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, 1998

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

                         Commission file number: 0-22600

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

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

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

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based upon the $1.16 closing price of the Registrant's Common Stock
as reported on the NASDAQ Smallcap  Market on March 18, 1999, was  approximately
$33.1  million.  Shares of  Common  Stock  held by each  executive  officer  and
director and by each person who owns 10% or more of the outstanding Common Stock
have been  excluded in that such  persons may be deemed to be  affiliates.  This
determination  of  affiliate  status  is not  necessarily  conclusive  for other
purposes.

The number of outstanding  shares of the  Registrant's  Common Stock as of March
18, 1999, was 32,413,413.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  Proxy Statement for the  Registrant's  1999 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, 1998

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  -   BUSINESS                                                          1

ITEM 2.  -   PROPERTIES                                                       12

ITEM 3.  -   LEGAL PROCEEDINGS                                                12

ITEM 4.  -   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              13

ITEM 4A. -   EXECUTIVE OFFICERS OF THE REGISTRANT                             14

                                PART II

ITEM 5.  -   MARKET FOR REGISTRANT'S COMMON EQUITY AND
              RELATED SHAREHOLDER MATTERS                                     15

ITEM 6.  -   SELECTED CONSOLIDATED FINANCIAL DATA                             16

ITEM 7.  -   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS                   18

ITEM 7A. -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       32


ITEM 8.  -   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                      32

ITEM 9.  -   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE                          32

                               PART III

ITEM 10. -   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT               33

ITEM 11. -   EXECUTIVE COMPENSATION                                           33

ITEM 12. -   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT                                                  33

ITEM 13. -   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   33

                                PART IV

ITEM 14. -   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
              REPORTS ON FORM 8-K                                             33

SIGNATURES                                                                    34
<PAGE>
                                     PART I

EXCEPT FOR THE HISTORICAL  INFORMATION  CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM  10-K  CONTAINS  OR  MAY  CONTAIN  FORWARD-LOOKING   STATEMENTS  (INCLUDING
STATEMENTS  IN THE  FUTURE  TENSE AND  STATEMENTS  USING  THE  TERMS  "BELIEVE,"
"ANTICIPATE,"  "EXPECT,"  "INTEND" OR SIMILAR  TERMS) WHICH ARE MADE PURSUANT TO
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES  LITIGATION REFORM ACT OF 1995.
THESE  FORWARD-LOOKING  STATEMENTS  INVOLVE RISKS AND  UNCERTAINTIES  THAT COULD
CAUSE THE COMPANY'S  ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM THOSE  DISCUSSED
HEREIN.  FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED  TO,  THOSE  DISCUSSED  IN "ITEM 1 --  BUSINESS"  AND "ITEM 7 --
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS" (PARTICULARLY "OUTLOOK: ISSUES AND RISKS" THEREIN), AS WELL AS THOSE
FACTORS  DISCUSSED  ELSEWHERE HEREIN OR IN ANY DOCUMENT  INCORPORATED  HEREIN BY
REFERENCE.

UNLESS OTHERWISE INDICATED,  ALL SHARE AND PER SHARE INFORMATION HEREIN HAS BEEN
RESTATED TO REFLECT THE  COMPANY'S  TWO-FOR-ONE  STOCK SPLITS WHICH  OCCURRED IN
1996.

ITEM 1. BUSINESS

THE COMPANY

Employee Solutions, Inc. (together with its subsidiaries "ESI" or the "Company")
is one of the largest  professional  employer  organizations (PEO) in the United
States,  specializing in integrated  employment  outsourcing solutions for small
and  mid-sized  businesses.   As  of  December  31,  1998,  the  Company  served
approximately  2,000 client companies  representing 40,800 worksite employees in
47 states.

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

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

RECENT DEVELOPMENTS

Effective  February  15,  1999,  Quentin  P.  Smith,  Jr. was  appointed  as the
Company's  president and chief  executive  officer.  Mr. Smith,  a member of the
Company's  board of directors  since January 1998, had served as chairman of the
board since  August  1998.  Mr.  Smith  formerly  served as  president  of Cadre
Business Advisors,  LLC, providing  professional  management consulting services
with  emphases on strategic  planning,  business  performance  improvement,  and
technology  integration.  Prior to forming  Cadre in April 1995,  Mr.  Smith was
partner-in-charge  of Arthur Andersen LLP's Desert Southwest business consulting
practice and co-owner of Data Line Services.  Mr. Smith currently  serves on the
board of  directors  of  Arizona's  largest  electric  company,  Arizona  Public
Service.  He is a member of the board of  directors  at Rodel,  Inc.,  a leading
supplier  to the  semi-conductor  industry  and a  member  of  Samaritan  Health
Systems' board of directors.

The Company recently completed a restructuring and cost-reduction plan primarily
involving the closing of remote payroll processing centers and other offices and
various  other  expense  reduction   strategies.   Back  office  functions  were
consolidated  at  the  Company's   corporate   headquarters.   These  and  other
initiatives  have  successfully  resulted  in  significant   reductions  in  the
Company's ongoing selling, general and administrative expense levels.
<PAGE>
The Company  experienced  increased  customer  attrition and decreased  internal
sales in late 1998 and early 1999 following the closure of certain field offices
in connection with the  restructuring  and  cost-reduction  plan. New management
under Mr. Smith's  leadership  intends to apply an aggressive focus on new sales
and customer  retention through improved  service,  while maintaining or further
reducing  expense  levels as needed.  In 1999,  the Company is placing a greater
emphasis  on  developing   marketing  alliances  in  order  to  achieve  greater
efficiencies in its selling efforts.  The Company believes that its reduced cost
structure, strengthened management team and existing cash resources position the
Company to execute  its 1999 plan.  For a  discussion  of various  matters  that
affect the Company's  1999 outlook,  see Item 7 -  "Management's  Discussion and
Analysis - Outlook: Issues and Risks."

INDUSTRY OVERVIEW

The PEO industry has undergone  rapid growth in recent  years.  According to the
National  Association  of  Professional  Employer   Organizations  (NAPEO),  the
industry  has  grown  at a  compound  rate of 29% from  1991 to  1996.  Industry
analysts  expect  the  PEO  industry  to  continue  to grow  rapidly  due to the
increased  regulatory  and  administrative   burden  being  experienced  by  all
employers  and the ongoing  requirements  of  businesses to manage their overall
employee related costs. The Small Business Administration estimated that in 1994
there were  nearly 6 million  businesses  with fewer  than 500  employees  which
employ over 51 million employees with an aggregate payroll of approximately $1.2
trillion. It is estimated that the entire PEO industry currently has between two
and three million  worksite  employees with annual payrolls of over $17 billion.
The large  size of the  potential  client  market  leaves  room for  substantial
continued growth of the PEO industry.

The PEO  industry  began to evolve in the 1980s,  primarily  in  response to the
increasing burdens on small to medium-sized  employers  resulting from a complex
regulatory and legal environment. While various service providers assisted these
businesses  with  specific  tasks,  PEOs began to emerge as  providers of a more
comprehensive range of employment-related services. As the industry has evolved,
the term  "professional  employer  organization"  came to be used to describe an
entity which  establishes  a  three-party  relationship  among the PEO, a client
business, and the employees of that client business. For client employers,  PEOs
can  perform  the   functions   of  human   resources,   payroll  and   benefits
administration  departments of larger companies.  The PEO offers employers a one
stop shop with a menu of choices  for the client  company to bundle the  payroll
and benefit related services into one contract.  The primary services  performed
by PEOs are payroll  administration,  workers' compensation  insurance,  medical
benefits and 401(k) retirement plans. The growth of the PEO industry results, in
significant  part, from the demand by relatively small businesses for assistance
in administrative  aspects of the employer/employee  relationship,  as well as a
means to allow  participation of their employees in attractive  employee benefit
programs.  By having  their  employees  become part of a larger  employee  pool,
employers  often  can  provide  access to  enhanced  benefits,  such as  medical
insurance,  which  would  not be  economically  available  to  relatively  small
employers.

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

                                       2
<PAGE>
CLIENTS

As of December 31, 1998, the Company's full-service PEO client base consisted of
approximately  2,000  client  companies,   representing   approximately   40,800
employees in 47 states.  At that date, the Company had customers in more than 12
specific  industries,  based on Standard Industrial  Classification (SIC) codes,
and no more than 34% of the Company's  customers were  classified in any one SIC
code. The Company's  approximate  client company  distribution by major industry
grouping as of December 31, 1997 is set forth below:

                                                             Percent of
         Industry Group                                        Clients
         --------------                                        -------
         Transportation:
                Private carriage/driver leasing                    10%
                For hire/standard PEO                              24
                                                                  ---
                Total                                              34
         Services:
                Professional                                       13
                Light Industrial                                    4
                Real Estate                                         3
                                                                  ---
                Total                                              20

                Manufacturing                                       7
                Construction                                        9
                Retail Trade                                        6
                Entertainment                                      15
                Wholesale Trade                                     4
                Agriculture and Fishing                             1
                Other                                               4

As part of its business strategy,  the Company targets a nationwide client base.
The  Company  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 15 employees as
of December 31, 1998 (excluding TEAM Services which employs a substantial number
of worksite  employees in the entertainment  industry on a part-time or periodic
basis),  while the average  client added through  internally-generated  sales in
1998  exceeded 11 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  August,  1998,  the Company  terminated its PEO  arrangement  with US
Xpress  Enterprises,  Inc. (US Xpress), a publicly-held  transportation  company
with  more  than  5,000  worksite  employees,  due to  unsatisfactory  financial
results. US Xpress, which had been the Company's largest customer since the time
that it became a customer in January 1997,  accounted for $121.3  million or 13%
of the  Company's  total  revenue  in 1998,  and  $180.4  million  or 19% of the
Company's total revenue in 1997.

The  Company  generally  has  benefited  from a high level of client  retention,
resulting  in a  significant  recurring  revenue  stream.  NAPEO's  standard for
measuring  attrition  is computed by dividing  the number of clients lost during
the period by the sum of the number of  clients at the  beginning  of the period
plus the number of clients  added  during the period  (Client  Attrition  Rate).
Based on this standard,  the Company's Client  Attrition Rate was  approximately
17%, 25% and 21%, respectively, for the years ended December 31, 1998, 1997, and
1996.  The  Company's  Client  Attrition  Rate is  attributable  to a variety of
factors,  including (i)  termination  by the Company  because the client did not
make timely payments or failed to meet the Company's  client risk profile,  (ii)
client  nonrenewal  due to repricing,  or service or price  dissatisfaction  and
(iii) client business failure, downsizing, or sale or acquisition of the client.
The  Company  experienced  increased  attrition  in late  1998  and  early  1999
following  the  closure  of  certain   field   offices  in  connection   with  a
restructuring plan.

                                       3
<PAGE>
The general division of  responsibilities  between the Company and its client as
co-employers under the Company's standard forms of subscriber agreements for PEO
services is as follows:

         THE COMPANY:
     *    Payroll preparation and reporting

     *    Tax reporting and payment (state and federal withholding,  FICA, FUTA,
          state unemployment)

     *    Workers'   compensation   compliance,   procurement,   management  and
          reporting

     *    Employment benefit procurement, administration and payment

     *    Monitoring changes in certain governmental  regulations  governing the
          employer/employee relationship and updating the client when necessary

          THE CLIENT:
     *    Supervision  and direction of job specific  activities and designation
          of job description and duties

     *    Hiring, firing and disciplining of employees

     *    Determination of salaries and wages

     *    Selection of fringe benefits, including employee leave policies

     *    Professional and business licensing and permits

     *    Compliance with immigration laws

     *    Compliance with health, safety and work laws and regulations

          JOINT:
     *    Implementation   of   policies   and   practices   relating   to   the
          employer/employee relationship

     *    Employer liability under workers' compensation laws

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

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

As a result of an acquisition in August 1996, the Company began providing driver
leasing  services in which the  Company  acts as sole  employer of the  worksite
employee.  In such cases,  the Company  contracts with certain of its clients to
provide  transportation workers who are sole employees of the Company. For these
workers,  the Company makes hiring,  termination  and placement  decisions,  and
assumes more related obligations than in the general "co-employer" relationship.
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).

                                       4
<PAGE>
SERVICES AND PRODUCTS

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

PAYROLL

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

HUMAN RESOURCES ADMINISTRATION

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

EMPLOYER REGULATORY COMPLIANCE

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

RISK MANAGEMENT/WORKERS' COMPENSATION

The Company offers its clients a fully-insured,  first-dollar  coverage workers'
compensation   insurance   program.   The  Company's  risk   management/workers'
compensation program provides its clients with access to safety programs through
the Company's  experienced safety  professionals,  early return to work programs
and access to managed care networks for workers'  compensation  services as part
of the PEO package.

BENEFITS PROGRAMS

The Company believes it generally can obtain employee benefits, negotiate annual
plan  arrangements,  and  administer  the  plans  and  related  claims  at rates
generally  not  available  to  small  and  medium-sized  firms  (depending  upon
geographic  location,  plan design and census  demographics  of the group).  The
Company's  benefits  programs  include (i) major  medical  indemnity,  preferred
provider and health  maintenance  organization  plans;  (ii) group term life and
accidental  death  and  dismemberment  insurance;  (iii)  dental  indemnity  and
preferred provider insurance;  (iv) vision care discount programs; (v) long term
disability  insurance;  and (vi) short term  disability  and other  supplemental
insurance programs.  Except for one self-insured health care program, the health
care  programs of the Company are fully  insured by  third-party  insurers.  See

                                       5
<PAGE>
"Medical  Programs"  below.  In addition,  the Company  offers  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.

WORKSITE EMPLOYEE SERVICES

The Company  also  provides  benefits  and  services  directly  to its  worksite
employees.  In 1998, the Company  introduced a debit card for the convenience of
its customers and worksite employees. The Company provides national and regional
bank affiliations to expedite payroll check cashing and direct deposit services,
and also offers  credit union  access to  employees.  The Company also  provides
discount  passes  for a  variety  of  recreational,  entertainment,  social  and
cultural items across the United States, and for certain types of services.  The
Company  has  introduced  a payroll  deduction  program  under which the Company
currently  offers  to  worksite  employees  the  ability  to  purchase  pre-paid
telephone cards and  specialized  insurance at competitive  prices.  The Company
intends to offer in the future  other  goods and  services  such as  homeowners,
automobile and other types of personal insurance and travel services.

SALES AND MARKETING

Although the PEO industry has grown  significantly  since its inception,  it has
not yet achieved widespread  customer  familiarity in many markets. As a result,
the Company  generally  must first explain to potential  clients what a PEO does
and the  benefits  a PEO  generally  offers  before  the  Company  can  sell its
particular  services to the  potential  client.  The Company  believes  that its
services can best be sold by experienced  sales  representatives  at individual,
face-to-face  meetings with potential clients. In 1999, the Company is placing a
greater emphasis on developing  marketing  alliances in order to achieve greater
efficiencies in its selling efforts.

SALES

The Company's  senior sales  management and sales  administration  functions are
located  at its  Phoenix  headquarters.  The  Company's  national  telemarketing
operations,  also based in Phoenix, generate new leads, which are supported by a
nationwide  network  of sales  representatives.  Headquarters  provides  ongoing
training and sales support to all Company sales representatives, assists them in
new prospect proposals,  and manages business  submissions.  The Company's field
sales  operations are  coordinated by sales managers  located in various cities,
who manage a network of full-time  sales  representatives  and  part-time  sales
brokers.  At December  31, 1998,  the  Company's  sales force  included 45 sales
representatives. During 1998, the Company transitioned a substantial majority of
its independent sales representatives to employee status. The Company intends to
build and  maintain an internal  sales force  consisting  primarily  of employee
sales representatives.

The Company's  sales  representatives  currently are  compensated  primarily via
commissions,  subject to certain  vesting and production  requirements.  In some
instances,  base salaries are provided to employee salespersons.  Sales managers
also receive an override commission on sales generated by sales  representatives
that report to them.  Commissions  may be payable after  termination  in certain
circumstances.

MARKETING

The Company's marketing operations provide  comprehensive  marketing support for
all  of  the  Company's  operations.  This  support  focuses  on  communications
strategies,  market  research and analysis,  product  development  and strategic
alliances.   The  marketing   department   also  provides   empirical  data  for
salespersons  to assist in  prospecting  activities in targeted  industries  and
regions.

The  marketing  department  has developed a  communications  strategy to provide
continuity and consistency of the Company's message. This strategy also seeks to
expand the Company's contacts through new relationships and expand relationships
with current clients.

MARKETING ALLIANCES

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

                                       6
<PAGE>
The  Company's   current   alliances   include:   cross  selling   arrangements;
arrangements  to offer  debit  cards,  prepaid  telephone  cards  and  specialty
insurance  products to  worksite  employees;  benefits  education  for  worksite
employees;  and a nationwide  check-cashing  program for worksite employees.  In
1999,  the  Company  entered  into an  alliance  with  IPEO,  an  Internet-based
professional  employer  organization  targeting technology and technical service
firms. In addition to marketing and technical initiatives,  the Company acquired
an equity position in IPEO by investing one million dollars in senior  preferred
stock.

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,  though
several are larger than or comparable to the Company in size. As the PEO concept
becomes  better  known and  achieves  greater  market  penetration,  the Company
expects the PEO market to become substantially more competitive. In areas of the
country where PEOs have achieved  greater market  recognition  and  penetration,
competition has become intense. While price is the principal competitive factor,
service  and the  coverage  and  quality  of  benefits  programs  are  important
ancillary competitive  considerations.  The Company's subscriber agreements with
its clients generally may be canceled upon 30 days written notice of termination
by either party. The short-term nature of most customer  agreements means that a
substantial  portion of the Company's  business  could be terminated  upon short
notice.

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

INFORMATION SYSTEMS

The  Company  utilizes  integrated  payroll  processing,  billing  and  benefits
management  information  and processing  systems.  The Company also has recently
converted  an advanced  management  system that assists the Company in executing
its risk management  program.  In 1998, the Company  completed the transition of
all PEO  processing  to a unified  software  platform and a  centralized  client
server at its Phoenix headquarters,  and installed a new Company-wide accounting
software  package.  See also "Item 7 -- Management's  Discussion and Analysis --
Outlook: Issues and Risks, Year 2000 Compliance" herein.

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

INVESTMENT POLICY

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

                                       7
<PAGE>
RISK MANAGEMENT/WORKERS' COMPENSATION PROGRAM

Workers' compensation is a state-mandated,  comprehensive insurance program that
requires  employers  to fund medical  expenses,  lost wages and other costs that
result from work-related injuries and illnesses, regardless of fault and without
any co-payment by the employee.  The Company has developed  various  systems and
policies  designed to control  its  workers'  compensation  costs and assist its
clients.  These systems and policies  include  comprehensive  risk evaluation of
prospective clients, the prevention of workplace injuries, early intervention in
employee  injury,  intensive  management  of the medical  costs  related to such
injuries and the prompt return of employees to work.

Since 1998, the Company has maintained workers' compensation  insurance coverage
on a guaranteed cost basis. Under its guaranteed cost arrangements,  the Company
pays an initial  deposit and,  thereafter,  a fixed  percentage  of its workers'
compensation  payroll on a monthly basis. The Company has no liability in excess
of such amounts  paid.  The  Company's  1999  guaranteed  cost coverage has been
obtained through TIG Insurance  Company,  with ManagedComp acting as third party
administrator and general agent. The Company's 1998 guaranteed cost coverage was
obtained through Stirling Cooke Risk Management Services, Inc.

The Company has been granted self-insured status in the State of Ohio, which the
Company   believes   provides  a  competitive   advantage   under  that  State's
monopolistic  workers'  compensation  structure.  The Company  retains  workers'
compensation  risk on Ohio claims of up to $50,000 per  occurrence.  Ohio claims
are not included in the guaranteed cost policies described above.

Prior to 1998, the Company  operated  various  partially  self-insured  workers'
compensation programs. In addition to providing coverage to PEO customers, these
programs  included the  marketing of workers'  compensation  coverage to non-PEO
customers on a  stand-alone  basis.  Effective  February  28, 1998,  the Company
completed a loss portfolio transfer that substantially  eliminated the Company's
remaining workers' compensation liability risk on pre-1998 claims under both its
PEO and its  stand-alone  workers'  compensation  programs.  While  the  Company
effectively discontinued marketing the stand-alone program at December 31, 1997,
the Company  retained  risk of up to $250,000 per  occurrence  on claims  taking
place after that date on a defined  portfolio of stand-alone  policies that were
in place as of such date. All of such stand-alone  policies expired in 1998. See
also "Item 7 - Management's  Discussion and Analysis - Outlook: Issues and Risks
- Adequacy of Loss Reserves" herein.

Although  the  Company  has  obtained  guaranteed  cost  workers'   compensation
coverage,  the Company intends to continue to manage workers' compensation costs
aggressively.  Should the Company experience  unfavorable trends in its workers'
compensation  experience,  the  availability  and/or  cost of coverage in future
periods could be materially adversely affected.

MEDICAL PROGRAMS

In addition to its medical  insurance  plans which are fully  insured by several
third party  providers,  the Company  offers a self-insured  program  through an
arrangement  with  Provident  Life & Accident  Company  (Provident).  (Two prior
partially  self-insured  arrangements  were terminated on December 31, 1997, and
the administrators of those arrangements are presently handling claim run-off in
accordance with the applicable programs.) As of December 31, 1998, approximately
833  employees  were insured under the  Provident  program.  Under the Provident
program,  the maximum  policy  coverage is $100,000 per covered  individual  per
year, for which the Company is responsible.  Working with Provident, the Company
seeks to limit its risk by  performing a review of loss  factors,  and carefully
monitoring claims experience.  The Company establishes  reserves for anticipated
liabilities;  however,  there  can be no  assurance  that the  reserves  will be
adequate due to such factors as unanticipated  loss development on known claims,
increases  in the number and  severity of new claims,  and a lack of  historical
claims experience with new clients.

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

ACQUISITIONS

The Company has experienced  significant  growth through  acquisitions in recent
years.  Two  acquisitions  were completed during 1998. In July 1998, the Company
acquired K.W.M. Corporation,  (known in the industry as the National Companies),
a personnel  leasing company  specializing  in driver leasing  services based in
City of Industry,  California.  The acquisition was designed to strengthen ESI's
presence in the strategically  important Southern California market. In December
1998,  the  Company  acquired  Fidelity  Resources   Corporation,   an  Oklahoma
City-based  professional employer organization with approximately 1,050 worksite
employees  at the time of the  acquisition.  Fidelity's  customers  are  located
primarily in Oklahoma and surrounding states. The acquisitions completed in 1998
reflect the Company's strategy of targeting smaller PEOs in strategic geographic
areas  that can be  integrated  efficiently  and  serve  as a base for  building
long-term  internal sales growth. The Company intends to focus on growth through
internal sales in 1999 and does not currently anticipate significant acquisition
activity.

                                       8
<PAGE>
EMPLOYEES

At December 31, 1998,  the Company  employed 356 full-time  corporate  employees
(reduced to 327 full-time  corporate employees at March 15, 1999) in addition to
the worksite employees.  The Company considers its employee relations to be very
good.

INDUSTRY REGULATION

FEDERAL REGULATION

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

TAXES; EMPLOYEE BENEFITS

As  employer  of  record  for  its  clients'  employees,   the  Company  assumes
responsibility  for the  payment  of  federal  and state  employment  taxes with
respect  to  wages  and  salaries  paid to its  worksite  employees.  There  are
essentially  three  types of  federal  employment  tax  obligations:  income tax
withholding  requirements,  social security obligations under the Federal Income
Contribution  Act  (FICA)  and  unemployment   obligations   under  the  Federal
Unemployment Tax Act (FUTA). Under the Internal Revenue Code of 1986, as amended
(the Code),  the employer has the obligation to remit the employer  portion and,
where  applicable,  withhold and remit the employee  portion of these taxes.  In
addition,  the Company is obligated to pay state unemployment taxes and withhold
state income taxes.

The Internal  Revenue  Service (IRS) has formed a Market  Segment Study Group to
examine  whether PEOs such as the Company are for certain  employee  benefit and
tax purposes the  "employers" of worksite  employees  under the Code. If the IRS
were to determine that the Company is not an "employer" under certain provisions
of the Code, it could  materially  adversely affect the Company in several ways.
With respect to benefit plans,  the tax qualified status of the Company's 401(k)
plans could be revoked,  and the Company's  cafeteria and medical  reimbursement
plans may lose their  favorable  tax status  (resulting  in employer  liability,
including  penalties for failure to withhold applicable taxes in connection with
the cafeteria  and medical  reimbursement  plans).  The Company  cannot  predict
either the timing or the nature of any final decision that may be reached by the
IRS with respect to the Market  Segment  Study Group or the ultimate  outcome of
any such decision,  nor can the Company predict whether the Treasury  Department
will issue a policy  statement  with respect to its position on these issues or,
if issued,  whether such  statement  would be favorable  or  unfavorable  to the
Company.  Effective as of January 1, 1997, the Company  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

                                       9
<PAGE>
adversely affected by any unfavorable IRS determination,  the Company intends to
convert  the  majority  of the sole  employer  plans  into one or more  multiple
employer plans, and the Company believes that any unfavorable IRS determination,
if applied  prospectively  (that is,  applicable  only to  periods  after such a
determination is reached),  probably would not have a material adverse effect on
the  Company's  financial  position  or results of  operations.  However,  if an
adverse IRS  determination  were applied  retroactively  to  disqualify  benefit
plans,  employees'  vested  account  balances  under  401(k)  plans would become
taxable,  an  administrative  employer  such as the  Company  would lose its tax
deductions to the extent its matching  contributions  were not vested,  a 401(k)
plan's trust could become a taxable trust and the administrative  employer could
be subject to liability with respect to its failure to withhold applicable taxes
and with respect to certain contributions and trust earnings. In such event, the
Company also would face the risk of client  dissatisfaction and potential claims
by clients or worksite employees.

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

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

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

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

A  definitive  judicial  interpretation  of an  employer  in  the  context  of a
full-service PEO arrangement has not been established. If the Company were found
not to be an employer for ERISA purposes,  its plans would not comply with ERISA
and the level of services the Company  could offer may be  materially  adversely
affected.  Further, as a result of such finding, the Company and its plans would
not enjoy the  pre-emption  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.

Certain  states  impose  or are  considering  imposing  certain  taxes  on gross
revenues or service fees of the Company and its competitors.  The Company cannot
predict with certainty the extent to which such taxes will be imposed.

                                       10
<PAGE>
WORKERS COMPENSATION

Workers' compensation is a state-mandated,  comprehensive insurance program that
requires  employers  to fund medical  expenses,  lost wages and other costs that
result from work-related injuries and illnesses, regardless of fault and without
any co-payment by the employee.  In exchange for providing workers' compensation
coverage  for  employees,  the  liability  of the  employer  under the  workers'
compensation statute generally is exclusive.  Workers' compensation benefits and
arrangements vary on a state-by-state basis and are often highly complex.

In most states,  workers' compensation benefits coverage (for both medical costs
and lost wages) is available  through the purchase of commercial  insurance from
private  insurance  companies,  participation  in state-run  insurance  funds or
employer  self-insurance.  Several states have mandated that  employers  receive
coverage  only from state  operated  funds.  Insurance  carriers  determine  the
employer's  premium  through an  evaluation  of risk by industry  type,  factors
specific to the employer, and the employer's actual loss history. Typically, the
insurance market maintains loss data on an individual employer basis through the
experience rating system.  Because PEOs aggregate many individual employer risks
under a single policy, and may fundamentally  alter the loss experience of those
risks, PEO relationships have altered traditional  methodologies for determining
premium and collecting and maintaining  experience  rating data. Some states are
evaluating the regulations  applicable to the experience rating system to ensure
adequate  data and  premium  collection  within  the PEO  industry.  Changes  to
existing experience rating mechanisms,  if adopted,  could materially  adversely
affect the cost of providing, and the market for, PEO services.

                                       10
<PAGE>
As a creation of state law,  workers'  compensation  is subject to change by the
state  legislature  and is influenced by the political  processes in each state.
Several  states  have  mandated  that  employers   receive  coverage  only  from
state-operated funds. Certain states have adopted legislation requiring that all
workers'  compensation  injuries  be  treated  through a managed  care  program.
Moreover,  because  workers'  compensation  benefits are mandated by law and are
subject  to  extensive  regulation,  payors and  employers  do not have the same
flexibility to alter  benefits as they have with other health benefit  programs.
It is difficult for payors and multi-state  employers to adopt uniform  policies
to  administer,  manage  and  control  the costs of  benefits  because  workers'
compensation programs vary from state to state.

HEALTH CARE REFORM

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

STATE AND LOCAL REGULATION

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

                                       11
<PAGE>
ITEM 2. PROPERTIES

The Company leases all of its offices.

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

The Company also leases smaller amounts of office space at various  locations in
a number of other  cities  for its sales and  operations  offices.  The  Company
believes  that  these  facilities  are  adequate  for its  existing  operations,
although  further  acquisitions  or  expansion  could  increase its office space
needs.  The Company  reduced the amount of space during 1998 in connection  with
expense reduction initiatives.

ITEM 3. - LEGAL PROCEEDINGS

The  Company  and certain of its  present  and former  directors  and  executive
officers  were named as  defendants  in ten actions filed between March 1997 and
May 1997.  While the exact  claims  and  allegations  varied,  they all  alleged
violations  by the Company of Section  10(b) of the Exchange Act, and Rule 10b-5
promulgated  thereunder,  with respect to the accuracy of  statements  regarding
Company reserves and other disclosures made by the Company and certain directors
and  officers.  These suits were filed after a  significant  drop in the trading
price of the Company's  Common Stock in March 1997. The suits were  consolidated
before the U.S.  District  Court in  Phoenix,  Arizona.  In November  1998,  the
Company entered into a settlement  agreement  calling for the claims against the
Company  and  all  other  defendants  to be  dismissed  with  prejudice  without
presumption  or admission of any  liability  or  wrongdoing.  Final terms of the
settlement  call for payment to the plaintiffs of $13.8 million in cash and $1.2
million in shares of the Company's Common Stock. A substantial  majority of both
the cash portion of the  settlement  and  litigation-related  expenses have been
paid by the  Company's  directors and officers'  insurance  carriers.  The Court
approved the settlement agreement on March 11, 1999.

The Company was named as a defendant in an action filed by Ladenburg  Thalmann &
Co., Inc. in the United States District Court,  Southern District of New York in
May 1997 alleging breach of contract under certain stock warrants. The plaintiff
sought  damages of at least $2.5 million.  In March 1999,  the Court granted the
Company's motion for summary judgment and dismissed the plaintiff's case.

An arbitration  panel awarded HDVT,  Inc. (the seller of certain assets acquired
by the Company from  Employers  Trust in February 1997) a total of $10.4 million
in additional  acquisition  purchase price in February  1999.  HDVT has filed an
action to confirm the award in Superior Court,  Maricopa  County,  Arizona.  The
Company has filed a motion to vacate the arbitration award, primarily on grounds
that the arbitrators exceeded the scope of their authority.  The Company also is
pursuing other available remedies,  including seeking a significant reduction of
the purchase price pursuant to a provision of the purchase agreement relating to
the  determination of certain workers'  compensation  expense items. The Company
has been advised that HDVT will seek additional  purchase price of approximately
$1 million  under this same  provision  of the  purchase  agreement,  though the
Company does not expect any additional  purchase price to become due thereby. At
the  time  of  final  resolution,  the  payment  will  be  accounted  for  as an
acquisition  cost  and  will  be  amortized  over  the  remaining  term  of  the
acquisition's original 15-year amortization schedule.

                                       12
<PAGE>
An arbitration proceeding between the Company and US Xpress is scheduled for May
1999 regarding issues under a PEO service agreement between the parties that was
terminated  by the Company in August 1998.  The parties  recently  stipulated to
dismiss related  proceedings pending in the United States District Court for the
Eastern  District of Tennessee,  including US Xpress'  request for a preliminary
injunction.   US  Xpress  seeks  recovery  of   approximately   $3,000,000  plus
unspecified  punitive damages primarily  relating to unpaid medical claims.  The
Company  intends  to  contest  the  claim  vigorously.   As  part  of  the  same
arbitration,  the Company is seeking recovery of damages for  misrepresentations
made by US Xpress  (relating  primarily to the costs associated with US Xpress's
medical  programs)  at the  time  the  parties  entered  into  the  PEO  service
agreement.

The Company has been named as a defendant in an action  filed by Bertram  Danzig
in February 1999 in Superior Court, Maricopa County,  Arizona alleging breach of
contract with respect to certain  payments  claimed to be owing during and after
his employment with the Company.  The complaint  seeks damages of  approximately
$1.8 million plus the  issuance of options to acquire  200,000  shares of Common
Stock. The Company intends to defend the action vigorously.  The Company further
will pursue  significant  counterclaims  against Mr. Danzig  relating to certain
liabilities  and other matters  incurred by the Company in  connection  with its
1996 acquisition of assets from Hazar, Inc., an entity of which Mr. Danzig was a
principal.  A director  of the  Company  has  agreed to  indemnify  the  Company
personally for amounts paid by the Company to Mr. Danzig in connection with this
matter, if any.

International  Color  Services,  L.L.C.  filed for  arbitration in December 1998
alleging breach of contract regarding fee issues under the PEO service agreement
between  the  parties.  The Company  has filed a  complaint  in Superior  Court,
Maricopa Count,  Arizona in January 1999 seeking a declaratory judgment that the
dispute is not subject to  arbitration.  Plaintiff  has filed a motion to compel
arbitration  and a counterclaim  seeking damages of over $400,000 plus attorneys
fees and costs and unspecified  punitive damages. The Company intends to contest
the claim vigorously.

From time to time,  the  Company  is named as a  defendant  in  lawsuits  in the
ordinary course of business. See Item 7 - "Management's  Discussion and Analysis
-  Outlook:  Issues  and  Risks -  Uncertainty  of  Extent  of PEO's  Liability;
Government Regulation of PEOs."

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 1998.

                                       13
<PAGE>
ITEM 4A. - EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

Quentin P. Smith,  Jr.  47    Chairman of the Board, President,             1998
                              Chief Executive Officer and Director

Bill C. Hollis          52    Senior Vice President, Customer Service       1999
                              Delivery

John V. Prince          44    Senior Vice President, CFO and Treasurer      1997

Paul M. Gales           43    Senior Vice President, General Counsel        1996
                              and Secretary

Mark J. Gambill         39    Senior Vice President and Chief               1997
                              Marketing Officer

Quentin P. Smith,  Jr. has been a Director of the Company  since  January  1998,
Chairman  of the Board of  Directors  since  August  1998,  and Chief  Executive
Officer and  President  since  February  1999.  Mr. Smith was President of Cadre
Business Advisors,  LLC, a professional  management consulting services company,
from April 1995 to February 1999. Previously, Mr. Smith was Partner-in-Charge of
the Desert Southwest Business  Consulting Group of Arthur Andersen LLP from 1993
to 1995 and a co-owner of Data Line Service Company,  a data processing  service
bureau, from 1988 to 1991. Mr. Smith is a director of Arizona Public Service Co.

Bill C. Hollis was named Senior Vice  President - Customer  Service  Delivery of
the Company in March 1999. Mr. Hollis also serves as Chief Executive  Officer of
Logistics  Personnel Corp.  ("LPC"),  the Company's  driver leasing  subsidiary.
Previously,  Mr.  Hollis  served as  President  of LPC from the time the Company
acquired LPC in August 1996 until March 1999 and in various management positions
with LPC's  predecessor  companies  for  approximately  25 years  prior to LPC's
acquisition  by the Company,  including  positions as Vice President with Penske
Truck Leasing, Inc. and Leaseway Transportation Corp.

John V. Prince  joined the Company as Vice  President - Finance in January  1997
and was named Treasurer in September 1998 and Chief  Financial  Officer in March
1999.  Previously,  Mr.  Prince held a number of  executive  positions  during a
17-year  career with First  Interstate  Bancorp,  Inc.  (now Wells Fargo) of Los
Angeles, and First Interstate Banks of Texas and Oklahoma,  including controller
of its $1.5 billion Oklahoma affiliate.

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

Mark J. Gambill was named Senior Vice President and Chief  Marketing  Officer in
March 1999. Mr. Gambill joined the Company as its Vice President of Marketing in
March 1997,  and also served as Senior Vice President - Sales and Marketing from
December  1997 to March 1999.  From 1994 to 1997,  Mr.  Gambill was  Director of
National  Accounts  and  Strategic  Alliances  for  Paychex,   Inc.,  a  payroll
processing  company.  Prior to that time,  Mr.  Gambill was a senior  manager in
sales and marketing for Ceridian  Corporation,  a payroll  processing  and human
resources company.

                                       14
<PAGE>
                                     PART II

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

The Company's  Common Stock has traded on the NASDAQ  Smallcap  Market under the
symbol "ESOL" since  November  1998.  The  Company's  Common Stock traded on the
NASDAQ National Market from January 1996 to November 1998.

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 NASDAQ  since
January 1996. As of March 18, 1999, the Company had 246  shareholders  of record
and over 13,000 beneficial holders.


         Quarter Ended                       High                 Low
         -------------                       ----                 ---
       December 31, 1998                     $3.31               $1.41
       September 30, 1998                    $3.78               $1.41
       June 30, 1998                         $5.28               $3.59
       March 31, 1998                        $5.84               $4.25
       December 31, 1997                     $7.94               $4.06
       September 30, 1997                    $6.13               $5.00
       June 30, 1997                         $7.38               $3.94
       March 31, 1997                        $28.38              $5.63

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 Indenture relating to the Company's 10% Senior Notes due 2004 (the "Notes"),
limits the payment of dividends by the Company.  The amount of future dividends,
if any, will be  determined  by the Board of Directors  based upon the Company's
earnings, financial condition, capital requirements and other conditions.

MISCELLANEOUS

The Company has issued securities in private placement  transactions pursuant to
Section 4(2) (or, in the case of shares being issued  pursuant to the securities
class action  settlement,  Section  3(a)(10)) of the  Securities  Act of 1933 as
described in the following paragraphs.

As part of the September 1997  acquisition of Phoenix Capital  Management,  Inc.
and  several  related PEO  companies  designated  as "ERC," the  Company  issued
752,587  restricted  unregistered  shares  of  the  Company's  Common  Stock  in
September 1997 to one individual who owned the acquired companies. Additionally,
the Company agreed to issue additional  restricted shares to be determined based
upon ERC  earnings  after  the  acquisition.  The  parties  are  concluding  the
calculation of the number of such additional shares,  which will be valued based
on the average  closing price of the Company's  Common Stock during the one-year
period following the closing of the acquisition.

As part of the December  1998  acquisition  of Fidelity  Resources  Corporation,
("Fidelity"),  the Company issued 625,000 restricted  unregistered shares of the
Company's  Common  Stock in  December  1998 to two  individuals  who  owned  the
acquired  company.  If the price of the  Company's  Common  Stock  (based on the
average price during the 20 days prior to the first  anniversary  of the closing
date (the  "Anniversary  Price")) is less than $4.00,  the Company  will provide
additional cash  consideration  or issue  additional  restricted  shares (or any
combination  thereof,  in the Company's  discretion) in an amount  sufficient so
that the aggregate value of the 625,000 shares (valued at the Anniversary Price)
plus such additional consideration equals $2.5 million. Subject to meeting gross
profit  targets on a specific  client  prior to July 1, 2000,  the Company  also
agreed to provide up to $500,000 of additional consideration in the form (in the
Company's  discretion)  of cash or additional  restricted  shares (valued at the
Anniversary  Price).  The Company also issued warrants to the two individuals to

                                       15
<PAGE>
purchase  up to  200,000  shares  of  its  Common  Stock.  The  warrants  become
exercisable at $2.125 per share if earnings  targets are achieved in each of the
three years following the closing of the acquisition.

The  Company  has  agreed to issue  shares of its  Common  Stock  valued at $1.2
million in connection with the settlement of securities class action litigation.
See "Item 3 - Legal Proceedings." The shares will be valued based on the average
price  during  the 20  trading  days  preceding  the date on which  the  Court's
judgment  approving the settlement becomes final. For purposes of the settlement
agreement,  the Court's  judgement will be considered  final three business days
after the  expiration  of time to file an  appeal  (i.e.  30 days from  entry of
judgement)  or, if an appeal is  filed,  the date on which the  judgement  is no
longer subject to further judicial review or appeal.

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, 1998,  1997,  1996,  1995 and
1994 and for the years then ended are derived  from the  consolidated  financial
statements of the Company,  which  consolidated  financial  statements have been
audited by Arthur Andersen LLP, independent public accountants. Except for 1994,
the earnings per share amounts for all prior years have been restated to conform
with  the  presentation   requirements  of  Statement  of  Financial  Accounting
Standards No. 128,  "Earnings per Share." Management does not believe the impact
of restatement for 1994 would be material.
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                        ------------------------------------------------------
(In thousands of dollars)               1998        1997         1996         1995        1994
                                        ----        ----         ----         ----        ----
<S>                                  <C>          <C>          <C>          <C>         <C>
Consolidated Statements of Operations Data:

Revenues                             $968,909     $933,817     $439,016     $164,455    $74,334
Cost of revenues                      934,684      903,255      400,862      150,675     71,068
Gross profit                           34,225       30,562       38,154       13,780      3,266
Selling, general and
 administrative expenses               49,293       33,411       17,310        7,183      2,297
Depreciation & amortization             6,145        4,617        2,073          426        269
Income (loss) from operations         (21,213)      (7,466)      18,771        6,171        700
Non-operating income (expense), net    (6,849)      (3,849)        (364)         510        129
Income (loss) before provision
 for taxes                            (28,062)     (11,315)      18,407        6,681        829
Income tax provision (benefit)           (111)      (2,819)       6,381        2,846        450
Net income (loss)                     (27,951)      (8,496)      12,026        3,835        379
</TABLE>

                                       16
<PAGE>
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                        ------------------------------------------------------
(In thousands, except per share data)   1998        1997         1996         1995        1994
                                        ----        ----         ----         ----        ----
<S>                                     <C>          <C>          <C>          <C>         <C>
Consolidated Balance Sheet Data

Working capital                     $  31,665     $  58,329     $ 30,449    $ 8,589    $ 2,394
Total assets                          175,105       207,217      125,969     36,840      9,310
Long-term debt                         85,000        85,000       42,800         --         --
Stockholders' equity                   15,716        42,389       46,507     19,943      6,401

Common Stock Data
Earnings (loss) per share
  Basic                                  (.88)         (.27)         .40        .17        .02
  Diluted                                (.88)         (.27)         .37        .16        .02

Weighted average common and
equivalent shares outstanding
  Basic                                31,817        31,193       30,224     22,392     20,145
  Diluted                              31,817        31,193       32,168     23,507     20,145

At period end:
  Worksite employees                   40,800        45,200       30,000     11,000      3,600
  Client companies                      2,000         1,700        1,200        920        450
  States with worksite employees           47            47           46         40         20
</TABLE>
                                       17
<PAGE>
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

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

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

RESULTS OF OPERATIONS -- OVERVIEW

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

REVENUES

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

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

COSTS OF REVENUES

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

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

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

Prior to January 1, 1998, workers'  compensation costs,  whether relating to PEO
worksite  employees  or  the  Company's  stand-alone  risk   management/workers'
compensation  program,  include the costs of claims up to the  retention  limits
relating to the Company's workers' compensation  program,  administrative costs,
premium taxes,  and excess  reinsurance and accidental  death and  dismemberment
insurance premiums. The Company retained workers' compensation liabilities up to
certain  specified  amounts under its pre 1998 workers'  compensation  insurance
agreements.  Accrued  workers'  compensation  claims  liability  is  based  upon
estimates of reported and  unreported  claims and the related  claims and claims
settlement  expenses in an amount equal to the retained  portion of the expected
total incurred claim. The Company's accrued workers'  compensation  reserves are

                                       18
<PAGE>
primarily  based on  industry-wide  data, and to a lesser extent,  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.  Changes in the  liability  are charged or credited to  operations  as the
estimates are revised.  Administrative  costs include fees paid to the Company's
insurers and costs of claims management by third party  administrators.  Premium
taxes  include  taxes and related fees paid to various  states based on premiums
written.  Premium for excess  reinsurance and accidental death and dismemberment
relate to premium payments to the Company's  insurers for the retention of risks
above specified limits.

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

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 one  self-insured  program  with a built-in  maximum
coverage  cap of $100,000 per person per year.  Prior to 1998,  the Company also
offered  certain  partially  self-insured  programs  with  specific  and, in one
program,  aggregate stop-loss insurance.  The Company recognizes a liability for
self-insured  and partially  self-insured  health insurance claims at the time a
claim is reported to the Company by the third party  claims  administrator,  and
also provides for claims incurred,  but not reported based on industry-wide data
and the Company's past claims experience.  The liability recorded may be more or
less than the actual amount of ultimate claims.  While the Company believes that
its reserves for  healthcare and workers'  compensation  claims are adequate for
future claims  payments,  there can be no assurance  that this will be the case.
See "Outlook: Issues and Risks" herein.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

DEPRECIATION AND AMORTIZATION

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

ACQUISITIONS

Period-to-period  comparisons are substantially affected by the Company's growth
through acquisition of other companies  providing PEO services.  The Company has
accounted  for its  acquisitions  using the  "purchase"  method  of  accounting,
whereby the results of such  acquired  companies  are reflected in the Company's
financial statements prospectively from the date of acquisition.  In addition to
increasing  revenues,  acquisition activity can affect gross profits and margins
because the industry mix of the acquired  companies  may differ from that of the
Company.  Further during the transition  period after an acquisition the Company
may act to implement  pricing changes where  appropriate and to eliminate client
relationships  which do not meet the Company's risk or  profitability  profiles.
Acquisition   activity   historically  has  increased  the  Company's   workers'
compensation  expense,  primarily by accelerating  the Company's  overall growth
rate and accelerating  its exposure in specific  higher-risk  segments,  such as
transportation.  The  Company  also  seeks  to  eliminate  certain  general  and
administrative  costs of acquired  companies  although  such  results may not be
achieved.
                                       19
<PAGE>
Company PEO  acquisitions  which have affected  recent periods have included the
following:  Hazar, Inc. and affiliates (Hazar) in October 1995; TEAM Services in
June 1996; Leaseway Personnel Corporation and Leaseway Administrative Personnel,
Inc.  (collectively,  "Leaseway")  in August 1996;  the  McClary-Trapp  group of
companies  (McClary-Trapp)  in November 1996; ETIC  Corporation  d/b/a Employers
Trust  (ETIC) in February  1997;  CMGR Inc.  and  Humasys,  Inc.  (collectively,
"CMGR") in February  1997;  four related PEO companies  referred to as "Employee
Resources Corporation" (collectively,  "ERC") in September 1997; Phoenix Capital
Management,  Inc.  (PCM),  a PEO service  provider,  in September  1997;  K.W.M.
Corporation (KWM) in June 1998; and Fidelity Resources Corporation (Fidelity) in
December 1998.

OPERATING RESULTS

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

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

RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR
ENDED DECEMBER 31, 1997

                                                         Percent
(In thousands of dollars)                  1998          Change          1997
                                           ----          ------          ----
Revenues                                 $968,909           4%         $933,817
Cost of revenues                          934,684           3           903,255
Gross profit                               34,225          12            30,562
Selling, general and administrative        49,293          48            33,411
Depreciation and amortization               6,145          33             4,617
Interest income                             1,885          45             1,303
Interest expense                            8,541          67             5,102
Net loss                                  (27,951)        229            (8,496)

REVENUES

Revenues  increased from $933.8 million for the year ended December 31, 1997, to
$968.9 million for the year ended December 31, 1998, a 4% increase. The increase
in  revenues  was  primarily  due  to  increased   revenues  in  TEAM  Services.
Acquisitions  also  accounted for a portion of the increase in revenues  between
the periods.  Growth from internal sales and  acquisitions was in part offset by
factors  such as  attrition of clients and  competitive  pressures.  The Company
transitioned  its sales  operations from Atlanta to Phoenix during the first six
months  of 1998,  which had a short  term  impact  on  sales.  Execution  of the
restructuring  and cost reduction plan resulted in increases in client attrition
and  decreases  in internal  sales in late 1998 and early 1999 due  primarily to
short-term  disruptions in client service.  While the Company has taken steps to
address these issues,  there can be no assurance that measures recently taken by
the Company to improve customer service,  reduce attrition and increase internal
sales will be effective.  The Company also  terminated its subscriber  agreement
with US Xpress  effective  August 19,  1998.  The number of  worksite  employees
decreased  from  approximately  45,200 at December  31, 1997,  to  approximately
40,800  at  December  31,  1998.  The  majority  of the  decrease  was  directly
attributable  to the Company's  termination  of the contract with US Xpress,  an
unprofitable client that had approximately 6,200 worksite employees.

                                       20
<PAGE>
In 1998, the Company discontinued offering risk management/workers' compensation
services to customers  who are not  full-service  PEO  customers of the Company.
This change was the result of the determination to emphasize other PEO marketing
strategies  and because of the decreased  profit  opportunities  resulting  from
increased price competition in the overall workers' compensation market.

COST OF REVENUES

Cost of revenues  increased 3% from $903.3  million for the year ended  December
31, 1997, to $934.7 million in the year ended  December 31, 1998.  This increase
is primarily  due to the increase in the Company's  revenues,  offset by reduced
costs  associated  with the transition to a guaranteed cost program as described
below. Additionally, the cost of revenues was adversely affected by $3.2 million
in unusual  charges which are not expected to recur,  including  $1.8 million in
healthcare  costs  incurred  under  the US  Xpress  contract,  $1.0  million  in
write-offs  for  certain  payroll  tax  receivables,  and $.4  million  in other
workers' compensation  expenses. The additional healthcare costs described above
in part led to the Company's decision to terminate the US Xpress contract.

Workers' compensation  expenses decreased  approximately 20% to $24.3 million in
1998  from  $30.4  million  in  1997,  due  primarily  to the  reduced  expenses
associated  with the Company's  change in business  strategy to minimize  future
uncertainty  associated with its workers' compensation programs by converting to
a guaranteed cost workers' compensation program and the discontinued offering of
stand-alone  workers'  compensation  services as described  above. The Company's
workers'  compensation  costs have increased under the terms of its 1999 program
as  compared  to its  1998  program  in part  due to  continued  development  of
historical losses.

Consistent with Company policy, the Company's workers'  compensation reserves at
December 31, 1998 (as related to costs associated with certain stand-alone cases
and Ohio claims) are based on a review by an  independent  actuary.  The actuary
relied on industry  standards,  while taking into account the Company's specific
risk structure and philosophy, in determining its findings.

Healthcare  expenses  decreased  approximately 19% to $22.0 million in 1998 from
$27.2 million in 1997, in part due to the termination of the US Xpress contract.

GROSS PROFIT

The Company's gross profit margin increased from 3.3% in the year ended December
31, 1997 to 3.5% in the year ended  December  31,  1998.  This  increase was due
primarily  to  decreased  workers'  compensation  expenses  associated  with the
guaranteed cost program and reduced healthcare expenses, offset by the impact of
repricing  existing clients due to competitive  factors and lower margins on new
business.  In addition,  the  proportion of TEAM Services  revenues,  which have
lower margins, increased during 1998.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and administrative  expenses increased by $15.9 million or 48%
from $33.4 million for the year ended December 31, 1997 to $49.3 million for the
year ended  December 31, 1998.  As a percent of revenues,  selling,  general and
administrative  expenses  increased  from 3.6% to 5.1%  during  the years  ended
December 31, 1997 and 1998,  respectively.  Factors contributing to the increase
in  selling,  general  and  administrative  expenses  in 1998 over 1997  include
significant charges not expected to recur in future periods, as described below.
The most  significant  charge is $6.2  million  in legal  expense  to settle the
securities  class action  litigation.  In addition,  during 1998 the Company has
written  down  approximately  $1.5  million in  receivables  relating to general
customer trade  receivables and recent collection  difficulties  associated with
the discontinuation of the Company's  stand-alone workers' compensation program.
Further,  certain  receivables  primarily  related to former sales and marketing
operations in Atlanta totaling  approximately  $1.0 million were reserved for in
the second  quarter.  The  receivables  are  non-customer  related  and  include
investments in sales personnel and strategic sales partners in the form of loans
or commission  advances.  Commission  expense  increased  during 1998 due to the
increase in revenues discussed above and an increase in commissionable business.
In addition,  the Company also incurred  approximately  $400,000 in professional
fees  associated  with  acquisition  activities that did not result in completed
transactions.

On August 11, 1998, the Company  announced a $1.4 million  restructuring  charge
related  to  a  cost-reduction  plan  that  included   initiatives  intended  to
significantly  reduce  selling,  general  and  administrative  costs.  See below
discussion of Restructuring  expense and cost-reduction plan. In addition to the
cost reduction plan expenses,  the Company incurred  non-recurring  professional
fees of  approximately  $550,000  primarily  related to certain  operational and
strategic  initiatives and approximately  $372,000 of duplicative salary expense

                                       21
<PAGE>
in the third quarter of 1998 related to the  implementation  of the  operational
initiatives.   These  and  other  initiatives  have  successfully   resulted  in
significant   reductions  in  the  Company's   ongoing   selling,   general  and
administrative expense levels.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization  represents depreciation of property and equipment
and  amortization  of  organizational   costs,   customer  lists  and  goodwill.
Depreciation  and  amortization  expense totaled $6.1 million for the year ended
December 31, 1998 compared to $4.6 million for the year ended December 31, 1997.
The  increase  was  due  primarily  to  goodwill  amortization   resulting  from
acquisitions   in  1997  and  the  second  quarter  of  1998,   depreciation  of
communication   and   computer   systems   and   the   installation   of  a  new
fully-integrated  accounting  system  in 1998.  Goodwill  amortization  of these
acquisitions  was recognized  from the date of  acquisition.  See "Liquidity and
Capital  Resources" below regarding the Company's issuance of $85 million in 10%
Senior Notes due 2004,  in particular  as to the  approximately  $3.5 million in
offering expenses which are being amortized over the term of the Notes.

RESTRUCTURING EXPENSE AND COST-REDUCTION PLAN

On August 11, 1998, the Company  announced a  restructuring  and  cost-reduction
plan primarily  involving the closing of remote payroll  processing  centers and
other  offices and  various  other  expense  reduction  strategies.  Back office
functions were consolidated at the Company's  Phoenix,  Arizona  headquarters to
take advantage of recent investments in systems upgrades. The Company incurred a
restructuring  charge in the third quarter of 1998 of $1.4  million,  consisting
primarily of severance  and lease  cancellation  costs.  During 1998 the Company
transitioned  operations  located in Indiana and  Massachusetts to its corporate
headquarters in Phoenix. Where offices were closed or consolidated,  the Company
maintains an active sales and customer  service presence to meet the local needs
of customers and to support internal growth.

INTEREST

Interest income increased from $1.3 million for the year ended December 31, 1997
to $1.9 million for the year ended December 31, 1998,  primarily due to interest
earned on cash held at the corporate  level  including the excess  proceeds from
the note  offering  and  restricted  cash and  investments  held for the  future
payment of workers'  compensation claims at the Company's wholly owned insurance
subsidiary, Camelback. Interest expense increased from $5.1 million for the year
ended  December 31, 1997 to $8.5  million for the year ended  December 31, 1998,
primarily  due to interest  accrued on the  Company's  $85 million in 10% Senior
Notes due 2004. See "Liquidity and Capital Resources."

EFFECTIVE TAX RATE

The  Company's  effective  tax rate provides for federal and state income taxes.
The effective tax rate for the year ended December 31, 1998 was a benefit of .4%
as compared to a benefit of 25% for the year ended  December 31,  1997.  The tax
rate used in each quarterly  reporting  period  generally was an estimate of the
Company's effective tax rate for the calendar year. As of December 31, 1998, the
Company has incurred  losses in excess of what could be carried back and applied
against  prior  years'  income to  generate  federal  income  tax  refunds.  The
remaining net operating loss will be available for carry-forward benefit only to
the extent of any subsequently generated taxable income. Also as of December 31,
1998, the Company  established a valuation  allowance against a $9.2 million net
deferred tax asset.

The  Company's  effective  tax rate  reflects the  operations  of the  Company's
wholly-owned  subsidiary,  Camelback,  which pays state  premium tax rather than
state  income tax.  Although the Company  believes  that it has  structured  its
Camelback  arrangements to qualify for such tax treatment,  any  disallowance of
this tax treatment could materially  affect the Company's  results of operations
for the current fiscal year and future fiscal years. The Company's effective tax
rate  will  vary from time to time  depending  primarily  on the mix of  profits
derived  from  the  Company's   various   profit   centers,   the  magnitude  of
nondeductible  items relative to overall  profitability  and other factors.  The
Company's estimated effective tax rate for financial reporting purposes for 1998
is also based on estimates of the following  items that are not  deductible  for
tax purposes:  (a) amortization of certain goodwill, and (b) one-half of the per
diem allowance relating to meals paid to truck drivers under a Company sponsored
program.

                                       22
<PAGE>
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR
ENDED DECEMBER 31, 1996

                                                         Percent
(In thousands of dollars)                 1997            Change         1996
                                          ----            ------         ----
Revenues                                $933,817            113%       $439,016
Cost of revenues                         903,255            125         400,862
Gross profit                              30,562            (20)         38,154
Selling, general and administrative       33,411             93          17,310
Depreciation and amortization              4,617            123           2,073
Interest income                            1,303             56             833
Interest expense                           5,102            327           1,196
Net (loss) income                         (8,496)          (171)         12,026

REVENUES

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

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

COST OF REVENUES

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

Workers'  compensation  expense for the year ended  December  31, 1997 was $30.4
million  compared to $10.0 million in the prior year. The increase  primarily is
due to the rapid growth in the Company's overall  business,  as discussed above,
accelerated by acquisition  activity and the addition of US Xpress, all of which
have increased  exposure in higher-risk  market segments such as transportation.
The increase is also due to an  unexpected  and  significant  increase in claims
activity, particularly in the fourth quarter of 1997, including loss development
on prior period claims.  This increase led in turn to a significant  increase in
the Company's workers'  compensation reserves as established via the independent
actuarial  review upon which the Company's  workers'  compensation  reserves are
based (see discussion below). In light of the unanticipated increased claims and
reserve requirements,  and taking into account prior unanticipated  increases in
actuarial reserve requirements (in particular,  an unanticipated  increase taken
at December 31, 1996), the Company implemented a change in its business strategy
whereby the Company seeks to minimize  future  uncertainty  associated  with its
worker's  compensation  expense.  The change in strategy is based on competitive

                                       23
<PAGE>
market conditions which provide an opportunity to obtain  third-party  insurance
at a favorable cost and which limit opportunities for the Company to profit from
risk  retention  and  the  changing  profile  of  its  worksite  employee  base.
Consistent with this strategy,  the Company increased its workers'  compensation
reserves at December  31,  1997  approximately  $6.0  million to  establish  its
reserves  at  a  level  intended  to  eliminate  any  risk  of  future  workers'
compensation loss development expense related to pre-1998 occurrences.

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

As part of the  Company's  change in business  strategy,  the  Company  obtained
fully-insured  guaranteed cost workers'  compensation coverage effective January
1,  1998,   thereby   eliminating  the  Company's  risk  retention  on  workers'
compensation  claims  arising after that date except for costs  associated  with
certain  stand-alone  cases  and Ohio  claims.  Consistent  with the  change  in
business  strategy,  the Company  also  effected a loss  portfolio  transfer for
pre-1998 claims.

GROSS PROFIT

The Company's gross profit margin decreased from 8.7% in the year ended December
31,  1996 to 3.3% in the  year  ended  December  31,  1997.  This  decrease  was
attributable to several factors  including higher workers'  compensation  costs,
the impact of repricing existing clients due to competitive  factors,  and lower
margins on new business.  The proportion of TEAM Services  revenues,  which have
lower margins,  increased during 1997. In addition,  while a significant portion
of the  Company's  total 1997 revenue was derived  from US Xpress,  as discussed
previously,  the gross profit on that revenue was  negligible for the year ended
December 31, 1997.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and  administrative  expenses for the year ended  December 31,
1997 increased by  approximately  $16.1 million to $33.4  million,  or 93%, from
$17.3 million for the year ended December 31, 1996. Factors  contributing to the
increase in selling,  general and administrative  expenses in 1997 over 1996 are
the inclusion of the  operations of various  acquisitions,  an increase from 216
corporate  employees  at  December  31, 1996 to 332 at December  31,  1997,  the
relocation of the  Company's  office space to a larger  facility to  accommodate
growth,  increased bad debt expense and increased professional services fees due
in part to litigation commenced against the Company in early 1997. These factors
which  caused  increases  in selling,  general and  administrative  expense were
partially  mitigated  by improved  systems  utilization  and  economies of scale
achieved  within the Company's  operations.  The Company's  insurance costs have
increased due primarily to the Company's growth.  Commission  expenses increased
in the year ended  December 31, 1997 compared to the same periods in 1996 due to
the increase in revenues discussed above.

DEPRECIATION AND AMORTIZATION

For the year ended  December 31, 1997,  depreciation  and  amortization  expense
totaled  $4.6 million  compared to $2.1 million for the year ended  December 31,
1996.  The  increase was due  primarily to  depreciation  of  communication  and
computer systems and goodwill  amortization  resulting from  acquisitions,  with
Leaseway  and  McClary-Trapp  in 1996 and ETIC and CMGR in 1997  being  the most
significant. Goodwill amortization of these acquisitions was recognized from the
date of acquisition.

INTEREST

Interest  expense for the year ended  December  31, 1997  totaled  $5.1  million
compared to $1.2 million for the year ended  December 31, 1996.  The increase in
interest  expense is primarily due to increased  borrowings.  For the year ended
December 31, 1997 interest income totaled $1.3 million  compared to $833,000 for
the year ended December 31, 1996.  The increase in interest  income is primarily
due to interest earned on both the restricted cash and investments  held for the
future  payment of workers'  compensation  claims at the Company's  wholly owned
insurance subsidiary, Camelback and cash held at the corporate level.

EFFECTIVE TAX RATE

The  Company's  effective  tax rate for the year ended  December  31, 1997 was a
benefit of 25% as compared to a provision  of 34.7% for the year ended  December
31, 1996. The Company recognized a tax benefit in 1997 as a result of its loss.

                                       24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

The Company defines liquidity as the ability to mobilize cash to meet operating,
capital and acquisition  financing needs. The Company's  primary sources of cash
in 1998 were from investing and financing activities.

Cash used by operating activities was $15.7 million during 1998 compared to cash
provided by operating activities of $7.2 million during 1997 and $3.3 million of
cash used during 1996.  Cash used by operating  activities in 1998 includes cash
paid in connection with a loss portfolio  transfer  discussed  below.  Operating
cash flows are derived  from  customers  for full PEO  services  rendered by the
Company.  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 Company's  TEAM Services and LPC  operations
extend  credit  terms  generally  from 7 to 45 days  as is  customary  in  their
respective market segments.  Stand-alone risk  management/workers'  compensation
services  are billed in  accordance  with  individual  policies.  If the Company
expands  or  enters  into  new  market  segments,  or  extends  credit  terms to
additional clients, its working capital  requirements may increase.  Included in
other  assets  is a  receivable  of  approximately  $1.4  million  from a single
stand-alone  client as to which  disputes have risen.  The Company has initiated
litigation against the former client seeking,  among other remedies,  collection
of the  receivable.  While the  Company  believes  that it will  prevail  in the
litigation,  there can be no assurance that this will be the case and an adverse
outcome  could result in the  write-off of all or a  substantial  portion of the
unreserved balance of the receivable.

Cash provided by investing activities was $1.2 million in 1998, and cash used in
investing  activities  was $15.0  million  and $46.9  million  in 1997 and 1996,
respectively.  Included in 1998  investing  activities  is $10.0 million of cash
representing the Company's investment in marketable  securities until such funds
are needed.  Acquisitions  are not expected to be a  significant  use of cash in
1999. An  arbitration  panel awarded  HDVT,  Inc. (the seller of certain  assets
acquired by the Company from Employers  Trust in February 1997) a total of $10.4
million in additional  acquisition  purchase price in February 1999. The Company
has filed a motion to vacate the  arbitration  award,  primarily on grounds that
the  arbitrators  exceeded  the scope of their  authority.  The Company  also is
pursuing other available remedies,  including seeking a significant reduction of
the purchase price pursuant to a provision of the purchase agreement relating to
the determination of certain workers' compensation expense items.

For 1998, 1997 and 1996, capital  expenditures were $2.7 million,  $2.5 million,
and $.7 million, respectively.  Capital expenditures in 1998 consisted primarily
of computer  equipment to enhance the Company's ability to support the Company's
increased  client  base  and  the   centralization  of  payroll  processing  and
accounting  systems.  During 1999, the Company  expects to continue to invest in
additional   computer  and   technological   equipment.   Although  the  Company
continuously reviews its capital expenditure needs, management expects that 1999
capital  expenditures  will continue in order to meet the needs of the Company's
base of worksite employees.

Cash provided in financing  activities  was $13.7 million,  $36.9  million,  and
$47.2 million for 1998, 1997 and 1996,  respectively.  Cash flows from financing
activities  during 1998 resulted  primarily from bank  overdrafts that generally
result  from  timing  differences  in  the  transfer  of  funds  between  banks.
Overdrafts  are repaid  through the  transfer of funds from other  Company  cash
accounts held in other banks.

At  December  31,  1998 and  December  31,  1997,  the Company had cash and cash
equivalents  of $39.3  million and $40.1  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.  At December 31, 1998, the Company had $10.0 million in investments  and
marketable  securities,  consisting  of money market  funds,  commercial  paper,
certificates  of  deposit  and U.S.  Treasury  and  agency  notes.  The  Company
generally  maintains  large cash  balances to meet its daily payroll and payroll
tax  obligations.  The  Company  continues  to  seek  improvements  in its  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.  In April,  1998 the Company  completed an LPT which resulted in a one
time  payment  of  $19.9  million  funded  primarily  from  restricted  cash and
investments (see below).

On April 22, 1998, the Company  completed a risk transfer of all of its pre-1998
workers'  compensation  claims  liability to a third party  insurer rated AAA by
Standard & Poor's,  effected  through an LPT valued as of February 28, 1998.  In
exchange for a premium of $19.9 million (paid primarily from restricted cash and
investments),  the  Company  acquired  reinsurance  of $35 million to insure its
pre-1998  workers  compensation  losses.  Based upon the  advice of its  outside
actuaries,  the Company  believes  that the risk that pre-1998  liability  could
exceed the $35 million aggregate limit is extremely  remote,  although there can
be no  assurance.  The LPT provides for profit  sharing  opportunities  with the
Company based on ultimate paid claims,  though there can be no assurance whether
or when a profit  will be  realized.  No  charge to  earnings  was  recorded  in
connection with this transaction in 1998 or is expected in future periods.

                                       25
<PAGE>
Under Bermuda law,  Camelback must maintain  statutory capital and surplus in an
amount  based  primarily  on premium  volume.  Bermuda  law also  regulates  the
circumstances  under which  Camelback may transfer funds to its parent  company,
whether via loan,  dividend or otherwise.  Primarily due to the  transition to a
guaranteed cost workers'  compensation program effective January 1, 1998 and the
LPT completed in April 1998,  these  provisions of Bermuda law do not materially
impact the Company.

The Company is engaged in  negotiations  with the  principal  carrier  under its
pre-1998 workers' compensation program concerning various issues associated with
closing out such program. During the course of the negotiations, the carrier has
taken the position  that  amounts are due from the Company to the  carrier.  The
negotiations  are in a  preliminary  phase  and the  parties  have  not  reached
agreement on the extent of the Company's liability, if any, to the carrier.

At December 31, 1998 and December 31, 1997,  the Company had working  capital of
$31.7 million and $58.3 million,  respectively.  See also "FUTURE CAPITAL NEEDS;
UNCERTAINTY OF ADDITIONAL FINANCING" and "SUBSTANTIAL LEVERAGE" below.

NOTE OFFERING

On October 21, 1997, the Company issued $85 million of Notes in an Offering (the
Offering)  effected as an exempt  offering  under the  Securities Act of 1933 as
amended  (Securities  Act).  Interest  under the Notes is payable  semi-annually
commencing  April 15, 1998,  and the Notes are not callable  until  October 2001
subject  to the  terms of the Note  Agreement.  The  Company  incurred  expenses
related to the Offering of  approximately  $3.5 million and will  amortize  such
costs  over the life of the Notes.  In April  1998,  the  Company  completed  an
exchange  offer for these notes which was registered  under the Securities  Act.
The indenture under which the Notes were issued includes certain restrictions on
use of cash, and other  expenditures,  by the Company  including  limitations on
dividends, repurchases of Company shares and the incurrence of new indebtedness.

In  connection  with the  Offering,  the  Company  entered  into an amended  and
restated credit facility (the "Amended  Credit  Facility")  which provided for a
revolving  line of credit of $20.0  million,  including  letters of credit drawn
thereunder.  In August  1998 the Company  canceled  the  facility.  There was no
outstanding balance on the revolving line of credit when it was canceled, and it
had not been drawn on by the Company during its existence.

                                       26
<PAGE>
OUTLOOK:  ISSUES AND RISKS

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

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

The Company  currently  anticipates  that its available cash resources  combined
with funds from operations will be sufficient to meet its presently  anticipated
working capital and capital  expenditures  requirements under its 1999 operating
plan. The Company may need to raise  additional  funds through public or private
debt  or  equity   financing  in  order  to  take  advantage  of   unanticipated
opportunities  or to respond to unanticipated  competitive  pressures or adverse
outcomes  associated  with litigation or other claims.  If additional  funds are
raised through the issuance of equity securities,  then the percentage ownership
of the then current  shareholders  of the Company may be reduced and such equity
securities  may have rights,  preferences  or privileges  senior to those of the
holders of the Company's Common Stock. There can be no assurance that additional
financing  will be  available on terms  favorable to the Company,  or at all. If
adequate funds are not available or are not available on acceptable  terms,  the
Company's   business,   operating  results  and  financial  condition  could  be
materially adversely affected.

SUBSTANTIAL LEVERAGE

The Company has  incurred  significant  debt  primarily in  connection  with its
expansion  through  acquisitions and its October 1997 issuance of its 10% Senior
Notes due 2004.  As of December 31,  1998,  the Company had  outstanding  senior
indebtedness  of  approximately   $85  million  and   stockholders'   equity  of
approximately $16 million, respectively.

The Company's ability to make scheduled  principal payments in respect of, or to
pay the interest or liquidated damages, if any, on, or to refinance,  any of its
indebtedness (including the Notes) will depend on its future performance, which,
to a certain extent,  is subject to general  economic,  financial,  competitive,
regulatory  and other  factors  beyond its  control.  Based  upon the  Company's
current level of operations,  management believes that cash flow from operations
and other  available  cash will be  adequate to meet the  Company's  anticipated
future requirements for working capital  expenditures,  scheduled lease payments
and scheduled payments of interest on its indebtedness, including the Notes, for
the foreseeable  future.  The Company may,  however,  need to refinance all or a
portion of the  principal of the Notes at or prior to maturity.  There can be no
assurance that the Company's  business will generate  sufficient  cash flow from
operations,  that anticipated  growth will occur or that funds will be available
from other sources or otherwise in an amount sufficient to enable the Company to
service or refinance its indebtedness,  including the Notes, or make anticipated
capital expenditures and lease payments. In addition,  there can be no assurance
that the  Company  will be able to effect  any such  refinancing  (or any equity
financing) on commercially reasonable terms. Also, the Company is facing several
matters in litigation or arbitration as discussed  elsewhere  herein, as well as
litigation incidental to its business. The Company's liquidity position could be
materially  adversely  affected  depending on the outcome of these matters.  See
"Litigation and Other Contingencies" and "Liquidity and Capital Resources."

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

LITIGATION AND OTHER CONTINGENCIES

While  certain  significant  litigation  matters  have been  resolved  recently,
including the settlement of a major  securities class action brought against the
Company  and  certain  of its  officers  and  directors  in  March  1997,  other
significant  matters remain unresolved.  For example,  the Company is seeking to
vacate a $10.4 million  arbitration  award obtained by HDVT, Inc. (the seller of
assets  acquired by the Company from  Employers  Trust in February 1997) against
the Company in February  1999. A separate  arbitration is scheduled for May 1999
to resolve a claim against the Company by its former client,  U.S.  Xpress,  for
approximately  $3 million in unpaid medical claims and to resolve a counterclaim
by the Company against U.S. Xpress for damages for misrepresentations made by it
at the time of contract  formation  with respect to U.S.  Xpress's  medical cost
history.  The State of Ohio has  assessed  sales and use taxes of  approximately
$5.2 million  against the Company that the Company  believes  have been assessed
erroneously  and is  contesting  vigorously.  The  Company  faces  other  claims

                                       27
<PAGE>
relating to prior contractual relationships and other matters. While the Company
will continue to seek vigorously to resolve these matters  favorably,  there can
be no assurance that the outcome of these matters, or any of them, will not have
a material adverse effect upon the Company's  results of operations or financial
position.

RESTRUCTURING AND COST-REDUCTION PLAN; EFFECT ON CLIENT RETENTION

In 1998, the Company completed a restructuring and cost-reduction plan primarily
involving the closing of remote payroll processing centers and other offices and
various  other  expense  reduction   strategies.   Back  office  functions  were
consolidated at the Company's corporate headquarters. While the Company believes
that  completion  of the plan  will  result  in  long-term  improvements  in its
operational  and  customer  service  capabilities  (in  addition to  significant
operating  expense  reductions),  the  plan  resulted  in  increases  in  client
attrition  and   decreases  in  internal   sales  due  primarily  to  short-term
disruptions in client service.  There can be no assurance that measures recently
taken by the Company to improve customer service,  reduce attrition and increase
internal sales will be effective.

RISKS ASSOCIATED WITH SIGNIFICANT GROWTH, INCLUDING GROWTH THROUGH ACQUISITIONS

The Company has experienced significant growth that has challenged the Company's
management,  personnel,  resources  and systems.  A  significant  portion of the
Company's  growth has been  accomplished  through the acquisition of other PEOs.
Growth through  acquisition  involves  substantial risks,  including the risk of
improper   valuation  of  the  acquired  business  and  the  risks  inherent  in
integrating  such  businesses  with  the  Company's  operations.  As part of its
business strategy,  the Company intends to pursue continued growth. There can be
no assurance  that the Company  will be able to achieve  growth in the future or
manage this growth effectively.

INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES AND WORKERS'
COMPENSATION RATES; AVAILABILITY OF PROGRAMS

State unemployment taxes are, in part, determined by the Company's  unemployment
claims experience.  Medical claims experience also greatly impacts the Company's
health  insurance rates and claims cost from year to year.  Similarly,  workers'
compensation  costs are  directly  affected  by  experience.  Should the Company
experience  a large  increase  in claims  activity  for  unemployment,  workers'
compensation and/or healthcare, 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 due to  contractual  or competitive  factors.  In addition,  the Company
would have difficulty competing with PEOs with lower claims rates that may offer
lower rates to clients.

The maintenance of health and workers'  compensation  insurance plans that cover
worksite  employees is a significant part of the Company's  business.  While the
Company believes that  replacements for its current  contracts could be obtained
on competitive terms, if doing so became necessary,  without causing significant
disruption to the Company's business, there can be no assurance in this regard.

TAX TREATMENT

The attractiveness to clients of a full-service PEO arrangement  depends in part
upon the tax treatment of payments for  particular  services and products  under
the Code (for example,  the opportunity of employees to pay for certain benefits
under a cafeteria  plan using pre-tax  dollars).  The Internal  Revenue  Service
(IRS) has formed a Market Segment Study Group to examine  whether PEOs,  such as
the Company,  are for certain  employee benefit and tax purposes the "employers"
of worksite  employees  under the Code.  The Company  cannot  predict either the
timing or the nature of any final  decision  that may be reached by the IRS with
respect to the Market  Segment  Study Group or the ultimate  outcome of any such
decision, nor can the Company predict whether the Treasury Department will issue
a policy  statement  with respect to its position on these issues or, if issued,
whether such statement would be favorable or unfavorable to the Company.  If the
IRS were to  determine  that the  Company  is not an  "employer"  under  certain
provisions  of the Code,  it could  materially  adversely  affect the Company in
several ways.  With respect to benefit  plans,  the tax qualified  status of the
Company's 401(k) plans could be revoked, and the Company's cafeteria and medical
reimbursement  plans may lose their  favorable  tax  status.  If an adverse  IRS
determination were applied retroactively to disqualify benefit plans, employees'
vested   account   balances  under  401(k)  plans  would  become   taxable,   an
administrative employer such as the Company would lose its tax deductions to the
extent its matching  contributions  were not vested, a 401(k) plan's trust could
become a taxable  trust and the  administrative  employer  could be  subject  to
liability  with  respect to its  failure to withhold  applicable  taxes and with
respect to certain  contributions and trust earnings. In such event, the Company
also would face the risk of client  dissatisfaction and potential  litigation by
clients or worksite employees.

As the  employer  of  record  for  many  client  companies  and  their  worksite
employees,  the Company must  account for and remit  payroll,  unemployment  and
other  employment-related  taxes to numerous federal, state and local tax, labor
and  unemployment  authorities,  and is subject  to  substantial  penalties  for
failure  to do so.  From time to time,  the  Company  has  received  notices  or
challenges  which may adversely  affect its tax rates and payments.  In light of
the IRS Market  Segment  Study Group and the general  uncertainty  in this area,
certain proposed  legislation has been drafted to clarify the employer status of
PEOs in the  context of the Code and  benefit  plans.  However,  there can be no

                                       28
<PAGE>
assurance that such  legislation will be proposed and adopted or in what form it
would be  adopted.  Even if it were  adopted,  the  Company  may need to  change
aspects of its operations or programs to comply with any requirements  which may
ultimately be adopted.  In particular,  the Company may need to retain increased
sole or shared control over worksite  employees if the  legislation is passed in
its current form.

CREDIT RISKS

As the  employer  of record  for its  worksite  employees,  the  Company  may be
contractually  obligated to pay their  wages,  benefit  costs and payroll  taxes
whether or not the  Company  receives  payment  from its  customer.  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 timely payment is not received. Limited extended payment terms are
offered in certain  cases  subject to local  competitive  conditions.  The rapid
turnaround  necessary  to process and make payroll  payments  leaves the Company
vulnerable to client credit risks,  some of which may not be identified prior to
the time payroll  payments are made.  There can be no assurance that the Company
will be able to timely terminate any delinquent accounts or that its contractual
termination rights will be judicially enforced.

By way of example,  a group of employees  filed suit against the Company in 1998
alleging that they were employees of the Company and that they had not been paid
certain wages.  The maximum amount claimed could have exceeded  $500,000.  While
the Company did not believe that it had any liability to the plaintiffs based on
the facts of the case, and the Company has successfully  obtained a dismissal of
the suit,  the Company may be required to deal further with the matter on appeal
and/or deal with similar claims in the future.

In  addition,  the  Company  competes in several  market  segments 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.  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.

CLIENT RELATIONSHIPS

The Company's  subscriber  agreements with its clients generally may be canceled
upon 30 days  written  notice of  termination  by  either  party,  except  where
different  arrangements  are  required  by  applicable  law.  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.  See  RESTRUCTURING  AND
COST-REDUCTION  PLAN; EFFECT ON CLIENT RETENTION.  The short-term nature of most
customer  agreements means that clients could terminate a substantial portion of
the Company's business upon short notice.

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

UNCERTAINTY OF EXTENT OF PEO'S LIABILITY; GOVERNMENT REGULATION OF PEOS

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

                                       29
<PAGE>
assurances  that the  Company  will not be found to be liable for damages in any
such suit, or that such  liability  would not have a material  adverse effect on
the Company. In addition, the Company believes that a portion of its clients may
not  be  maintaining  the  insurance   coverage  required  under  their  service
agreements  with the  Company.  Although  the client  generally  is  required to
indemnify  the  Company  for any  liability  attributable  to the conduct of the
client or employee, the Company may not be able to collect on such a contractual
indemnification   claim  and  thus  may  be  responsible   for  satisfying  such
liabilities. In addition,  employees of the client may be deemed to be agents of
the  Company,  subjecting  the  Company  to  liability  for the  actions of such
employees.

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

ADEQUACY OF LOSS RESERVES

The  Company  obtained  fully-insured   guaranteed  cost  workers'  compensation
coverage   effective  January  1,  1998,  thereby   eliminating,   with  certain
exceptions, the Company's risk retention on workers' compensation claims arising
after that date. The Company  retained risk up to $250,000 per  occurrence  with
respect to a defined  portfolio of  stand-alone  policies which were in place at
December 31,  1997,  which  policies  expire at various  dates during 1998.  The
Company also retained risk up to $50,000 per  occurrence for claims under Ohio's
monopolistic  workers'  compensation  structure,  with  an  aggregate  liability
limitation.

The Company's  reserves for losses and loss  adjustment  expenses under the Ohio
and stand-alone programs referred to in the preceding paragraph are estimates of
amounts needed to pay reported and unreported claims and related loss adjustment
expenses.  Loss reserves are inherently uncertain and are subject to a number of
circumstances  that  are  highly  variable  and  difficult  to  predict.  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, to the Company's operating results in the period in which
the deficiency is identified.

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,
though several are larger than or comparable to the Company in size. The Company
also competes with non-PEO  companies,  whose offerings overlap with some of the
Company's  services,  including payroll processing firms,  insurance  companies,
temporary  personnel companies and human resource consulting firms. In addition,
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, have entered or will enter the PEO market.

ISSUANCE OF ADDITIONAL SHARES

As discussed elsewhere herein, the Company anticipates issuing additional shares
of its Common Stock during 1999 (1) in  connection  with the  settlement  of the
securities class action litigation; (2) in payment of the purchase price for the
June 1996  acquisition  of TEAM  Services  and (3) in payment  of the  remaining
purchase  price for the  September  1997 ERC  acquisition.  The Company  also is
obligated to issue certain  additional shares of Common Stock (or pay additional
cash, in its  discretion)  in connection  with the December 1998  acquisition of
Fidelity Resources Corp. if the price of the Company's Common Stock is less than
$4 per share during approximately  November 1999, subject to certain conditions.
The  numbers  of  shares  to be  issued  in  connection  with the  class  action
settlement, TEAM purchase price and (should the Company elect to make payment in
the form of shares of Common Stock) supplemental  Fidelity purchase price varies
in proportion to the Nasdaq  trading price of the Common Stock (i.e.  the number
of shares increases to the extent the Nasdaq trading price  decreases,  and vice
versa).

YEAR 2000

Many computer  programs process  transactions  based on using two digits for the
year of the  transaction  rather  than a full four year  digits  (e.g.  "98" for
1998).  Systems  that  process  Year  2000  transactions  with the year "00" may
encounter significant processing  inaccuracies or inoperability.  Management has
determined  that,  like most other  companies,  it will be required to modify or
replace portions of its software so that its information systems will be able to
properly utilize dates subsequent to December 31, 1999.

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<PAGE>
STATE OF READINESS

The Company  began  developing  its plan to address Year 2000 in 1997.  The plan
includes  hardware,  software,  electronic  equipment and building systems,  and
evaluates  risk  associated  with  vendor  readiness.   The  plan  includes  (1)
inventorying Year 2000 items; (2) assigning  priorities to identified items; (3)
assessing  Year 2000  compliance of material  items  (whether  internal or third
party-related);  (4) repairing or replacing  material items determined not to be
Year 2000 compliant;  (5) testing material items; and (6) assessing  contingency
plans.

At December 31, 1998, the inventory, priority assessment and internal compliance
assessment  phases  are  substantially  completed  except  for  elements  of the
operations of the Company's LPC subsidiary. The Company intends to substantially
complete those phases for LPC by mid-1999.  Prioritization  of items is assigned
based on the level of disruption to Company  operations  and client service that
would  result from  noncompliance.  While Year 2000 issues  present  significant
risks  for  the  Company  due to the  nature  of its  business,  no  significant
noncompliance issues were identified during these phases, though there can be no
assurance that such issues will not be identified in the future.  Due in part to
the Company's  relatively short operating history, the Company operates only one
so-called "legacy" system, limiting its exposure to certain Year 2000 issues.

The repair and  replacement  phase of the  Company's  plan has been  implemented
primarily  through  various  systems  upgrades  that have been  conducted in the
ordinary course of business,  which upgrades  primarily were implemented to meet
the Company's needs in view of its rapid growth and  independently  of Year 2000
considerations.   The   Company   anticipates   that   repair  and   replacement
considerations relevant to its LPC subsidiary, if any, will be managed through a
transition of LPC functions  onto the Company's  core software  platform,  which
transition  previously had been scheduled for operational reasons independent of
Year 2000  considerations.  A  limited  amount of  software  has been  purchased
primarily for Year 2000 compliance purposes.

The Company has commenced  the testing phase of its Year 2000 plan.  The Company
intends to test its systems for accuracy  through the use of test data on a wide
variety of the  Company's  normal  operating  transactions  under  various  date
conditions. The testing phase is approximately 30 - 40% complete. The Company is
reviewing  software  products to assist it in completing the testing phase on an
automated  basis.  The Company  believes  that these tests can be  completed  in
sufficient time to permit required modifications, if any, to be made on a timely
basis.

The Company  believes that it does not have material risks  associated with Year
2000  issues for  non-information  technology  systems  due to the nature of its
operations.

The Company has also assessed its third party relationships and has identified a
list of vendors that it considers  most  significant  to its  operations.  These
vendors primarily  include third party hardware and software vendors,  financial
institutions,   taxing  authorities,  third  party  administrators  and  benefit
providers.  The  Company  already  has  obtained  compliance  statements  from a
substantial  majority of its key vendors (generally through information publicly
available  from such  vendors),  and has  commenced  the  process of  requesting
written  information from designated key vendors regarding their Year 2000 plans
and state of readiness.  Upon completion of the  third-party  evaluation and the
testing of its internal  systems,  the Company intends to test  significant data
interfaces with third party vendors to verify their compliant status.

COSTS TO ADDRESS YEAR 2000 ISSUE

The  Company has not  incurred  and does not expect to incur  significant  costs
related  to Year  2000  issues  other  than the time of  internal  personnel  to
complete the Company's  Year 2000 plans.  As referred to above,  the Company has
expended significant resources to upgrade various systems in the ordinary course
of its business, which upgrades were implemented primarily to meet the Company's
needs in view of its rapid growth and independently of Year 2000 considerations.
A  limited  amount  of  software  has been  purchased  primarily  for Year  2000
compliance  purposes.  As noted  above,  the Company  currently  is  considering
purchasing an additional  software  product to assist in completing  the testing
phase. Total costs for year 2000 upgrades are expected to be less than $25,000.

RISKS ASSOCIATED WITH YEAR 2000 ISSUES; CONTINGENCY PLANNING

The  Company  presently  believes  that  the  Year  2000  issues  will  not pose
significant  operational  problems  for the Company.  However,  if all Year 2000
issues are not properly identified,  or assessment,  repair or replacement,  and
testing are not  effected  timely with  respect to Year 2000  problems  that are
identified,  there  can be no  assurance  that the  Year  2000  issues  will not
materially  adversely  impact the Company's  results of operations or materially
adversely affect the Company's relationships with customers,  vendors or others.
Additionally,  there  can be no  assurance  that the Year  2000  issues of other
entities will not have a material  adverse  impact on the  Company's  systems or
results of operations.  Among the problems which might occur without appropriate
planning and testing  are: the  inability  to transmit  direct  deposit  payroll
through banking systems to deposit funds into worksite employees' bank accounts;
the  inability  to collect  funds  electronically  in  payment of the  Company's

                                       31
<PAGE>
service  fees;  the  failure to  properly  calculate  payroll  information;  the
untimely  transmission of benefits enrollment or claims data to and from benefit
providers;  and the  inability to deliver  payroll  checks to  employees  due to
failure in transportation or courier systems.

The Company has begun,  but not yet  completed,  an analysis of the  operational
problems and costs (including loss of revenues) that would be reasonably  likely
to result  from the  failure by the  Company  and key third  parties to complete
efforts  necessary  to  achieve  Year  2000  compliance  on a  timely  basis.  A
contingency plan has not yet been finalized for dealing with the most reasonably
likely  worst  case  scenario,  and  such  scenario  has  not yet  been  clearly
identified.   The  Company   currently  plans  to  complete  such  analysis  and
contingency planning mid-1999.

The costs of the Company's  Year 2000 efforts and the dates on which the Company
believes  it will  complete  such  efforts  are  based  upon  management's  best
estimates,  which were  derived  using  numerous  assumptions  regarding  future
events,  including the continued availability of certain resources,  third-party
compliance,  and other factors.  There can be no assurance that these  estimates
will prove to be accurate, and actual results could differ materially from those
currently   anticipated.   Specific  factors  that  could  cause  such  material
differences  include,  but are not  limited  to,  the  availability  and cost of
personnel  trained in Year 2000  issues,  the  ability of the  Company and third
parties (including  vendors,  customers and, in particular,  federal,  state and
local governments) to identify,  assess, replace or repair and test all relevant
items  (including  embedded  technology),   the  ability  of  third  parties  to
communicate  compliance  issues to the  Company  on a timely  basis,  unforeseen
expenses, and similar uncertainties.

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

The Company is primarily  exposed to market risks from  fluctuations in interest
rates  and the  effects  of  those  fluctuations  on the  market  values  of its
investments and marketable  securities that are classified as available-for-sale
marketable securities.  Cash equivalent short-term investments consist primarily
of high quality  investment grade  instruments,  such as commercial paper, which
are not  significantly  exposed to interest rate risk, except to the extent that
changes in interest rates will  ultimately  affect the amount of interest income
earned on these investments.  The  available-for-sale  marketable securities are
subject  to  interest  rate risk  because  these  securities  generally  include
financial instruments such as certificates of deposit, corporate bonds, and U.S.
Treasury  securities and agency notes that have an original  maturity of greater
than 90 days.  Because these instruments are considered highly liquid,  they are
not significantly  exposed to interest rate risk. However,  the market values of
these securities may be affected by changes in prevailing interest rates.

The Company  attempts to limit its  exposure  to  interest  rate risk  primarily
through diversification and strict adherence to the Company's investment policy.
See "Note 1 - Summary of Significant Accounting Policies" to Item 8 - "Financial
Statements." The Company's  investment  policy is designed to maximize  interest
income while preserving its principal investment.

ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial  statements required by Form 10-K are set forth commencing at page F-1
hereof.

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

Not applicable.

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<PAGE>
                                    PART III

ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The biographical  information relating to the Company's directors included under
the caption "Election of Directors" in the Company's  definitive Proxy Statement
for  its  1999  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,  1998.  Information  as to the
Company's executive officers is set forth in Item 4A above.

ITEM 11. - EXECUTIVE COMPENSATION

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

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

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

ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  (1)  Financial   statements  required  by  Form  10-K  are  set  forth
               commencing on page F-1 hereof.

     (a)  (2) Financial statement schedules

              Schedule II - Valuation and Qualifying Accounts - is set forth at
              page F-36 hereof.

     (a)  (3) Exhibits

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

     (b)  REPORTS ON FORM 8-K FOR LAST YEAR

          The Company  filed a report on Form 8-K dated  November  17, 1998 that
          reported  that the Company had entered into an agreement to settle all
          of the  securities  class action  lawsuits  then  pending  against the
          Company. Financial statements were not required or filed.

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<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, 1999
                                        EMPLOYEE SOLUTIONS, INC.


                                        By /s/ Quentin P. Smith, Jr.
                                          ----------------------------------
                                           Quentin P. Smith, Jr.
                                           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:

        Signature                          Title                     Date


/s/ Quentin P. Smith, Jr       Chairman of the Board, Chief       March 31, 1999
-----------------------------
Quentin P. Smith, Jr.          Executive Officer, President
                               And Director

/s/ Harvey A. Belfer           Director                           March 31, 1999
-----------------------------
Harvey A. Belfer

/s/ Marvin D. Brody            Director                           March 31, 1999
-----------------------------
Marvin D. Brody

/s/ David R. Carpenter         Director                           March 29, 1999
-----------------------------
David R. Carpenter

/s/ Jeffrey A. Colby           Director                           March 29, 1999
-----------------------------
Jeffrey A. Colby

/s/ Sara R. Dial               Director                           March 29, 1999
-----------------------------
Sara R. Dial

/s/ James E. Gorman            Director                           March 30, 1999
-----------------------------
James E. Gorman

/s/ Robert L. Mueller          Director                           March 27, 1999
-----------------------------
Robert L. Mueller

/s/ John V. Prince             Chief Financial Officer            March 31, 1999
-----------------------------
John V. Prince

                                       34
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                               (THE "REGISTRANT")

                                  EXHIBIT INDEX
                                       TO
                               REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Exhibit                                                Incorporated Herein        Filed
Number    Description                                  by Reference to           Herewith
------    -----------                                  ---------------           --------
<S>       <C>                                          <C>
3(i)      Registrant's   composite   Articles   of     Registrant's   Report  on
          Incorporation, as amended                    Form  10-K  for the  year
                                                       ended  December  31, 1996
                                                       (1996   10-K)  (See  also
                                                       Exhibit  A  included   in
                                                       Exhibit 4.5 below)

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

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

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

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

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

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

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

10.2*     Employee  Solutions,   Inc.  1995  Stock     Registrant's   Form  10-Q
          Option Plan, as amended  through June 2,     for  the  quarter   ended
          1998                                         September     30,    1998
                                                       (September 1998 10-Q)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                Incorporated Herein        Filed
Number    Description                                  by Reference to           Herewith
------    -----------                                  ---------------           --------
<S>       <C>                                          <C>
10.3*     Employment  Agreement  dated  March  18,     1996 10-K
          1997  Between  Registrant  and  Paul  M.
          Gales

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

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

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

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

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

10.8      Indemnification  Agreements  between the
          Registrant and:

10.8.1*   Marvin D. Brody                              1996 10-K

10.8.2*   Jeffery A. Colby                             1996 10-K

10.8.3*   Morris C. Aaron (Agreements in this form     1996 10-K
          were  also   entered  into  between  the
          Company and each of Paul M. Gales,  Mark
          J.  Gambill,  James E.  Gorman,  John V.
          Prince and Bill C. Hollis.)

10.8.4*   Henry G. Walker (Agreements in this form     1996 10-K
          were  also   entered  into  between  the
          Company  and each of Quentin  P.  Smith,
          Jr.,   Sara  R.   Dial   and   David  R.
          Carpenter)

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

10.10*    Letter Agreement dated February 27, 1998     Registrant's   Form  10-K
          between the Company and Ward Phelan          for year  ended  December
                                                       31, 1997

10.11*    Employment  Agreement  dated  April  16,     Registrant's   Report  on
          1998  between  Registrant  and  Mark  J.     Form 10-Q for the quarter
          Gambill                                      ended   March  31,   1998
                                                       (March 1998 10-Q)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                                Incorporated Herein        Filed
Number    Description                                  by Reference to           Herewith
------    -----------                                  ---------------           --------
<S>       <C>                                          <C>
10.11.1*  Amendment No. 1 to Employment  Agreement                                  X
          dated March 9, 1999  between  Registrant
          and Mark J. Gambill

10.12*    Second  Amended and Restated  Employment     March 1998 10-Q
          Agreement   and   Amendment   to  Option
          Agreement  dated  as of  April , 1998 by
          and among ESI,  ESI-EAST,  as  employer,
          and Edward L. Cain, as Employee.

10.13     Asset     Purchase,     Joint    Venture     March 1998 10-Q
          Termination and Mutual Release Agreement
          dated as of April 7, 1998  between  ESI,
          ESI-EAST,  Edward L. Cain and the Edward
          L. Cain Agency, Inc.

10.14     Reinsurance  Binder  for Loss  Portfolio     March 1998 10-Q
          Transfer

10.15*    Employment agreement dated as of May 11,     September 1998 10-Q
          1998  between  Registrant  and  James E.
          Gorman

10.16*    Memorandum of Understanding  dated as of     September 1998 10-Q
          August 6, 1998  between  Registrant  and
          Marvin D. Brody

10.17*    Severance,   Release,   and  Cooperation     September 1998 10-Q
          Agreement dated as of September 11, 1998
          between Registrant and Morris C. Aaron

10.18*    Severance  Agreement dated July 31, 1997                                  X
          between  the   Registrant  and  John  V.
          Prince

10.19*    Employment  Agreement dated February 15,                                  X
          1999 between the  Registrant and Quentin
          P. Smith, Jr.

10.20*    Employment  Agreement  dated  August  1,                                  X
          1996 between Logistics  Personnel Corp.,
          a subsidiary of the Registrant (LPC) and
          Bill C. Hollis

10.21*    Amendment to Employment  Agreement dated                                  X
          March 3, 1999  between  the  Registrant,
          LPC and Bill C. Hollis

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

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

                                      INDEX

                                                                        Page
                                                                        ----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                 F-2

FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1998 and 1997                 F-3
Consolidated Statements of Operations - For the Years
     Ended December 31, 1998, 1997 and 1996                              F-4
Consolidated Statements of Stockholders' Equity - For the
Years Ended December 31, 1998, 1997 and 1996                             F-5
Consolidated Statements of Cash Flows - For the Years
     Ended December 31, 1998, 1997 and 1996                              F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               F-8


                                      F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Employee Solutions, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets  of  EMPLOYEE
SOLUTIONS,  INC. (an Arizona  corporation)  and  subsidiaries as of December 31,
1998  and  1997,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements taken as a whole. Schedule II of Part IV, Item 14 herein is
presented  for the  purpose  of  complying  with  the  Securities  and  Exchange
Commission  rules  and is not  part  of the  basic  financial  statements.  This
schedule has been subjected to the auditing  procedures applied in the audits of
the  basic  financial  statements  and,  in our  opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.


                                                    Arthur Andersen LLP

Phoenix, Arizona,
 March 17, 1999.

                                      F-2
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997

(In thousands of dollars, except share data)
                                                           1998         1997
                                                         ---------    --------
                                     ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                $  39,287    $ 40,110
Investments and marketable securities                        9,997          --
Restricted cash and investments                              1,088      19,000
Accounts receivable, net                                    38,742      57,467
Receivables from insurance companies                         6,704       7,070
Prepaid expenses and deposits                                2,303       4,562
Income taxes receivable                                      5,040       4,080
Deferred income taxes                                          811       4,138
                                                         ---------    --------
      Total current assets                                 103,972     136,427

Property and equipment, net                                  4,543       3,159
Deferred income taxes                                           60         485
Goodwill and other assets, net                              66,530      67,146
                                                         ---------    --------

      Total assets                                       $ 175,105    $207,217
                                                         =========    ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft                                           $  13,727    $     --
Accrued salaries, wages and payroll taxes                   28,719      43,263
Accounts payable                                             5,898       4,363
Accrued workers' compensation and health insurance           9,617      24,586
Income taxes payable                                           751          --
Other accrued expenses                                      13,595       5,886
                                                         ---------    --------

      Total current liabilities                             72,307      78,098

Deferred income taxes                                          871         517
                                                         ---------    --------
Long-term debt                                              85,000      85,000
                                                         ---------    --------
Other long-term liabilities                                  1,211       1,213

Commitments and contingencies

Stockholders' equity:
Class A convertible preferred stock, nonvoting,
  no par value, 10,000,000 shares authorized,
  no shares issued and outstanding                              --          --
Common stock, no par value, 75,000,000 shares
  authorized, 32,419,595 shares issued and
  outstanding in 1998, and 31,683,120 shares
  issued and outstanding in 1997                            35,800      34,420
(Accumulated deficit) retained earnings                    (20,085)      7,866
Cumulative unrealized gain on investment securities              1         103
                                                         ---------    --------
      Total stockholders' equity                            15,716      42,389
                                                         ---------    --------

      Total liabilities and stockholders' equity         $ 175,105    $207,217
                                                         =========    ========

                     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, 1998, 1997 AND 1996

(In thousands of dollars, except share and
 per share data)                             1998         1997          1996
                                        -----------   -----------   -----------

Revenues                                $   968,909   $   933,817   $   439,016
                                        -----------   -----------   -----------
Cost of revenues:
 Salaries and wages of worksite
  employees                                 814,453       765,047       341,988
 Healthcare and workers' compensation        55,913        75,595        30,234
 Payroll and employment taxes                64,318        62,613        28,640
                                        -----------   -----------   -----------

      Cost of revenues                      934,684       903,255       400,862
                                        -----------   -----------   -----------

Gross profit                                 34,225        30,562        38,154

Selling, general and administrative
 expenses                                    49,293        33,411        17,310
Depreciation and amortization                 6,145         4,617         2,073
                                        -----------   -----------   -----------

      Income (loss) from operations         (21,213)       (7,466)       18,771

Other income (expense):
 Interest income                              1,885         1,303           833
 Interest expense                            (8,541)       (5,102)       (1,196)
 Other                                         (193)          (50)           (1)
                                        -----------   -----------   -----------
Income (loss) before provision for
 income taxes                               (28,062)      (11,315)       18,407

Income tax provision (benefit)                 (111)       (2,819)        6,381
                                        -----------   -----------   -----------

      Net income (loss)                 $   (27,951)  $    (8,496)  $    12,026
                                        ===========   ===========   ===========
Net income (loss) per common and
 common equivalent share:
   Basic                                $      (.88)  $      (.27)  $       .40
                                        ===========   ===========   ===========
   Diluted                              $      (.88)  $      (.27)  $       .37
                                        ===========   ===========   ===========
Weighted average number of common and
 common equivalent shares outstanding:
   Basic                                 31,817,176    31,193,367    30,224,357
                                        ===========   ===========   ===========
   Diluted                               31,817,176    31,193,367    32,167,777
                                        ===========   ===========   ===========

                     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, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
                                                   Retained              Cumulative
                                                   Earnings              Unrealized      Total     Comprehensive
(In thousands of dollars,                Common  (Accumulated  Treasury   Gain on     Stockholders'    Income
 except share data)                       Stock    Deficit)     Stock    Investments     Equity        (Loss)
 ------------------                       -----    --------     -----    -----------     ------        ------
<S>                                      <C>       <C>          <C>         <C>         <C>          <C>
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 common 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       12,026
                                         -------   --------     -----       -----       --------     --------
COMPREHENSIVE INCOME                                                                                 $ 12,026
                                                                                                     ========
BALANCE, DECEMBER 31, 1996                30,145     16,362        --          --         46,507           --

Issuance of 752,587 shares of common
 stock in connection with acquisitions     2,585         --        --          --          2,585           --
Issuance of 201,100 shares of common
stock in connection with exercise of
common stock options                         502         --        --          --            502           --
Tax benefit related to the exercise
 of stock options                          1,188         --        --          --          1,188           --
Change in unrealized net gains,
net of applicable taxes                       --         --        --         103            103          103
Net loss                                      --     (8,496)       --          --         (8,496)      (8,496)
                                         -------   --------     -----       -----       --------     --------
COMPREHENSIVE LOSS                                                                                   $ (8,393)
                                                                                                     ========
BALANCE, DECEMBER 31, 1997                34,420      7,866        --         103         42,389           --

Issuance of 625,000 shares of common
 stock and 200,000 warrants
 in connection with acquisitions           1,111         --        --          --          1,111           --
Issuance of 111,475 shares of common
stock in connection with exercise of
common stock options                         199         --        --          --            199           --
Tax benefit related to the exercise of
stock options                                 70         --        --          --             70           --
Change in unrealized net gains,
net of applicable taxes                       --         --        --        (102)          (102)        (102)
Net loss                                      --    (27,951)       --          --        (27,951)     (27,951)
                                         -------   --------     -----       -----       --------     --------
COMPREHENSIVE LOSS                                                                                   $(28,053)
                                                                                                     ========
BALANCE, DECEMBER 31, 1998               $35,800   $(20,085)    $  --       $   1       $ 15,716
                                         =======   ========     =====       =====       ========
</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, 1998, 1997 AND 1996


(In thousands of dollars)                       1998         1997       1996
                                              ---------   ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers                  $ 987,634   $ 911,189   $ 414,256
Cash paid to suppliers and employees           (980,636)   (896,812)   (411,438)
Cash paid in loss portfolio transfer            (19,950)         --          --
Interest received                                 1,885       1,303         833
Interest paid                                    (8,640)     (5,152)     (1,196)
Income taxes refunded (paid), net                 4,008      (3,315)     (5,772)
                                              ---------   ---------   ---------
     Net cash provided by (used in)
      operating activities                      (15,699)      7,213      (3,317)
                                              ---------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment               (2,749)     (2,499)       (702)
Business acquisitions                            (3,267)     (5,024)    (37,251)
Purchase of investments, net                     (9,997)         --          --
Cash (invested in) released from
 restricted accounts, net                        17,912      (7,500)     (8,757)
Issuance of notes receivable and other, net          --          --        (189)
Disbursements for deferred costs                   (723)         --          --
                                              ---------   ---------   ---------
     Net cash provided by (used in)
      investing activities                        1,176     (15,023)    (46,899)
                                              ---------   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt             --       6,905      42,800
Repayment of long-term debt                          --     (49,705)         --
Proceeds from issuance of long-term
 senior notes                                        --      85,000          --
Payment of deferred loan costs                     (226)     (3,285)       (515)
Proceeds from issuance of common stock              199         502       7,786
Increase (decrease) in bank overdraft
 and other                                       13,727      (2,477)     (2,904)
                                              ---------   ---------   ---------
     Net cash provided by financing
      activities                                 13,700      36,940      47,167
                                              ---------   ---------   ---------
Net increase (decrease) in cash and
 cash equivalents                                  (823)     29,130      (3,049)

CASH AND CASH EQUIVALENTS, beginning of year     40,110      10,980      14,029
                                              ---------   ---------   ---------

CASH AND CASH EQUIVALENTS, end of year        $  39,287   $  40,110   $  10,980
                                              =========   =========   =========

                     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, 1998, 1997 AND 1996
                                   (CONTINUED)




                                                  1998       1997        1996
                                                --------   --------    --------
RECONCILIATION  OF NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss)                               $(27,951)   $(8,496)   $ 12,026
                                                --------    -------    --------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization                      6,145      4,617       2,073
Loss on sale of fixed assets                         193         --          --
Write-off of deferred acquisition costs              772         --          --
Other non-cash charges                             1,200         58          --
Decrease (increase) in accounts receivable, net   18,725    (22,628)    (24,760)
Decrease (increase) in receivables from
 insurance companies                                 366     (1,152)     (5,832)
Decrease (increase) in prepaid expenses
 and deposits                                      2,259     (3,304)       (736)
Decrease (increase) in deferred income
 taxes, net                                        4,106     (2,522)       (539)
Decrease (increase) in other assets                  166       (805)     (2,532)
(Decrease) increase in accrued salaries,
  wages and payroll taxes                        (14,544)    25,677      10,905
(Decrease) increase in accrued workers'
 compensation and health insurance               (14,969)    17,659       4,464
(Decrease) increase in other long-term
 liabilities                                          (2)      (136)      1,349
Increase (decrease) in accounts payable            1,535        285      (2,038)
(Decrease) increase in income taxes
 payable/receivable                                 (209)    (3,612)      1,148
Increase in other accrued expenses                 6,509      1,572       1,155
                                                --------    -------    --------

                                                  12,252     15,709     (15,343)
                                                --------    -------    --------
     Net cash provided by (used in)
       operating activities                     $(15,699)   $ 7,213    $ (3,317)
                                                ========    =======    ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During  the  year  ended  December  31,  1996,  certain  notes  receivable  from
officers/directors  were repaid with the  Company's  common stock owned by these
individuals in the amount of $157,000.  There were no activities of this type in
1997 or 1998.

In connection with business acquisitions during 1998, 1997 and 1996, the Company
assumed  net  liabilities  of  $300,000,  $900,000  and $5.5  million and issued
$813,000, $2.6 million and $4.3 million of common stock, respectively.  In 1998,
$298,000 of warrants were also issued.

                     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, 1998, 1997 AND 1996

(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, 1998,  ESI serviced  approximately  2,000  client  companies  with
approximately 40,800 worksite employees in 47 states.

In   1995   the   Company   began   to   offer   employers    stand-alone   risk
management/workers'  compensation  services.  At December 31, 1997, this program
served  approximately  83 additional  employers,  and no additional  stand-alone
services  were sold during 1998.  At December  31,1998,  there were no remaining
policies in effect.

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 34%, represents
the largest  concentration  of  customers,  including  one former  customer that
generated approximately 20% and 13% of total revenues in 1997 and 1998.

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent assets and liabilities at the date of the financial  statements,  and
the reported amounts of revenues and expenses during the reporting  period.  The
nature of the Company's  business requires  significant  estimates to be made in
the  areas  of  workers'   compensation  reserves  and  revenue  recognized  for
retrospectively rated insurance policies.  The actual results of these estimates
may be unknown for a period of years.  Actual  results  could  differ from those
estimates.

CASH AND CASH EQUIVALENTS

Cash and cash  equivalents  consist of cash and highly liquid  investments  with
original maturities of three months or less when purchased. All cash equivalents
are invested in high quality  investment grade  instruments,  such as commercial
paper,  at  December  31, 1998 and 1997,  and are stated at fair  market  value.
Substantially  all cash  and cash  equivalents,  including  restricted  cash and
investments, are not insured at December 31, 1998.

RESTRICTED CASH AND INVESTMENTS

Prior to January 1, 1998,  the Company was partially  self-insured  for workers'
compensation  risks.  Under such programs,  at December 31, 1997, its "fronting"
carriers  required  an  estimated  $19 million to be held in a  restricted  bank
account for payment of future  claims,  and future  capitalization  of Camelback
Insurance,  Ltd.  (Camelback),  the  Company's  wholly owned  off-shore  captive
insurance  company.  Such restricted cash and investments were calculated by the
Company's  carriers  based on  estimates of the future  growth in the  Company's
business and ultimate losses on such business. For this purpose, ultimate losses
are actuarially determined by the carriers utilizing industry-wide data that may
not reflect the Company's historical or expected ultimate losses.

                                      F-8
<PAGE>
At December 31, 1998,  restricted  cash was  approximately  $1.1 million,  which
represented  amounts held for  settlement  of a legal matter (see  footnote 10).
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  (SFAS) No. 115,
"Accounting for Investments in Certain Debt and Equity Securities."

INVESTMENTS AND MARKETABLE SECURITIES

At December 31, 1998,  the Company  maintained  approximately  $16.8  million of
investments  in its cash and cash  equivalents  and  investments  and marketable
securities  accounts.  These securities are considered  available-for-sale  and,
accordingly,  are recorded at market value.  Securities with original maturities
of 90 days or less consisted of commercial paper,  money market and mutual funds
that  had an  estimated  fair  value  of $6.8  million  at  December  31,  1998.
Securities with original  maturities  greater than 90 days consisted of $600,000
in certificates of deposit,  $4.0 million in commercial  paper,  $4.1 million in
corporate  bonds and $1.3 million in U.S.  Treasury  securities and agency notes
and had an estimated fair value of $10 million at December 31, 1998.

INSURANCE COMPANY RECEIVABLES

Prior to January 1, 1998,  the Company's risk  management/workers'  compensation
services  program was  conducted via fronting  arrangements  with  insurers.  At
December  31,  1998 and 1997,  the  Company had  receivables  from its  fronting
companies of $6.7 million and $7.1 million,  respectively.  Such amounts consist
of the  difference  between  cash  contractually  required to be advanced to the
insurance  companies for loss funds,  administrative  fees,  excess  reinsurance
premiums and premium  taxes and the  Company's  estimate of the actual  expenses
incurred.  The amount of the  receivable is subject to  reconciliation  with the
insurers upon final audit of the various policy periods.

The Company is engaged in  negotiations  with the  principal  carrier  under its
pre-1998 workers' compensation program concerning various issues associated with
closing out such program. During the course of the negotiations, the carrier has
taken the position  that  amounts are due from the Company to the  carrier.  The
negotiations  are in a  preliminary  phase  and the  parties  have  not  reached
agreement on the extent of the Company's liability, if any, to the carrier.

ACCOUNTS RECEIVABLE/REVENUE RECOGNITION

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

                                                                    December 31,
(In thousands of dollars)                              1998             1997
                                                     --------         --------
        Trade accounts receivable                    $ 27,130        $ 23,015
        Unbilled salary
          and wage accruals                            11,921          31,513
        Unbilled stand alone premium revenue            1,985             657
        Other, including affiliated parties             2,628           3,386
        Allowance for estimated
          uncollectible receivables                    (4,922)         (1,104)
                                                     --------        --------

             Total accounts receivable, net          $ 38,742        $ 57,467
                                                     ========        ========

At December 31, 1998 and 1997,  receivables from affiliated  parties included in
the above totals were $2.2 million and $2.9 million, respectively.

                                      F-9
<PAGE>
CREDIT RISK

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

PROPERTY AND EQUIPMENT

Property and equipment  primarily  consists of software  purchased and developed
for internal use and office  furniture  and  equipment  and is recorded at cost.
Depreciation is recorded on the  straight-line  method over the estimated useful
lives of the  assets  which  range  from three to five  years.  Maintenance  and
repairs  that  neither  materially  add  to  the  value  of  the  property,  nor
appreciably prolong its life, are charged to expense as incurred. Betterments or
renewals  are  capitalized  when  incurred.  Property  and  equipment  is net of
accumulated  depreciation  of  $1,681,000  and $861,000 at December 31, 1998 and
1997, respectively.

GOODWILL AND OTHER ASSETS

Included  in goodwill  and other  assets is $65.2  million and $64.1  million at
December 31, 1998 and 1997,  respectively,  representing the unamortized cost of
goodwill.  Goodwill  represents  the excess of the purchase  price paid over the
fair market value of the net assets for all acquired  companies.  As of December
31,  1998,  goodwill  of $26  million is being  amortized  over 30 years,  $38.4
million  over  15  years  and  $800,000  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 $10.2 million
and $6.5 million at December 31, 1998 and 1997, respectively.

Also included in goodwill and other assets at December 31, 1998 and 1997 is $1.4
million and $2.9 million,  respectively,  representing  the net receivable after
reserves for stand-alone workers' compensation premium due from one customer for
a two-year  program  ended  December 31, 1997.  The Company  believes this to be
collectible and has commenced litigation  proceedings to collect the outstanding
premium.

BANK OVERDRAFT

Bank overdraft  represents  outstanding  checks in excess of cash on hand at the
applicable bank, and generally result from timing differences in the transfer of
funds between banks.  Historically,  these checks are covered when presented for
payment  through the transfer of funds from other  Company cash accounts held in
other banks.

ACCRUED WORKERS' COMPENSATION AND HEALTH INSURANCE

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

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

                                      F-10
<PAGE>
Individual risk  management/workers'  compensation  claims in excess of $250,000
and up to the statutory  limits of the states where the Company operates are the
responsibility  of Reliance.  The  Company's  prior  arrangements  with AIG were
structured in a manner similar to its current arrangements with Reliance.  While
the retention of the first $250,000 of individual  workers'  compensation claims
and the capital  requirements  resulting from the establishment of Camelback are
intended  to  enhance  profitability,  these  actions  increased  the  Company's
exposure to risk from workers' compensation claims.

To meet growing  needs of the  Company's  business on August 1, 1996 the Company
entered  into  an  arrangement  with  Legion  Insurance  Company  (Legion),   on
substantially  the same terms as the Reliance program except that the Company is
responsible for the first $350,000 per occurrence with no aggregate to limit the
Company's  liability.  Loss funds,  recorded as restricted  cash and investments
under the Reliance program, are held by Legion for the Company's benefit and are
included in receivables from insurance  companies in the amount of $2.1 and $3.6
million at December 31, 1998 and 1997, respectively.

To further reduce its potential  liability,  the Company has secured  accidental
death and dismemberment insurance from an insurance affiliate of the Chubb Group
of Insurance Companies (Chubb) that covers losses up to $500,000 (increased from
$250,000 in July 1996,  to obtain a net reduction in excess  reinsurance  costs)
for certain types of serious claims and maintains  umbrella coverage for certain
liabilities  (other than losses  resulting  from workers'  compensation  claims)
which the Company may incur in connection  with its  administration  of its risk
management/workers'  compensation  program.  The Chubb policy was  terminated in
February  1998 in  connection  with the  Company's  decision  to  obtain a fully
insured guaranteed cost program for 1998. Effective January 1, 1998, the Company
obtained workers' compensation insurance coverage on a fully-insured, guaranteed
cost basis.  This  guaranteed  cost program  eliminates  ESI's risk retention on
workers'  compensation  claims  arising after that date with limited  exceptions
related  to the  stand-alone  policies  expiring  throughout  1998 and Ohio self
insurance as described below.

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

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

INCOME TAXES

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

Deferred  income taxes arise from temporary  differences  resulting from certain
revenue and expense items  reported for financial  accounting  and tax reporting
purposes in  different  periods.  Reductions  in current  income  taxes  payable
related  to  disqualifying  dispositions  of  qualified  stock  options  and the
exercise  of  non-qualified  stock  options  are  credited  to common  stock.  A
valuation  allowance  is provided  against  deferred  tax assets  which,  in the
opinion  of  management,  do not meet the "more  likely  than not"  criteria  of
statement of Financial Accounting Standards No. 109. Because of recent operating
losses, a valuation allowance of $9.2 million was provided in 1998. See Note 4.

                                      F-11
<PAGE>
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share." The
earnings per share amounts for 1996 has been restated to conform to the 1997 and
1998  presentation  as required by SFAS No. 128. The computation of adjusted net
income and  weighted  average  common and common  equivalent  shares used in the
calculation of net income per common share is as follows:
<TABLE>
<CAPTION>
(In thousands of dollars, except share and per share data)
                                       1998                         1997                       1996
                             -------------------------   -------------------------   ------------------------
                                Basic        Diluted        Basic        Diluted        Basic       Diluted
<S>                           <C>           <C>           <C>           <C>           <C>          <C>
Weighted average of
common shares outstanding     31,817,176    31,817,176    31,193,367    31,193,367    30,224,357   30,224,357

Dilutive effect of options
and warrants outstanding              --            --            --            --            --    1,943,420
                             -----------   -----------   -----------   -----------   -----------  -----------
Weighted average of
common and common
equivalent shares             31,817,176    31,817,176    31,193,367    31,193,367    30,224,357   32,167,777
                             ===========   ===========   ===========   ===========   ===========  ===========

Net income (loss)            $   (27,951)  $   (27,951)  $    (8,496)  $    (8,496)  $    12,026  $    12,026

Adjustments to net income             --            --            --            --            --           --
                             -----------   -----------   -----------   -----------   -----------  -----------
Adjusted net income for
purposes of the income per
common share calculation     $   (27,951)  $   (27,951)  $    (8,496)  $    (8,496)  $    12,026  $    12,026
                             ===========   ===========   ===========   ===========   ===========  ===========
Net income per common and
common equivalent share      $     (0.88)  $     (0.88)  $     (0.27)  $     (0.27)  $      0.40  $      0.37
                             ===========   ===========   ===========   ===========   ===========  ===========
</TABLE>

The  calculation  of weighted  average common and common  equivalent  shares for
purposes of  calculating  the 1998 and 1997 diluted  earnings per share excludes
approximately 2,163,506 and 1,951,049, respectively,  weighted average shares of
options,  warrants, and contingently issuable shares computed under the treasury
stock method, as their effects would be anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

These calculations are subjective in nature,  involve  uncertainties and matters
of significant  judgment and do not include tax  ramifications;  therefore,  the
results  cannot be determined  with  precision,  substantiated  by comparison to
independent  markets  and may not be  realized  in an actual  sale or  immediate
settlement  of  the  instruments.  There  may  be  inherent  weaknesses  in  any
calculation  technique,  and changes in the  underlying  assumptions  used could
significantly  affect the results.  For all of these reasons, the aggregation of
the fair value calculations presented herein does not represent,  and should not
be construed to represent, the underlying value of the Company.

                                      F-12
<PAGE>
The following table presents a summary of the Company's  financial  instruments,
as defined by SFAS 107:

                                                   December 31,
                                   ---------------------------------------------
                                          1998                     1997
                                   ---------------------   ---------------------

(In thousands of dollars)          Carrying   Estimated    Carrying   Estimated
                                    Amount    Fair Value    Amount    Fair Value
                                    ------    ----------    ------    ----------
Financial Assets

Cash and cash equivalents          $39,287     $39,287     $40,110     $40,110
Investments and marketable
 securities                          9,997       9,997          --          --
Restricted cash and investments      1,088       1,088      19,000      19,000
Other financial assets, primarily
 accounts receivable                46,834      46,834      67,550      67,550

Financial Liabilities

Bank overdraft                      13,727      13,727          --          --
Long-term debt                      85,000      60,350      85,000      82,025
Other financial liabilities,
 primarily accrued liabilities      59,040      59,040      79,311      79,311

Financial  instruments  other than long-term debt approximate fair value because
of their  short-term  duration.  The value of long-term  debt is based on market
quotes.

(2) COMMON STOCK SPLITS:

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

(3) LEASE COMMITMENTS:

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

(In thousands of dollars)
                                Years Ending
                                 December 31,           Amount
                                 ------------           ------
                                    1999                $1,775
                                    2000                 1,601
                                    2001                 1,526
                                    2002                 1,436
                                    2003                 1,423
                              Thereafter                   348
                                                        ------
                                   Total                $8,109
                                                        ======

Rental expense under all leases was $2.5 million,  $1.9 million, and $734,000 in
1998, 1997 and 1996, respectively.

                                      F-13
<PAGE>
(4) INCOME TAXES:

The  components of the  provision for income taxes for the years ended  December
31, 1998, 1997 and 1996 were as follows:


(In thousands of dollars)                     1998          1997         1996
                                            --------      --------     --------
Current                                     $(4,217)      $  (297)      $6,935
Deferred                                      4,106        (2,522)        (554)
                                            -------       -------       ------

Income tax provision (benefit)              $  (111)      $(2,819)      $6,381
                                            =======       =======       ======

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


(In thousands of dollars)                            1998      1997       1996
                                                   -------    -------    ------
Income tax expense (benefit) at statutory rate     $(9,822)   $(3,847)   $6,442
Increase in valuation allowance                      9,188         --        --
Non-deductible goodwill amortization                   352        271       197
Non-deductible per diem and other expenses             193        336        41
State taxes, net of federal benefit                     34        451       179
Change in estimate related to 1995 state taxes          --         --      (430)
Other                                                  (56)       (30)      (48)
                                                   -------    -------    ------

Income tax provision (benefit)                     $  (111)   $(2,819)   $6,381
                                                   =======    =======    ======

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

                                         1998                     1997
                                 ---------------------    ---------------------
                                            Long-term                Long-term
                                  Current     Assets      Current     Assets
(In thousands of dollars)         Assets   (Liabilities)  Assets   (Liabilities)
                                  ------  -------------   ------      -----
Depreciation and amortization    $   --       $(871)      $   --      $(517)
Reserves not deductible
    for tax purposes               9,404        655        4,138        485
Valuation allowance               (8,593)      (595)          --         --
                                 -------      ------      ------      -----

                                 $   811      $(811)      $4,138      $ (32)
                                 =======      =====       ======      =====

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

NOTE OFFERING

On October 21, 1997, the Company issued $85 million of 10% Senior Notes due 2004
(the  Notes) in an  Offering  (the  Offering)  effected  under  Rule 144A of the
Securities Act of 1933 as amended  (Securities Act). Interest under the Notes is
payable semi-annually  commencing April 15, 1998, and the Notes are not callable
until October 2001 subject to the terms of the  Indenture  under which the Notes
were  issued.   The  Company  incurred  expenses  related  to  the  Offering  of
approximately $3.5 million, which is included in other assets, and will amortize
such costs over the life of the Notes.  In April 1998, the Company  completed an
exchange  offer for these notes which was registered  under the Securities  Act.
The indenture under which the Notes were issued includes certain restrictions on
use of cash, and other  expenditures,  by the Company  including  limitations on
dividends, repurchases of Company shares and the incurrence of new indebtedness.

The  Notes  are   general   unsecured   obligations   of  the  Company  and  are
unconditionally  guaranteed  on a joint  and  several  basis by  certain  of the
Company's   wholly-owned   current  and  future   subsidiaries.   The  Company's
wholly-owned  insurance  subsidiary,  which is a  non-guarantor  subsidiary,  is
subject  to certain  statutory  and  contractual  restrictions  which  limit its
ability to pay dividends or make loans to the Company or other subsidiaries. The
financial  statements presented below include the separate or combined financial
position  for the years ended  December  31,  1998 and 1997,  and the results of
operations  and cash  flows  for each of the  three  years in the  period  ended
December  31,  1998,  of  Employee  Solutions,   Inc.  (Parent),  the  guarantor
subsidiaries   (Guarantors)  and  the  subsidiaries  which  are  not  guarantors
(Non-guarantors).

                                      F-15
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
                                                        For the Year Ended December 31, 1998
                                          ------------------------------------------------------------
                                                                   Non-
(In thousands of dollars)                 Parent   Guarantors   Guarantors   Eliminating  Consolidated
                                          ------   ----------   ----------   -----------  ------------
<S>                                      <C>         <C>         <C>          <C>          <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                $  8,176    $24,503     $  6,608     $     --     $ 39,287
Investments and marketable securities       9,997         --           --           --        9,997
Restricted cash and
    investments                             1,088         --           --           --        1,088
Accounts receivable, net                   15,460     22,495          787           --       38,742
Receivables from insurance
    companies                                  --         --        6,704           --        6,704
Prepaid expenses and deposits               1,532        753           18           --        2,303
Income taxes receivable                     5,040         --           --           --        5,040
Deferred income taxes                         811         --           --           --          811
Due from affiliates                         7,789      2,711       (6,726)      (3,774)          --
                                         --------    -------     --------     --------     --------
        Total current assets               49,893     50,462        7,391       (3,774)     103,972

Property and equipment, net                 4,213        314           16           --        4,543
Deferred income taxes                          60         --           --           --           60
Goodwill and other assets, net             34,044     32,208          278           --       66,530
Investment in subsidiaries                 36,005         --           --      (36,005)          --
                                         --------    -------     --------     --------     --------
        Total assets                     $124,215    $82,984     $  7,685     $(39,779)    $175,105
                                         ========    =======     ========     ========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft                           $    308    $13,419     $     --     $     --     $ 13,727
Accrued salaries, wages and
    payroll taxes                           5,932     22,167          620           --       28,719
Accounts payable                            1,584      1,051        3,263           --        5,898
Accrued workers' compensation
    and health insurance                    3,141        618        5,858           --        9,617
Income taxes payable                          751         --           --           --          751
Other accrued expenses                      9,123      2,316        2,156           --       13,595
Due to affiliates                           1,789     16,030      (14,045)      (3,774)          --
                                         --------    -------     --------     --------     --------
        Total current liabilities          22,628     55,601       (2,148)      (3,774)      72,307
                                         --------    -------     --------     --------     --------

Deferred income taxes                         871         --           --           --          871
                                         --------    -------     --------     --------     --------
Long-term debt                             85,000         --           --           --       85,000
                                         --------    -------     --------     --------     --------
Other long-term liabilities                    --      1,211           --           --        1,211
                                         --------    -------     --------     --------     --------
Commitments and contingencies

STOCKHOLDERS' EQUITY
Class A convertible preferred stock            --         --           --           --           --
Common stock, no par value                 35,800      2,622          771       (3,393)      35,800
Additional paid in capital                     --     26,342           50      (26,392)          --
(Accumulated deficit) retained earnings   (20,085)    (2,792)       9,012       (6,220)     (20,085)
Unrealized gain on investments                  1         --           --           --            1
                                         --------    -------     --------     --------     --------

Total stockholders' equity                 15,716     26,172        9,833      (36,005)      15,716
                                         --------    -------     --------     --------     --------
Total liabilities and stockholders'
 equity                                  $124,215    $82,984     $  7,685     $(39,779)    $175,105
                                         ========    =======     ========     ========     ========
</TABLE>
                                      F-16
<PAGE>
<TABLE>
<CAPTION>
                                                       For the Year Ended December 31, 1997
                                         ------------------------------------------------------------
                                                                  Non-
(In thousands of dollars)                Parent   Guarantors   Guarantors   Eliminating  Consolidated
                                         ------   ----------   ----------   -----------  ------------
<S>                                     <C>         <C>         <C>          <C>          <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                $ 22,692   $ 11,848    $ 5,570      $     --      $ 40,110
Restricted cash and
    investments                                --         --     19,000            --        19,000
Accounts receivable, net                   20,822     34,360      2,285            --        57,467
Receivables from insurance
    companies                                  --      5,430      1,640            --         7,070
Prepaid expenses and deposits               2,822      1,465        275            --         4,562
Income taxes receivable                     4,080         --         --            --         4,080
Deferred income taxes                       4,138         --         --            --         4,138
Due from affiliates                        30,346     (1,122)    12,855       (42,079)           --
                                         --------   --------    -------      --------      --------
        Total current assets               84,900     51,981     41,625       (42,079)      136,427

Property and equipment, net                 2,857        276         26            --         3,159
Deferred income taxes                         485         --         --            --           485
Goodwill and other assets, net             32,105     34,625        416            --        67,146
Investment in subsidiaries                 46,477         --         --       (46,477)           --
                                         --------   --------    -------      --------      --------
        Total assets                     $166,824   $ 86,882    $42,067      $(88,556)     $207,217
                                         ========   ========    =======      ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued salaries, wages and
    payroll taxes                        $ 20,253   $ 21,422    $ 1,588      $     --      $ 43,263
Accounts payable                            1,082      2,318        963            --         4,363
Accrued workers' compensation
    and benefits                            1,612      2,211     20,763            --        24,586
Other accrued expenses                      2,612      2,541        733            --         5,886
Due to affiliates                          13,359     22,243      6,477       (42,079)           --
                                         --------   --------    -------      --------      --------
        Total current liabilities          38,918     50,735     30,524       (42,079)       78,098
                                         --------   --------    -------      --------      --------

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

Commitments and contingencies

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

Total stockholders' equity                 42,389     34,934     11,543       (46,477)       42,389
                                         --------   --------    -------      --------      --------
Total liabilities and stockholders'
 equity                                  $166,824   $ 86,882    $42,067      $(88,556)     $207,217
                                         ========   ========    =======      ========      ========
</TABLE>
                                      F-17
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
                                               For the Year Ended December 31, 1998
                                   ------------------------------------------------------------
                                                             Non-
(In thousands of dollars)          Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                   ------    ----------   ----------   -----------  ------------
<S>                              <C>         <C>         <C>          <C>          <C>

Revenues                         $ 265,523    $ 670,874    $ 34,201     $ (1,689)    $ 968,909
                                 ---------    ---------    --------     --------     ---------
Cost of revenues:
Salaries and wages of
    worksite employees             221,615      563,715      29,123           --       814,453
Healthcare and workers'
    compensation                    14,913       39,028       1,972           --        55,913
Payroll and employment taxes        20,362       41,079       2,877           --        64,318
                                 ---------    ---------    --------     --------     ---------

    Cost of revenues               256,890      643,822      33,972           --       934,684
                                 ---------    ---------    --------     --------     ---------

    Gross profit                     8,633       27,052         229       (1,689)       34,225

Selling, general and
    administrative expenses         12,951       33,652       2,690           --        49,293
Intercompany selling, general
    and administrative expense         769          821          99       (1,689)           --
Depreciation and amortization        4,518        1,599          28           --         6,145
                                 ---------    ---------    --------     --------     ---------

Loss from operations                (9,605)      (9,020)     (2,588)          --       (21,213)

Other income (expense):
Interest income                      1,159          169         557           --         1,885
Interest expense and other          (9,033)          (3)        302           --        (8,734)
                                 ---------    ---------    --------     --------     ---------
Loss before benefit
    for income taxes               (17,479)      (8,854)     (1,729)          --       (28,062)

Income tax benefit, net                 --          (92)        (19)          --          (111)
                                 ---------    ---------    --------     --------     ---------

                                   (17,479)      (8,762)     (1,710)          --       (27,951)
Income from wholly-owned
    subsidiaries                   (10,472)          --          --       10,472            --
                                 ---------    ---------    --------     --------     ---------

Net loss                         $ (27,951)   $  (8,762)   $ (1,710)    $ 10,472     $ (27,951)
                                 =========    =========    ========     ========     =========
</TABLE>

                                      F-18
<PAGE>
<TABLE>
<CAPTION>
                                               For the Year Ended December 31, 1997
                                   ------------------------------------------------------------
                                                             Non-
(In thousands of dollars)          Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                   ------    ----------   ----------   -----------  ------------
<S>                              <C>          <C>          <C>          <C>          <C>

Revenues                         $ 465,847    $ 426,058    $ 74,815     $(32,903)    $ 933,817
                                 ---------    ---------    --------     --------     ---------
Cost of revenues:
Salaries and wages of
    worksite employees             404,316      351,899      36,591      (27,759)      765,047
Healthcare and workers'
    compensation                    15,134       26,216      34,245           --        75,595
Payroll and employment taxes        32,814       26,741       3,058           --        62,613
                                 ---------    ---------    --------     --------     ---------

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

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

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

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

Other income (expense):
Interest income                        320           90         893           --         1,303
Interest expense and other          (5,320)         (14)        182           --        (5,152)
                                 ---------    ---------    --------     --------     ---------
Income (loss) before provision
    (benefit) for income taxes     (17,397)       5,201         881           --       (11,315)

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

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

Net income (loss)                $  (8,496)   $   3,906    $    641     $ (4,547)    $  (8,496)
                                 =========    =========    ========     ========     =========
</TABLE>

                                      F-19
<PAGE>
<TABLE>
<CAPTION>
                                               For the Year Ended December 31, 1996
                                   ------------------------------------------------------------
                                                             Non-
(In thousands of dollars)          Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                   ------    ----------   ----------   -----------  ------------
<S>                             <C>         <C>         <C>          <C>          <C>

Revenues                         $ 128,185    $ 293,874    $ 36,313     $(19,356)     $ 439,016
                                 ---------    ---------    --------     --------      ---------
Cost of revenues:
Salaries and wages of
    worksite employees             103,873      230,469       7,646           --        341,988
Healthcare and workers'
    compensation                     4,751       29,585      12,768      (16,870)        30,234
Payroll and employment taxes         8,146       19,721         773           --         28,640
                                 ---------    ---------    --------     --------      ---------

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

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

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

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

Other income (expense):
Interest income                        227           92         514           --            833
Interest expense and other          (1,185)         (11)         (1)          --         (1,197)
                                 ---------    ---------    --------     --------      ---------
Income before provision
    for income taxes                   700        2,744      14,963           --         18,407

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

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

Net income                       $  12,026    $   1,677    $  9,143     $(10,820)     $  12,026
                                 =========    =========    ========     ========      =========
</TABLE>
                                      F-20
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
                                                          For the Year Ended December 31, 1998
                                              ------------------------------------------------------------
                                                                        Non-
(In thousands of dollars)                     Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                              ------    ----------   ----------   -----------  ------------
<S>                                           <C>         <C>         <C>          <C>          <C>
RECONCILIATION OF NET LOSS TO
 NET CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:
Net loss                                      $(27,951)   $ (8,762)   $ (1,710)     $ 10,472     $(27,951)
                                              --------    --------    --------      --------     --------
ADJUSTMENTS TO RECONCILE NET
 LOSS TO NET CASH PROVIDED
 BY (USED IN) OPERATING
 ACTIVITIES:
Depreciation and amortization                    4,518       1,599          28            --        6,145
Loss on sale of assets                             192          --           1            --          193
Write-off of deferred acquisition costs            772          --          --            --          772
Other non-cash expenses                          1,200          --          --            --        1,200
Decrease in accounts receivable,  net            5,362      11,865       1,498            --       18,725
(Increase) decrease in receivables
 from insurance companies                           --       5,430      (5,064)           --          366
Decrease in prepaid expenses and deposits        1,290         712         257            --        2,259
Decrease in deferred income taxes, net           4,106          --          --            --        4,106
Decrease in other assets                           165          --           1            --          166
(Decrease) increase from inter-
    company transactions                        20,000      (8,726)       (802)      (10,472)          --
Increase (decrease) in accrued
 salaries, wages, and payroll taxes            (14,321)        745        (968)           --      (14,544)
Increase (decrease) in accrued workers'
    Compensation and healthcare                  1,529      (1,593)    (14,905)           --      (14,969)
Decrease in other long-term liabilities             --          (2)         --            --           (2)
Increase (decrease) in accounts payable            502      (1,267)      2,300            --        1,535
Decrease in income taxes payable/receivable       (209)         --          --            --         (209)
Increase (decrease) in other
 accrued expenses                                5,311        (225)      1,423            --        6,509
                                              --------    --------    --------      --------     --------
                                                30,417       8,538     (16,231)      (10,472)      12,252
                                              --------    --------    --------      --------     --------
        Net cash provided by (used in)
           operating activities                  2,466        (224)    (17,941)           --      (15,699)
                                              --------    --------    --------      --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment              (2,566)       (184)          1            --       (2,749)
Business acquisitions                           (2,889)       (356)        (22)           --       (3,267)
Purchase of investments, net                    (9,997)         --          --            --       (9,997)
Cash invested in restricted cash
    and investments                             (1,088)         --      19,000            --       17,912
Disbursements for deferred costs                  (723)         --          --            --         (723)
                                              --------    --------    --------      --------     --------
        Net cash provided by (used in)
           Investing activities                (17,263)       (540)     18,979            --        1,176
                                              --------    --------    --------      --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock             199          --          --            --          199
Payment of deferred loan costs                    (226)         --          --            --         (226)
Increase in bank overdraft                         308      13,419          --            --       13,727
                                              --------    --------    --------      --------     --------
        Net cash provided by
           financing activities                    281      13,419          --            --       13,700
                                              --------    --------    --------      --------     --------
Net increase (decrease) in cash and cash
    equivalents                                (14,516)     12,655       1,038            --         (823)
CASH AND CASH EQUIVALENTS,
    beginning of year                           22,692      11,848       5,570            --       40,110
                                              --------    --------    --------      --------     --------
CASH AND CASH EQUIVALENTS,
    end of year                               $  8,176    $ 24,503    $  6,608      $     --     $ 39,287
                                              ========    ========    ========      ========     ========
</TABLE>

                                      F-21
<PAGE>
<TABLE>
<CAPTION>
                                                       For the Year Ended December 31, 1997
                                           ------------------------------------------------------------
                                                                     Non-
(In thousands of dollars)                  Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                           ------    ----------   ----------   -----------  ------------
<S>                                       <C>         <C>         <C>          <C>          <C>
RECONCILIATION OF NET INCOME TO
 NET CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:
Net income (loss)                         $ (8,496)   $  3,906    $    641      $ (4,547)     $ (8,496)
                                          --------    --------    --------      --------      --------
ADJUSTMENTS TO RECONCILE NET
 INCOME (LOSS) TO NET CASH
 PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:
Depreciation and amortization                2,863       1,722          32            --         4,617
Increase in accounts receivable,  net       (9,910)    (10,775)     (1,943)           --       (22,628)
(Increase) decrease in receivables
    from insurance companies                    --      (2,273)      1,121            --        (1,152)
Increase in prepaid expenses
 and deposits                               (2,021)     (1,071)       (154)           --        (3,246)
Increase in deferred income taxes, net      (2,522)         --          --            --        (2,522)
(Increase) decrease in other assets         (1,023)        324        (106)           --          (805)
(Decrease) increase from inter-
    company transactions                      (733)      2,870      (6,684)        4,547            --
Increase in accrued salaries,
    wages, and payroll taxes                10,363      14,242       1,072            --        25,677
Increase (decrease) in accrued workers'
    compensation and healthcare              1,381          (8)     16,286            --        17,659
Increase in other long-term liabilities         --        (136)         --            --          (136)
Increase (decrease) in accounts payable        893        (967)        359            --           285
Decrease in income taxes
 payable/receivable                         (3,612)         --          --            --        (3,612)
Increase in other accrued expenses             399         472         701            --         1,572
                                          --------    --------    --------      --------      --------
                                            (3,922)      4,400      10,684         4,547        15,709
                                          --------    --------    --------      --------      --------
    Net cash provided by (used in)
     operating activities                  (12,418)      8,306      11,325            --         7,213
                                          --------    --------    --------      --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment          (2,446)        (53)         --            --        (2,499)
Business acquisitions                       (4,296)       (675)        (53)           --        (5,024)
Cash invested in restricted cash
    and  investments                            --          --      (7,500)           --        (7,500)
                                          --------    --------    --------      --------      --------
    Net cash used in investing
     activities                             (6,742)       (728)     (7,553)           --       (15,023)
                                          --------    --------    --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
    long-term debt, net                     42,200          --          --            --        42,200
Proceeds from issuance of common stock         502          --          --            --           502
Payment for deferred
    loan costs                              (3,285)         --          --            --        (3,285)
Decrease in bank overdraft and other            --      (2,477)         --            --        (2,477)
                                          --------    --------    --------      --------      --------
    Net cash provided by (used
     in) financing activities               39,417      (2,477)         --            --        36,940
                                          --------    --------    --------      --------      --------
Net increase in cash and cash
    equivalents                             20,257       5,101       3,772            --        29,130
CASH AND CASH EQUIVALENTS,
    beginning of year                        2,435       6,747       1,798            --        10,980
                                          --------    --------    --------      --------      --------
CASH AND CASH EQUIVALENTS,
    end of year                           $ 22,692    $ 11,848    $  5,570      $     --      $ 40,110
                                          ========    ========    ========      ========      ========
</TABLE>
                                      F-22
<PAGE>
<TABLE>
<CAPTION>
                                                       For the Year Ended December 31, 1996
                                           ------------------------------------------------------------
                                                                     Non-
(In thousands of dollars)                  Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                           ------    ----------   ----------   -----------  ------------
<S>                                          <C>         <C>         <C>          <C>          <C>
RECONCILIATION OF NET INCOME TO
 NET CASH (USED IN) PROVIDED
 BY OPERATING ACTIVITIES:
Net income                                $ 12,026    $  1,677    $  9,143     $(10,820)     $ 12,026
                                          --------    --------    --------     --------      --------
ADJUSTMENTS TO RECONCILE NET
 INCOME TO NET CASH (USED IN)
 PROVIDED BY OPERATING
 ACTIVITIES:
Depreciation and amortization                  983       1,074          16           --         2,073
Increase in accounts receivable,  net       (5,464)    (18,963)       (333)          --       (24,760)
Decrease (increase) in receivables
    from insurance companies                    86      (3,157)     (2,761)          --        (5,832)
Increase in prepaid expenses and
 deposits                                     (486)       (129)       (121)          --          (736)
(Increase) decrease in deferred
    income taxes, net                       (1,299)        760          --           --          (539)
Increase in other assets                        --      (2,253)       (279)          --        (2,532)
(Decrease) increase from inter-
    company transactions                   (62,735)     52,846        (931)      10,820            --
Increase in accrued salaries,
    wages, and payroll taxes                 6,724       3,665         516           --        10,905
(Decrease) increase in accrued workers'
    compensation and healthcare                (50)      1,090       3,424           --         4,464
Increase in other long-term liabilities         --       1,349          --           --         1,349
Increase (decrease) in accounts payable       (406)     (1,753)        121           --        (2,038)
Increase in income taxes
 payable/receivable                          1,148          --          --           --         1,148
(Decrease) increase in other
 accrued expenses                              (65)      1,188          32           --         1,155
                                          --------    --------    --------     --------      --------

                                           (61,564)     35,717        (316)      10,820       (15,343)
                                          --------    --------    --------     --------      --------
    Net cash (used in)  provided by
      operating activities                 (49,538)     37,394       8,827           --        (3,317)
                                          --------    --------    --------     --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment            (573)        (92)        (37)          --          (702)
Business acquisitions                      (10,225)    (27,026)         --           --       (37,251)
Cash invested in restricted cash
  and investments                               --          --      (8,757)          --        (8,757)
Issuance of notes receivable and
 other, net                                     --        (189)         --           --          (189)
                                          --------    --------    --------     --------      --------

    Net cash used in investing
      activities                           (10,798)    (27,307)     (8,794)          --       (46,899)
                                          --------    --------    --------     --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt    42,800          --          --           --        42,800
Proceeds from issuance of common stock       7,786          --          --           --         7,786
Decrease in bank overdraft and other            --      (3,419)         --           --        (3,419)
                                          --------    --------    --------     --------      --------
    Net cash provided by (used
     in) financing activities               50,586      (3,419)         --           --        47,167
                                          --------    --------    --------     --------      --------
Net (decrease) increase in cash
 and cash equivalents                       (9,750)      6,668          33           --        (3,049)
CASH AND CASH EQUIVALENTS,
    beginning of year                       12,185          79       1,765           --        14,029
                                          --------    --------    --------     --------      --------
CASH AND CASH EQUIVALENTS,
    end of year                           $  2,435    $  6,747    $  1,798     $     --      $ 10,980
                                          ========    ========    ========     ========      ========
</TABLE>
                                      F-23
<PAGE>
(6) STOCKHOLDERS' EQUITY:

SHAREHOLDERS RIGHTS PLAN

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

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

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

WARRANTS

Warrant activity in 1996, 1997 and 1998 was as follows:

                                                                       Weighted-
                                                                       average
                                                      Number           Exercise
                                                    of Warrants         Price
                                                    -----------         -----
Outstanding at December 31, 1996                      120,000            1.88
                                                      =======

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

   Granted                                            200,000            2.13
                                                      -------

Outstanding at December 31, 1998                      320,000            1.93
                                                      =======

The number of warrants exercisable were 120,000 at each respective year-end.  Of
the  remaining  outstanding  warrants,  120,000  expire on  January  2, 1999 and
200,000 expire on November 30, 2008.

STOCK OPTION PLANS

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

The total number of options made  available and reserved for issuance  under the
1993 and 1995 Plans are 1,200,000 and 4,500,000,  respectively.  The Company has
granted options of 1,096,659 shares and 3,584,285 shares under the 1993 and 1995
plans,  respectively,  through  December 31,  1998.  Under both plans the option
exercise  price  equals  the  stock's  market  price  on the date of  grant.  No
compensation  expense was recorded for the stock  options under the 1993 or 1995
Plans in the  accompanying  financial  statements  as the Company has elected to
retain the accounting  prescribed under Accounting  Principles Board Opinion No.
25 (APB 25).  Employee stock options  generally  become fully  exercisable  over

                                      F-24
<PAGE>
three years from the grant date and generally have terms from five to ten years.
Upon  termination of employment,  the option  exercise  period is reduced or the
options are canceled.

The  following  table is a summary of the  Company's  1993 and 1995 Stock Option
Plan  activity and related  information  for the three years ended  December 31,
1998:

                                                                    Weighted-
                                                                     average
                                                   Number           Exercise
                                                 of Options           Price
                                                 ----------           -----
         Outstanding at December 31, 1995         2,721,688          $ 2.56

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

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

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

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

              Granted                             2,030,770            3.26
              Exercised                            (101,475)           1.75
              Canceled                           (1,727,644)           6.60
                                                 ----------

         Outstanding at December 31, 1998         3,594,900            3.50
                                                 ==========

         Exercisable options as of:
              December 31, 1996                     791,843            2.57
              December 31, 1997                   1,204,088            4.23
              December 31, 1998                   2,012,030            3.72

         Available for future grants
           at December 31, 1998                   1,019,056

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

                                               December 31, 1998
                                 -----------------------------------------------
                                   Weighted-
                                    average                            Weighted-
                                   Remaining                           average
                                  Contractual                          Exercise
                                 Life (Yrs.mths)        Number          Price
                                 ---------------        ------          -----
RANGE OF EXERCISE PRICES
  1993 Stock Option Plan
    $1.84 - $3.31
      Options outstanding             1.4               269,706        $ 2.57
      Options exercisable                               269,706          2.57

    $7.56
      Options outstanding             2.0                40,000          7.56
      Options exercisable                                40,000          7.56

  1995 Stock Option Plan
    $1.81 - $3.94
      Options outstanding             5.6             2,721,099          2.40
      Options exercisable                             1,406,674          2.53

    $4.31 - $5.72
      Options outstanding             7.0               306,595          5.06
      Options exercisable                               123,983          4.71

    $10.50 - $21.25
      Options outstanding             2.5               257,500         13.71
      Options exercisable                               171,667         13.71

The weighted average fair value of options granted under the 1993 and 1995 Stock
Option Plans was $3.29, $4.46 and $6.10 for 1998, 1997 and 1996, 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.  The Company measures the compensation  costs of
its  employee  stock  option  plan using the  intrinsic  value  based  method of
accounting  prescribed in APB 25.  Accordingly,  no  compensation  cost has been
recognized for stock options granted under the 1993 or 1995 Stock Option Plans.

                                      F-26
<PAGE>
Net income  (loss) and earnings  (loss) per share would have been changed to the
pro forma amounts indicated below:


(In thousands of dollars, except                   Year Ended December 31,
 per share data)                             ---------------------------------
                                                1998       1997         1996
                                             ---------   --------    ---------
         Net income (loss):
              As reported                    $(27,951)   $ (8,496)    $12,026
              Pro forma                       (30,943)    (10,569)     13,233

         Basic earnings (loss) per share:
              As reported                       (.88)       (.27)         .40
              Pro forma                         (.97)       (.34)         .44

         Diluted earnings (loss) per share:
              As reported                       (.88)       (.27)         .37
              Pro forma                         (.97)       (.34)         .41

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 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 1998:  risk-free  interest  rate of 4.90%;
expected  dividend yield of 0%;  expected  option term of 2 years;  and expected
volatility of 117%. The following  weighted  average  assumptions  were used for
grants  in  1997  and  1996:   risk-free  interest  rate  of  5.92%  and  5.98%,
respectively;  expected  dividend yield of 0%;  expected  lives of 2 years;  and
expected volatility of 98% and 67%, respectively.

The Company  adopted an  Employee  Stock  Purchase  Plan  effective  March 1999.
Participating  employees are permitted to acquire shares of the Company's common
stock through payroll deduction at a 15% discount from the average trading price
during the 10 days prior to  implementation  of the plan or the 10 days prior to
the  expiration  of the plan in  January  2000,  whichever  price is lower.  The
Company has reserved  500,000  shares of its Common Stock for issuance under the
plan.

                                      F-27
<PAGE>
(7) SEGMENT INFORMATION

The  Company,  in  relation  to SFAS No. 131  "Disclosure  About  Segments of an
Enterprise and Related  Information,"  has defined the following five reportable
segments:  Core PEO  services,  Logistics  Personnel  Corp,  TEAM  Services  and
Stand-Alone Workers' Compensation services and US Xpress.

The Company, through its Core PEO segment, provides a full-range of services and
products to its customers.  Typically,  ESI becomes the "employer of record" for
the client  company's  employees and provides payroll  administration,  workers'
compensation  insurance  and risk  management  administration,  human  resources
administration and benefits programs.  Additionally, other products and services
are offered directly to worksite  employees,  such as employee payroll deduction
programs for disability and specialty  health  insurance,  debit cards,  prepaid
telephone cards and other personal financial services.

Formerly,  the Company  provided  its Core PEO  services  to US Xpress,  a large
transportation  company.  US  Xpress  was the  Company's  largest customer  with
approximately  6,200 worksite  employees.  The Company terminated its subscriber
service agreement with US Xpress effective August 19, 1998.

Logistics  Personnel  Corp (LPC)  provides  specialized  leasing of all types of
distribution  personnel,   including  drivers,  warehouse  workers,   mechanics,
dispatchers,  forklift operators and  administrators.  A full range of services,
including employee recruiting,  hiring and management;  payroll  administration;
claims and audit handling;  workers' compensation  insurance coverage;  employee
benefits programs and tax reporting is provided to its customers.

TEAM Services  specializes in leasing  commercial talent (actors and actresses),
musicians and recording  engineers to the music and advertising  segments of the
entertainment  industry. In addition,  TEAM generates revenue from touring bands
with the entertainment industry.

The Company,  formerly through its Stand-Alone  Workers'  Compensation  segment,
provided its workers' compensation program to non-PEO customers on a stand-alone
basis.  Based on a change in business  strategy as of 1998,  the Company will no
longer  market  new  stand-alone  policies.  This  change  is  the  result  of a
determination  to emphasize  other PEO marketing  strategies  and because of the
decreased profit opportunities resulting from increased price competition in the
overall workers' compensation market.

The accounting  policies of the segments are the same as those  described in the
summary of significant accounting policies.

                                      F-28
<PAGE>
Information  concerning revenue, gross profit and assets by business segment was
as follows (in thousands):

                                               For the Year Ended December 31,
                                             ----------------------------------
                                               1998         1997         1996
                                             --------     --------     --------
REVENUE
      Core PEO                               $569,394     $532,761     $347,219
      US Xpress                               121,323      180,403
      LPC                                     102,218      122,550       42,739
      TEAM                                    174,109       87,764       32,525
      Stand-Alone                               1,865       10,339       16,532
                                             --------     --------     --------
      Consolidated Total                      968,909      933,817      439,016
                                             --------     --------     --------
GROSS PROFIT
      Core PEO                                 23,713       17,749       22,842
      US Xpress                                   (66)         541
      LPC                                       9,919        8,981        4,874
      TEAM                                      2,029        1,742          881
      Stand-Alone                              (1,370)       1,549        9,557
                                             --------     --------     --------
      Total                                    34,225       30,562       38,154

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE    49,293       33,411       17,310
DEPRECIATION AND AMORTIZATION                   6,145        4,617        2,073
                                             --------     --------     --------
INCOME/(LOSS) FROM OPERATIONS                 (21,213)      (7,466)      18,771
                                             --------     --------     --------
OTHER INCOME/(EXPENSE)
      Interest income                           1,885        1,303          833
      Interest expense                         (8,541)      (5,102)      (1,196)
      Other                                      (193)         (50)          (1)
                                             --------     --------     --------
INCOME/(LOSS) BEFORE PROVISION FOR
 INCOME TAXES                                 (28,062)     (11,315)      18,407

INCOME TAX PROVISION (BENEFIT)                   (111)      (2,819)       6,381
                                             --------     --------     --------
NET INCOME (LOSS)                            $(27,951)    $ (8,496)    $ 12,026
                                             ========     ========     ========
DEPRECIATION AND AMORTIZATION
      Core PEO                               $  5,062     $  3,608     $  1,638
      LPC                                         927          883          379
      TEAM                                        153          121           53
      Stand-Alone                                   3            5            3
                                             --------     --------     --------
      Consolidated Total                     $  6,145     $  4,617     $  2,073
                                             ========     ========     ========
TOTAL ASSETS
      Core PEO                               $ 94,540     $106,512     $ 58,727
      LPC                                      35,192       36,825       36,302
      TEAM                                     29,380       14,926        4,329
      Stand-Alone                              15,993       48,954       26,611
                                             --------     --------     --------
      Consolidated Total                     $175,105     $207,217     $125,969
                                             ========     ========     ========

                                      F-29
<PAGE>
(8) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

The following table presents summary unaudited quarterly financial data from the
Company's  consolidated   statements  of  operations  (all  earnings  per  share
calculations have been restated to conform to SFAS No. 128):
<TABLE>
<CAPTION>
(In thousands of dollars, except share and per share data)

                                                  Quarter Ended
                              ------------------------------------------------------
                                March 31,     June 30,   September 30,  December 31,
                                ---------     --------   -------------  ------------
<S>                           <C>          <C>           <C>           <C>
1998
Revenues                      $   220,930  $   254,399   $   231,636   $   261,944
Gross profit                        9,466        8,471         8,970         7,318

Basic
 Net loss                            (905)      (5,722)       (7,168)      (14,156)
 Weighted average shares       31,701,036   31,766,725    31,792,787    32,005,193
 Net loss per share                  (.03)        (.18)         (.23)         (.44)
Diluted
 Net loss                            (905)      (5,722)       (7,168)      (14,156)
 Weighted average shares       31,701,036   31,766,725    31,792,787    32,005,193
 Net loss per share                  (.03)        (.18)         (.23)         (.44)

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

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

(9) ACQUISITIONS:

ACQUISITION OF FIDELITY RESOURCES CORPORATION

Effective December 1, 1998, the Company acquired Fidelity Resources  Corporation
(Fidelity),  a PEO services company by issuing 625,000  restricted shares of the
Company's common stock, valued at $1.30 per share ($2.00 less a 35% discount for
the  lack of  marketability  of the  restricted  shares).  If the  price  of the
Company's  common stock (based on the average  price during the 20 days prior to
the first  anniversary  of the closing date (the  "Anniversary  Price")) is less
than $4.00,  the Company will provide  additional  cash  consideration  or issue
additional  restricted shares (or a combination thereof) in an amount sufficient
so that the aggregate  value of the 625,000  shares  (valued at the  Anniversary
Price)  plus such  additional  consideration  equals  $2.5  million.  Subject to
meeting  gross profit  targets on a specific  client prior to July 1, 2000,  the
Company also agreed to provide up to $500,000 of additional consideration in the
form of cash or additional  restricted shares (valued at the Anniversary Price).
The Company also issued  warrants to purchase up to 200,000 shares of its common
stock that  become  exercisable  at $2.125  per share if  earnings  targets  are
achieved in each of the three years following the closing of the acquisition.

INVESTMENT IN IPEO

At  December  31,  1998,  accounts  receivable  includes a  $300,000  short-term
convertible  secured  promissory note  receivable from PEO Partners,  Inc. d/b/a
IPEO  ("IPEO").  In 1999 the Company has  subsequently  entered into an alliance
with  IPEO,  an  Internet-based  professional  employer  organization  targeting
technology  and  technical  service  firms.  On January  22,  1999,  the Company
acquired  $1 million  of Series B  Preferred  Stock at $.75 per  share,  through
conversion of the promissory note and an additional payment of $668,923.

                                      F-30
<PAGE>
ACQUISITION OF K.W.M. CORPORATION

In July 1998, the Company  acquired K. W. M.  Corporation,  a personnel  leasing
company  specializing  in driver  leasing  services  based in City of  Industry,
California. The total purchase price was $560,000, of which $220,000 was paid at
closing, and $340,000 is due to be paid on April 5, 1999.

ACQUISITION OF PHOENIX CAPITAL MANAGEMENT, INC. AND AFFILIATED COMPANIES

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

ACQUISITION OF PROMPT PAY, INC.

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

ACQUISITION OF CMGR COMPANIES

On February 17, 1997,  the Company  completed the  acquisition  of the principal
assets of CMGR,  Inc.,  and Humasys  (collectively,  CMGR) for $3.9 million.  At
closing $2.3 million was paid in cash. At December 31, 1997  approximately  $3.1
million had been recorded as goodwill. An interim payment of $500,000 toward the
final purchase price was paid nine months after the closing. During 1998 interim
payments of $250,000 were advanced  towards the purchase  price,  and on October
15,  1998 a final  payment  was made in the amount of  $625,000.  CMGR was a New
Jersey  based  PEO with a client  base  consisting  primarily  of  professional,
service and light industrial companies,  with approximately 75 clients and 1,700
worksite employees.

ACQUISITION OF ETIC CORPORATION

On February 1, 1997,  the Company  completed  the  acquisition  of the principal
assets of ETIC Corporation, d/b/a Employers Trust (ETIC). The purchase price was
$30,000  plus five times  ETIC's total  pre-tax  income for the 12-month  period
ending  January  31,  1998.  At closing  $855,000  was paid in cash.  The excess
purchase price over net assets acquired was approximately $1.0 million which has
been  recorded as goodwill.  The final  payment of purchase  price was due on or
before  April 30,  1998,  and was to have  been paid in cash.  See Note 10 for a
description of the dispute that has arisen  related to the purchase.  ETIC was a
Cincinnati,  Ohio based PEO with a client  base  consisting  primarily  of light
industrial,  transportation and construction  companies,  with approximately 150
clients and 2,000 worksite employees.

ACQUISITION OF THE MCCLARY-TRAPP COMPANIES

On November 1, 1996,  the Company  completed  the  acquisition  of the principal
assets of the  McClary-Trapp  Companies for  approximately  $10.6  million.  The
purchase price has been paid in the form of cash, assumed  liabilities,  and the
Company's  unregistered common stock, valued at the average closing price on the
NASDAQ  National Market for the month ended October 31, 1996, less a discount of
35% for  lack of  marketability  of the  unregistered  shares.  Pursuant  to the

                                      F-31
<PAGE>
purchase agreement,  the consideration for the assets of McClary-Trapp  included
53,000 shares of the Company's  unregistered common stock (which carries certain
registration  rights) valued at an average price of $13.09 per share ($20.14 per
share less the 35% discount) plus cash in the amount of $9.4 million and assumed
liabilities.  The excess of purchase  price over net assets  acquired  was $10.9
million  of which  $10.6  million  has been  recorded  as  goodwill.  The  final
settlement  was completed on January 6, 1999, and resulted in a reduction of the
final purchase price in the amount of $156,945.  McClary-Trapp  Companies leased
approximately  2,000 worksite employees with a client base consisting  primarily
of light industrial, transportation and service companies.

ACQUISITION OF LEASEWAY PERSONNEL CORPORATION

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

ACQUISITION OF TEAM SERVICES

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

ASHLIN TRANSPORTATION SERVICES, INC.

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

ACQUISITION OF EMPLOYEE SOLUTIONS-EAST, INC. (ESEI)

Effective  January 1, 1996, the Company  completed its  acquisition of ESEI. The
base purchase price  consisted 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.

                                      F-32
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION

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

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


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

Total revenues                                              $   522,286
Net income                                                       12,758

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

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

(10) CONTINGENCIES:

The  Company  has  received a letter  from the  Arizona  Department  of Economic
Security   indicating  that  the  Company  has  been  assigned  a  higher  state
unemployment  tax rate for  calendar  year 1994 than the Company  believes it is
entitled.  In consultation with legal counsel the Company believes that based on
Arizona Revised  Statutes it is entitled to the lower rate. If it was ultimately
determined that the higher rate applies,  the Company would owe $500,000 (before
interest  and the income tax effect)  more than is  reflected  in the  Company's
financial  statements.  As of December 31, 1998, the compounded interest totaled
approximately $252,000.

The State of New York has  asserted  that the Company is a  successor  for state
unemployment insurance (SUI) purposes to certain entities from which the Company
acquired  limited  assets in  connection  with the Hazar  acquisition  effective
January  1996.  The State  further  asserts  that the  Company  was  subject  to
increased  tax rates during 1996 and 1997 as a result of successor  status.  The
liabilities  asserted are approximately  $500,000.  The Company is appealing the
determination.

The State of Ohio has issued a  preliminary  assessment  of $5.2  million  (plus
penalty)  relating to sales taxes  potentially  applicable  to certain  types of
services.  While the Company  believes  that no tax  ultimately  will be payable
based on the preliminary assessment, there can be no assurance that this will be
the case.

The  Company  and certain of its  present  and former  directors  and  executive
officers  were named as  defendants  in ten actions filed between March 1997 and
May 1997.  While the exact  claims  and  allegations  varied,  they all  alleged
violations  by the Company of Section  10(b) of the Exchange Act, and Rule 10b-5
promulgated  thereunder,  with respect to the accuracy of  statements  regarding
Company reserves and other disclosures made by the Company and certain directors
and  officers.  These suits were filed after a  significant  drop in the trading
price of the Company's  Common Stock in March 1997. The suits were  consolidated
before the U.S.  District  Court in  Phoenix,  Arizona.  In November  1998,  the
Company entered into a settlement  agreement  calling for the claims against the
Company  and  all  other  defendants  to be  dismissed  with  prejudice  without
presumption  or admission of any  liability  or  wrongdoing.  Final terms of the
settlement  call for payment to the plaintiffs of $13.8 million in cash and $1.2

                                      F-33
<PAGE>
million in shares of the Company's Common Stock. A substantial  majority of both
the cash portion of the  settlement  and  litigation-related  expenses have been
paid by the  Company's  directors and officers'  insurance  carriers.  The Court
approved  the  settlement  agreement  on March 11,  1999.  The Company  recorded
expense of approximately $6.2 million during 1998 related to this litigation.

The Company was named as a defendant in an action filed by Ladenburg  Thalmann &
Co., Inc. in the United States District Court,  Southern District of New York in
May 1997 alleging breach of contract under certain stock warrants. The plaintiff
sought  damages of at least $2.5 million.  In March 1999,  the Court granted the
Company's motion for summary judgment and dismissed the plaintiff's case.

An arbitration  panel awarded HDVT,  Inc. (the seller of certain assets acquired
by the  Company  from  ETIC in  February  1997)  a total  of  $10.4  million  in
additional acquisition purchase price in February 1999. HDVT has filed an action
to confirm the award in Superior Court,  Maricopa County,  Arizona.  The Company
has filed a motion to vacate the  arbitration  award,  primarily on grounds that
the  arbitrators  exceeded  the scope of their  authority.  The Company  also is
pursuing other available remedies,  including seeking a significant reduction of
the purchase price pursuant to a provision of the purchase agreement relating to
the determination of certain workers' compensation expense items. At the time of
final  resolution,  the payment will be accounted for as an acquisition cost and
will be amortized over the remaining term of the acquisition's  original 15-year
amortization schedule.

An arbitration  proceeding between the Company and US Xpress  Enterprises,  Inc.
(US  Xpress) is  scheduled  for May 1999  regarding  issues  under a PEO service
agreement between the parties that was terminated by the Company in August 1998.
The parties recently  stipulated to dismiss related  proceedings  pending in the
United States District Court for the Eastern District of Tennessee, including US
Xpress'  request  for a  preliminary  injunction.  US Xpress  seeks  recovery of
approximately $3.0 million plus unspecified  punitive damages primarily relating
to unpaid medical claims.  The Company intends to contest the claim  vigorously.
As part of the same arbitration,  the Company is seeking recovery of damages for
misrepresentations made by US Xpress (relating primarily to the costs associated
with US Xpress's medical  programs) at the time the parties entered into the PEO
service agreement.

The Company has been named as a defendant  in an action  filed by an employee in
February 1999 in Superior Court,  Maricopa  County,  Arizona  alleging breach of
contract with respect to certain  payments  claimed to be owing during and after
his employment with the Company.  The complaint  seeks damages of  approximately
$1.8 million plus the  issuance of options to acquire  200,000  shares of Common
Stock. The Company intends to defend the action vigorously.  The Company further
will pursue significant  counterclaims  against the employee relating to certain
liabilities  and other matters  incurred by the Company in  connection  with its
1996 acquisition of assets from Hazar, Inc., an entity of which the employee was
a  principal.  A director  of the Company  has agreed to  indemnify  the Company
personally  for amounts paid by the Company to the employee in  connection  with
this matter, if any.

International  Color  Services,  L.L.C.  filed for  arbitration in December 1998
alleging breach of contract regarding fee issues under the PEO service agreement
between  the  parties.  The Company  has filed a  complaint  in Superior  Court,
Maricopa Count,  Arizona in January 1999 seeking a declaratory judgment that the
dispute is not subject to  arbitration.  Plaintiff  has filed a motion to compel
arbitration  and a counterclaim  seeking damages of over $400,000 plus attorneys
fees and costs and unspecified  punitive damages. The Company intends to contest
the claim vigorously.

From time to time,  the  Company  is named as a  defendant  in  lawsuits  in the
ordinary course of business.  These lawsuits are not expected to have a material
adverse effect on the Company's financial position or results of operations.

                                      F-34
<PAGE>
(11) RELATED PARTY TRANSACTIONS:

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


(In thousands of dollars)                         1998        1997       1996
                                                  ----        ----       ----
Processing fees paid to company owned
 by shareholder                                   $ --       $1,030       $805
Non-compete agreement settlements with
 two shareholders                                   --           --        543

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

(12) RESTRUCTURING CHARGE:

On August 11, 1998, the Company  announced a  restructuring  and  cost-reduction
plan primarily  involving the closing of remote payroll  processing  centers and
other offices and various other expense reduction  strategies.  As a result, the
Company  incurred a  restructuring  charge in the third  quarter of 1998 of $1.4
million,  consisting  primarily  of  severance  and  lease  cancellation  costs.
Included in the $1.4 million restructuring charge were $900,000 of severance and
other  employee   termination  costs  related  to  the  termination  of  certain
individuals.  The remaining portion relates to lease commitments and termination
penalties associated with the closure of seven offices.  Approximately  $976,000
has been charged against the restructuring  liability.  Most of the $1.4 million
has been or is expected to be paid in cash.

(13) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING  ACTIVITIES.  The statement  establishes  accounting and
reporting  standards  requiring that every derivative  instrument be recorded on
the balance  sheet at its fair value.  SFAS No. 133 is effective  for  financial
statements for periods  beginning after June 15, 1999.  Adoption of SFAS No. 133
would have an  immaterial  effect on the  December 31, 1998  and 1997  financial
statements.

(14) LOSS PORTFOLIO TRANSFER

On April 22, 1998, the Company  completed a risk transfer of all of its pre-1998
workers'  compensation  claims liability to a third party insurer,  rated AAA by
Standard & Poor's, effected through a Loss Portfolio Transfer (LPT) valued as of
February 28, 1998. In exchange for a premium of $19.9  million  (paid  primarily
from restricted cash and investments),  the Company acquired  reinsurance of $35
million to insure its  pre-1998  workers'  compensation  losses.  Based upon the
advice  of its  outside  actuaries,  the  Company  believes  that the risk  that
pre-1998  liability  could  exceed the $35  million  aggregate  limit is remote,
although  there  can be no  assurance.  The  LPT  provides  for  profit  sharing
opportunities  with the Company based on ultimate paid claims,  though there can
be no assurance whether or when a profit will be realized. No charge to earnings
was  recorded  in  connection  with this  transaction  in 1998 or is expected in
future periods.

                                      F-35
<PAGE>
                                   SCHEDULE II

                            EMPLOYEE SOLUTIONS, INC.

                      VALUATION AND QUALIFYING ACCOUNTS For
                the Years Ended December 31, 1998, 1997, and 1996

                                                            December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                   ----       ----       ----
                                                         (in thousands)

Allowance for doubtful accounts:
  Balance at beginning of year                   $ 5,550    $ 1,729    $   215
  Provision charged to expense                     3,431      4,159      1,918
  Charge-offs                                       (488)      (338)      (404)
                                                 -------    -------    -------
  Balance at end of year*                          8,493    $ 5,550    $ 1,729
                                                 =======    =======    =======

                                                            December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                   ----       ----       ----
                                                         (in thousands)
Restructuring allowance:
  Balance at beginning of year                   $    --    $    --    $    --
  Provision charged to expense                     1,400         --         --
  Payments/usage                                    (976)        --         --
                                                 -------    -------    -------
  Balance at end of year                         $   424    $    --    $    --
                                                 =======    =======    =======

                                                            December 31,
                                                 ------------------------------
                                                   1998       1997       1996
                                                   ----       ----       ----
                                                         (in thousands)
Tax valuation allowance:
  Balance at beginning of year                   $    --    $    --    $    --
  Provision charged to expense                     9,188         --         --
  Payments/usage                                      --         --         --
                                                 -------    -------    -------
  Balance at end of year                         $ 9,188    $    --    $    --
                                                 =======    =======    =======

*   Included in this amount is a provision for a long-term  receivable  included
    in other assets.

                                      F-36