales operations, which are directed by the
Company's Vice President - Sales, 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 and
report to an RVP. Because of the need to educate  prospective  clients as to the
benefits  of a PEO and the lead  time  necessary  for a sales  person  to become
effective  in the PEO  industry,  to  assure a  significant  nationwide  selling
presence,  the  Company  believes  it is  appropriate  to maintain a large sales
force.  At December 31, 1996,  the Company's  sales force  included 45 full-time
RVPs, general agents and sales agents, and 4 part-time brokers.

                 The RVPs,  general  agents and the 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's stand-alone risk management/workers' compensation
services generally are 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  an  insurance   wholesaler.   RMA  is
responsible for recruiting and training a nationwide  sales staff of independent
brokerage agencies or sales agents,  providing effective  communication channels
between the agencies and the Company's  underwriting  personnel,  and developing
and managing sales compensation  programs.  RMA's independent agencies and sales
representatives receive compensation based on production.

                 Strategic Marketing Alliances

                 The Company has entered into several strategic  alliances which
it believes  may enhance the  marketing of its products and services by allowing
it to benefit from the experience,  industry  expertise,  geographical reach and
customer contacts of the other organizations with minimal financial  investment.
These alliances can provide both entities with profitable business opportunities
to either expand the Company's customer base or expand the services and products
which the Company can offer.

                 The Company's current  alliances include  arrangements by which
Company  PEO and  workers'  compensation  services  are  marketed  by  others in
exchange for the right to provide  certain  services  for the Company,  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 at least one is larger than the Company in
terms of the number of  worksite  employees  and  several  others  approach  the
Company's  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 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.  The
Company also incurs direct  competition  from numerous  PEOs,  some of which may
have greater  resources,  greater  assets and larger  marketing  staffs than the
Company.  The Company also competes less directly 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.

                 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.
                                       13
<PAGE>
                 The Company recently has experienced the effects of an increase
in  competition,  and a  general  softening  of  the  market,  in  the  workers'
compensation and benefits areas.

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,  which  assists the Company in
executing its risk management program.

                 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 Company has recently  established an investment policy with
respect to its short-term  investment portfolio maintained to fund the Camelback
trust  account  maintained  by  its  Camelback   Insurance  Ltd.   ("Camelback")
subsidiary,  the trust  account  required  by  Reliance  (with which the Company
conducts the majority of its risk management workers' compensation programs) for
future claims payments and related requirements for its risk management/workers'
compensation program. See "Risk Management/Workers' Compensation Program" below.
The  investment  policy  applies  to the  Company's  personnel  and  to  outside
investment managers that the Company may appoint from time to time.

                 The basic  objectives of the  investment  policy are the safety
and  preservation  of the invested  funds,  the liquidity of investments to meet
cash  flow  requirements,  the  realization  of a  maximum  rate  of  return  on
investments,  and  the  reduction  of  tax  liability,  where  appropriate.  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.  Prior
to the adoption of this investment  policy,  the Company  invested its available
funds  primarily  in  certificates  of  deposit  and  other  short  term  liquid
investments.

Risk Management/Workers' Compensation Program

                 Overview

                 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.

                 The  overall   premiums   paid  by   employers   for   workers'
compensation  insurance  generally  are  governed in each state by  statute.  An
employer's actual premium is determined  primarily by multiplying the employer's
total  payroll  within each  industry  classification  by a statutory  or manual
premium rate for each  classification,  and then  increasing or decreasing  that
gross premium  amount to take into account the  employer's  actual and projected
claims experience.  A company with a higher than average claims experience,  for
example, would generally pay a higher premium than one with a lower than average
claims experience. This system (known as "experience modification" or "EMod") is
designed  in part to reduce  premium  costs for  employers  that  maintain  safe
workplaces and to encourage safe workplaces.

                 Traditional Workers' Compensation Model

                 In  a  traditional  workers'  compensation   arrangement,   the
workers'  compensation  insurance company administers claims itself or through a
third-party claims administrator  ("TPA"). The employer generally is required to
notify the  insurer or the TPA of every  claim,  and the insurer or the TPA then
evaluates the claim,  maintains  contact with the worker,  medical providers and
the employer, makes any required payments and estimates the
                                       14
<PAGE>
appropriate  initial reserve for the claim.  Under this system, a PEO has little
direct control over the main  components of its premium  costs:  losses and loss
administration  expenses.  Losses can be  controlled to some extent by the PEO's
client,  which manages the worksite,  and the TPA, which evaluates the propriety
of claims.  Claims  administration  expenses are controlled to a large degree by
the TPA, which manages the speed and efficiency of claims settlement and charges
the insured a fee for its services.

                 ESI's Risk Management/Workers' Compensation Model

         The Company  believes that it has developed a risk  management/workers'
compensation  program  and  philosophy  which  allows  the  Company  to  achieve
favorable  results from  workers'  compensation  operations.  Specifically,  the
Company maintains the following standards:

         o        maximum loss per occurrence of $250,000 or $350,000

         o        no Category IV risks (highest risk occupations)

         o        selective client acceptance

         o        relatively few claims assignments per claims manager

         o        effective closure of claims

         o        30-day cancellation provisions in PEO contracts

         o        retain no risk for accidental death and dismemberment
                  or other catastrophic losses

The following  section explains in greater detail the operation of the Company's
partially self-insured risk management/workers' compensation program.

                 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.  Prior to June 1,
1994,  the  Company  covered  all  its  workers'  compensation   obligations  by
purchasing  policies from third-party  insurers which provided  coverage for the
Company's  workers'   compensation   claims,   although  the  Company  partially
self-insured  for a portion of its workers'  compensation  coverage from 1994 to
1995. These traditional arrangements provided the Company with little or no risk
for workers'  compensation losses, but did not permit ESI to actively manage its
workers' compensation premium costs.

                 Under the  traditional  arrangement,  the  Company  had  little
control over its workers'  compensation  costs and generally  passed these costs
through to its customers. The Company believed,  however, that if it could lower
its workers' compensation costs, and share the cost savings with its clients, it
would be able to market its PEO services more  effectively.  For this reason, in
June 1995 the Company began providing  workers'  compensation  insurance through
Camelback, its newly formed wholly-owned offshore insurance company chartered in
Bermuda,  in  coordination  with its  servicing  insurers  which are rated  "A-"
(excellent) or better by A.M. Best Company.  Under its current  arrangement with
Reliance,  Reliance  provides full first dollar insurance  coverage for workers'
compensation  losses and Camelback  reinsures  Reliance's  obligation for losses
equal to or less than  $250,000  for each  occurrence.  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 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 does not  underwrite  or accept  Category IV
risks, which contain the highest risk occupations.

                 To  create  additional   flexibility  by  having  the  internal
resources to operate similar programs with other insurers, the Company is in the
process of forming Camelhead Insurance Ltd. in Hawaii ("Camelhead"). The Company
anticipates  that it will utilize  Camelback for its programs in connection with
Reliance, and use Camelhead for other programs. See "Other Arrangements" below.

                 The Company believes that its current risk  management/workers'
compensation  arrangement  helps lower its  workers'  compensation  costs in the
following ways:

                 Underwriting.   The  Company's  Risk   Management   Department,
established in June 1994,  works to control the Company's  exposure to losses by
ensuring that prospective  clients present acceptable risks.  Before the Company
accepts  any PEO or  stand-alone  clients,  it reviews the  client's  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 the  Department  believes it can
manage  effectively.  The Company carefully  scrutinizes each potential client's
risk profile before undertaking any leasing arrangement. Many cases submitted to
the Company are rejected and do not become clients of the Company. Once a client
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 may terminate its  relationship  with any PEO client 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.  ESI
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's Risk  Management  Department
seeks through  active claims  management  to resolve  claims  quickly and at the
lowest possible cost. To achieve this, the Company  maintains a low ratio of ESI
claims  managers  to claims so that each  case may be  properly  evaluated.  The
Company emphasizes prompt attention to injuries and claims,  striving to achieve
immediate reporting of injuries and with a goal of contacting the
                                       15
<PAGE>
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
weekly  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.

                 Where permitted by state law, the Company itself administers or
pays  most  claims  with an  expected  loss of $5,000  or less,  thereby  saving
proportionally  high TPA claims  administration fees for such small claims. With
at least 75% of all claims  falling  below this  $5,000  threshold,  the Company
believes this policy results in significant  cost savings.  For claims exceeding
$5,000,  the  Company  and the 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 pro-active claims
management  approach permits it to settle its claims,  on average,  more quickly
than ordinary workers' compensation insurers.

                 The  Company  retained  Lindsay  Morden as its  primary  TPA in
mid-1996, replacing its prior primary TPA. The Company also uses Mark VII as its
TPA for certain transportation-related  programs as part of a strategic alliance
in which Mark VII affiliates also solicit prospects on behalf of the Company.

                 Advantages of a Wholly-Owned Insurance Subsidiary.

                 The    Company     believes    that    operating    its    risk
management/workers'  compensation  program  using  Camelback  provides  it  with
operational  and  financial  advantages.  Use of Camelback  provides the Company
flexibility  in  administering  its program and  coordinating  coverage with its
insurers.  The  Company  receives  certain  tax  advantages,  because  insurance
companies  may  generally  deduct  reserves  when booked versus when paid. As an
insurance  company,  Camelback  pays state  "premium  tax" and  accordingly  its
profits are not subject to state income tax.  Also,  ESI's use of the  insurance
subsidiary  and its  maintenance  of a  trust  fund  reduces  credit  risks  for
Reliance, thereby lowering administrative costs of the Reliance program to ESI.

                 Reserves.

                 To recognize liabilities for future unpaid losses, reserves are
established  which  represent  estimates of future  amounts needed to pay claims
with respect to insured events that have occurred. Reserves are also established
for loss adjustment expenses, which represent the estimated expenses of settling
claims,  including legal and other fees, and general  expenses of  administering
the claims  adjustment  process.  The Company also provides for claims incurred,
but not reported,  based on  industry-wide  data and the  Company's  past claims
experience  through  consultation with an actuary.  Reserves are estimates based
both on historical experience and on judgment of the effects future economic and
social forces are likely to have on Camelback'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 subject to uncertainty and
a number of highly variable  circumstances.  See "Adequacy of Loss Reserves" and
"Loss and Claims Experiences" in Item 7 -- "Management's Discussion and Analysis
- Outlook: Issues and Risks."

                 The Company is required through its fronting  arrangements with
Reliance and Legion to maintain  restricted  cash and  investments to secure the
future  payment  of  workers'  compensation  losses.  Such  restricted  cash and
investments have been calculated by the Company's  fronting  carriers  (Reliance
and Legion) 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 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 is classified as a
current asset as the Company settles and pays most workers'  compensation claims
within one year from  occurrence.  At December  31,  1996,  Restricted  Cash and
Investments related to the Legion program will be classified as Receivables from
Insurance Companies until Camelhead is formed and the funds are ceded to it.

                 During the limited  period of time the Company has operated its
risk management/workers' compensation programs, it believes that it has achieved
below average loss  experience  rates due to its selective  evaluation  process,
safety programs and active claims  management.  However,  the Company may not be
able to maintain such a loss  experience  over a longer  period of time.  Future
loss experience could increase due to weakened underwriting controls as a result
of growth, the loss experience of acquired operations,  increased competition in
the Company's risk  management/workers'  compensation  business or other factors
which may affect the Company's standards, procedures or claims experience in the
future. An increase in the Company's loss
                                       16
<PAGE>
experience  would  decrease  the  Company's  net  income  and  could  materially
adversely affect the Company's business and financial performance.

                 Stand-alone Program

                 Starting in 1996, the Company began formally  offering its risk
management/workers'  compensation  program on a  stand-alone  basis to companies
that  are  not   full-service   PEO  clients  or  in  connection  with  possible
acquisitions  of  other  PEOs.  See  "Services  and  Products--Stand-Alone  Risk
Management/Workers' Compensation" above.

                 Other Arrangements

                 In part to lessen its  dependence  upon  Reliance,  the Company
regularly explores the establishing of additional relationships. The Company has
established  an  additional  relationship  with Legion,  which  relationship  is
similar to the Reliance program and provides workers'  compensation services for
certain Company transportation operations. The Company retains an obligation for
losses up to $350,000  for each  workers'  compensation  occurrence  for LPC and
other  Company  driver  leasing  operations  and  certain  other  transportation
programs which are covered  through Legion;  the Company's  Accidental and Death
and Dismemberment  insurance from Chubb also applies to the Legion program.  The
Company  intends to proceed  with  continuing  relationships  with more than one
insurance company to provide alternative sources of service,  although there can
be  no  assurance  that  Company  will  be  able  to  successfully  continue  an
arrangement with any such insurer.

Medical Program

                 In  addition  to its  medical  insurance  plans which are fully
insured by third party  providers,  the Company  offers  partially  self-insured
programs   through   arrangements   with  Nationwide   Life  Insurance   Company
("Nationwide")  and  John  Alden  Life  Insurance  Company   ("Alden"),   and  a
self-insured   program  through  arrangement  with  Provident  Life  &  Accident
Insurance company ("Provident"), in addition to its fully insured medical plans.
As of December 31, 1996,  approximetely  6% of employees  were insured under the
Nationwide,  Alden  and  Provident  plans.  Pursuant  to the  arrangements  with
Nationwide  and Alden,  the Company is  responsible  for  deductibles of $75,000
($100,000 prior to January 1, 1997) 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.
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.   Working  with   Nationwide   and  Pacific   Atlantic
Administrators,  which  act as  TPAs  for  the  Alden  program,  and  Provident,
respectively,  the  Company  seeks to limit its risk by  performing  an in-depth
review of loss factors before agreeing to provide coverage, carefully monitoring
claims  experience and identifying and adding preferred  provider  organizations
with competitive discounts as appropriate.  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  severity  of new  claims,  and a lack of
historical claims experience with new clients.

Government 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 form of agreement provides 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.
                                       17
<PAGE>
                 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  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.

                 The  Internal  Revenue  Service  ("IRS")  has  formed  a Market
Segment Study Group to examine  whether PEOs such as the Company are for certain
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.
First,  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.  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.
                                       18
<PAGE>
                 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  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, and Camelhead would be subject to the insurance laws and regulations of
Hawaii.  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  in an amount  equal to at least 20% of the net
premiums written through Camelback's  fronting  arrangements,  provided that the
percentage  requirement is reduced to 10% at such time as premium volume reaches
at least $6 million. The Company is subject to additional  requirements pursuant
to its arrangements with Reliance. See "Management's  Discussion and Analysis --
Liquidity  and  Capital  Resources."  Hawaii  laws would  require  Camelhead  to
maintain statutory capital and surplus in an amount equal to at least 33-1/3% of
the net premiums written through Camelhead's fronting arrangements.  The laws of
Bermuda and Hawaii 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.

                 The Company's risk  management/workers'  compensation  services
program is 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.

                 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 41 states, and has applied to
be licensed in others. 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.
                                       19
<PAGE>
                 Health Care Reform

                 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.

                 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.

                 The Health Insurance Portability and Accountability Act of 1996
may increase the Company's risks relating to worksite  employee health insurance
programs  because it extends  the  periods for which,  and  circumstances  under
which, an employer must allow a former employee to participate in the employer's
health plans.  Such expanded  availability may adversely affect the risk profile
and claims experience of groups insured through the Company,  and thereby affect
the Company's  premiums and the Company's  retained risks under its self-insured
programs.

                 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, 16
states have passed laws that have licensing or registration  requirements and at
least three states are considering  such  regulation.  Twelve states,  Arkansas,
Florida,  Maine,  Montana,  Nevada, New Hampshire,  New Mexico,  South Carolina,
Tennessee,  Texas,  Utah and Vermont,  have passed laws that license PEOs. Three
states, Rhode Island,  Oregon and Minnesota,  require PEOs to be registered with
these states.  One state (Idaho)  establishes  guidelines  for PEOs. 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  for the current  fiscal
year and future fiscal years.

Employees

                 At December  31,  1996,  the  Company  employed  216  full-time
corporate employees in addition to the worksite employees. The Company considers
its employee relations to be very good.


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

                 The Company leases all of its offices.

                 The Company's  headquarters office space at 2929 East Camelback
Road,  Phoenix,  Arizona is leased for a term  expiring on March 31,  1997.  The
Company leases additional space nearby for its risk management
                                       20
<PAGE>
operations. The Company has leased new space at 6225 North 24th Street, Phoenix,
Arizona for its home  office,  and to  consolidate  and  increase  space for its
expanding Phoenix  operations.  The new lease takes effect on April 1, 1997, and
increases  the  useable  space for the  Company's  home office  operations  from
approximately 18,000 square feet to 58,000 square feet.

                 The Company  also  leases  smaller  amounts of office  space at
various  locations  in a number of other  cities  for its  sales and  operations
offices.  A number of RVPs of the Company also rent space, at their own expense,
for sales 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.

ITEM 3. - LEGAL PROCEEDINGS
---------------------------

                 Securities Class Actions

                 The Company,  and certain of its executive officers,  have been
named as  defendants  in several  actions  filed in March 1997.  While the exact
claims and  allegations  vary,  they all  allege  violations  by the  Company of
Section  10(b)  of the  Securities  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 shortly after a significant drop in the trading
price of the  Company's  Common  Stock in March 1997.  Each of the actions  seek
certification  of  a  class  consisting  of  purchasers  of  securities  of  the
Registrant  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 Company
believes  the  actions  are  without  merit  and  intends  to  defend  the cases
vigorously. Actions known to the Company as having been filed are:

                 (a) Keith Blaich, on behalf of himself and all others similarly
situated,  against Employee Solutions, Inc., Marvin Brody, Harvey A. Belfer, Roy
A.  Flegenheimer,  and Morris C. Aaron,  United  States  District  Court for the
District of Arizona, Case No. CIV 97-545 PHX RGS.

                 (b) Gail Lehmann, Lucian B. Cox, III and Frederick Schwartz, on
behalf of themselves and all others similarly situated,  vs. Employee Solutions,
Inc., Harvey A. Belfer, Marvin D. Brody, Roy Alan Flegenheimer,  Edward L. Cain,
Jr. and Morris C.  Aaron,  United  Stated  District  Court for the  District  of
Arizona, Case No. CIV 97-547 PHX SMM.

                 (c)  Harold M.  Sucher,  individually  and on behalf of and all
others  situated,  vs.  Employee  Solutions,  Inc.,  Marvin D. Brody,  Harvey A.
Belfer,  Morris Aaron and Bertram  Danzig,  United States District Court for the
District of Arizona , Case No. CIV 97-553 PHX EHC.

                 (d) Stephen A. Roplin and Atlas Biscuit Co., Inc., on behalf of
themselves and all others similarly situated,  against Employee Solutions, Inc.,
Marvin D. Brody, Roy Flegenheimer,  Morris C. Aaron and Harvey A. Belfer, United
States District Court for the District of Arizona, Case No. CIV 97-614 PHX SMM.


                 Tax Matters

                 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. In consultation  with legal
counsel,  the  Company  believes  that based on Arizona  Revised  Statutes it is
entitled to the lower rate. If it is 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.

                 The  Company  received  payroll tax  penalty  notices  from the
Internal Revenue Service and various states, relating to the acquired operations
of Hazar alleging certain late payment of payroll taxes. The penalties  proposed
to be  assessed  against  the  Company  total  approximately  $470,000  and  the
penalties  to be assessed  against  Hazar total  approximately  $330,000 for the
period  during which the Company  performed  designated  management  services on
behalf of the  predecessor.  The Company has been  informed  that the Service is
considering  abatement of the  penalties  assessed  against it, at the Company's
request.

                 The Company believes that it has defenses to these actions, and
has objected vigorously to payment of such past taxes and penalties. However, it
is not possible to predict if the Company will be successful in abating
                                       21
<PAGE>
these taxes and penalties. The Company would be required to record these amounts
as an additional  expense and liability if, at any time in the future, it became
apparent  that it was  probable  that the  company  would not  prevail  in these
matters.

                 Other

                 The Company was named as a defendant in a lawsuit  filed by M &
M  Building  Services,  Inc.  in the  Superior  Court of the  State of  Arizona,
Maricopa County, No. CV 96-03682,  in March 1996 challenging the manner in which
the Company billed plaintiff for payroll taxes.  The complaint  alleges improper
billing practices and other causes of action and seeks  unspecified  damages and
injunctive relief.  The suit purports to be brought as a class action,  although
the Company  was  subsequently  informed  that class  certification  will not be
sought.  The Company  intends to defend the matter  vigorously,  and has filed a
motion for dismissal.

                 The Company was named as a defendant in a lawsuit  filed by B&B
Amusements, Inc. in the Superior Court of the State of Arizona, Maricopa County,
No. CV  96-21078 in December  1996  challenging  the manner in which the Company
billed  plaintiff for payroll  taxes.  The complaint  alleges  improper  billing
practices  and  other  causes  of  action  and  seeks  unspecified  damages  and
injunctive relief.  The suit purports to be brought as a class action,  although
the Company  was  subsequently  informed  that class  certification  will not be
sought. The Company intends to defend the matter vigorously.

                 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 establishes
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 employee's  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.

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 1996.

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

<S>                            <C>     <C>                                                              <C>
Marvin D. Brody                 53      Chairman of the Board, President, Chief                           1993
                                        Executive Officer and Director

Roy A. Flegenheimer             49      Chief Operating Officer and Secretary                             1993

Edward L. Cain, Jr.             37      Vice President of Sales and Director                              1995

Morris C. Aaron                 32      Chief Financial Officer and Treasurer                             1996
</TABLE>
                                       22
<PAGE>
<TABLE>
<CAPTION>
<S>                            <C>     <C>                                                              <C>
Paul M. Gales                   41      Vice President and General Counsel                                1996

Mark J. Gambill                 37      Vice President 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  since December 1995.  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.

                 Edward L. Cain,  Jr. has been a Director of the  Company  since
July 1995 and has been the Company's  Vice  President of Sales since April 1995.
Mr. Cain has been  President of the  Company's  sales and  marketing  subsidiary
since  June  1994.  From  1991  until  1994,  he was the  Director  of Sales and
Marketing for Personal Benefits Group, an Atlanta-based  PEO. Prior thereto,  he
was  a  sales  agent  in  CIGNA's  individual   financial  service  division  in
Springfield, Massachusetts and later in Grand Rapids, Michigan.

                 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,  most recently as senior manager 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.  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
Marketing in March 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,  an  international  payroll  processing and
human resources company.

                                     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, and the Nasdaq  Smallcap Market
prior thereto. As of March 17, 1997, the Company had 150 holders of record.

Quarter Ended
                                                             High         Low
                                                             ----         ---
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
December 31, 1995........................................   $ 9 1/8     $ 3
September 30, 1995.......................................   $ 3 7/8     $ 2 3/8
                                       23
<PAGE>
June 30, 1995............................................   $ 2 5/8     $ 1 3/4
March 31, 1995...........................................   $ 2 3/8    $1 11/16


                 To the extent the above  quotations were reported by the Nasdaq
Smallcap  Market,  they reflect  interdealer  prices,  without  retail  mark-up,
mark-down or commission and may not represent actual transactions.

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 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") in the fourth quarter of 1996 as described in the following paragraph.

                 As part of the  total  consideration  of $10.6  million  in the
November 1996 acquisition of the McClary- Trapp Group, the Company issued 53,000
unregistered  shares  of  the  Company's  common  stock  which  are  subject  to
registration  rights  and  valued at  $700,000  to three  individuals,  who were
affiliates of the acquired companies.


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, 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,  as indicated in
their report included elsewhere herein. The selected consolidated financial data
presented  below as of  December  31, 1993 and 1992 and for the years 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.  The per share data and share amounts have been
restated to give effect to the two-for-one  stock splits effected in the form of
100% stock dividends effective January 16, 1996 and July 26, 1996.
                                       24
<PAGE>
<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                     ----------------------------------------------------------
                                                                       1996        1995        1994         1993         1992
                                                                     --------    --------    --------     --------     --------
<S>                                                                  <C>         <C>         <C>          <C>          <C>
Consolidated Statements of                                                                (In thousands)
Earnings Data:

Revenues.........................................                    $439,016    $164,455    $ 74,334     $ 48,571     $ 11,191

Cost of revenues.................................                     400,862     150,675      71,068       46,501       10,800

Gross profit.....................................                      38,154      13,780       3,266        2,070          391

Selling, general and administrative expenses.....                      17,310       7,183       2,297        1,471          299

Depreciation & amortization......................                       2,073         426         269          128           24

Income from operations...........................                      18,771       6,171         700          471           68

Non-operating income (expense), net..............                        (364)        510         129         (263)          (6)

Income before provision for taxes................                      18,407       6,681         829          208           62

Income tax provision.............................                       6,381       2,846         450           98           14

Net income.......................................                      12,026       3,835         379          110           48
</TABLE>
<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                     ----------------------------------------------------------
                                                                       1996        1995        1994         1993         1992
                                                                     --------    --------    --------     --------     --------
<S>                                                                  <C>         <C>         <C>          <C>          <C>
Consolidated Balance Sheet                                                   (In thousands, except per share data)
Data:

Working capital (deficit)........................                    $ 30,449    $  8,589    $  2,394     $    (36)    $   (146)

Total assets.....................................                     125,969      36,840       9,310        6,399          664

Long-term debt...................................                      42,800        --          --           --           --

Stockholders' equity ............................                      46,507      19,943       6,401        3,451           14

Common Stock Data

Earnings per share

-Primary.........................................                         .37         .16         .02          .01         --

-Fully diluted...................................                         .37         .14         .02          .01         --

Weighted average common and
equivalent shares outstanding

-Primary.........................................                      32,168      23,507      20,145       11,414       10,120

-Fully diluted...................................                      32,386      26,431      20,145       15,716       10,120

Growth Percentages

Revenues.........................................                         167%        121%         53%         334%       1,884%

Net income.......................................                         214%        912%        246%         129%         237%
</TABLE>
                                       25
<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 and  statements  using the terms
"believe," "anticipate," "expect," "intend" or similar terms) 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 client's  workers'  compensation  and
benefit plan experience, Company administrative resources required, the expected
profit,  and  other  factors.  These  fees 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.  The  Company  also  receives  fee income for  certain  other types of
services, such as those in connection with its driver leasing program (which was
commenced in 1996 as a result of the Leaseway  acquisition),  although such fees
have not yet been material to the Company.

                 Costs of Revenues

                 The Company's primary 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 is  responsible  for  payment of these  costs even if not
reimbursed by its clients. The Company has recently begun extending credit terms
to clients  in  certain  industries.  See  "Outlook:  Issues and Risks -- Credit
Risks" herein.

                 Employment  related taxes consist of the employer's  portion of
payroll taxes required under the Federal Income Contribution Act ("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
size of payments, and vary from state to state.

                 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  premiums,  and accidental death and dismemberment  insurance
which the  Company  maintains  to limit its  losses.  In its  arrangements  with
Reliance through the Company's  wholly-owned  insurance subsidiary,  and Legion,
the Company retains workers'  compensation  liabilities up to certain  specified
amounts. Retained workers' compensation claims liability is recorded at the time
a claim is reported to the Company, in an amount
                                       26
<PAGE>
equal to the retained  portion of the expected total incurred claim. The Company
also provides for claims incurred, but not reported, based on industry-wide data
and  the  Company's  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.  While the Company  believes that its reserves are
adequate for future claims expense,  there can be no assurance that this will be
the case. See "Outlook:  Issues and Risks." Changes in the liability are charged
or credited to operations as the  estimates  are revised.  Administrative  costs
include fees paid to Reliance and Legion 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 relates
to premium  payments to the Company's  insurers for the retention of risks above
specified limits. The Company also purchases accidental death and  dismemberment
insurance which covers the Company and its excess  reinsurance  carriers against
catastrophic  losses  related  to  workers'  compensation  claims up to  certain
limits. See "Item 1 -- Risk Management/Workers' Compensation Program."

                 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.  See "Item 1 --
Medical Program." 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 are adequate for future
claims  expense,  there can be no  assurance  that  this  will be the case.  See
"Outlook: Issues and Risks."

Selling, General and Administrative Expenses

                 The Company's  primary  operating  expenses are  administrative
personnel  expenses,  other general and administrative  expenses,  and sales and
marketing  expenses.  Administrative  personnel  expenses include  compensation,
fringe benefits and other personnel  expenses related to the Company's  internal
administrative  employees.  Other general and  administrative  expenses  include
rent,  office supplies and expenses,  legal and accounting  fees,  insurance and
other operating  expenses.  Sales and marketing expenses include  commissions to
sales executives and related  expenses.  The Company's  headquarters and Phoenix
operations are moving to new offices beginning in April 1997, to accommodate the
significant   growth  which  the  Company  has  experienced  in   administrative
employees. This is expected to significantly increase the Company's rent expense
in future periods.

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.
Because of the Company's recent and possible future  acquisitions,  amortization
costs are expected to increase substantially in future periods.

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, and prior period financial statements therefore
have not been  restated to reflect  these  acquired  operations.  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 and because of the  transition  period after an acquisition in which the
Company acts to implement  pricing  changes where  appropriate  and to eliminate
client  relationships  which  do not meet the  Company's  risk or  profitability
profiles.  Because  the  Company  intends  to focus in the short term on further
integrating  prior  acquisitions,  the Company  does not  currently  expect 1997
acquisition activity to be as extensive as in 1996.

Quarterly Operating Results

                 Revenues  are also  affected  by bonus  payrolls  in the fourth
quarter,  which tend to increase due to the common practice of employers  paying
year end  bonuses.  The effects of the  flow-through  of such bonus  payrolls to
worksite employees are substantially higher in December than in any other month.
In addition to increasing  revenues,  these payments also affect margins because
of the offsetting nature of bonus payments to worksite employees as costs.
                                       27
<PAGE>
                 Quarterly  margin  comparisons are affected by the relative mix
of  stand-alone  risk  management/workers'  compensation  services  and full PEO
services in any  particular  period.  Significant  numbers of  conversions  from
stand-alone   risk   management/workers'   compensation  to   full-service   PEO
arrangements  (such as those which have  occurred  in  connection  with  certain
Company  acquisitions)  would  tend  to  increase  gross  profit  amounts  while
decreasing  gross margins because of the addition of  pass-through  salaries and
wages to both revenues and costs.

                 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
has a  decreasing  impact  on the  Company's  working  capital  and  results  of
operations  as the year  progresses.

Results of  Operations--Year  Ended  December  31,  1996  Compared to Year Ended
December 31, 1995.

                                                   (in thousands)

                                                       Percent
                                           1996        Change      1995
                                           ----        ------      ----

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


                 Net income  for the year ended  December  31,  1996,  was $12.0
million,  or $.37 per fully diluted share,  reflecting  significant  growth from
1995 net income of $3.8 million,  or $.14 per fully diluted  share.  Revenues of
$439.0 million for the year ended December 31, 1996, were 167% higher than 1995.
The growth is the result of integration of several  acquisitions;  the growth in
the Company's stand alone 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  services  were $16.1 million in 1996 compared
with $3.6 million for 1995.

                 The  Company  recently  began  to  experience  the  effects  of
competition and a general  weakening in the workers'  compensation  and employee
benefits  markets,  which slowed revenue  growth.  This trend has continued into
1997.  Policies  in place at January 1, 1997  represent  annualized  premiums of
approximately  $12  million.  Each such  policy is  subject  to  renewal in 1997
subject to agreement of the parties.

Cost of Revenues
                                       28
<PAGE>
                 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 the following discussion.

                 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. The overall
results  of the  Company's  risk  management/workers'  compensation  program  as
measured against industry data can be attributed to the Company's selectivity in
new  client  acceptance,  the  effective  use of safety  inspections  and safety
programs  and its  ability  to manage and close open  claims  coupled  with stop
losses of $250,000 and $350,000 per  occurrence,  the  maintenance of accidental
death and  dismemberment  insurance  through  Chubb,  no  Category  IV high risk
clients,  and a 30-day  cancellation  capability on PEO  business.  Although the
Company  believes its internal method of establishing  reserves  continues to be
appropriate,  the Company  commissioned  an  independent  third party  actuarial
review of the Company's workers'  compensation  reserves at year end 1996, as it
had for year end 1995.  In the 1996  review,  the  actuary  primarily  relied on
industry-wide  data,  while taking into account to a lesser  extent than in past
reviews  ESI's  specific risk  structure  and  philosophy,  in  determining  its
findings.  Although the Company  believes that  determining  reserves based more
heavily upon its actual  historical  experience is  appropriate  and  adequately
addressed its exposure,  it determined to adopt the reserve levels determined by
the review,  and intends to use similar  methodologies  going  forward which may
have an impact on future periods.  See "Adequacy of Loss Reserves" and "Loss and
Claims  Experience"  below  in  "Outlook:   Issues  and  Risks"  for  a  further
explanation of risks and uncertainties  relating to the Company's  establishment
of reserves.

                 The  following  table  provides an  analysis  of the  Company's
workers' compensation reserves from its partially  self-insured programs for the
years ended  December 31, 1996 and 1995 and the seven months ended  December 31,
1994:

                                                      (In thousands)

                                               1996          1995          1994
                                           --------      --------      --------

Reserve - Beginning of period              $  1,052      $     45      $    0.0

Losses                                       10,034         2,230           172

Payments                                     (5,932)       (1,223)         (127)
                                           --------      --------      --------

Reserve - End of period                    $  5,154      $  1,052      $     45
                                           ========      ========      ========



                 The   following   table   summarizes   certain   indicators  of
performance  regarding the Company's  risk  management  department's  ability to
close out workers' compensation claims in each of the years ended December 31:
                                       29
<PAGE>
                           Incurred Claims by Calendar Year

                                           Approximate            Approximate
                      Approximate          Open Claims            Open Claims
Year ended            Total                December 31,           December 31,
December              Number of            1996                   1995
31,                   Claims

1996                  3,266                1,156                  N/A

1995                  1,024                   89                  191

1994                    100                    4                    4
                      -----                 ----                  ---

                      4,390                1,249                  195
                      =====                =====                  ===


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  employees  became included in the Company's PEO
business.  The Company  generally earns 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 because the PEO
revenues include significant (and substantially  offsetting) revenue and expense
items  for  payroll  and  payroll-related  costs  for  the  worksite  employees.
Accordingly, the Company's overall margin is affected in significant part by the
mix of revenues derived from  full-service PEO clients and clients for which the
Company provides only risk management/workers' compensation services.

                 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  workers'  compensation  claims  managers to 37 at
December 31, 1996 compared to seven at December 31, 1995.  The Company  believes
that a continuous focus on maintaining a low ratio of cases per claim manager is
a significant  factor in  controlling  workers'  compensation  expense.  In this
regard,  the Company  continues to implement a policy whereby the maximum number
of active  claims which each claims  manager may handle is 50. Based on industry
data,  the Company  believes  that this maximum is  significantly  less than the
industry average. See "Business--Risk  Management/Workers' Compensation Program"
in Item 1 and "Adequacy of Loss  Reserves" and "Loss and Claims  Experience"  in
"Outlook: Issues and Risks" below.

Selling, General and Administration

                 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 expense 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 and bad debt expenses increased in the year ended
December  31, 1996  compared to 1995 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.  The most  extensive  growth  in
selling,
                                       30
<PAGE>
general and administrative  expenses has been in the risk management department.
This trend is expected to continue into the foreseeable  future. The Company has
recently  signed a seven  year  lease on new office  space in  Phoenix,  Arizona
containing  significantly  more space at higher rates than its existing offices;
the approximate annual rental increase is expected to be $1 million. The Company
also expects that costs for  professional  services  will  increase in 1997 as a
result of litigation recently brought against the Company; see "Outlook:  Issues
and Risks-Litigation."

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.  Amortization  of goodwill  from the
Hazar  acquisition  began in October  1995,  and  amortization  of Leaseway  and
McClary-Trapp began during 1996; therefore, amortization costs will be higher in
1997 and future years.  Amortization  relating to the acquisitions  completed in
1995, 1996 and to date in 1997 is expected to be approximately $1.4 million more
in 1997 than in 1996.

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 and investments  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. The Company anticipates
its interest  expense will  significantly  increase in future periods  depending
upon amounts borrowed under its new revolving  credit  facility.  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 a change in estimate  for 1995 taxes.  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.  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.  While the
Company's effective tax rate will vary from time to time depending on the mix of
profits  derived from  Camelback and the Company's  various other profit centers
and other  factors,  the Company  believes it will  continue to benefit from the
lower rate applicable to profits derived from Camelback. The Company's estimated
effective  tax rate for financial  reporting  purposes for 1996 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.  The tax rate used in each  quarterly
reporting  period is generally an estimate of the  Company's  effective tax rate
for the calendar year.

1997 Outlook

                 Many  factors  may affect the  Company's  1997  operations  and
results as compared to 1996. As discussed in more detail above, some of the more
significant  factors  include:  a narrowing of profit  margins in the  Company's
business  which  began  to be felt in late  1996 and  continues  into  1997;  an
increase in  competition  and an overall  weakening in pricing for the Company's
services in the workers'  compensation and employee  benefit markets;  increased
reliance on  industry-wide  data relative to ESI's  specific risk  structure and
philosophy in estimating workers'  compensation  reserves;  certain tax benefits
the Company  received in 1996 relating to prior years;  and  increased  interest
expense, lease payments, amortization and litigation expense.

         Additional factors which may impact the Company's future operations and
results are discussed below under "Outlook: Issues and Risks."

Results of  Operations  -- Year Ended  December 31, 1995  Compared to Year Ended
December 31, 1994
                                       31
<PAGE>
                                                    (in thousands)

                                                        Percent
                                         1995           Change       1994
                                         ----           ------       ----

Revenues                               $164,455          121%      $74,334

Cost of revenues                        150,675          112        71,068

Gross profit                             13,780          322         3,266

Selling, general and administrative       7,183          213         2,297

Depreciation and amortization               426           58           269

Interest income                             296          469            52

Net income                                3,835          912           379


                 Net income for 1995 was $3.8 million or $0.14 per fully diluted
share,  reflecting  significant growth from 1994 net income of $379,000 or $0.02
per fully  diluted  share.  Revenues of $164.5  million in 1995 were 121% higher
than in 1994 and were the most significant  factor  contributing to the increase
in net income.  The growth results from the  integration of the  acquisitions of
Employment  Services  of  Michigan,   Inc.  (which  has  been  renamed  Employee
Solutions-Midwest, Inc. ("ESM")) and Hazar, Inc. and certain of its subsidiaries
("Hazar"),  the  success  of direct  sales and  marketing  efforts  of  Employee
Solutions-East,  Inc.  ("ESEI")  and the  efficient  administration  of existing
business.  The Company's focus on managing operating expenses also played a role
in maintaining profit margins.

Revenues

                 Revenues  increased  from  $74.3  million  in  the  year  ended
December 31, 1994 to $164.5 million for the year ended December 31, 1995, a 121%
increase. The increase in revenues was partially due to sales from the Company's
expanded sales force through ESEI, which commenced operations in June 1994, plus
the full year impact in 1995 of new business added throughout 1994. In addition,
the acquisitions of ESM, effective January 1, 1995, and Hazar, effective October
2,  1995,   accounted  for  revenues  of  $17.4   million  and  $35.8   million,
respectively,  in the year ended  December 31, 1995.  The number of PEO worksite
employees   increased  from   approximately   3,600  at  December  31,  1994  to
approximately 11,000 at December 31, 1995.

                 In 1995, the Company commenced placing risk management/workers'
compensation  services to clients which are not PEO clients of the Company and a
portion of the increase in revenues  during the year ended  December 31, 1995 is
attributable  to  this  program.   A  significant   portion  of  the  1995  risk
management/workers'  compensation  services  results  reflects the  inclusion of
approximately  5,900 leased  employees of Hazar from May 1, 1995 through October
2, 1995, at which time the Company  completed its acquisition of Hazar and these
employees became leased  employees of the Company.  As of December 31, 1995, the
Company provided risk management/workers' compensation services to approximately
3,500 non-PEO employees.

Cost of revenues

                 Cost of revenues  increased 112% from $71.1 million in the year
ended  December 31, 1994 to $150.7  million in the year ended December 31, 1995.
This  increase is  primarily  due to the increase in the  Company's  business as
explained in the paragraph above. Workers' compensation costs decreased on a per
leased  employee  basis during the year ended December 31, 1995 compared to 1994
due to the Company's ability to execute effectively its risk management programs
which include on-site safety  programs,  active claims  management and efficient
execution  of claims  processing.  In  addition,  the new program  utilizes  the
Company's wholly owned insurance subsidiary,  Camelback , which was activated in
May  1995.  The  Company's  state  unemployment  tax rate in  Arizona  increased
significantly in 1995 compared to 1994.

Gross profit

         The Company's gross profit margin increased from 4.4% in the year ended
December 31, 1994 to 8.4% in the year ended  December 31,  1995.  This  increase
primarily was attributable to an increase in risk
                                       32
<PAGE>
management/workers'  compensation  services related to non-PEO employees.  Gross
profit  margin on revenues  derived from risk  management/workers'  compensation
services  provided to non-PEO  employees tends to be  significantly  higher than
gross profit margin on revenues  derived from the Company's PEO clients  because
the gross  profit  margin  calculation  with  respect  to PEO  clients  includes
significant (and substantially offsetting) revenue and expense items relating to
payroll and payroll-related costs. The margin is affected in significant part by
the mix of revenues  derived from employee leasing clients and clients for which
the Company provides only risk management/workers' compensation services.

                 Revenues  during the year ended  December 31, 1995 include risk
management/workers'  compensation  revenues  derived  from Hazar,  whose  leased
employees  were not leased  employees of the Company for a period of five months
prior  to the  October  2,  1995  acquisition.  These  employees  became  leased
employees of the Company for financial  reporting  purposes effective October 2,
1995,  which  affected the mix of the  Company's  revenues for the quarter ended
December  31,  1995 and reduced the gross  profit  margin in the fourth  quarter
below that for the entire year. In 1995,  the Company's  gross profit margin was
slightly impacted by the Company's higher Arizona unemployment tax rate.

Selling, general and administrative

                 Selling,  general and administrative expenses increased by $4.9
million or 213% from $2.3  million in the year ended  December  31, 1994 to $7.2
million  for the year ended  December  31,  1995.  Factors  contributing  to the
increase in selling,  general and administrative  expenses in 1995 over 1994 are
the  integration  of ESM and Hazar  operations,  an increase  from 39  corporate
employees  at December  31, 1994 to 115 at December  31,  1995,  resulting  in a
significant  increase in personnel  costs,  and the  expansion of the  Company's
office  space by 7,200  square feet to 17,350  square feet at December 31, 1995.
These  factors  which caused  increases in selling,  general and  administrative
expenses were partially  mitigated by improved systems utilization and economies
of scale achieved within the Company's operations.  Beginning February 13, 1996,
the Company  increased such space by 1,650 square feet to accommodate the growth
of the risk  management/workers'  compensation  services  staff.  The  Company's
general  liability  insurance  costs  have  increased  due in part to the  added
corporate staff, and costs for directors and officers  liability  insurance also
increased. Costs to operate ESEI, which began in mid-1994,  increased in 1995 to
support the growth in the Company's sales and marketing  efforts  throughout the
country.  Commission  expenses  increased  in  1995  compared  to 1994 at a rate
greater  than the increase in revenue  between the periods  because of the lower
level of commissions applicable to the Company's 1994 revenue. In November 1994,
Marvin D. Brody,  Chairman of the Board,  became Chief Executive  Officer of the
Company.  His  compensation as CEO began January 1, 1995.  Effective  October 2,
1995 three executive officers received increases in their compensation  totaling
$140,000 annually.  Selling, general and administrative expenses are expected to
continue  to  increase  to meet the needs of new  business.  The most  extensive
growth in selling,  general and administrative  expenses is expected in the area
of risk management/workers' compensation services.

Depreciation and amortization

                 Depreciation  and  amortization   represented  depreciation  of
property and equipment and amortization of organizational  costs, customer lists
and goodwill in the years ended December 31, 1994 and 1995. The increase was due
primarily  to  depreciation  of new  phone and  computer  systems  and  goodwill
amortization resulting from the acquisition of Hazar.

Interest income

                 Interest  income  increased  from  $52,000  for the year  ended
December  31, 1994 to $296,000 for the year ended  December 31, 1995,  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.

Effective tax rate

                 The effective  tax rate for 1995 was 42.6%  compared with 54.3%
for 1994.  The Company's  estimated  effective tax rate for financial  reporting
purposes for the first three  quarters in 1995 was 45.0%,  which  estimated rate
was 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. In the fourth quarter
                                       33
<PAGE>
of 1995,  the Company  successfully  completed  the  transition of a significant
portion of the per diem allowance programs back to client companies  retroactive
to January 1, 1995.  The Company's tax expense in excess of statutory  rates for
the year ended December 31, 1994 primarily was due to  non-deductible  goodwill,
as well as some non-deductible per diem expenses. The reduction in the Company's
effective  tax rate in 1995 also  resulted  from an  increased  profit base over
which non-deductible  goodwill and per diem allowances have less of an impact on
the tax rate.  Management believes the Company's effective tax rate will decline
in 1996 as non-deductible  goodwill and  non-deductible per diem allowances have
an even lesser  impact on a growing  profit  base,  though no  assurance of such
decline  or growth  can be  provided.  The tax rate used in each  quarter  is an
estimate of the Company's effective tax rate for the calendar year.

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 sources of cash  traditionally  have been from financing  activities and
operations,  though  operations  represented a use of cash in 1996  primarily to
finance    receivables   of   acquired    companies   and   stand   alone   risk
management/workers' compensation clients.

                 Cash used in operating activities was $3.3 million during 1996.
Cash provided by operating  activities was $6.3 million and $712,000 in 1995 and
1994.  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 certain companies in the McClary-Trapp Group plus growth
in the stand alone program decreased the Company's  operating cash flows in 1996
by approximately $15.1 million as these operations extend credit terms generally
from 15 to 45 days as is customary in their respective markets segments.  Had it
not been for these accounts  receivable  requirements in 1996, the Company would
have generated cash flow from operations of approximately  $11.8 million.  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. As 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 provided by financing activities was $47.2  million during
1996 compared to cash provided by financing  activities of $8.0 million and $2.6
million in 1995 and 1994,  respectively.  Cash flows from  financing  activities
during 1996 resulted primarily from the Company's  borrowing (see below) and the
sale of the Company's Common Stock upon exercise of warrants and options, offset
by cash used to fund bank overdrafts of acquired companies.

                 Cash  used in  investing  activities  was $46.9  million,  $2.2
million and $2.4 million in the years ended 1996,  1995 and 1994,  respectively.
The primary use of cash in 1996 was for business  acquisitions with Leaseway and
McClary-Trapp  accounting for  approximately  $34.0 million of the $37.3 million
spent. For 1996, 1995 and 1994,  capital  expenditures were $ 702,000,  $238,000
and $189,000, respectively. Fiscal 1996 capital expenditures consisted primarily
of personal  computers  and other  computer  equipment to enhance its ability to
support ESI's increasing  client and employee base. In 1997, the Company intends
to relocate its headquarters  offices,  and other Phoenix  operations,  to a new
facility.  The Company anticipates that related leaseholds and improvements will
be financed by the landlord as a buildout allowance,  and subsequently reflected
in rental  payments.  Moving  costs and office  furniture  will  represent  cash
outlays in the first and second quarters of 1997 of approximately  $1.0 million.
Also  during  1997,  the Company  expects to  continue  to invest in  additional
computer and technological equipment.  Although the Company continuously reviews
its capital needs, management expects that 1997 capital expenditures will exceed
those incurred in prior periods to meet the needs of the Company's  growing base
of worksite employees.

                 At December 31, 1996 and  December  31,  1995,  the Company had
cash and cash equivalents of $11.0 million and $14.0 million, respectively. Cash
and cash equivalents 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 has developed 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 to maintain
restricted  cash and  investments  to secure  the  future  payment  of  workers'
compensation  losses.  Such restricted cash and investments have been calculated
by the Company's  fronting  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 fronting  carriers  utilizing
industry-wide data and
                                       34
<PAGE>
regulatory  requirements  which may not  reflect  the  Company's  historical  or
expected  ultimate  losses.  Restricted  cash and investments is 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 in the trust fund without the agreement of Reliance.  See "Item 1 --
Risk  Management/Workers'  Compensation Program". At December 31, 1996 and 1995,
approximately  $11.5  million and $2.7  million  were on deposit at Camelback as
restricted cash and investments.

                 At December 31, 1996 and 1995, the Company had working  capital
of $30.4 million and $8.6 million,  respectively.  The significant growth in the
Company's  working  capital  is a  direct  result  of an  increase  in  1996  in
restricted  cash and  investments  of $8.8  million from 1995 which was financed
from cash  flows  from  operations,  and an  increase  in third  party  accounts
receivable of  approximately  $15.1 million,  of which $6.1 million was financed
out of the  Company's  operating  cash flow and  approximately  $9.0 million was
financed from borrowings under the line.

                 Assuming  continued  growth of the Company's  full-service  PEO
business and stand-alone risk management/workers' compensation services program,
the  Company   anticipates   that  it  will  be  required  under  its  insurance
arrangements  with its  insurers  to set aside  increasing  amounts of funds for
payment of claims and related administrative costs.

                 Under Bermuda law,  Camelback must maintain  statutory  capital
and  surplus  in an  amount  equal to at least 20% of the net  premiums  written
through  the  Company's  fronting  arrangements,  provided  that the  percentage
requirement is reduced to 10% at such time as annualized  premium volume reaches
$6,000,000.  Under Hawaii law,  Camelhead will be required to maintain statutory
capital and surplus in an amount  equal to at least  33-1/3% of the net premiums
written through the Company's fronting arrangements. Camelhead's initial capital
and surplus are expected to be $7.5 million.  The laws of the  jurisdictions  of
incorporation  also regulate the  circumstances  under which these  insurers may
loan funds to their  parent  company.  In 1996,  the  Company  paid to  Reliance
approximately  $20.9  million  of which  $14.8  million  was ceded to the trust
account at Camelback  for payment of claims.  The Company also paid to Legion in
1996  approximately  $3.6  million of which  $3.1  million in loss funds will be
ceded to Camelhead  when such  captive is  authorized  and  activated.  Between
Reliance and Legion,  the Company  used cash from  operations  of  approximately
$24.5 million to fund its partially  self-insured workers' compensation programs
in 1996.  In the future,  these  factors may limit the ability of the Company to
execute its planned  growth  strategy and may limit the ability of Camelback and
Camelhead  to transfer  funds to its parent  company  (whether  via  dividend or
otherwise).

                 On August 1, 1996,  the Company  entered  into a three year $35
million  revolving  credit  facility for the purposes of 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.  The
revolving credit facility  provides 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 pays a commitment
fee of 3/8% on the unused portion of the line. Total costs incurred in obtaining
this  facility  and  the  expansion  were  approximately  $500,000  and  will be
amortized over the life of the facility. The line matures on August 1, 1999, and
the maximum  borrowing  will decrease by $3.0 million in each quarter  beginning
February 1, 1998. The principal loan covenants are as follows:  current ratio of
at least 1.4 to 1; total liabilities to net worth of not more than 2 to 1; total
funded debt to earnings before taxes,  depreciation and amortization of not more
than 2 to 1. The facility  includes  certain  other  covenants and is secured by
substantially all of the Company's  assets.  Since the Company obtained its line
of credit in August 1996,  the $42.8  million drawn under the line has been used
almost exclusively for acquisition  financing  including:  $24.0 million for the
acquisition of Leaseway;  $9.4 million for the acquisition of the  McClary-Trapp
Group, and  approximately  $8.7 million to finance  accounts  receivable on such
acquisitions.  At March 26, 1997, the Company had borrowed  approximately  $46.0
million under the credit facility;  at that date, the Company's  borrowing limit
was $54 million as a  consequence  of the  combination  of the  overall  line of
credit and borrowing covenants.

                 The Company has financed its acquisitions  through combinations
of  issuance  of Common  Stock,  borrowing  under its credit  facility,  working
capital and assumption of acquired company obligations.  The Company's revolving
credit  facility  restricts its ability to consummate any  acquisition  for more
than $10 million or five times earnings before interest, taxes, depreciation and
amortization.  The Company received a waiver under the revolving credit facility
to enter into its agreement to acquire the McClary-Trapp Group.

                 Management  believes that  existing cash and cash  equivalents,
cash generated from ongoing operations,  and cash available through its existing
line of credit will satisfy the anticipated  cash  requirements of the Company's
current operations for the foreseeable future; however, the Company's ability to
continue  funding  its  acquisition  strategy is  dependent  upon its ability to
obtain additional funds through equity or debt financing.

Outlook:  Issues and Risks
                                       35
<PAGE>
                 The  Company  believes  that  future  growth  opportunities  in
revenues and profits remain available.  However, the following issues and risks,
among  others  (including  those  discussed  elsewhere  herein),  should also be
considered in evaluating its 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 intends to expand 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.
Because  the Company  intends to focus in the short term on further  integrating
prior acquisitions into the Company's operations, the Company does not currently
expect 1997 acquisition activity to be as extensive as in 1996.

                 A substantial  portion of the Company's  recent and anticipated
growth is attributable  to its risk  management/workers'  compensation  services
program.  The risks  associated  with  rapid  growth in this  area  include  the
potential for poor  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 assurances  that this
conversion will ultimately prove to be successful,  or that other future changes
in systems or procedures will be successfully  completed. To accommodate growth,
the Company is also  relocating  its Phoenix  operations to new offices in April
1997, which move may result in certain disruptions.  Any failure to successfully
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.

                 Adequacy  of  Loss   Reserves.   Under  its  present   workers'
compensation  arrangements,  the Company is  responsible  for the first $250,000
($350,000  for certain  transportation  programs) of each loss with no aggregate
limit to the number of losses for which the  Company may be liable and under its
partially  self-insured and  self-insured  health  insurance  arrangements,  the
Company is responsible for the first $100,000 or $75,000 per covered  individual
per year, depending upon the program. The Company's reserves for losses and loss
adjustment  expenses  under  its  workers'  compensation  and  health  insurance
programs 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  highly  variable  and  difficult  to  predict
circumstances. 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  insurance  liability will not materially exceed its loss
and loss  adjustment  expense  reserves.  If the 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,  in the
Company's net income in the period in which the deficiency is identified.

                 Loss and Claims  Experience.  During the limited period of time
the Company has operated its risk management/workers'  compensation programs, it
believes that it has achieved a below average loss  experience  ratio due to its
selective  evaluation  process,  safety  programs,   active  claims  management,
maintenance of its accidental death and dismemberment  policy,  and exclusion of
Category IV risks.  However, the Company may not be able to maintain such a loss
experience over a longer period of time.  Future loss experience  could increase
due to weakened underwriting  standards as a result of internal growth, the loss
experience of acquired operations,  increased  competition in the Company's risk
management/workers'  compensation business or other factors which may affect the
Company's standards,  procedures or claims experience in the future. An increase
in the Company's  loss  experience  would  decrease the Company's net income and
could  materially   adversely  affect  the  Company's   business  and  financial
performance.

                 The  Company  provides  stand-alone  risk   management/workers'
compensation  coverage on either a  guaranteed  cost basis or a  "retrospective"
basis in which premiums are adjusted after the end of the policy term to reflect
loss experience. In a guaranteed cost arrangement, the Company bears the risk of
losses,  which may be higher than  anticipated.  While  premiums are adjusted to
reflect actual losses in a retrospective policy, which may reduce risk
                                       36
<PAGE>
to the Company,  lower than anticipated  losses on these policies may negatively
affect the Company  because the Company may have recorded a higher premium which
would have resulted from the expected loss level.

                 State  unemployment  taxes  are,  in  part,  determined  by the
Company's  claims  experience.   Claims  experience  also  greatly  impacts  the
Company's health  insurance rates and claims cost from year to year.  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 the PEOs with
lower claims rates that may offer lower rates to clients.

                 Tax Code  Treatment.  The IRS has formed a Market Segment Study
Group to examine  whether  PEOs such as the Company are for certain 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.  First,
with respect to benefit plans,  the tax qualified status of the Company's 401(k)
plans would be revoked,  and the Company's  cafeteria and medical  reimbursement
plans may lose their favorable tax status. 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),  would probably 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.

                 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.

                 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).  Changes to the
Code,  related IRS  regulations or other laws and  regulations  could  adversely
affect the Company's business and financial performance.

                 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. However, the rapid turnaround necessary to process
and make payroll payments leaves the
                                       37
<PAGE>
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  structures  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. In each case,  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.

                 Litigation. The Company has been named as defendants in several
actions  alleging  violations of securities laws with respect to the accuracy of
certain statements  regarding Company reserves and other disclosures made by the
Company  and  certain of its  directors  and  officers.  These  suits were filed
shortly after  significant  drop in trading price of the shares of the Company's
common stock in March 1997.  While the  complaints do not specify  damages,  the
Company expects the requests to be substantial.  The Company believes the claims
are without merit, and intends to vigorously defend these actions.  However, the
cost of defending  these  actions  could have a material  adverse  effect on the
Company's results of operations in future periods, and their ultimate resolution
could have a material adverse effect on the Company's  results of operations and
financial  condition.  In addition,  publicity  relating to the litigation could
have a negative  effect on the  Company's  relationships  with its  current  and
prospective clients, employees and suppliers.

                 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 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 more  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, 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.

         Dependence  on  One  Insurer.   The  Company  believes  that  its  risk
management/workers'  compensation services program has been and will continue to
be an  important  competitive  factor  in  its  growth  and  profitability.  The
Company's risk  management/workers'  compensation  services program is currently
being conducted  principally in  coordination  with one insurer,  Reliance.  The
Company's  contract with Reliance was last renewed June 1, 1996,  and is subject
to annual renewals and may, if certain conditions are not met by the Company, be
canceled by Reliance on 30 days'  notice.  There can be no  assurance  that upon
expiration  of the current  term the Company can renew the  Reliance  program on
commercially  reasonable  terms.  The  Company  would  be  materially  adversely
affected by a termination of its arrangements with Reliance if the Company could
not quickly make similar  arrangements  with another insurer.  In part to lessen
its dependence upon Reliance, the Company is seeking to establish  relationships
with  additional  insurers,  and has entered into an  agreement  with Legion for
certain Company  programs.  The Company's  ability to make similar  arrangements
with other  insurers is  limited,  however,  because  other  insurers  generally
require  large  segregated  books of  business  in order to  lessen  the risk of
adverse  selection by the Company and to maximize the economic  potential of the
arrangement  for the  insurer.  There can  therefore  be no  assurance  that the
Company will be able to  significantly  lessen its dependence on Reliance in the
near future.

         Uncertainty  of Extent of PEO's  Liability;  Government  Regulation  of
PEOs.  The Company's  clients 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
                                       38
<PAGE>
specifically  address the obligations and  responsibilities  of  non-traditional
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. Compliance with these laws and regulations is
time consuming and expensive.

         The Company's standard form of client service agreement establishes 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,  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 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 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,  16 states  have
passed laws that have licensing or registration  requirements and at least three
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 utilizes
Camelback and proposes to form  Camelhead as a  wholly-owned  insurance  company
chartered in the state of Hawaii.  Insurance  companies  such as  Camelback  and
Camelhead 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 Camelhead  and Camelback  could  materially  adversely  affect the
Company's operations and results.

         The Company's risk management/workers' compensation services program is
conducted via "fronting" arrangements with insurers. 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.

         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 41  states,  and has  applied  to be
licensed in others.  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.
                                       39
<PAGE>
         Acquisitions.  The  Company  has grown  substantially  in recent  years
through the acquisition of other PEO and similar  companies.  A key component of
the Company's  growth strategy is to continue to pursue  attractive  acquisition
opportunities.  However, 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. Also, there can be no assurance that the Company will have
or be able to  obtain  the  resources  necessary  to  successfully  make  future
acquisitions or to integrate acquired operations into the Company's.  Because of
the need to integrate  acquisitions  into the Company's  operations and the high
volume of  acquisitions  in 1996,  the Company  does not  currently  expect 1997
acquisition  activity to be as extensive as in 1996. 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 thoroughly evaluate each acquisition candidate prior to an acquisition, there
can also be no  assurance  that,  once  acquired,  the  Company  will be able to
integrate the acquired company with the Company's existing operations or achieve
acceptable  levels of revenues,  profitability or productivity from the acquired
company.

         In   addition,   because  the  Company   generally   accounts  for  its
acquisitions  using the "purchase"  method of accounting,  prior periods are not
restated   to   reflect   those   acquisitions.    Therefore,    the   Company's
period-to-period results may vary significantly as a result of acquisitions.

         Health Care Reform  Proposals.  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.

         The Health  Insurance  Portability and  Accountability  Act of 1996 may
increase the Company's  risks  relating to worksite  employee  health  insurance
programs  because it extends  the  periods for which,  and  circumstances  under
which,  an  employer  must allow an employee to  participate  in the  employer's
health plans.  Such expanded  availability may adversely affect the risk profile
and claims experience of groups insured through the Company,  and thereby affect
the Company's  premiums and the Company's  retained risks under its self-insured
programs.

         Tax  Liabilities.  As the  employer of record for  approximately  1,200
client companies and their 30,000 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.  The  Company  has  received  a letter  from  the  Arizona
Department of Economic  Security with respect to its  unemployment  tax rate for
the year ended December 31, 1994 which, if determined  adversely to the Company,
would result in an amount due of  approximately  $500,000  (before  interest and
income tax  effect).  In  addition,  the Company  has  notices  from the IRS and
various  states  alleging late payment of payroll taxes  relating to an acquired
company.  The  penalties  proposed  to be assessed  against  the  Company  total
approximately  $470,000 for  post-acquisition  filings,  and the penalties to be
assessed against the predecessor  company total  approximately  $390,000 for the
period  during which the Company  performed  designated  management  services on
behalf of the  predecessor.  The Company  believes that it has defenses to these
actions,  and has  objected  vigorously  to  payment  of  such  past  taxes  and
penalties.  However,  it is not  possible  to  predict  if the  Company  will be
successful  in abating  these taxes and  penalties,  or other claims which could
arise in the future.  The Company  would be required to record these  amounts as
additional  expense and  liability  if, at any time in the  future,  it appeared
probable that the Company would not prevail in these matters.

         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 at least one is larger than the
Company and  several  others  approach  the  Company's  size.  The Company  also
competes less directly with non-PEO  companies whose offerings overlap with some
of the Company's PEO services,  including payroll  processing  firms,  insurance
companies, temporary personnel companies and human resource consulting firms. In
addition, the Company expects
                                       40
<PAGE>
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.

         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.  The Company recently has experienced the effects
of an increase in  competition,  and a general  softening of the market,  in the
workers' compensation and benefits areas, which affects the Company's growth and
margins.

         Dependence  Upon  Certain  Officers and Key  Employees.  The Company is
highly dependent upon the services of certain of its officers and key employees,
particularly Marvin D. Brody, its Chief Executive Officer.  The loss of services
of any of these  individuals  would  have a  material  adverse  effect  upon the
Company. The Company does not have employment or non-competition agreements with
Mr. Brody or employment agreements with certain other of these individuals.

         Volatility  of  Securities  Prices.  The market price of the  Company's
common stock has risen substantially since its initial public offering in August
1993,  and in that time has been and may  continue  to be highly  volatile.  The
market experienced particularly severe volatility in March 1997. Factors such as
the Company's actual or anticipated operating results,  acquisition activity, or
other  announcements  by or about the Company or its  competitors  have, and may
continue to have,  a  significant  effect on the market  price of the  Company's
securities.  In  addition,  the  Company's  Common Stock is quoted on the Nasdaq
National Market,  which market has  experienced,  and is likely to experience in
the future,  significant  price and volume  fluctuations  which could  adversely
affect the price of the Company's  Common Stock without  regard to the operating
performance of the Company.

         Authorization   of  Preferred   Stock.   The   Company's   Articles  of
Incorporation  authorize  the issuance of up to  10,000,000  shares of Preferred
Stock with such rights and preferences as may be determined from time to time by
the Board of Directors.  No shares of Preferred Stock are currently outstanding.
Accordingly,  under the Articles of  Incorporation,  the Board of Directors may,
without shareholder approval, issue Preferred Stock with dividend,  liquidation,
conversion,  voting, redemption or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. The issuance of
any shares of  Preferred  Stock  having  rights  superior to those of the Common
Stock may result in a decrease of the value or market  price of the Common Stock
and  could  further  be used by the  Board as a device  to  prevent  a change in
control of 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-27 hereof. Supplementary data is set forth in Note 8 thereto.

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

         Not applicable.

                                    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  1997  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, 1996.

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

         The  information  under  the  heading   "Executive   Compensation"  and
"Compensation  of Directors" in the Proxy  Statement is  incorporated  herein by
reference.
                                       41
<PAGE>
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 quarter

         The Company  filed a report on Form 8-K dated  November  14, 1996 which
reported under Item 2 the acquisition by the Company of substantially all of the
assets of the  McClary-Trapp  Companies  effective  November 1, 1996.  Financial
statements were not required or filed.

         On October 29, 1996,  the Company filed a report on Form 8-K dated June
22,  1996 which  reported  under Item 2 the  acquisition  by the  Company of the
outstanding  capital  stock of GCK  Entertainment  Services I, Inc.  and Talent,
Entertainment  and  Media  Services,   Inc.  (together  "Team").  The  following
financial statements were filed as part of such Form 8-K:

         a.       Team   Consolidated   Balance  Sheets  as  of  June  22,  1996
                  (unaudited) and December 31, 1995.
         b.       Team Consolidated  Statements of Operations for the year ended
                  December 31, 1995 and the interim  periods ended June 30, 1995
                  (unaudited) and June 22, 1996 (unaudited).
         c.       Notes to Team Consolidated Financial Statements.
         d.       The  Company's  Combined Pro Forma  Balance Sheet for June 30,
                  1996 (unaudited).
         e.       The Company's  Combined Pro Forma Statements of Operations for
                  June 30, 1996 (unaudited) and year ended December 31, 1995.
         f.       Notes to the Company's Pro Forma Financial Statements.
                                       42
<PAGE>
Item 8.  FINANCIAL STATEMENTS





                                      INDEX
<TABLE>
<CAPTION>
                                                                                                            Page

<S>                                                                                                          <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                                     F-2

FINANCIAL STATEMENTS
   Consolidated  Balance  Sheets - December  31, 1996 and 1995                                               F-3
   Consolidated Statements of Operations - For the Years
       Ended December 31, 1996, 1995 and 1994                                                                F-4
   Consolidated Statements of Stockholders' Equity - For the
       Years Ended December 31, 1996, 1995 and 1994                                                          F-5
   Consolidated Statements of Cash Flows - For the Years
       Ended December 31, 1996, 1995 and 1994                                                                F-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                   F-8
</TABLE>
                                      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,
1996  and  1995,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity  and cash flows for the three  years in the  period  ended
December 31, 1996.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion, the 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, 1996 and 1995, and the results of their
operations and their cash flows for the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.


                                                  Arthur Andersen LLP

Phoenix, Arizona,
   March 25, 1997.
                                      F-2
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(In thousands of dollars, except share data)                                          1996          1995
                                                                                   -----------   -----------
<S>                                                                                <C>           <C>
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                       $    10,980   $    14,029
   Restricted cash and investments                                                      11,500         2,743
   Accounts receivable, net                                                             34,839         7,866
   Receivables from insurance companies                                                  5,918            86
   Prepaid expenses and deposits                                                         1,258           379
   Deferred income taxes                                                                 1,156           334
                                                                                   -----------   -----------

                  Total current assets                                                  65,651        25,437

Property and equipment, net                                                              1,084           440
Deferred income taxes                                                                      539          --
Goodwill and other assets, net                                                          58,695        10,963
                                                                                   -----------   -----------

                  Total assets                                                     $   125,969   $    36,840
                                                                                   ===========   ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Bank overdraft                                                                  $     2,477   $     3,752
   Accrued salaries, wages and payroll taxes                                            17,586         6,681
   Accounts payable                                                                      4,078         1,114
   Accrued workers' compensation and health insurance                                    6,927         2,463
   Income taxes payable                                                                    720         2,207
   Other accrued expenses                                                                3,414           631
                                                                                   -----------   -----------

                  Total current liabilities                                             35,202        16,848
                                                                                   -----------   -----------

Deferred income taxes                                                                      111            49
                                                                                   -----------   -----------
Long-term debt                                                                          42,800          --
                                                                                   -----------   -----------
Other long-term liabilities                                                              1,349          --
                                                                                   -----------   -----------

Commitments and contingencies

Stockholders' equity
   Class A convertible  preferred  stock,  nonvoting,  no par value, 10,000,000
     shares authorized, no shares in 1996 and 1995 issued and outstanding                 --            --
   Common stock, no par value,  75,000,000 shares authorized,  30,729,433 shares
     issued and outstanding in 1996, and 26,747,196 shares issued and 26,652,272
     shares outstanding in 1995                                                         30,145        15,938
   Retained earnings                                                                    16,362         4,336
   Treasury stock, no shares in 1996 and 94,924 shares in 1995, at cost                   --            (331)
                                                                                   -----------   -----------

                  Total stockholders' equity                                            46,507        19,943
                                                                                   -----------   -----------
                  Total liabilities and stockholders' equity                       $   125,969   $    36,840
                                                                                   ===========   ===========
</TABLE>
              The accompanying notes are an integral part of these
                          consolidated balance sheets.
                                      F-3
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(In thousands of dollars, except share data)                                      1996            1995            1994
                                                                              ------------    ------------    ------------
<S>                                                                           <C>             <C>             <C>
Revenues                                                                      $    439,016    $    164,455    $     74,334
                                                                              ------------    ------------    ------------

Cost of revenues
   Salaries and wages of worksite employees                                        341,988         132,379          62,827
   Healthcare and workers' compensation                                             30,234           7,591           3,095
   Payroll and employment taxes                                                     28,640          10,705           5,146
                                                                              ------------    ------------    ------------

                  Cost of revenues                                                 400,862         150,675          71,068
                                                                              ------------    ------------    ------------

Gross profit                                                                        38,154          13,780           3,266

Selling, general and administrative expenses                                        17,310           7,183           2,297
Depreciation and amortization                                                        2,073             426             269
                                                                              ------------    ------------    ------------

                  Income from operations                                            18,771           6,171             700

Other income (expense):
   Interest income                                                                     833             296              52
   Interest expense                                                                 (1,196)            (25)             (3)
   Minority interest and other                                                          (1)            239              80
                                                                              ------------    ------------    ------------

Income before provision for income taxes                                            18,407           6,681             829

Income tax provision                                                                 6,381           2,846             450
                                                                              ------------    ------------    ------------

                  Net income                                                  $     12,026    $      3,835    $        379
                                                                              ============    ============    ============


Net income per common and common equivalent share:
     Primary                                                                  $        .37    $        .16    $        .02
                                                                              ============    ============    ============

     Fully diluted                                                            $        .37    $        .14    $        .02
                                                                              ============    ============    ============


Weighted average number of common and common equivalent shares outstanding:
     Primary                                                                    32,167,777      23,506,782      20,145,484
                                                                              ============    ============    ============

     Fully diluted                                                              32,385,735      26,430,586      20,145,484
                                                                              ============    ============    ============
</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, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                                                                              Total
                                                            Preferred      Common    Retained   Treasury   Stockholders'
(In thousands of dollars, except share data)                    Stock       Stock    Earnings      Stock     Equity
                                                             --------    --------    --------   --------    --------
<S>                                                          <C>         <C>         <C>        <C>         <C>
BALANCE, December 31, 1993                                   $      6    $  3,323    $    122   $   --      $  3,451

    Purchase of 16,000 shares of treasury stock                  --          --          --          (35)        (35)
    Issuance of 2,256,000 shares of common stock in
      connection with a private placement                        --         2,606        --         --         2,606
    Net income                                                   --          --           379       --           379
                                                             --------    --------    --------   --------    --------
BALANCE, December 31, 1994                                          6       5,929         501        (35)      6,401

    Issuance of 5,060,000 shares of common stock in
      connection with conversion of preferred stock                (6)          6        --         --          --
    Issuance of 3,887,200 shares of common stock in
      connection with exercise of underwriter and IPO
      warrants                                                   --         7,142        --         --         7,142
    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
                                                             ========    ========    ========   ========    ========
</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, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(In thousands of dollars)                                         1996         1995         1994
                                                               ---------    ---------    ---------
<S>                                                            <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Cash received from customers                                $ 408,424    $ 162,137    $  74,473
   Cash paid to suppliers and employees                         (405,606)    (155,066)     (73,713)
   Interest received                                                 833          279           42
   Interest paid                                                  (1,196)         (25)          (3)
   Income taxes paid, net of refunds                              (5,772)      (1,046)         (87)
                                                               ---------    ---------    ---------

         Net cash (used in) provided by operating activities      (3,317)       6,279          712
                                                               ---------    ---------    ---------



CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                               (702)        (238)        (189)
   Business acquisitions                                         (37,251)        (961)         (27)
   Cash invested in restricted cash and investments               (8,757)      (1,372)      (1,361)
   Issuance of notes receivable, net                                (189)         383         (360)
   Other, net                                                       --              3         (447)
                                                               ---------    ---------    ---------

         Net cash used in investing activities                   (46,899)      (2,185)      (2,384)
                                                               ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt                       42,800         --           --
   Proceeds from issuance of common stock                          7,786        8,123        2,606
   Payment of deferred loan costs                                   (515)        --           --
   Decrease in bank overdraft and other                           (2,904)        (136)         (35)
                                                               ---------    ---------    ---------


         Net cash provided by financing activities                47,167        7,987        2,571
                                                               ---------    ---------    ---------

Net increase (decrease)  in cash and cash equivalents             (3,049)      12,081          899

CASH AND CASH EQUIVALENTS, beginning of year                      14,029        1,948        1,049
                                                               ---------    ---------    ---------

CASH AND CASH EQUIVALENTS, end of year                         $  10,980    $  14,029    $   1,948
                                                               =========    =========    =========
</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, 1996, 1995 AND 1994
                                   (CONTINUED)
<TABLE>
<CAPTION>
                                                                 1996        1995        1994
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>
RECONCILIATION OF NET INCOME TO NET CASH (USED IN)
   PROVIDED BY OPERATING ACTIVITIES:
     Net income                                                $ 12,026    $  3,835    $    379
                                                               --------    --------    --------

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN )
   PROVIDED BY OPERATING ACTIVITIES:
     Depreciation and amortization                                2,073         426         269
     Miscellaneous non-cash charges                                --          (193)        (77)
     Tax benefit from stock options                               2,635         267        --
     (Increase) decrease in accounts receivable, net            (24,760)     (2,249)        186
     Increase in insurance company receivables                   (5,832)        (86)       --
     Increase in prepaid expenses and deposits                     (736)       (183)        (17)
     Increase in deferred income tax assets                        (601)       (275)        (42)
     Decrease (increase) in other assets                         (2,532)        (17)         26
     Increase (decrease) in accrued salaries,
          wages and payroll taxes                                10,905       1,319        (160)
     Increase in accrued workers' compensation
          and health insurance                                    4,464         676         287
     Increase (decrease) in other long term liabilities           1,349         (39)       (261)
     (Decrease) increase in accounts payable                     (2,038)        599         113
     (Decrease) increase in income taxes payable                 (1,487)      1,776         392
     Increase (decrease) in other accrued expenses                1,155         404        (397)
     Increase in deferred income tax liabilities                     62          19          14
                                                               --------    --------    --------

                                                                (15,343)      2,444         333
                                                               --------    --------    --------

         Net cash (used in) provided by operating activities   $ (3,317)   $  6,279    $    712
                                                               ========    ========    ========
</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.

In  connection  with  business  acquisitions during  1996 and 1995,  the Company
assumed net  liabilities of $5,478,000 and $5,385,000 and issued  $4,274,000 and
$1,613,000 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, 1996, 1995 AND 1994




(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, 1996,  ESI serviced  approximately  1,200  client  companies  with
approximately 30,000 worksite employees in 46 states.

The   Company   began   in   1995   to   offer   employers    stand-alone   risk
management/workers'  compensation  services.  At December 31, 1996, this program
covers an additional  approximately  13,500 workers employed by approximately 64
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 worksite employees.

         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. Certain
amounts  have been  reclassified  from prior years to conform  with current year
presentation.

         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
                                      F-8
<PAGE>
retrospectively  rated  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 U.S. Treasury securities,
at December 31, 1996 and 1995,  and are stated at cost which  approximates  fair
market value. For purposes of the statements of cash flows,  investments with an
original  maturity  of less  than  90  days  are  considered  cash  equivalents.
Substantially  all cash  and cash  equivalents,  including  restricted  cash and
investments, are not insured at December 31, 1996.

         Restricted Cash and Investments

The Company's risk management/workers' compensation programs with its "fronting"
carriers required  $11,500,000  and  $2,743,000  at December  31, 1996 and 1995,
respectively,  to be held in a restricted  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 which 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.   At  December  31,  1996,  the  Company  maintained   approximately
$8,666,000  of  investments  with  maturities  between  90 days  and  one  year,
respectively.   These   securities  are  considered   available  for  sale  and,
accordingly,  are recorded at market value.  The difference  between  historical
cost and market value was not material.

         Insurance Company Receivables

The  Company's  risk   management/workers'   compensation  services  program  is
conducted  via fronting  arrangements  with  insurers.  At December 31, 1996 and
1995, the Company had receivables from its fronting  companies of $5,918,000 and
$86,000,  respectively.  Such  amounts  consist of the  difference  between cash
advanced to the insurance  companies based on estimates of administrative  fees,
excess  reinsurance and premium taxes and the actual expenses  incurred and paid
by the insurer on behalf of the Company.
                                      F-9
<PAGE>
         Accounts Receivable/Revenue Recognition

Revenue is recognized as services are performed.  The following table presents a
summary of the Company's accounts receivable.

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

                                                                    December 31,
                                                       -------------------------
(In thousands of dollars)                                  1996            1995
                                                       --------        --------

Trade accounts receivable                              $ 17,306        $  3,091
Unbilled salary and wage accruals                        14,544           4,187
Unbilled stand alone premium revenue                        618             183
Other                                                     3,001             620
Allowance for estimated
     uncollectible receivables                             (630)           (215)
                                                       --------        --------
Total accounts receivable, net                         $ 34,839        $  7,866
                                                       ========        ========

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

Contractual  payment  terms  extended  to  customers  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.

At December 31, 1996 and 1995,  receivables from related parties included in the
above totals were $3,287,000 and $1,227,000, 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 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 $440,000 and $180,000 at December 31, 1996
and 1995, respectively.
                                      F-10
<PAGE>
         Goodwill and Other Assets

Included in goodwill and other assets is $55,756,000 and $10,230,000 at December
31, 1996 and 1995, 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  acquired.  As of  December  31,  1996,  goodwill  of
$27,198,000  is being  amortized  over 30 years,  $26,365,000  over 15 years and
$2,193,000 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 $2,457,000 and
$656,000 at December 31, 1996 and 1995, respectively.

Also  included in goodwill and other assets at December 31, 1996 is $2.9 million
representing  estimated unbilled stand alone workers'  compensation  premium due
from one customer for the first year of a two-year  policy.  Approximately  $2.6
million was billed and collected from this customer in 1996.

          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

The Company offers 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.

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'
                                      F-11
<PAGE>
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 increase the Company's exposure
to risk from workers' compensation claims.

To meet growing needs of the Company's  business and to lessen its dependence on
Reliance,  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. The Company is in
the process of  establishing a second captive  insurance  company for the Legion
program.  Until such captive is formed and  activated,  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 $3,157,000 at December 31, 1996.

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  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 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 and 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.
                                      F-12
<PAGE>
         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.

         Net Income Per Common and Common Equivalent Share

The Company used the modified  treasury  stock method  prescribed  by Accounting
Principles Board Opinion No. 15 to compute net income per share in 1995 and 1994
since the number of warrants  and options  outstanding  were in excess of 20% of
common shares issued and outstanding. The Company used the treasury stock method
to compute net income per share in 1996. The  computation of adjusted net income
and weighted average common and common equivalent shares used in the calculation
of income per common share is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

     (In thousands of dollars, except share data)
                                                          1996                      1995                       1994
                                      ------------------------  ------------------------  -------------------------
                                                         Fully                     Fully                      Fully
                                          Primary      Diluted      Primary      Diluted      Primary       Diluted
                                      -----------  -----------  -----------  -----------  -----------   ----------
<S>                                    <C>          <C>          <C>          <C>          <C>           <C>
     Weighted average of
     common shares outstanding         30,224,357   30,224,357   22,391,616   22,391,616   15,085,484    15,085,484

     Weighted average Class A
     preferred stock assumed
     converted                            N/A           N/A             N/A          N/A    5,060,000     5,060,000

     Dilutive effect of options
     and warrants outstanding           1,943,420    2,161,378    1,115,166    4,038,970          --            --
                                      -----------  -----------  -----------  -----------  -----------   ----------

     Weighted average of common
     and common equivalent
     shares                            32,167,777   32,385,735   23,506,782    26,430,586  20,145,484    20,145,484
                                      ===========  ===========  ===========   ===========  ==========   ===========

     Net income                       $    12,026  $    12,026  $     3,835  $     3,835  $       379   $       379

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

     Adjusted net income for
     purposes of the income per
     common share calculation         $    12,026  $    12,026  $     3,700  $     3,700  $       379   $       379
                                      ===========  ===========  ===========  ===========  ===========   ===========

     Net income per common and
     common equivalent share          $      0.37  $      0.37  $      0.16  $      0.14  $      0.02   $      0.02
                                      ===========  ===========  ===========  ===========  ===========   ===========

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

Adjustments to 1995 net income reflect the  amortization of contingent  goodwill
relating  to  the  Employment  Services  of  Michigan,   Inc.  and  Hazar,  Inc.
acquisitions (see Note 9).

The effect of the modified  treasury stock method on 1994 was  antidilutive  and
therefore had no impact on the computation.
                                      F-13
<PAGE>
         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 set forth below for the Company's financial  instruments
are made solely to comply with the  requirements  of SFAS 107 and should be read
in conjunction with the financial statements and notes.

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.

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)                                          1996                                  1995
                                               -----------------------------       -------------------------------
                                                  Carrying         Estimated          Carrying           Estimated
                                                    amount        fair value             amount         fair value
Financial Assets
<S>                                            <C>              <C>                <C>               <C>
Cash and cash equivalents                      $    10,980      $     10,980       $     14,209      $      14,209
Restricted cash and investments                     11,500            11,500              2,743              2,743
Other financial assets, primarily
    accounts receivable                             43,696            43,657              8,685              8,685

Financial Liabilities

Bank overdraft                                       2,477             2,477              3,752              3,752
Long-term debt                                      42,800            42,800                 --                 --
Other financial liabilities, primarily
    accounts payable                                33,354            33,354             10,889             10,899

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

Financial  instruments  other than long-term debt approximate fair value because
of their short-term duration.  Long-term debt approximates fair value because of
the variable interest rate.
                                      F-14
<PAGE>
(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)   EMPLOYEE BENEFITS:

The Company  maintains two money  purchase  pension plans which are available to
those  clients who wish to  participate.  Contributions  to the plans are either
seven  and  one-half  percent  or  ten  percent  of  each  eligible   employee's
compensation,  depending upon which plan the employee is covered by. The Company
funds both plans on a monthly basis.

One of the Company's  subsidiaries is party to several union  contracts  whereby
benefits are provided to employees  through Multiple  Employer Pension Plans. In
connection  with the acquisition of this subsidiary in 1996, the Company assumed
certain  contingent  liabilities  for the funding of various  pension plans that
could materialize if a significant  decrease in contribution units as defined in
the various  contracts  were to occur.  The Company has  recorded a liability of
approximately $1.8 million based on information provided to the Company from the
various plans.



(4)   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
               ------------                     ------

                      1997                    $   1,117
                      1998                        1,316
                      1999                        1,160
                      2000                        1,099
                      2001                        1,052
               Later years                        2,360
                                              ---------
                     Total                    $   8,104
                                              =========

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

Rental  expense under all leases was $734,000,  $162,000,  and $150,000 in 1996,
1995 and 1994, respectively.
                                      F-15
<PAGE>
(5)   INCOME TAXES:

The  components of the  provision for income taxes for the years ended  December
31, 1996, 1995 and 1994 were as follows:

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

(In thousands of dollars)                     1996          1995          1994
                                            -------       -------       -------

    Current                                 $ 6,935       $ 3,102       $   478
    Deferred                                   (554)         (256)          (28)
                                            -------       -------       -------

    Income tax provision                    $ 6,381       $ 2,846       $   450
                                            =======       =======       =======

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

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

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

(In thousands of dollars)                         1996        1995        1994
                                                 -------     -------     -------

    Income tax expense at
      statutory rate                             $ 6,442     $ 2,272     $   282
    Non-deductible goodwill amortization             197          73          60
    Non-deductible per diem
      and other expenses                              41          85          38
    State taxes, net of federal benefit              179         429          70
    Change in estimate related to 1995
        state taxes                                 (430)       --          --
    Other                                            (48)        (13)       --
                                                 -------     -------     -------

    Income tax provision                         $ 6,381     $ 2,846     $   450
                                                 =======     =======     =======

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

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

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

                                              1996                          1995
                         -------------------------    --------------------------
                                        Long-term
                         Current           Assets     Current          Long-term
(In thousands of dollars) Assets     (Liabilities)     Assets      (Liabilities)
                          ------     ------------      ------      -------------

Depreciation and
    amortization          $   --     $       (111)     $   --      $        (22)
Reserves not deductible
 for tax purposes          1,130              539         334                --
Other, net                    26               --          --               (27)
                          ------     ------------      ------      -------------

                          $1,156     $        428      $  334      $        (49)
                          ======     ============      ======      =============

--------------------------------------------------------------------------------
                                      F-16
<PAGE>
(6)   LONG-TERM DEBT:

On August 1, 1996, the Company  entered into a three year $35 million  revolving
credit facility for the purposes of acquisition  financing,  working capital and
general corporate  purposes.  The revolving credit facility provides for various
borrowing rate options  including  borrowing rates based on a fixed spread of 25
basis  points over prime or 250 basis points over the London  Interbank  Offered
Rate (LIBOR). The Company pays a commitment fee of 3/8% on the unused portion of
the line.  Total costs  incurred in obtaining  this facility were  approximately
$400,000 and are being amortized over the life of the facility. The line matures
on August 1, 1999. The principal loan covenants are as follows as defined in the
agreement: current ratio of at least 1.4 to 1; total liabilities to net worth of
not more than 2 to 1; total funded debt to earnings  before taxes,  depreciation
and  amortization  of not more than 2 to 1.  Certain  acquisitions  are  limited
without the lender's  approval.  The facility is secured by substantially all of
the Company's assets.

In October,  1996 the Company  increased  the line of credit by $10.0 million to
$45.0 million in anticipation of additional acquisition financing. Costs related
to such increase were  approximately  $100,000 and are being  amortized over the
remaining  life of the facility.  Subsequent to year end, the line was increased
to $60  million.  Additional  costs  of  $150,000  will be  amortized  over  the
remaining life of the loan.  Commencing February 1, 1998, the commitment will be
reduced by $3 million every three months until the scheduled maturity date.

As a subfeature  of the  revolving  credit  facility,  on December 31, 1996,  an
irrevocable and unconditional  Letter of Credit was established in the amount of
$1 million,  with scheduled  increases to a total amount of $2 million on May 1,
1997,  expiring on September 5, 1997. The letter of credit will be automatically
extended  unless the  beneficiary  is notified  30 days prior to the  expiration
date,  provided  that the  expiration  date cannot be subsequent to the maturity
date of the  revolving  credit  facility.  The  undrawn  amount of the letter of
credit is reserved  under the  revolving  credit  facility and not available for
borrowing.

Since the loan was funded on August 1, 1996,  through  December  31,  1996,  the
average   principal   amount   outstanding   has  been  $34.0 million   and  the
weighted-average  interest  rate has been 8.24%.  As of December 31,  1996,  the
outstanding balance was $42.8 million and the weighted-average interest rate was
8.50%.



 (7)  STOCKHOLDERS' EQUITY:

         Preferred Stock

On  April  12,  1995,  each  of the  1,265,000  outstanding  shares  of  Class A
convertible  preferred  stock were  converted  into four shares of common stock.
These preferred shares were considered  converted in the 1994 earnings per share
calculations  because the Company  achieved  the  earnings  target in 1994 which
allowed the shares to be converted.
                                      F-17
<PAGE>
         Warrants

Warrant activity in 1994, 1995 and 1996 was as follows:

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

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

Outstanding at December 31, 1993                5,179,240         $  1.64

Granted                                         2,816,000            2.30
                                              -----------
Outstanding at December 31, 1994                7,995,240            1.87

Granted                                           320,000            2.23
Exercised                                      (4,979,200)           1.62
Canceled                                              (40)           1.88
Canceled and replaced with options               (400,000)           2.13
                                              -----------
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
                                              ===========

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

The number of warrants  exercisable  were  120,000,  2,936,000  and 7,595,240 at
December  31,  1996,  1995 and 1994,  respectively.  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-statutory  options. In addition,  all
consultants  are eligible to participate in the plans and receive  non-statutory
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 1,116,660 shares and 2,770,579 shares, respectively,  through
December 31, 1996. 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
                                      F-18
<PAGE>
Accounting  Principles  Board  Opinion No. 25 (APB 25).  Employee  stock options
generally  become  fully  exercisable  over three  years from the grant date and
generally have terms for up to five years.  Upon termination of employment,  the
option 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,
1996:

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

                                                                       Weighted-
                                                                         average
                                                   Number               Exercise
                                               of Options                  Price
                                               ----------             ----------
     Outstanding at December 31, 1993             550,000             $     1.08

     Granted                                      400,000                   2.32
     Canceled                                     (20,000)                  1.24
                                               ----------
     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
                                               ==========


     Outstanding options exercisable as of:
       December 31, 1994                          626,668
       December 31, 1995                          859,160
       December 31, 1996                          791,843

       Available for future grants
       at December 31, 1996                       812,761

--------------------------------------------------------------------------------
                                      F-19
<PAGE>
The  following  table is a summary of  selected  information  for the  Company's
compensatory stock option plans:

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

                                                               December 31, 1996
                               -------------------------------------------------

                                    Weighted-
                                      average                          Weighted-
                                    Remaining                            average
                                  Contractual                           Exercise
                               Life (in yrs.)        Number                Price
                               --------------        ------            ---------

RANGE OF EXERCISE PRICES
1993 Stock Option Plan
$1.24 -  $3.31
     Options outstanding                  3.0        557,852           $    2.66
     Options exercisable                             270,511                2.25

1995 Stock Option Plan
$2.13 -  $4.3125
     Options outstanding                  4.7      1,593,339                2.67
     Options exercisable                             516,332                2.62

$10.50 -  $21.88
     Options outstanding                  4.7        962,579               15.37
     Options exercisable                               5,000               14.50

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

The weighted-average fair value of options granted under the 1993 and 1995 Stock
Option Plans was $6.10 and $1.07 for 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-20
<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,
                                                              --------------------------------------------
                                                                            1996                      1995
<S>                                                                    <C>                       <C>
Net Income:
       As Reported                                                     $ 12,026                  $ 3,835
       Pro Forma                                                         13,233                    3,256

Primary EPS:
       As Reported                                                          .37                      .16
       Pro Forma                                                            .41                      .13

Fully Diluted EPS:
       As Reported                                                          .37                      .14
       Pro Forma                                                            .41                      .12

---------------------------------------------------------------------------------------------------------------------------
</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 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-21
<PAGE>
(8)    QUARTERLY FINANCIAL INFORMATION (UNAUDITED):


The following table presents summary unaudited quarterly financial data from the
Company's consolidated statements of operations:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

Quarter ended
(In thousands of dollars, except share data)         March 31,      June 30,   September 30, December 31,
<S>                                                <C>           <C>           <C>           <C>
     1996
     Revenues                                      $    73,934   $    91,008   $   125,238   $   148,836
     Gross profit                                        7,669         8,826        12,374         9,285
     Net income                                          2,352         3,116         4,246         2,312
     Net income per share
        Primary                                            .07           .10           .13           .07
        Fully diluted                                      .07           .10           .13           .07
     Weighted-average shares
        Primary                                     32,048,552    32,564,993    33,020,742    32,770,684
        Fully diluted                               32,262,830    32,564,993    33,043,173    32,784,871

     1995
     Revenues                                      $    28,800   $    29,159   $    33,436   $    73,060
     Gross profit                                        1,826         2,633         3,627         5,694
     Net income                                            310           691         1,205         1,629
     Net income per share
        Primary                                            .01           .03           .05           .06
        Fully diluted                                      .01           .03           .05           .05
     Weighted-average shares
        Primary                                     21,101,948    21,101,948    26,226,280    27,799,146
        Fully diluted                               21,101,948    21,101,948    26,226,280    28,882,526

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


(9)   ACQUISITIONS:

         Acquisition of Employment Services of Michigan, Inc.

The  Company  purchased  all of the  outstanding  capital  stock  of  Employment
Services of Michigan,  Inc., a transportation  PEO,  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
                                      F-22
<PAGE>
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.

         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. The Company acquired Hazar through
ESI America,  Inc.  (ESI America) a newly formed  wholly owned  subsidiary.  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. The Company  acquired  Employer  Sources
through  Employee  Solutions of  California,  Inc.  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.

Hazar and LMS were PEO's which,  together with some of their subsidiaries,  have
been  operating  under  the  protection  of the  federal  bankruptcy  laws.  The
acquisition  increased  the  number  of the  Company's  worksite  employees  and
expanded the Company's geographic reach to key markets in California,  New York,
New Jersey, Massachusetts, New Hampshire, Rhode Island and Illinois.

         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.  The  former  owner  serves as  ESEI's  president  pursuant  to an
employment agreement which, as amended,  provides for the payment of commissions
based on employee-leasing  business placed through ESEI after the effective date
of  acquisition.  ESEI's  president had previously  received  options to acquire
400,000  shares of the Company's  common stock at an exercise price of $2.13 per
share (the fair market value on the date of grant) which expire through November
10, 2004, and which,  among other terms and  conditions,  become  exercisable in
November 1999 subject to continued  employment.  ESEI's president was elected to
the Company's board of directors in 1995 and has served as its vice president of
sales since April 1995.
                                      F-23
<PAGE>
         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.

         Acquisition of TEAM Services

On June 22, 1996, the Company  completed the purchase of all of the  outstanding
capital stock of GCK  Entertainment  Services I, 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.  Based on current  earnings of TEAM  Services,  no
additional  purchase  price will be required and,  accordingly,  any  contingent
purchase price has not been considered in the earnings per share calculation for
1996.

         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 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
                                      F-24
<PAGE>
assets  acquired  was  $10,871,000  of which  $10,498,000  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.

         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,  ESI America,  TEAM
Services  and LPC for the years ended  December  31, 1996 and 1995,  and assumed
that the acquisitions had been effective as of the beginning of each period.

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 and  accordingly,
does not  reflect  results  that  would  occur from a change in  management  and
planned  restructuring of the operations of ESI America. 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          1995
                                                   -----------   -----------

Total revenues                                     $   522,286   $   411,349
Net income                                              12,758         3,243

Net income per common and common
  equivalent share
     Primary                                               .40           .14
     Fully diluted                                         .39           .12

Weighted average number of common and
  common equivalent shares outstanding
     Primary                                        32,167,777    23,506,782
     Fully diluted                                  32,385,735    26,430,586

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



(10)  ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:

The Financial  Accounting  Standards Board (FASB) has issued SFAS 128 , Earnings
per Share.  SFAS 128  requires  companies  to change the method for  calculating
earnings per share. SFAS 128
                                      F-25
<PAGE>
is effective  for financial  statements  for periods  ending after  December 15,
1997. The Company has not yet determined the effect of adopting SFAS 128.



(11)  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 to. 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, 1996,  the  compounded
interest totaled approximately $140,000.

The Company  received  payroll tax penalty  notices  from the  Internal  Revenue
Service  and  various  states,  relating  to the  acquired  operations  of Hazar
alleging  certain late payment of payroll  taxes.  The penalties  proposed to be
assessed against the Company total  approximately  $470,000 and the penalties to
be assessed  against  Hazar total  approximately  $390,000 for the period during
which the  Company  performed  designated  management  services on behalf of the
predecessor. The Company has been informed that the IRS is considering abatement
of the penalties.

The  Company,  and  certain  of its  executive  officers,  have  been  named  as
defendants in several  actions  filed in March 1997.  While the exact claims and
allegations  vary, they all allege violations by the Company of Section 10(b) of
the Securities 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
shortly  after a significant  drop in the trading price of the Company's  common
stock  in  March  1997.  Each  of the  actions  seek  certification  of a  class
consisting of purchasers of securities of the Registrant 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 Company believes the actions are without
merit and intends to defend the cases vigorously.

From time to time,  the Company is named as a defendant  in lawsuits  filed by a
client or clients  relating to the contractual  arrangement  between the Company
and the client. Such actions allege various contractual violations.

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 sucessfully
asserted in all cases,  and 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.

(12) RELATED PARTY TRANSACTIONS:


Related party transactions not mentioned  elsewhere in the financial  statements
are summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------

(in thousands of dollars)                                              1996        1995         1994
                                                                     ------      ------      -------

<S>                                                                  <C>         <C>         <C>
Legal services provided by officer/director                          $   --      $   60      $   154
Processing fees paid to company owned by shareholder                    805         820           --
Risk management/workers' compensation services to a company
   owned by a shareholder                                                --         205           --
Non-compete agreement settlements with two shareholders                 543          --           --
----------------------------------------------------------------------------------------------------------------------------
</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-26
<PAGE>
(13)     SUBSEQUENT EVENTS:


To date in 1997,  the Company has  acquired two PEOs in  transactions  described
below:

         Acquisition of ETIC Corporation

On February 1, 1997,  the Company  completed  the  acquisition  of the principal
assets of ETIC Corporation,  dba Employers Trust ("ETIC"). The purchase price is
$30,000  plus five times  ETIC's total  pre-tax  income for the 12-month  period
ending  January 31,  1998.  $855,000 of the  purchase  price was paid in cash at
closing.  An interim  payment  toward the purchase price may be due on or before
April 30, 1997 if ETIC meets certain earnings  thresholds.  The final payment of
purchase  price is due on or before April 30, 1998.  The purchase  price will be
paid in cash. ETIC is a Cincinnati,  Ohio based company  specializing in leasing
to a client base consisting  primarily of light industrial,  transportation  and
construction  companies,  with  approximately  150  clients  and 2,000  worksite
employees.

         Acquisition of CMGR Companies

On February 17, 1997,  the Company  completed the  acquisition  of the principal
assets of CMGR,  Inc.,  and Humasys for $3.0 million in cash and $850,000 in the
assumption of certain  liabilities.  $1.5 million of the purchase price was paid
in cash at the closing. An interim payment of $500,000 toward the purchase price
is due 6 months after the closing.  The final payment  toward the purchase price
is due on or  before  April  18,  1998.  CMGR  is a New  Jersey  based  company,
specializing in leasing to a client base consisting  primarily of  professional,
service and light industrial companies,  with approximately 75 clients and 1,700
worksite  employees.
                                      F-27
<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 31st day of March, 1997.

                                        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 31, 1997
-----------------------------------                   Executive Officer, President
Marvin D. Brody                                       and Director


/s/ Harvey A. Belfer                                  Director                                      March 31, 1997
-----------------------------------
Harvey A. Belfer

/s/ Edward L. Cain, Jr.                               Director                                      March 31, 1997
-----------------------------------
Edward L. Cain, Jr.

/s/ Jeffery A. Colby                                  Director                                      March 31, 1997
-----------------------------------
Jeffery A. Colby

/s/ Robert L. Mueller                                 Director                                      March 31, 1997
-----------------------------------
Robert L. Mueller

/s/ Henry G. Walker                                   Director                                      March 31, 1997
-----------------------------------
Henry G. Walker

/s/ Morris C. Aaron                                   Chief Financial Officer (also,                March 31, 1997
-----------------------------------                   principal accounting officer)
Morris C. Aaron
</TABLE>
<PAGE>

                            EMPLOYEE SOLUTIONS, INC.
                               (the "Registrant")

                                  EXHIBIT INDEX
                                       TO
                               REPORT ON FORM 10-K
<TABLE>
<CAPTION>

Exhibit                                                              Incorporated Herein                   Filed
Number                            Description                          By Reference To                   Herewith
------                            -----------                          ---------------                   --------
<C>                     <C>                                          <C>                                   <C>
3(i)                    Registrant's composite Articles of                                                  X
                        Incorporation, as amended


3(ii)                   Registrant's Bylaws, as amended                                                     X

4.1                     Loan Agreement dated August 1, 1996          Registrant's Current Report
                        between the Registrant and Bank One          on Form 8-K dated August 1,
                        Arizona, NA                                  1996 ("8/1/96 8-K")

4.1.1                   Amendment No. One thereto, dated             Registrant's Form 10-Q for
                        October 15, 1996                             the quarter ended
                                                                     September 30, 1996
                                                                     ("September 1996 10-Q")

4.1.2                   Second Modification Agreement dated
                        February 19, 1997

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

                        Registrant's Camelback Road Office           Registrant's Registration
                        Lease                                        Statement on Form SB-2
                                                                     declared effective August 12,
                                                                     1993 (No. 33-62548)("Form
                                                                     SB-2")

10.2                    Employment Agreement with                    Form SB-2
                        Harvey A. Belfer, as amended

10.3                    Employment Agreement with Roy A.             Form SB-2
                        Flegenheimer [superseded]

10.3.1                  Amendment to Employment                      1994 Form 10-KSB
                        Agreement with Roy Flegenheimer
                        [superseded]

10.3.2                  Second Amendment to Employment               Registrant's Form 10-K for
                        Agreement with Roy Flegenheimer              the fiscal year ended
                        [superseded]                                 December 31, 1995 ("1995
                                                                     10-K")

10.3.3                  Third Amendment to Employment                1995 10-K
                        Agreement with Roy Flegenheimer
                        [superseded]
</TABLE>
                                      EI-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                   Filed
Number                            Description                           By Reference                     Herewith
------                            -----------                          ---------------                   --------
<C>                     <C>                                          <C>                                   <C>
10.4*                   Employment Agreement with Roy                                                       X
                        Flegenheimer dated March 18, 1997
                        [superseding prior agreements]

10.5                    Employment Agreements dated
                        March 18, 1997 between the
                        Registrant and:

10.5.1*                      Morris C. Aaron                                                                X

10.5.2*                      Paul M. Gales                                                                  X

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

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

10.7*                   Employment Agreement between                 September 1994 10-QSB
                        Employee Solutions-East, Inc. and
                        Edward L. Cain, Jr.

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

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

10.9                    Supplemental Agreement to Joint              September 1994 10-QSB
                        Venture Agreement among Registrant,
                        Edward L. Cain, Jr. and Employee
                        Solutions, Inc.

10.10                   Stock Purchase Agreement to acquire          Registrant's Form 10-Q for
                        Employment Services of Michigan,             the quarter ended March 31,
                        Inc.                                         1995

10.10.1                 Amended Restated Stock Purchase              1995 10-K
                        Agreement to acquire Employment
                        Services of Michigan, Inc.

10.11*                  Employee Solutions, Inc. 1995 Stock                                                 X
                        Option Plan, as amended
</TABLE>
                                      EI-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                   Filed
Number                            Description                           By Reference                     Herewith
------                            -----------                          ---------------                   --------
<C>                     <C>                                          <C>                                   <C>
10.12                   Asset Purchase Agreement with                Registrant's Form 8-K/A filed
                        Hazar, Inc. and its subsidiaries             October 2, 1995 ("October 2,
                                                                     1995 Form 8-K/A")

10.13                   Management Services Agreement                October 2, 1995 Form 8-K/A
                        dated October 2, 1995 between ESI
                        America, Inc. and Employer Sources,
                        Inc., a subsidiary of Hazar, Inc.

10.14                   Warrant Agreement dated October 2,           October 2, 1995 Form 8-K/A
                        1995 with Hazar, Inc.

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

10.16                   Asset Purchase Agreement dated               8/1/96 8-K
                        July 5, 1996 by and among Leaseway
                        Transportation Corp., Leaseway
                        Personnel Corp., Leaseway
                        Administrative Personnel, Inc. and
                        Employee Solutions, Inc.

10.16.1                 First Amendment to Asset Purchase            8/1/96 8-K
                        Agreement dated August 1, 1996 by
                        and among Leaseway Transportation
                        Corp., Leaseway Personnel Corp.,
                        Leaseway Administrative Personnel,
                        Inc., Employee Solutions, Inc. and
                        Logistics Personnel Corp.

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

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

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

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

10.20                   Asset Purchase Agreement between             September 1996 10-Q
                        the Registrant and the McClary-Trapp
                        Companies dated as of November 1,
                        1996
</TABLE>
                                      EI-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                              Incorporated Herein                   Filed
Number                            Description                           By Reference                     Herewith
------                            -----------                          ---------------                   --------
<C>                     <C>                                          <C>                                   <C>
10.21                   Indemnification Agreements effective
                        as of November 21, 1996 between the
                        Registrant and:

10.21.1*                     Marvin D. Brody                                                                X

10.21.2*                     Edward L. Cain, Jr.                                                            X

10.21.3*                     Jeffery A. Colby                                                               X

10.21.4*                     Roy A. Flegenheimer                                                            X

10.21.5*                     Morris C. Aaron                                                                X

10.21.6*                     Paul M. Gales                                                                  X

10.21.7*                     Henry G. Walker                                                                X

21.1                    Subsidiaries of Registrant                                                          X

23.1                    Consent of Arthur Andersen LLP                                                      X

27                      Financial Data Schedule                                                             X
</TABLE>
------------------------------

     *Designates management or compensatory agreements
                                      EI-4