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, 1999

[ ] 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                      (I.R.S. Employer
of 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:

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

           Securities Registered Pursuant to Section 12(g) of the Act:

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based upon the $.78 closing price of the Registrant's  Common Stock
as reported on the NASDAQ SmallCap  Market on March 20, 2000, was  approximately
$29.9 million. Effective March 22, 2000, the Company's Common Stock is traded on
the OTC Bulletin  Board.  Shares of Common Stock held by each executive  officer
and  director and by any 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
20, 2000, was 38,433,027.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's  Proxy Statement for the  Registrant's  2000 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, 1999

                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  BUSINESS                                                            2

ITEM 2.  PROPERTIES                                                         13

ITEM 3.  LEGAL PROCEEDINGS                                                  14

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                15

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT                               15

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          SHAREHOLDER MATTERS                                               16

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA                               17

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         34

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                        34

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE                                          34

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                 34

ITEM 11. EXECUTIVE COMPENSATION                                             34

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT                                                    34

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                     34

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
          REPORTS ON FORM 8-K                                               35

SIGNATURES
<PAGE>
                                     PART I

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

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,  1999,  the  Company  served
approximately  1,900 client companies  representing 34,900 worksite employees in
approximately 46 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,  and other personal financial services.  The client company generally
retains  management  control  of  the  worksite  employees,   including  hiring,
supervision and termination and determining the employees' job  descriptions and
salaries.

INDUSTRY OVERVIEW

The PEO industry has undergone rapid growth in recent years.  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 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  that  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

                                       2
<PAGE>
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. 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."

CUSTOMERS

As of December 31, 1999, the Company's  full-service PEO customer base consisted
of approximately 1,900 customer  companies,  representing  approximately  34,900
employees in 46 states.  At that date, the Company had customers in more than 12
specific  industries,  based on Standard Industrial  Classification (SIC) codes,
and no more than 29% of the Company's  customers were  classified in any one SIC
code. The Company's  approximate customer company distribution by major industry
grouping as of December 31, 1999 is set forth below:

                                                                  Percent of
     Industry Group                                                Customers
     --------------                                                ---------
     Transportation:
        Private carriage/driver leasing                               10%
        For hire/standard PEO                                         19
                                                                     ---
          Total                                                       29
     Services:
        Professional                                                  13
        Light Industrial                                               4
        Real Estate                                                    3
                                                                     ---
          Total                                                       20

       Manufacturing                                                   7
       Construction                                                    9
       Retail Trade                                                    6
       Entertainment                                                  21
       Wholesale Trade                                                 4
       Agriculture and Fishing                                         1
       Other                                                           3

As part of its  business  strategy,  the  Company  has  historically  targeted a
nationwide  customer base. The Company seeks to maintain an overall diversity of
customers,  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 recently refocused its sales and
marketing  efforts  to target  industries  and  geographic  territories  that it
believes  present the  greatest  opportunities  for  profitable  growth,  and to
emphasize marketing through third-party alliances.

The Company's  average  full-service PEO customer had approximately 12 employees
as of December 31, 1999  (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 customer added through  internally-generated
sales in 1999 was 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.

                                       3
<PAGE>
The Company  generally  has benefited  from a high level of customer  retention,
resulting  in a  significant  recurring  revenue  stream.  One  common  industry
standard for measuring attrition is computed by dividing the number of customers
lost during the period by the sum of the number of customers at the beginning of
the  period  plus the number of  customers  added  during  the period  (Customer
Attrition Rate).  Based on this standard,  the Company's Customer Attrition Rate
was approximately 19%, 17% and 25%,  respectively,  for the years ended December
31, 1999, 1998, and 1997. The Company's  Customer Attrition Rate is attributable
to a variety of factors,  including (i)  termination by the Company  because the
customer did not make timely  payments or failed to meet the Company's  customer
risk profile,  (ii) customer  nonrenewal  due to repricing,  or service or price
dissatisfaction  and (iii) customer  business  failure,  downsizing,  or sale or
acquisition of the customer. The Company experienced increased attrition in late
1998 and early 1999 following the closure of certain field offices in connection
with a restructuring  plan. The Company also experienced  increased attrition in
1999,  particularly in its core PEO services.  While a portion of this attrition
resulted from the Company's  proactive  elimination of unprofitable or high-risk
customers,  the  Company  also  experienced  attrition  based  on  violation  of
noncompetition   agreements  by  former  salespersons  and  other  factors.  The
Company's  2000  operating  plan includes  continuing  improvements  in customer
service functions to reduce attrition,  and the Company is aggressively  seeking
to enforce its noncompetition agreements.

The general division of responsibilities between the Company and its customer as
co-employers under the Company's  standard forms of customer  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 CUSTOMER:

*    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

                                       4
<PAGE>
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,  certain  states  require the Company to
retain certain  additional control rights over worksite employees as compared to
the Company's standard arrangements.

The  Company's  contracts  with  its  customers  historically  were  subject  to
cancellation by either party upon 30 days written notice,  and could be canceled
more quickly by the Company  under certain  circumstances  such as nonpayment of
fees by the client. In 1999, the Company began entering into multi-year  service
agreements  with new customers,  subject to earlier  termination in the event of
certain  breaches.  The fee paid by the customer 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 customer  based on factors  including  market  conditions,
customer needs and services required,  the customer's workers'  compensation and
benefit plan experience and the administrative  resources required.  The service
fee  generally  is  expressed  as a fixed  percentage  of the  customer's  gross
salaries and wages.

The Company also provides  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  customers 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).

SERVICES AND PRODUCTS

The  Company   provides  its  customers   with  a   comprehensive   offering  of
employment-related services and products. The Company's flexible approach allows
its customers 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 customer  in advance of each  payroll  date and
reserves the right to terminate  its  agreement  with the customer 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."

                                       5
<PAGE>
HUMAN RESOURCES ADMINISTRATION

The   Company's    comprehensive    human   resources    services   reduce   the
employment-related  administrative  burdens  faced  by its  customers.  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
customers  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  customers  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 customers a fully-insured, first-dollar coverage workers'
compensation   insurance   program.   The  Company's  risk   management/workers'
compensation  program  provides  its  customers  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
"Medical  Programs"  below.  In addition,  the Company  offers  pre-tax  premium
conversion  and health care and  dependent  care spending  plans,  and qualified
retirement  plans,  such as  401(k)  plans,  in  which  worksite  employees  may
participate,  and assists the  customer 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.

                                       6
<PAGE>
The Company recently  announced a preliminary  agreement with American  Heritage
Life ("AHL"),  a member of the Allstate Group, under which the parties will form
a strategic  alliance  for the  marketing  of AHL's  comprehensive  portfolio of
voluntary  health  and  life  insurance   products  to  the  Company's  worksite
employees.  The parties are in the process of negotiating a definitive agreement
and currently expect to commence  marketing efforts during the second quarter of
2000.

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  customer.  The Company  believes that its
business-to-business  PEO  enterprise  solution can best be sold by  experienced
sales  representatives  at  individual,  face-to-face  meetings  with  potential
clients.  Commencing  in 1999,  the  Company is  implementing  several new sales
channel distribution methods.

STRATEGIC ALLIANCE PARTNERS

The Company has aggressively  worked to establish  long-term  strategic alliance
partners with numerous  organizations around the United States through which the
Company offers its services to the organizations'  members on a preferred basis.
The  Company  has   established   definitive   agreements   with  the  following
organizations:

Cold Stone Creamery                                             10 years

Office Furniture USA                                            10 years

Greater Phoenix Chamber of Commerce                             10 years

Grand Canyon Minority Supplier Development Council               3 years

House Doctors                                                   12 years

New Horizons Computer Learning Centers                    In 6 month pilot phase

Performance Resources                                           10 years

Irvine Chamber of Commerce                                       1 year

The Company has also  performed  endorsed  sales into MAACO  franchise  and Best
Western member  locations,  though the Company has  determined  that it will not
pursue  additional Best Western member  locations in the future due primarily to
the availability of opportunities  providing more significant  profit potential.
The Company will continue to establish strategic alliance partnerships within 11
targeted geographic markets.

TECHNOLOGY SALES DIVISION

The Company has identified  technology companies as favorable candidates for PEO
services due primarily to higher  average  compensation  structures and Internet
capability.  The Company has established sales offices in Boston,  San Francisco
and Phoenix focused on selling into the technology marketplace.

TELESALES

The  Company  has   established   a  telesales   function   with  three  primary
responsibilities:  upselling new Company  products or enhanced  Company products
and services to the Company's  existing  customer base;  identifying the members
within a  strategic  alliance  partner  organization  that are most likely to be
receptive to the Company's PEO  services,  and assisting  with sales of American
Heritage Life  products by  coordinating  and  scheduling  meetings  between AHL
agents and the Company's customers. The Company also is expanding its Website to
support the sale of certain of its value-added products via the Internet.

                                       7
<PAGE>
SALES MANAGEMENT AND PERSONNEL

The Company's  senior sales  management and sales  administration  functions are
located at its Phoenix  headquarters.  Headquarters  provides  ongoing sales and
customer   support   training   and  sales   support   to  all   Company   sales
representatives,  assists in new prospect  proposals,  performs  detailed  price
analysis on each prospective  customer,  and manages business  submissions.  The
Company's  field sales  operations  are  coordinated  by regional sales managers
located  in  various   cities,   who  manage  a  network  of   full-time   sales
representatives  and part-time sales agents. At December 31, 1999, the Company's
sales force included 45 sales representatives.  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
with a competitive base salary and a gross profit focused commissions  schedule,
subject to certain  vesting and  production  requirements.  Sales  managers also
receive a competitive base salary and an override  commission on sales generated
by sales representatives that report to them.

MARKETING

The Company's marketing department provides comprehensive  marketing support for
all  of  the  Company's  operations.  This  support  focuses  on  communications
strategies and materials,  market research and analysis, product development and
marketing  alliances  for  value  added-products  and  services.  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

As discussed above, the Company recently announced a preliminary  agreement with
AHL under which the parties will form a strategic  alliance for the marketing of
AHL's comprehensive portfolio of voluntary health and life insurance products to
the Company's worksite employees.  The parties are in the process of negotiating
a definitive agreement and currently expect to commence marketing efforts during
the  second  quarter of 2000.  The  Company  intends  to enter  into  additional
marketing  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.

COMPETITION

The market for many of the services provided by the Company is highly fragmented
with over 2,200 PEOs  currently  competing in the United  States.  Many of these
PEOs have limited  regional or state  specific  operations  and  relatively  few
worksite employees, though a few, including Staff Leasing, Inc. and Administaff,
Inc.,  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,  quality of benefits,  and  performance  of the 401(k)
programs are important ancillary competitive considerations.

The  Company  believes  that  currently  its  greatest  competition  is with the
traditional model in which clients provide employment-related  services in-house
together with the use of independent insurance brokers.  Further,  certain large
insurance  companies have become more  aggressive in workers'  compensation  and
have reduced pricing in order to obtain market share, 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

                                       8
<PAGE>
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 implemented
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.  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.

In 1999, the Company  introduced ESI Direct,  the customer access portion of the
newly  redesigned  Web site.  ESI Direct  allows  customers  secure  access to a
variety of information via dynamic Web interface,  and includes a remote payroll
entry  application  and other service tools  designed to maximize  efficiency to
better serve customers.

See also "Item 7-- Management's  Discussion and Analysis--  Outlook:  Issues and
Risks, Year 2000 Compliance" herein.

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.

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  2000  guaranteed  cost coverage has been
obtained  through  American  International  Group Risk Management  (AIGRM).  The
Company's  1999  guaranteed  cost  coverage was obtained  through TIG  Insurance
Company, with ManagedComp acting as third party administrator and general agent.

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

                                       9
<PAGE>
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.  See "Item 7 -  Management's
Discussion  and  Analysis - Outlook:  Issues  and Risks --  Increases  in Health
Insurance  Premiums,   Unemployment  Taxes  and  Workers'   Compensation  Rates;
Availability of Programs."

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, 1999, approximately
798  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  premium  rates  reflecting
competitive  price  increases by geographic  regions with all of its third party
health care insurers that are generally  effective through December 31, 2000, at
which time renewal provisions would apply.

EMPLOYEES

At December 31, 1999, the Company employed 316 full-time  corporate employees in
addition to the worksite employees. The Company considers its employee relations
to be very good.

INDUSTRY REGULATION

FEDERAL REGULATION

Employers in general are  regulated by numerous  federal laws relating to labor,
tax and  employment  matters.  Generally,  these laws prohibit  race,  age, sex,
disability  and religious  discrimination,  mandate  safety  regulations  in the
workplace,  set minimum wage rates and regulate employee benefits.  Because many
of  these  laws  were  enacted  prior  to  the  development  of  non-traditional
employment  relationships,  such  as PEO  services,  many of  these  laws do not
specifically  address the obligations and  responsibilities  of  non-traditional
employers.  As a result,  interpretive  issues  concerning the definition of the
term "employer" in various federal laws have arisen pertaining to the employment

                                       10
<PAGE>
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
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.

                                       11
<PAGE>
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.

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.

                                       12
<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,  various 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.

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 at its  headquarters  facilities
and in certain remote locations during 1999 in connection with expense reduction
initiatives.

                                       13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

The Company has been named as a defendant  in an action filed by James E. Gorman
in Arizona  Superior  Court in August 1999 alleging  breach of contract,  fraud,
defamation and related  matters in connection with the termination of Mr. Gorman
as the Company's  president and chief  executive  officer in February  1999. The
complaint seeks contractual  damages of approximately  $588,000 plus unspecified
tort  damages.  The  Company  is  contesting  the  claim  vigorously.  The Court
dismissed the plaintiff's principal tort claims in November 1999.

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 County, 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 $500,000 plus attorneys
fees and costs and unspecified  punitive damages.  The Company is contesting the
claim vigorously.

Stirling Cooke Insurance  Services Inc. filed suit in the United States District
Court for the Middle  District of Florida  against the Company in December  1999
alleging  breach of contract and failure to pay insurance  premiums in violation
of Florida law.  Stirling  Cooke, in its capacity as managing and general agent,
placed  workers  compensation  insurance  for the Company  with three  insurance
companies  for calendar year 1998.  Stirling  Cooke alleges that ESI owes unpaid
premium in the amount of $2,797,905  to those  companies.  The Company  believes
that Stirling  Cooke's suit is without merit based on an explicit  Memorandum of
Understanding between the parties that defined the applicable rates for the 1998
workers' compensation program and intends to defend the suit vigorously.

The State of Ohio has issued an assessment  of $5.2 million  (plus  interest and
penalty) relating to sales taxes potentially  applicable to certain types of PEO
services  provided  by the  Company.  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  State of Ohio  further  issued a sales  tax  assessment  in the  amount  of
approximately  $16.5  million  (including  interest and  penalties) in July 1999
against  HDVT,  Inc.  (the seller of certain  assets  acquired by the Company in
February  1997) with respect to the  operations  of HDVT prior to the  Company's
acquisition  of  certain  assets  of HDVT  (then  known as  Employers  Trust) in
February 1997. The State of Ohio  concurrently  issued an assessment in the same
amount  against the Company as  successor  to HDVT.  The Company  believes  that
meritorious defenses are available to the assessment.  In addition, $6.0 million
of cash and  675,000  shares of the  Company's  Common  Stock are being  held in
escrow for payment of amounts, if any, ultimately  determined to be due pursuant
to such  assessment.  If the Company is held to have liability  pursuant to such
assessment,  the escrowed  assets prove  insufficient to satisfy such liability,
and HDVT is unable to pay any such shortfall,  the Company's  maximum  liability
with respect to the assessment is approximately $3.2 million.

Four individuals brought suit in Steuben County Superior Court, Angola,  Indiana
in 1998 alleging  that they were  employees of the Company and that they had not
been paid certain wages in connection  with the bankruptcy of a former  customer
with  which the  Company  had  commenced  a  limited  service  arrangement.  The
individuals purport to represent a class of employees.  Plaintiffs seek from the
Company unpaid wages, vacation and other benefits owed by the former customer in
a total  amount  for the  purported  class in  excess of  $600,000,  potentially
subject to trebling under applicable wage statutes. The Company does not believe
that it has any  liability to the  plaintiffs  and has  successfully  obtained a
dismissal  of the suit.  Plaintiffs  have  commenced  an appeal  process  in the
Indiana Court of Appeals.

The Company  initiated an  arbitration  proceeding  and related suit in November
1999 in the United States  District Court for the District of Arizona seeking to
enjoin  Edward L. Cain,  Jr., a former  executive  officer  and  director of the
Company,  from violating a noncompetition  agreement.  The Company's action also
seeks collection of a promissory note from Mr. Cain in the amount of $350,000. A
company affiliated with Mr. Cain, MyBenefitSource.com, has filed suit in Georgia
state court seeking to enjoin the Company's actions. Mr. Cain has counterclaimed
for  unspecified  damages  based on various  tort  theories,  for a  declaratory
judgment  voiding the  noncompetition  agreement,  and for  cancellation  of the
promissory note. The Company believes that the  counterclaims  are without merit
and intends to defend them 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."

                                       14
<PAGE>
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 1999.

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.     48      Chief Executive Officer,
                                    President and Director            1998

Bill C. Hollis            53      Senior Vice President,
                                    Operations                        1999

John V. Prince            45      Senior Vice President,
                                    CFO and Treasurer                 1997

Lee E. Martin             38      Senior Vice President,
                                    Sales and Marketing               1999

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 -  Operations  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.

Lee E. Martin  joined the  Company as Senior Vice  President - Sales in May 1999
and was named Senior Vice  President - Sales and  Marketing in August 1999.  Mr.
Martin previously served with HNC Software,  Inc. as Vice President - Sales from
1993 through 1997 and Vice President - Worldwide  Strategic  Relationships  from
1998 until joining the Company.

                                       15
<PAGE>
                                     PART II

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

The Company's  Common Stock is traded on the OTC Bulletin Board under the symbol
"ESOL"  effective  March 22, 2000.  The Company's  Common Stock  previously  was
traded on the Nasdaq SmallCap Market from November 1998 to March 2000 and 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 20, 2000, the Company had 246 shareholders of record.

================================================================================

      Quarter Ended                                 High            Low
      -------------                                 -----          -----
      December 31, 1999                             $1.13          $ .63
      September 30, 1999                            $1.38          $ .78
      June 30, 1999                                 $1.41          $ .81
      March 31, 1999                                $2.53          $ .81
      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

================================================================================

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"),
as well as the Loan Agreement entered into in October 1999, limit the payment of
dividends by the Company.  See Item 7 - "Management's  Discussion and Analysis -
Liquidity and Capital  Resources." 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 June 1996  acquisition  of TEAM  Services,  the Company agreed to
issue shares of its Common Stock in an amount to be  determined  based upon TEAM
earnings during the year ended June 30, 1999.  Pursuant to such  agreement,  the
Company  issued  2,157,753  shares of its  Common  Stock to the  sellers of TEAM
Services on December 28, 1999.

As part of the September 1997  acquisition of Phoenix Capital  Management,  Inc.
and several  related PEO companies  designated  as "ERC," the Company  agreed to
issue  shares of its Common Stock in an amount to be  determined  based upon ERC
earnings after the acquisition. The number of shares issuable has been agreed by
the parties to be  approximately  1,150,000  shares,  though the Company has the
right to withhold such shares as security for  indebtedness  owed to the Company
by the  seller  of the  ERC  companies.  The  Company  currently  is  conducting
negotiations with the seller concerning these matters.

In  connection  with  the  December  1998  acquisition  of  Fidelity   Resources
Corporation,  ("Fidelity"),  the Company issued an aggregate of 2,206,258 shares
of its Common Stock in February  2000 as an  additional  purchase  price payment
based on a formula provided in the acquisition agreement.

Under an  agreement  dated in 1998,  pursuant to which  securities  class action
litigation  was  settled,  the Company is required  to issue  851,149  shares of
Common  Stock to members of the  plaintiff  class  upon  receipt of  appropriate
instructions from plaintiffs' counsel.

                                       16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with the Company's  Consolidated Financial Statements and the Notes thereto, and
"Item 7 --  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations"  appearing  elsewhere herein.  The selected  consolidated
financial data presented  below as of December 31, 1999,  1998,  1997,  1996 and
1995 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.

<TABLE>
<CAPTION>
=================================================================================================
(In thousands of dollars)                                 Year Ended December 31,
                                     -----------------------------------------------------------
                                       1999         1998         1997         1996        1995
                                     --------     --------     --------     --------     -------
<S>                                  <C>           <C>           <C>           <C>           <C>
Consolidated Statements of
Operations Data:
Revenues                             $939,835     $968,909     $933,817     $439,016     $164,455
Cost of revenues                      902,208      934,684      903,255      400,862      150,675
Gross profit                           37,627       34,225       30,562       38,154       13,780
Selling, general and
  administrative expenses              36,228       49,293       33,411       17,310        7,183
Depreciation & amortization             7,492        6,145        4,617        2,073          426
Goodwill impairment                    42,205           --           --           --           --
Income (loss) from operations         (48,298)     (21,213)      (7,466)      18,771        6,171
Non-operating income (expense), net    (7,619)      (6,849)      (3,849)        (364)         510
Income (loss) before provision
  for taxes                           (55,917)     (28,062)     (11,315)      18,407        6,681
Income tax provision (benefit)            145         (111)      (2,819)       6,381        2,846
Net income (loss)                     (56,062)     (27,951)      (8,496)      12,026        3,835


(In thousands of dollars)                                 Year Ended December 31,
except per share data)             -----------------------------------------------------------
                                       1999         1998         1997         1996        1995
                                     --------     --------     --------     --------     -------
Consolidated Balance Sheet Data
Working capital                      $ 15,410     $ 31,665     $ 58,329     $ 30,449     $  8,589
Total assets                          122,327      175,105      207,217      125,969       36,840
Note payable                           10,000           --           --           --           --
Long-term debt                         85,000       85,000       85,000           --           --
Stockholders' (deficit) equity        (28,726)      15,716       42,389       46,507       19,943

Common Stock Data
  Earnings (loss) per share
  Basic                                 (1.55)        (.88)        (.27)         .40          .17
  Diluted                               (1.55)        (.88)        (.27)         .37          .16

Weighted average common and
 equivalent shares outstanding
  Basic                                36,214       31,817       31,193       30,224       22,392
  Diluted                              36,214       31,817       31,193       32,168       23,507

At period end:
  Worksite employees                   34,900       40,800       45,200       30,000       11,000
  Client companies                      1,900        2,000        1,700        1,200          920
  States with worksite employees           46           47           47           46           40

=================================================================================================
</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 (as related to costs
associated with certain discontinued  stand-alone program cases and Ohio claims,

                                       18
<PAGE>
as more  fully  described  below),  is based  upon  estimates  of  reported  and
unreported  claims and the related claims and claims  settlement  expenses in an
amount equal to the retained  portion of the expected total incurred claim.  The
Company's  accrued  workers'   compensation  reserves  are  primarily  based  on
industry-wide data, and to a lesser extent, the Company's 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 includes 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
expired  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.  Previous
acquisitions  have  generally  resulted in  considerable  goodwill  because PEOs
generally require few fixed assets to conduct their operations.

                                       19
<PAGE>
ACQUISITIONS

Period-to-period  comparisons have been substantially  affected by the Company's
previous strategy of growth through acquisitions.  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.  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.

Company PEO  acquisitions  which have affected  recent periods have included the
following:  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 full PEO services,  TEAM
Services services, and driver leasing services 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.  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.

                                       20
<PAGE>
RESULTS OF  OPERATIONS--  YEAR ENDED  DECEMBER  31, 1999  COMPARED TO YEAR ENDED
DECEMBER 31, 1998

================================================================================
                                                          Percent
(In thousands of dollars)                    1999         Change         1998
-------------------------                    ----         ------         ----
Revenues                                  $ 939,835         (3)%      $ 968,909
Cost of revenues                            902,208         (3)         934,684
Gross profit                                 37,627         10           34,225
Selling, general and administrative          36,228        (27)          49,293
Depreciation and amortization                 7,492         22            6,145
Goodwill impairment                          42,205         --               --
Interest income                               1,196        (37)           1,885
Interest expense                              8,854          4            8,541
Net loss                                    (56,062)       101          (27,951)
================================================================================

REVENUES

Revenues  decreased from $968.9 million for the year ended December 31, 1998, to
$939.8  million  for  the  year  ended  December  31,  1999,  a 3%  decrease.  A
contributing  factor to the decline in 1999 revenues was ESI's termination of US
Xpress as a major  customer that had  approximately  6,200  worksite  employees.
While an unprofitable relationship for ESI, US Xpress contributed $121.3 million
to 1998 revenues. Excluding this revenue, 1999 revenues reflected an increase of
$92.2 million,  or 10.9% over adjusted 1998 revenues.  Core PEO revenues for the
1999 calendar year were $561.1 million, a 1% decline from 1998 core PEO revenues
of  $569.4  million.  Growth  from  core PEO  internal  sales  was  slower  than
anticipated  as the Company  began the  initiative  of  transitioning  its sales
efforts away from the transportation services industry and other less profitable
blue  collar  customers  within  the core PEO  business  segment  towards a more
profitable high tech and other professional white collar customer profile.  Also
contributing  to this decline was the  Company's  implementation  of  re-pricing
initiatives  which included the termination of certain  unprofitable  customers,
other normal year-end  customer  attrition,  (which was higher than anticipated)
and attrition  resulting  from breaches of  noncompetition  agreements by former
salespersons.  The number of worksite  employees  decreased  from  approximately
40,800 at December 31, 1998, to  approximately  34,900 at December 31, 1999. See
"Outlook:  Issues  and  Risks  -  Implementation  of  Operating  Plan;  Customer
Attrition."

Revenues from Logistics  Personnel Corp., which provides  specialized leasing of
all types of  distribution  personnel,  increased from $102.2 million in 1998 to
$109.8 million for 1999, an increase of 7%.  Revenues from TEAM Services,  which
provides specialized leasing services to the entertainment  industry,  increased
from $174.1  million in 1998 to $269.0 million for 1999, an increase of 55%. The
increase at TEAM Services was primarily  attributable  to growth  experienced in
the music touring business, which benefited in part from touring bands and other
concert  activities  associated with year 2000 events.  The Company continues to
engage  in  discussions  with  prospective   purchasers  of  its  TEAM  Services
subsidiary,  though  there can be no  assurance  that a sale can be completed on
satisfactory terms.

COST OF REVENUES

Cost of revenues  decreased 3% from $934.7  million for the year ended  December
31, 1998, to $902.2 million in the year ended  December 31, 1999.  This decrease
was primarily  attributable to the recognition of a $1.7 million refund received
on prior year workers'  compensation  premiums paid to a state funded  insurance
program,  the reversal of $1.7 million of reserves  previously  established  for
expected union health and welfare pension fund withdrawals  which did not occur,
the  termination  of US Xpress,  and the reversal of $1.8 million in actuarially
determined  excess  workers'  compensation  reserves.   Cost  of  revenues  also
benefited from Company-initiated  terminations of unprofitable customers as well
as customers which did not meet the Company's minimum pricing criteria.

                                       21
<PAGE>
Consistent with Company policy, the Company's workers'  compensation reserves at
December  31, 1999 (as related to costs  associated  with  certain  discontinued
stand-alone  program  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.

GROSS PROFIT

The Company's gross profit margin increased from 3.5% in the year ended December
31, 1998 to 4.0% for the year ended  December  31, 1999.  This  increase was due
primarily to lower workers'  compensation  and health and welfare  expenses,  as
more fully described above, and the impact of repricing existing clients to meet
minimum pricing standards.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses of $36.2 million for the year ended
December  31, 1999  decreased by 27%, or $13.1  million  from the $49.3  million
incurred  in  1998.   This   decrease  was  due   primarily  to  the   Company's
implementation  of ongoing  expense  reduction  initiatives,  and the absence of
certain  significant  charges that were taken in 1998,  as more fully  described
below. As a percent of revenues,  selling,  general and administrative  expenses
decreased  from 5.1% to 3.9% during the years ended  December 31, 1998 and 1999,
respectively.  Included in 1999 selling,  general and administrative expenses is
$3.8 million in bad debt expense compared to $5.0 million in 1998.

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 $7.5 million for the year ended
December 31, 1999 compared to $6.1 million for the year ended December 31, 1998.
The  increase  was due  primarily  to goodwill  amortization  resulting  from an
acquisition  in the fourth  quarter of 1998,  additional  purchase price paid on
ETIC,  and  depreciation  of  communication  and computer  systems  enhancements
recognized  throughout  1999.  Goodwill  amortization of the fourth quarter 1998
acquisition  was recognized  from the date of  acquisition.  Amortization of the
additional purchase price paid on ETIC was recognized prospectively.

GOODWILL IMPAIRMENT

The Company  performs  quarterly  evaluations  of its goodwill by estimating the
future  cash flows  expected  to result from  customer  relationships  and other
assets acquired in previous  acquisitions.  Factors considered in estimating the
expected  cash flows  include  whether  there has been an adverse  change in the
business climate such as unusually high customer attrition, an adverse action or
assessment by a regulator,  a change in legal factors,  or a combination of such
factors that may have  resulted in an  accumulation  of costs  significantly  in
excess of what  ultimately may be recoverable  through the realization of future
cash flows.

The Company  experienced  several  different adverse  developments  during 1999,
particularly during the fourth quarter, that resulted in impairment. The Company
was not able to offset  the  effects  of client  attrition  experienced  in 1999
primarily caused by factors including customer concern regarding ESI's financial
condition,  the effect on 1999 revenue  following  the closure of certain  field
offices in connection  with a restructuring  plan, and the Company's  failure to
add adequate new revenue from  customers  meeting  ESI's  minimum  profitability
requirements,  particularly  in its core PEO  services.  While a portion of this
attrition resulted from the Company's  proactive  elimination of unprofitable or
high-risk  customers,  the Company also  experienced  unusually  high  attrition
during the  fourth  quarter of 1999  based on the  violation  of  noncompetition
agreements by former salespersons and other factors.

                                       22
<PAGE>
After  performing  the fourth  quarter 1999 cash flow analysis it was determined
that  the  unamortized  goodwill  recorded  on  several  acquisitions   exceeded
management's  estimate of the amount expected to be realized,  and an impairment
write-down  of $42.2  million was recorded to adjust  remaining  goodwill to the
estimated realizable values.

INTEREST

Interest income decreased from $1.9 million for the year ended December 31, 1998
to $1.2  million for the year ended  December  31,  1999,  primarily  due to the
reduction of cash held and invested at the  corporate  level.  Interest  expense
increased from $8.5 million for the year ended December 31, 1998 to $8.9 million
for the year ended December 31, 1999,  primarily due to interest  accrued on the
Company's  new $10 million loan and security  agreement  entered into on October
26, 1999. 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, 1999 was a provision of
 .3% as compared to a benefit of .4% for the year ended  December 31, 1998. As of
December  31, 1999,  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.

                                       23
<PAGE>
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.  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.

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 were 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.

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) were 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.

                                       24
<PAGE>
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  included
significant  charges  that  were not  expected  to recur in future  periods,  as
described below.  The most significant  charge was $6.2 million in legal expense
to settle the securities class action litigation.  In addition,  during 1998 the
Company wrote down approximately $1.5 million in receivables relating to general
customer trade  receivables  and  collection  difficulties  associated  with the
discontinuation  of the Company's  stand-alone  workers'  compensation  program.
Additionally,   certain  receivables  primarily  related  to  former  sales  and
marketing  operations  in  Atlanta  totaling  approximately  $1.0  million  were
reserved for in the second quarter of 1998. The  receivables  were  non-customer
related and included 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
in the third quarter of 1998 related to the  implementation  of the  operational
initiatives.  These and other initiatives 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
maintained an active sales and customer service presence to meet the local needs
of customers and to support internal growth.

                                       25
<PAGE>
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  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.

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 1999 was from investing activities.

Cash used by operating  activities was $6.1 million during 1999 compared to cash
used by operating  activities of $15.7 million during 1998. 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.  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 net  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. The Company's suit was dismissed in 1999
on the basis that the  Company  lacked  standing to pursue the  collection.  The
Company  has taken steps that it believes  are  sufficient  to restore its suit.
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 $3.1 million in 1999, compared to $1.2
million in 1998. Included in 1998 investing  activities is $10.0 million of cash
derived from  maturities of investments in marketable  securities that were used
to fund the  additional  payment made during 1999 to HDVT,  Inc. 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  parties  entered  into a
settlement  agreement  in June  1999  where ESI paid  $7.5  million  in cash and
675,000 shares of the Company's Common Stock.

For 1999, 1998 and 1997, capital  expenditures were $1.0 million,  $2.7 million,
and $2.5 million, respectively. Capital expenditures in 1999 consisted primarily
of capitalized  development  costs and computer  equipment to implement new data
warehouse  storage  capabilities and to enhance the Company's ability to support

                                       26
<PAGE>
the  transition  to "ESI Direct" and other  service  tools  designed to maximize
efficiency  and better  serve  customers.  During 2000,  the Company  expects to
continue to invest in  additional  computer  and  technological  equipment  on a
limited basis.

Cash used in  financing  activities  was $2.3 million in 1999,  consisting  of a
reduction in bank  overdrafts  of $11.3  million and a $1.1  million  payment of
deferred loan costs on a new short-term $20 million credit facility  obtained in
October  1999.  The new facility  also included a $10 million term loan, as more
fully described below.  Cash provided in financing  activities was $13.7 million
and $36.9 million for 1998 and 1997, respectively.

At  December  31,  1999 and  December  31,  1998,  the Company had cash and cash
equivalents of $34.0 million and $39.3 million, respectively.

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, 1999 and December 31, 1998,  the Company had working  capital of
$15.4  million and $31.7  million,  respectively.  See also "FUTURE  CAPITAL AND
LIQUIDITY   NEEDS;   UNCERTAINTY  OF  ADDITIONAL   FINANCING"  AND  "SUBSTANTIAL
LEVERAGE",  NEGOTIATIONS  WITH HOLDERS OF  INDEBTEDNESS;  POTENTIAL  SUBSTANTIAL
DILUTION OF COMMON STOCKHOLDERS."

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 was 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 is  amortizing  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,
although the note payable described below was a permitted borrowing .

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.

NOTE PAYABLE

On October 26, 1999 the Company entered into a loan and security  agreement (the
"Loan Agreement") with Foothill Capital  Corporation and Ableco Finance LLC (the
"Lenders") providing for a term loan of $10 million at an interest rate of 13.5%
and a revolving loan (based on eligible accounts receivable) to a maximum of $10
million  (including  letters of credit drawn  thereunder) at an interest rate of
prime plus 2%. The Company received the proceeds of the term loan on October 29,
1999.  The  Company  does not  currently  intend to draw on the  revolving  loan
facility  except as security for various  letters of credit.  The Company paid a
closing fee of $800,000 and will pay a commitment  fee of 50 basis points on the
unused portion of the revolving  line, as well as letter of credit fees of 2.0%.
If the term loan then remains  outstanding,  the interest rate thereon increases
by 25 basis points per month beginning on July 29, 2000 and a fee of $100,000 is
payable on July 29, 2000 and on October 29, 2000. The Loan Agreement  matures on
January 1, 2001. The principal loan covenants are as follows: tangible net worth
of  ($72,390,000)  at  December  31,  1999,  ($71,320,000)  at March  31,  2000,
($70,220,000)  at June  30,  2000,  ($68,270,000)  at  September  30,  2000  and
($66,090,000)  at December 31, 2000;  and EBITDA (as defined) of  $1,230,000  at
December 31, 1999,  $2,560,000  at March 31, 2000,  $2,780,000 at June 30, 2000,
$3,410,000 at September 30, 2000 and  $3,770,000 at December 31, 2000.  The Loan
Agreement also includes  covenants  relating to capital  expenditure  limits and
worksite  employee  headcount  and average gross margin  requirements.  The Loan
Agreement further contains, among other limitations,  restrictions on mergers or
the sale of significant  assets or use of the proceeds thereof,  investments and
business acquisitions,  and additional indebtedness or liens. The Loan Agreement
includes certain other customary covenants,  and is secured by substantially all

                                       27
<PAGE>
of the  Company's  assets  (including  pledges  of the  stock  of the  Company's
subsidiaries and control agreements over substantially all of the Company's cash
accounts). The Company anticipates that it will not be in compliance with one or
more of the  covenants  set forth above as of March 31,  2000 and has  therefore
classified the debt obligation as a current liability.

"GOING CONCERN" MATTERS; MANAGEMENT'S PLANS

The  accompanying  consolidated  financial  statements  of the Company have been
presented  on the  basis  that it is a going  concern,  which  contemplates  the
realization of assets and the  satisfaction  of liabilities in the normal course
of business.  As more fully  described  above in this Item, the liquidity of the
Company has been adversely  affected by recurring  operating  losses  (including
significant  payments  in recent  years in  settlement  of  litigation)  and the
incurrence of  substantial  indebtedness.  At December 31, 1999, the Company had
outstanding  indebtedness  of $10.0  million  under its secured  loan  facility,
outstanding senior  indebtedness of $85.0 million and a deficit in stockholders'
equity of approximately $28.7 million,  respectively.  The Company believes that
it  currently is leveraged  to a  significantly  greater  extent than any of its
principal  competitors.  In  addition,  due to the  Company's  inability to meet
projected revenue growth because of the market's continued  negative  perception
of the  Company's  financial  stability,  which will have an  adverse  effect on
earnings before interest,  taxes,  depreciation and amortization  (EBITDA),  the
Company  anticipates  that it will not be in compliance  with one or more of the
covenants set forth in its secured loan facility as of March 31, 2000.  Based on
the factors discussed in this paragraph, the report of the Company's independent
public  accountants  includes an explanatory  paragraph  expressing  substantial
doubt regarding the Company's ability to continue as a going concern.

The  Company is  pursuing  initiatives  intended  to improve  its cash flows and
liquidity  position.  The Company has begun negotiations with the holders of the
unsecured senior  indebtedness  aimed at reducing or eliminating the outstanding
principal amount of such indebtedness (and accrued interest) in exchange for the
issuance of shares of its equity  securities.  The Company  further will seek to
negotiate a waiver of any  noncompliance  under its secured  loan  facility.  In
addition,  the Company is seeking to accelerate  revenue growth through a recent
refocus of its sales and marketing  efforts to target  industries and geographic
territories that it believes present the greatest  opportunities  for profitable
growth, and to emphasize  marketing through third-party  alliances.  The Company
further  is  implementing  expense  reductions  to offset  the effect of delayed
revenue growth. See also in this Item the discussion under the headings "Issues:
Outlook  and  Risks  -  `SUBSTANTIAL  LEVERAGE;  NEGOTIATIONS  WITH  HOLDERS  OF
INDEBTEDNESS;  POTENTIAL SUBSTANTIAL DILUTION OF COMMON  STOCKHOLDERS;'  `FUTURE
CAPITAL AND LIQUIDITY  NEEDS;  UNCERTAINTY  OF ADDITIONAL  FINANCING;  POTENTIAL
NONCOMPLIANCE   WITH  LOAN   AGREEMENT   ABILITY   TO   SERVICE   INDEBTEDNESS;'
`CONSEQUENCES  OF  SUBSTANTIAL  LEVERAGE;'  `IMPLEMENTATION  OF OPERATING  PLAN;
CUSTOMER ATTRITION.'"

Assuming the success of the initiatives discussed in the preceding paragraph, of
which there can be no assurance,  the Company  believes that sufficient  capital
resources  will  be  generated  from  operations,   equity   investment   and/or
refinancing of outstanding  debt to provide  necessary  working capital for 2000
and  operate  as  a  going  concern.  Accordingly,  the  consolidated  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of recorded asset amounts or the amounts and  classification  of
liabilities  or any other  adjustments  that might result  should the Company be
unable to continue as a going  concern.  The Company's  continuation  as a going
concern is dependent upon its ability to generate  sufficient  cash flow to meet
its  obligations  on a timely  basis,  to comply with the terms of its financing
agreements,  to obtain  additional  financing or refinancing as may be required,
and ultimately to attain profitability.

OUTLOOK:  ISSUES AND RISKS

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

SUBSTANTIAL  LEVERAGE;  NEGOTIATIONS  WITH  HOLDERS OF  INDEBTEDNESS;  POTENTIAL
SUBSTANTIAL DILUTION OF COMMON STOCKHOLDERS

The Company has  incurred  significant  debt  primarily in  connection  with the
October 1997 issuance of its $85 million 10% Senior Notes due 2004 (the "Notes")
and the  October  1999 Loan  Agreement  (described  in  "Liquidity  and  Capital
Resources,"   above).   At  December  31,  1999,  the  Company  had  outstanding
indebtedness  of $10.0  million  under the Loan  Agreement,  outstanding  senior
indebtedness  of  $85.0  million  and  a  deficit  in  stockholders'  equity  of
approximately  $28.7  million,   respectively.  The  Company  believes  that  it
currently  is  leveraged  to a  significantly  greater  extent  than  any of its
principal competitors.

                                       28
<PAGE>
In an effort to improve cash flows and reduce the  Company's  indebtedness,  the
Company   has  begun   negotiations   with  the   holders   of  the  Notes  (the
"Noteholders"). The Company is seeking to negotiate the reduction or elimination
of the outstanding principal amount of the Notes and accrued interest thereon in
exchange for the issuance of shares of its equity securities.  If the Company is
able to reach  agreement  with the  Noteholders  upon  such a  transaction,  the
Company   anticipates  that  the  percentage   ownership  of  the  then  current
shareholders  of  the  Company  will  be  materially  reduced,  and  the  equity
securities issued to participating Noteholders also may have rights, preferences
or privileges  senior to those of the holders of the Company's Common Stock. The
Company is seeking to complete  negotiations  with the Noteholders and currently
intends to submit to  shareholders  for  approval  on or before  July 15, 2000 a
proposal relating to all or a portion of the negotiations.

There  can be no  assurance  whether  or when a  satisfactory  agreement  can be
reached  with  the  Noteholders.   If  the  Company  is  unable  to  complete  a
satisfactory agreement with the Noteholders,  the Company will remain subject to
the current principal and interest  obligations (and other terms and conditions)
associated  with the Notes,  it will not likely be able to retain certain of its
key  employees,  and its  liquidity  position  and  ability to  operate  will be
materially  adversely  affected.  Among  its  obligations  under  the Notes is a
regular semi-annual interest payment of $4.25 million due on April 15, 2000. The
Company  currently is  evaluating  whether it will make such  interest  payment.
Failure to make such interest  payment for thirty (30) days following  April 15,
2000 without the consent of the Noteholders would constitute a default under the
Notes  and,  by virtue of  cross-default  provisions,  the Loan  Agreement.  See
"FUTURE  CAPITAL AND  LIQUIDITY  NEEDS;  UNCERTAINTY  OF  ADDITIONAL  FINANCING;
POTENTIAL NONCOMPLIANCE WITH LOAN AGREEMENT."

FUTURE  CAPITAL  AND  LIQUIDITY  NEEDS;  UNCERTAINTY  OF  ADDITIONAL  FINANCING;
POTENTIAL NONCOMPLIANCE WITH LOAN AGREEMENT

If  a  satisfactory   agreement  with  the   Noteholders  can  be  reached  (see
"Substantial  Leverage;  Negotiations  with Holders of  Indebtedness;  Potential
Substantial Dilution of Common Stockholders," above),  management believes that,
based on its 2000 operating plan and subject to the discussion herein concerning
the Loan  Agreement,  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  remaining  indebtedness.  The  Company  will  need  to  raise
additional  funds  through  public  or  private  debt  or  equity  financing  if
satisfactory  arrangements  cannot be reached with its  principal  lenders,  the
revenue and cash flow elements of its 2000 operating plan are not met,or to deal
with  unanticipated cash  requirements,  such as adverse litigation  outcomes or
material  customer payment  defaults.  For a discussion of risks associated with
the Company's 2000 operating plan, see  "Implementation  of Operating  Plan." If
additional  funds are raised  through  the  issuance of equity  securities,  the
percentage  ownership  of the then current  shareholders  of the Company will be
materially 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
acceptable 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,
financial  condition  and  ability  to  operate  will  be  materially  adversely
affected.

Due to the Company's inability to meet projected revenue growth, which will have
an  adverse  effect  on  earnings  before  interest,   taxes,  depreciation  and
amortization (EBITDA), the Company anticipates that it will not be in compliance
with one or more of the  covenants  set forth in the Loan  Agreement as of March
31,  2000.   While  the  Company  will  seek  to  negotiate  a  waiver  of  such
noncompliance,  there can be no assurance that a waiver or similar agreement can
be reached on satisfactory terms. Unless satisfactory  refinancing  arrangements
can be  made,  of which  there  can be no  assurance,  the  Company's  financial
condition  and ability to operate will be materially  adversely  affected if the
lenders under the Loan Agreement accelerate the Company's  obligations under the
Loan Agreement as a result of such  noncompliance or otherwise.  At December 31,
1999, the Company had  outstanding  indebtedness of $10.0 million under the Loan
Agreement.

                                       29
<PAGE>
ABILITY TO SERVICE INDEBTEDNESS; CONSEQUENCES OF SUBSTANTIAL LEVERAGE

The Company's ability to make scheduled  principal payments in respect of, or to
pay the interest on, or to refinance,  any of its  indebtedness  (including  the
Loan Agreement and any outstanding 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.  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 Loan  Agreement and the
Notes,  or  make  anticipated  capital  expenditures  and  lease  payments.  See
"SUBSTANTIAL  LEVERAGE;  NEGOTIATIONS  WITH HOLDERS OF  INDEBTEDNESS;  POTENTIAL
SUBSTANTIAL  DILUTION OF COMMON  STOCKHOLDERS,"  "FUTURE  CAPITAL AND  LIQUIDITY
NEEDS;  UNCERTAINTY OF ADDITIONAL FINANCING;  POTENTIAL  NONCOMPLIANCE WITH LOAN
AGREEMENT" and "IMPLEMENTATION OF OPERATING PLAN; CUSTOMER ATTRITION."

The  degree  to which the  Company  is  leveraged  has  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, including
repayment of principal,  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  Loan  Agreement  and  Notes  indenture  contain  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,  liquidity  position,
business and financial performance.

IMPLEMENTATION OF OPERATING PLAN; CUSTOMER ATTRITION

The Company's 2000  operating  plan depends in  significant  part upon achieving
revenue  growth  through  internal  sales and  marketing  efforts.  The  Company
recently  refocused its sales and  marketing  efforts to target  industries  and
geographic  territories that it believes present the greatest  opportunities for
profitable growth,  and to emphasize  marketing through  third-party  alliances.
While the Company  believes  that its refocused  sales and  marketing  plan will
result in consistent  and  profitable  revenue  growth,  the Company has not yet
demonstrated successful implementation of the plan and there can be no assurance
that successful implementation can be achieved.

The Company's  2000  operating  plan also depends on a significant  reduction of
customer  attrition.  The Company  experienced  significant  attrition  in 1999,
resulting in a net reduction of  approximately  5,900 worksite  employees during
the  year.  While a  portion  of this  attrition  resulted  from  the  Company's
proactive  elimination of unprofitable or high-risk customers,  the Company also
experienced attrition based on violation of noncompetition  agreements by former
salespersons  and other  factors.  The Company's  2000  operating  plan includes
continuing  improvements  in  customer  service  functions  intended  to  reduce
attrition, and the Company is aggressively seeking to enforce its noncompetition
agreements.  There can be no assurance that customer retention can be materially
improved. The Company anticipates that its efforts to achieve revenue growth and
reduce  attrition will be adversely  affected by the market's  current  negative
perception of the Company's financial stability.

The Company's  agreements with its customers  historically  have been subject to
cancellation upon 30 days written notice of termination by either party,  except
where different  arrangements  are required by applicable law. While the Company
has commenced the use of longer-term  agreements,  the short-term nature of most
current  customer  agreements means that customers could terminate a substantial
portion of the Company's business upon short NOTICE.

DE-LISTING OF COMMON STOCK FROM NASDAQ

Effective  March 22, 2000,  the  Company's  Common  Stock was delisted  from the
Nasdaq SmallCap Market due to noncompliance with the following  requirements for
continued listing of its Common Stock: maintenance of a market capitalization of
at least $35 milllion and a minimum bid price of $1.00 per share. As a result of
the de-listing,  trading in the Company's Common Stock currently is conducted in
the  Over-the-Counter  Bulletin Board of the National  Association of Securities
Dealers,  Inc.  and/or the so-called  "pink  sheets." As a  consequence  of such
de-listing,  investors  may find it more  difficult  to dispose of, or to obtain
accurate quotations as to the price of the Company's Common Stock.

                                       30
<PAGE>
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.

LITIGATION AND OTHER CONTINGENCIES

While  certain  significant  litigation  matters  were  resolved in 1999,  other
significant  matters  remain  unresolved.  For  example,  the  State of Ohio has
assessed  significant  sales and use taxes  against the Company that the Company
believes  have been  assessed  erroneously  and is  contesting  vigorously.  The
Company faces other claims 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.

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   an  increase  in  claims   activity  for   unemployment,   workers'
compensation and/or healthcare, or if other factors result in higher expenses in
these areas, the Company's costs in these areas would increase.  In such a case,
the Company may not be able to pass these higher costs to its  customers  due to
contractual or competitive  factors. By way of example,  the Company experienced
certain cost  increases  for 2000,  not all of which were able to be passed onto
customers.  In addition,  the Company may experience  difficulty  competing with
PEOs with lower 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.

                                       31
<PAGE>
As the  employer  of  record  for  many  client  companies  and  their  worksite
employees,  the Company must  account for and remit  payroll,  unemployment  and
other  employment-related  taxes to numerous federal, state and local tax, labor
and  unemployment  authorities,  and is subject  to  substantial  penalties  for
failure  to do so.  From time to time,  the  Company  has  received  notices  or
challenges  which may adversely  affect its tax rates and payments.  In light of
the IRS Market  Segment  Study Group and the general  uncertainty  in this area,
certain proposed  legislation has been drafted to clarify the employer status of
PEOs in the  context of the Code and  benefit  plans.  However,  there can be no
assurance that such  legislation will be proposed and adopted or in what form it
would be  adopted.  Even if it were  adopted,  the  Company  may need to  change
aspects of its operations or programs to comply with any requirements  which may
ultimately be adopted.  In particular,  the Company may need to retain increased
sole or shared control over worksite  employees if the  legislation is passed in
its current form.

CREDIT RISKS

As the employer of record for its worksite  employees,  the Company generally is
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.

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.

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 customer
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

                                       32
<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 are
not 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 expired 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.

YEAR 2000 COMPLIANCE

Many computer  programs process  transactions  based on using two digits for the
year of the  transaction  rather  than a full four year  digits  (e.g.  "98" for
1998).  Accordingly,  the  Company  prepared  for the  Year  2000  issue  on the
assumption that systems that process Year 2000  transactions  with the year "00"
might  encounter  significant  processing  inaccuracies  or  inoperability.  The
Company's  preparations  included  preparing  an  overall  plan  for  Year  2000
compliance;  assessing the potential  risks  associated with its systems and its
interactions  with third  parties;  testing  hardware and software under various
scenarios;  obtaining  written  information from third parties  concerning their
state of readiness;  and developing  contingency plans.  Through March 15, 2000,
the  Company  has not  experienced  any  adverse  effects  from  the  Year  2000
conversion  and does not currently  expect that it will  experience  any adverse
effects.  In addition,  the Company has not experienced any adverse effects with
any of its third party vendors or  customers.  While the Company does not expect
that it will  experience  any adverse  effects  related to this  issue,  it will
continue to monitor  for Year 2000  specific  issues on an informal  basis using
existing staff.

                                       33
<PAGE>
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,  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.

                                    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  2000  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,  1999.  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.

                                       34
<PAGE>
                                     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

              None.

                                       35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS

                                      INDEX

                                                                            Page
                                                                            ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                     F-2

FINANCIAL STATEMENTS

  Consolidated Balance Sheets -
    December 31, 1999 and 1998                                               F-3

  Consolidated Statements of Operations -
    For the Years Ended December 31, 1999, 1998 and 1997                     F-4

  Consolidated  Statements  of  Stockholders' Equity -
    For the Years Ended December 31, 1999, 1998 and 1997                     F-5

  Consolidated Statements of Cash Flows -
    For the Years Ended December 31, 1999, 1998 and 1997                     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,
1999  and  1998,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management.  Our responsibility is
to express an opinion on these  financial  statements  and schedule based on our
audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Employee  Solutions,  Inc. and
subsidiaries  as of  December  31,  1999  and  1998,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting  principles  generally accepted
in the United States.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in Note 16 to the
financial statements,  the Company has suffered recurring losses from operations
and entered into  negotiations to restructure  its debt that raises  substantial
doubt about its ability to continue as a going  concern.  Management's  plans in
regard to these matters are also described in Note 16. The financial  statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and  classification  of liabilities that
might result should the Company be unable to continue as a going concern.

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 3, 2000.

                                      F-2
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

(In thousands of dollars, except share data)               1999          1998
                                                        ---------     ---------
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                             $  34,014     $  39,287
  Investments and marketable securities                       100         9,997
  Restricted cash                                           1,000         1,088
  Accounts receivable, net                                 38,296        38,742
  Receivables from insurance companies                      6,618         6,704
  Prepaid expenses and deposits                             1,088         2,303
  Income taxes receivable                                      --         5,040
  Deferred income taxes                                        --           811
                                                        ---------     ---------
      Total current assets                                 81,116       103,972

Property and equipment, net                                 4,211         4,543
Deferred income taxes                                          --            60
Goodwill and other assets, net                             37,000        66,530
                                                        ---------     ---------

       Total assets                                     $ 122,327     $ 175,105
                                                        =========     =========

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

CURRENT LIABILITIES:
  Bank overdraft                                        $   2,472     $  13,727
  Accrued salaries, wages and payroll taxes                31,175        28,719
  Accounts payable                                          6,224         5,898
  Accrued workers' compensation and
    health insurance                                        7,188         9,617
  Income taxes payable                                        363           751
  Other accrued expenses                                    8,284        13,595
  Note payable                                             10,000            --
                                                        ---------     ---------
      Total current liabilities                            65,706        72,307
                                                        ---------     ---------

Deferred income taxes                                          --           871
                                                        ---------     ---------
Long-term debt                                             85,000        85,000
                                                        ---------     ---------
Other long-term liabilities                                   347         1,211
                                                        ---------     ---------
Commitments and contingencies

Stockholders' (deficit) 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, 36,182,547 shares issued and
   outstanding in 1999, and 32,419,595 shares issued
   and outstanding in 1998                                 39,550        35,800
  Common stock to be issued, no par value,
   4,206,829 shares                                         7,871            --
  Accumulated deficit                                     (76,147)      (20,085)

  Cumulative unrealized gain on investment securities          --             1
                                                        ---------     ---------

      Total stockholders' (deficit) equity                (28,726)       15,716
                                                        ---------     ---------

Total liabilities and stockholders' (deficit) equity    $ 122,327     $ 175,105
                                                        =========     =========

              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, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(In thousands of dollars, except share
  and per share data)                                      1999             1998              1997
                                                       -----------      -----------       -----------
<S>                                                    <C>               <C>                <C>
Revenues                                               $   939,835      $   968,909       $   933,817
                                                       -----------      -----------       -----------
Cost of revenues:
   Salaries and wages of worksite employees                804,324          814,453           765,047
   Healthcare and workers' compensation                     40,690           55,913            75,595
   Payroll and employment taxes                             57,194           64,318            62,613
                                                       -----------      -----------       -----------

        Cost of revenues                                   902,208          934,684           903,255
                                                       -----------      -----------       -----------

Gross profit                                                37,627           34,225            30,562

Selling, general and administrative expenses                36,228           49,293            33,411
Depreciation and amortization                                7,492            6,145             4,617
Goodwill impairment                                         42,205               --                --
                                                       -----------      -----------       -----------

        Loss from operations                               (48,298)         (21,213)           (7,466)

Other income (expense):
Interest income                                              1,196            1,885             1,303
Interest expense                                            (8,854)          (8,541)           (5,102)
Other                                                           39             (193)              (50)
                                                       -----------      -----------       -----------
        Loss before provision for income taxes             (55,917)         (28,062)          (11,315)

Income tax provision (benefit)                                 145             (111)           (2,819)
                                                       -----------      -----------       -----------

        Net loss                                       $   (56,062)     $   (27,951)      $    (8,496)
                                                       ===========      ===========       ===========
Net loss per common and common equivalent share:
   Basic                                               $     (1.55)     $      (.88)      $      (.27)
                                                       ===========      ===========       ===========
   Diluted                                             $     (1.55)     $      (.88)      $      (.27)
                                                       ===========      ===========       ===========
Weighted average number of common and common
 equivalent shares outstanding:
   Basic                                                36,213,874       31,817,176        31,193,367
                                                       ===========      ===========       ===========
   Diluted                                              36,213,874       31,817,176        31,193,367
                                                       ===========      ===========       ===========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997



<TABLE>
<CAPTION>
                                                        Common   Retained       Cumulative      Total
                                                        Stock     Earnings      Unrealized   Stockholders'  Comprehensive
(In thousands of dollars,                      Common   To Be    Accumulated  Gain (Loss) on  (Deficit)        Income
   except share data)                           Stock   Issued    (Deficit)     Investments     Equity          (Loss)
                                                -----   ------    ---------     -----------     ------          ------
<S>                                            <C>      <C>        <C>            <C>           <C>          <C>
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             --
Issuance of 1,668 shares of common
 stock in connection with exercise of
 common stock options                                3      --          --           --                3             --
Issuance of 75,000 of common stock warrants
 in connection with consulting services             41      --          --           --               41             --
Issuance of 1,771,169 shares of common stock
 in connection with settlement of litigation       735     851          --           --            1,586             --

Issuance of 6,204,794 shares of common
 stock in connection with acquisition            2,971   7,020          --           --            9,991             --

Change in unrealized net gains, net of
 applicable taxes                                   --      --          --           (1)              (1)            (1)

Net loss                                            --      --     (56,062)          --          (56,062)       (56,062)
                                              --------  ------    --------         ----         --------       --------
COMPREHENSIVE LOSS                                                                                             $(56,063)
                                                                                                               ========
BALANCE, DECEMBER 31, 1999                    $ 39,550  $7,871    $(76,147)          --         $(28,726)
                                              ========  ======    ========         ====         ========
</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, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
(In thousands of dollars)                                          1999           1998            1997
                                                                ---------       ---------       ---------
<S>                                                           <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Cash received from customers                                   $ 940,281       $ 987,634       $ 911,189
 Cash paid to suppliers and employees                            (943,354)       (980,636)       (896,812)
 Cash paid in loss portfolio transfer                                  --         (19,950)             --
 Interest received                                                  1,196           1,885           1,303
 Interest paid                                                     (8,681)         (8,640)         (5,152)
 Income taxes refunded (paid), net                                  4,507           4,008          (3,315)
                                                                ---------       ---------       ---------
     Net cash (used in) provided by operating activities           (6,051)        (15,699)          7,213
                                                                ---------       ---------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                (1,008)         (2,749)         (2,499)
 Business acquisitions                                             (5,896)         (3,267)         (5,024)
 Change in investments and marketable securities                    9,897          (9,997)             --
 Cash (invested in) released from restricted accounts, net             88          17,912          (7,500)
 Disbursements for deferred costs                                      --            (723)             --
                                                                ---------       ---------       ---------
     Net cash provided by (used in) investing activities            3,081           1,176         (15,023)
                                                                ---------       ---------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of long-term debt                              --              --           6,905
 Proceeds from note payable                                        10,000              --              --
 Repayment of long-term debt                                           --              --         (49,705)
 Proceeds from issuance of long-term
   senior notes                                                        --              --          85,000
 Payment of deferred loan costs                                    (1,051)           (226)         (3,285)
 Proceeds from issuance of common stock                                 3             199             502
 Increase (decrease) in bank overdraft                            (11,255)         13,727          (2,477)
                                                                ---------       ---------       ---------
     Net cash (used in) provided by financing activities           (2,303)         13,700          36,940
                                                                ---------       ---------       ---------
Net increase (decrease) in cash and
  cash equivalents                                                 (5,273)           (823)         29,130

CASH AND CASH EQUIVALENTS, beginning of year                       39,287          40,110          10,980
                                                                ---------       ---------       ---------

CASH AND CASH EQUIVALENTS, end of year                          $  34,014       $  39,287       $  40,110
                                                                =========       =========       =========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-6
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                   (CONTINUED)

<TABLE>
<CAPTION>
                                                                1999           1998           1997
                                                              --------       --------       --------
<S>                                                              <C>            <C>            <C>
RECONCILIATION OF NET LOSS TO NET CASH
 PROVIDED BY (USED IN) OPERATING ACTIVITIES:
  Net loss                                                    $(56,062)      $(27,951)      $ (8,496)
                                                              --------       --------       --------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
 PROVIDED BY (USED IN) OPERATING ACTIVITIES:
  Depreciation and amortization                                  7,492          6,145          4,617
  Goodwill impairment                                           42,205             --             --
  Loss on sale of fixed assets                                      --            193             --
  Write-off of deferred acquisition costs                           --            772             --
  Other non-cash charges, net                                   (1,170)         1,200             58
  Decrease (increase) in accounts receivable, net                  446         18,725        (22,628)
  Decrease (increase) in receivables from
   insurance companies                                              86            366         (1,152)
  Decrease (increase) in prepaid expenses and deposits           1,215          2,259         (3,304)
  Decrease (increase) in deferred income taxes, net                 --          4,106         (2,522)
  Decrease (increase) in other assets                              784            166           (805)
  Increase (decrease)  in accrued salaries, wages
   and payroll taxes                                             2,456        (14,544)        25,677
  (Decrease) increase in accrued workers'
   compensation and health insurance                            (2,429)       (14,969)        17,659
  (Decrease) increase in other long-term debt                      347             (2)          (136)
  Increase in accounts payable                                     326          1,535            285
  (Decrease) increase in income taxes payable/receivable         4,652           (209)        (3,612)
  Increase (decrease) in other accrued expenses                 (6,399)         6,509          1,572
                                                              --------       --------       --------

                                                                50,011         12,252         15,709
                                                              --------       --------       --------

     Net cash provided by (used in) operating activities      $ (6,051)      $(15,699)      $  7,213
                                                              ========       ========       ========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In connection with business acquisitions during 1999, 1998 and 1997, the Company
assumed net liabilities of $-0-,  $300,000,  and $900,000 and issued $9,991,000,
$813,000,  and $2.6  million of common  stock,  respectively.  In 1999 and 1998,
$41,000 and $298,000 of warrants  were also issued,  respectively.  In addition,
$1,586,000 of common stock was issued in 1999 in connection  with  settlement of
litigation.

              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, 1999, 1998 AND 1997

(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, 1999,  ESI serviced  approximately  1,900  client  companies  with
approximately 34,900 worksite employees in 46 states.

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 29%, represents
the largest  concentration  of  customers,  including  one former  customer that
generated approximately 13% of total revenues in 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 accounting principles
generally  accepted in the United States  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 certificates
of deposit,  at December 31, 1999 and 1998, and are stated at fair market value.
Substantially  all cash  and cash  equivalents,  including  restricted  cash and
investments, are not insured at December 31, 1999.

RESTRICTED CASH

At December  31,  1999,  restricted  cash was  approximately  $1 million,  which
represented  accounts  held by banks as security for certain types of controlled
disbursement  transaction  risk.  Subsequent to year end the restriction on this
account was released.  At December 31, 1998,  restricted cash was  approximately
$1.1 million,  which represented  amounts held for settlement of a legal matter.
Restricted   investments   consist  of  certificates  of  deposit  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."

                                      F-8
<PAGE>
INVESTMENTS AND MARKETABLE SECURITIES

At December 31, 1999,  the Company  maintained  approximately  $15.2  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 money  market  and  mutual  funds  that had an
estimated  fair value of $15.0  million at December  31, 1999.  Securities  with
original  maturities  greater than 90 days consisted of a certificate of deposit
with a fair value of approximately $151,300.

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,  1999 and 1998,  the  Company had  receivables  from its  fronting
companies  of $6.6  million  and $6.7  million,  respectively.  The  receivables
represent cash contractually  required to be advanced to the insurance companies
for loss funds,  administrative  fees, excess  reinsurance  premiums and premium
taxes.  At December 31, 1999 and 1998 the Company has recorded  estimates of the
actual  expenses  incurred of $4.1  million and $3.3 million  respectively.  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.

================================================================================

(In thousands of dollars)                           December 31,    December 31,
                                                       1999            1998
                                                     --------        --------
Trade accounts receivable                            $ 28,866        $ 27,130
Unbilled salary and wage accruals                      11,384          11,921
Unbilled stand alone premium revenue                    1,842           1,985
Other, including affiliated parties                     2,133           2,628
Allowance for estimated uncollectible receivables      (5,929)         (4,922)
                                                     --------        --------
       Total accounts receivable, net                $ 38,296        $ 38,742
                                                     ========        ========

================================================================================

At December 31, 1999 and 1998,  receivables from affiliated  parties included in
the above totals were $1.3 million and $2.2 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.  Improvements
or renewals are  capitalized  when  incurred.  Property and  equipment is net of
accumulated  depreciation  of $2,988,000 and $1,681,000 at December 31, 1999 and
1998, respectively.

GOODWILL AND OTHER ASSETS

Included  in goodwill  and other  assets is $31.7  million and $60.6  million at
December 31, 1999 and 1998,  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.  During 1999 the
Company  recognized a goodwill  impairment charge of $42.2 million to write-down
its remaining  goodwill to the estimated fair value of $31.7  million.  See Note
10.

Goodwill and other assets are net of  accumulated  amortization  of $6.0 million
and $10.2 million at December 31, 1999 and 1998, respectively.

Also  included in goodwill  and other  assets at December 31, 1999 and 1998 is a
$1.4 million net receivable for stand-alone  workers'  compensation  premium due
from one customer  for a two-year  program  that 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.

                                      F-10
<PAGE>
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 the Company is responsible  for the first $250,000 per occurrence
with no aggregate to limit the Company's liability.

Individual risk  management/workers'  compensation  claims in excess of $250,000
and up to the statutory  limits of the states where the Company operates are the
responsibility  of Reliance.  The  Company's  prior  arrangements  with AIG were
structured in a manner similar to its current arrangements with Reliance.

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 $1.8 and $2.1 million at December 31, 1999 and 1998, respectively.

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.

LOSS CONTINGENCIES

The Company expenses legal fees related to loss  contingencies as the legal fees
are incurred.

                                      F-11
<PAGE>
INCOME TAXES

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

Deferred  income taxes arise from temporary  differences  resulting from certain
revenue and expense items  reported for financial  accounting  and tax reporting
purposes in  different  periods.  Reductions  in current  income  taxes  payable
related  to  disqualifying  dispositions  of  qualified  stock  options  and the
exercise  of  non-qualified  stock  options  are  credited  to common  stock.  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 SFAS
No. 109. See Note 3.

NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE

The  computation  of adjusted  net loss and weighted  average  common and common
equivalent  shares used in the  calculation  of net loss per common  share is as
follows:

<TABLE>
<CAPTION>
==================================================================================================================
(In thousands of dollars,
  except share and per                     1999                           1998                        1997
  share data)                    -------------------------   -------------------------   -------------------------

                                    Basic        Diluted        Basic        Diluted        Basic        Diluted
                                 -----------   -----------   -----------   -----------   -----------   -----------
<S>                              <C>            <C>            <C>            <C>            <C>            <C>
Weighted average of
  common shares outstanding       36,213,874    36,213,874    31,817,176    31,817,176    31,193,367    31,193,367

Dilutive effect of options
  and warrants outstanding                --            --            --            --            --            --
                                 -----------   -----------   -----------   -----------   -----------   -----------
Weighted average of common
  and common equivalent shares    36,213,874    36,213,874    31,817,176    31,817,176    31,193,367    31,193,367
                                 ===========   ===========   ===========   ===========   ===========   ===========
Net loss                         $   (56,062)  $   (56,062)  $   (27,951)  $   (27,951)  $    (8,496)  $    (8,496)

Adjustments to net loss                   --            --            --            --            --            --
                                 -----------   -----------   -----------   -----------   -----------   -----------
Adjusted net loss for purposes
  of the loss per common share
  calculation                    $   (56,062)  $   (56,062)  $   (27,951)  $   (27,951)  $    (8,496)  $    (8,496)
                                 ===========   ===========   ===========   ===========   ===========   ===========
Net loss per common and common
  equivalent share               $     (1.55)  $     (1.55)  $     (0.88)  $     (0.88)  $     (0.27)  $     (0.27)
                                 ===========   ===========   ===========   ===========   ===========   ===========
==================================================================================================================
</TABLE>

The  calculation  of weighted  average common and common  equivalent  shares for
purposes of calculating  the 1999, 1998 and 1997 diluted loss per share excludes
approximately 39,313,  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.

                                      F-12
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The following table presents a summary of the Company's  financial  instruments,
as defined by SFAS 107:

<TABLE>
<CAPTION>
============================================================================================
                                                                December 31,
                                            ------------------------------------------------
                                                    1999                        1998
                                            ---------------------   -----------------------
                                           Carrying    Estimated    Carrying     Estimated
(In thousands of dollars)                   Amount     Fair Value    Amount      Fair Value
                                            ------     ----------    ------      ----------
<S>                                        <C>          <C>         <C>           <C>
Financial Assets

Cash and cash equivalents                  $34,014      $34,014     $39,287       $39,287
Investments and marketable securities          100          100       9,997         9,997
Restricted cash                              1,000        1,000       1,088         1,088
Other financial assets, primarily
  accounts receivable                       46,302       46,302      46,834        46,834

Financial Liabilities

Bank overdraft                               2,472        2,472      13,727        13,727
Note payable                                10,000       10,000          --            --
Long-term debt                              85,000       42,500      85,000        60,350
Other financial liabilities,
 primarily accrued liabilities              53,581       53,581      59,791        59,791

===========================================================================================
</TABLE>

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
estimates.

                                      F-13
<PAGE>
(2) 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
       -------------------------                             -------
                 2000                                        $ 1,628
                 2001                                          1,536
                 2002                                          1,472
                 2003                                          1,429
                 2004                                            360
                                                             -------

                    Total                                    $ 6,425
                                                             =======

================================================================================

Rental expense under all leases was $2.4 million, $2.5 million, and $1.9 million
in 1999, 1998 and 1997, respectively.

(3) INCOME TAXES

The  components of the  provision for income taxes for the years ended  December
31, 1999, 1998 and 1997 were as follows:

================================================================================

(In thousands of dollars)                     1999          1998          1997
-------------------------                     ----          ----          ----
Current                                       $145        $(4,217)      $  (297)
Deferred                                        --          4,106        (2,522)
                                              ----        -------       -------

Income tax provision (benefit)                $145        $  (111)      $(2,819)
                                              ====        =======       =======

================================================================================

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

================================================================================

(In thousands of dollars)                      1999         1998         1997
-------------------------                    --------      -------      -------
Income tax benefit at statutory rate         $(19,571)     $(9,822)     $(3,847)
Increase in valuation allowance                17,641        9,188           --
Non-deductible goodwill amortization            4,415          352          271
Non-deductible per diem and other expenses        203          193          336
State taxes, net of federal benefit            (2,482)          34          451
Other                                             (61)         (56)         (30)
                                             --------      -------      -------

Income tax provision (benefit)               $    145      $  (111)     $(2,819)
                                             ========      =======      =======

================================================================================

                                      F-14
<PAGE>
The  Company's  entire  net  deferred  tax asset  was  offset  with a  valuation
allowance at December  31, 1999 and December 31, 1998 in light of the  uncertain
future  utilization  of net operating  loss  carryforwards  (NOLCs),  tax credit
carryforwards and other future deductions.

At December  31, 1999 the Company  has regular  federal  NOLCs of  approximately
$25.5  million which will expire,  if unused,  in 2019. At December 31, 1999 the
Company also has federal tax  carryforwards of approximately  $600,000 a portion
of which will also expire, if unused, in 2019.

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

================================================================================

(in thousands of dollars)                                  1999          1998
-------------------------                                --------      --------
Deferred tax liabilities:

Depreciation and amortization                            $  1,170      $    871
                                                         --------      --------
Deferred tax assets:
Intangible assets with remaining tax basis                 12,245            --
Accruals and reserves not deductible for tax purposes       4,927        10,059
Net operating loss carryforwards                           10,219            --
Tax credit carryforwards                                      608            --
Valuation allowance                                       (26,829)       (9,188)
                                                         --------      --------
Total deferred tax assets                                   1,170           871
                                                         --------      --------

Net deferred taxes                                       $     --      $     --
                                                         ========      ========

================================================================================

(4) NOTE PAYABLE

On October 26, 1999 the Company entered into a loan and security  agreement (the
"Loan Agreement") with Foothill Capital  Corporation and Ableco Finance LLC (the
"Lenders") providing for a term loan of $10 million at an interest rate of 13.5%
and a revolving loan (based on eligible accounts receivable) to a maximum of $10
million  (including  letters of credit drawn  thereunder) at an interest rate of
prime plus 2%. The Company received the proceeds of the term loan on October 29,
1999.  The  Company  does not  currently  intend to draw on the  revolving  loan
facility  except as security  for  various  letters of credit  ($5.4  million at
December  31,  1999).  The Company paid a closing fee of $800,000 and will pay a
commitment fee of 50 basis points on the unused  portion of the revolving  line,
as well as  letter  of  credit  fees of 2.0%.  If the  term  loan  then  remains
outstanding,  the interest  rate thereon  increases by 25 basis points per month
beginning on July 29, 2000 and a fee of $100,000 is payable on July 29, 2000 and
on October  29,  2000.  The Loan  Agreement  matures  on  January  1, 2001.  The
principal loan covenants are as follows:  tangible net worth of ($72,390,000) at
December 31, 1999,  ($71,320,000)  at March 31, 2000,  ($70,220,000) at June 30,
2000,  ($68,270,000)  at September  30, 2000 and  ($66,090,000)  at December 31,
2000; and EBITDA (as defined) of $1,230,000 at December 31, 1999,  $2,560,000 at
March 31, 2000,  $2,780,000  at June 30, 2000,  $3,410,000 at September 30, 2000
and $3,770,000 at December 31, 2000. The Loan Agreement also includes  covenants
relating to capital  expenditure  limits and  worksite  employee  headcount  and
average gross margin  requirements.  The Loan Agreement further contains,  among
other limitations,  restrictions on mergers or the sale of significant assets or
use  of  the  proceeds  thereof,  investments  and  business  acquisitions,  and
additional  indebtedness  or liens.  The Loan Agreement  includes  certain other
customary covenants, and is secured by substantially all of the Company's assets
(including  pledges  of the  stock of the  Company's  subsidiaries  and  control
agreements over  substantially all of the Company's cash accounts).  The Company
anticipates  that it will not be in compliance with one or more of the covenants
set  forth  above as of March 31,  2000 and has  therefore  classified  the debt
obligation as a current liability.

                                      F-15
<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,  1999 and 1998,  and the results of
operations  and cash  flows  for each of the  three  years in the  period  ended
December  31,  1999,  of  Employee  Solutions,   Inc.  (Parent),  the  guarantor
subsidiaries   (Guarantors)  and  the  subsidiaries  which  are  not  guarantors
(Non-guarantors).

                                      F-16
<PAGE>
BALANCE SHEETS

<TABLE>
<CAPTION>
===============================================================================================================
(In thousands of dollars)
-------------------------                                     For the Year Ended December 31, 1999
                                                    -----------------------------------------------------------
                                                                            Non-
                                                    Parent    Guarantors  Guarantors  Eliminating  Consolidated
                                                    ------    ----------  ----------  -----------  ------------
<S>                                                <C>         <C>         <C>         <C>         <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                        $ 16,452    $ 14,148    $  3,414    $     --      $  34,014
  Investments and marketable securities                 100          --          --          --            100
  Restricted cash                                     1,000          --          --          --          1,000
  Accounts receivable, net                           14,240      23,512         544          --         38,296
  Receivables from insurance companies                   --          --       6,618          --          6,618
  Prepaid expenses and deposits                       1,023          64           1          --          1,088
  Due from affiliates                                 8,150       2,644      (7,020)     (3,774)            --
                                                   --------    --------    --------    --------      ---------
       Total current assets                          40,965      40,368       3,557      (3,774)        81,116

  Property and equipment, net                         3,937         265           9          --          4,211
  Goodwill and other assets, net                      9,947      27,053          --          --         37,000
  Investment in subsidiaries                         42,872          --          --     (42,872)            --
                                                   --------    --------    --------    --------      ---------
       Total assets                                $ 97,721    $ 67,686    $  3,566    $(46,646)     $ 122,327
                                                   ========    ========    ========    ========      =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY

CURRENT LIABILITIES:
  Bank overdraft                                   $  2,472    $     --    $     --    $     --      $   2,472
  Accrued salaries, wages and payroll taxes           5,607      25,276         292          --         31,175
  Accounts payable                                      966       1,151       4,107          --          6,224
  Accrued workers' compensation and health
  insurance                                               5         953       6,230          --          7,188
  Income taxes payable                                  421         (56)         (2)         --            363
  Other accrued expenses                              4,614         976       2,694          --          8,284
  Due to affiliates                                  17,015      11,300     (24,541)     (3,774)            --
  Note payable                                       10,000          --          --          --         10,000
                                                   --------    --------    --------    --------      ---------
       Total current liabilities                     41,100      39,600     (11,220)     (3,774)        65,706
                                                   --------    --------    --------    --------      ---------

  Deferred income taxes                                  --          --          --          --             --
                                                   --------    --------    --------    --------      ---------
  Long-term debt                                     85,000          --          --          --         85,000
                                                   --------    --------    --------    --------      ---------
  Other long-term liabilities                           347          --          --          --            347
                                                   --------    --------    --------    --------      ---------
Commitments and contingencies

STOCKHOLDERS' (DEFICIT) EQUITY

  Class A convertible preferred stock                    --          --          --          --             --
  Common stock, no par value                         39,550       2,622         771      (3,393)        39,550
  Common stock to be issued                           7,871          --          --          --          7,871
  Additional paid in capital                             --      26,342          50     (26,392)            --
  (Accumulated deficit) retained earnings           (76,147)       (878)     13,965     (13,087)       (76,147)
                                                   --------    --------    --------    --------      ---------

       Total stockholders' (deficit) equity         (28,726)     28,086      14,786     (42,872)       (28,726)
                                                   --------    --------    --------    --------      ---------
Total liabilities and stockholders'
  (deficit) equity                                 $ 97,721    $ 67,686    $  3,566    $(46,646)     $ 122,327
                                                   ========    ========    ========    ========      =========

===============================================================================================================
</TABLE>
                                      F-17
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
(In thousands of dollars)
-------------------------                                         For the Year Ended December 31, 1998
                                                  -------------------------------------------------------------
                                                                             Non-
                                                   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                                     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-18
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
===============================================================================================================

(In thousands of dollars)                                      For the Year Ended December 31, 1999
-------------------------                       ---------------------------------------------------------------
                                                                          Non-
                                                  Parent    Guarantors   Guarantors   Eliminating  Consolidated
                                                  ------     ---------   ----------   -----------  ------------
<S>                                              <C>         <C>         <C>           <C>           <C>
Revenues                                         $ 221,682   $695,487     $ 22,666      $     --     $ 939,835
                                                 ---------   --------     --------      --------     ---------
Cost of revenues:
 Salaries and wages of worksite employees          188,508    596,947       18,869            --       804,324
 Healthcare and workers' compensation                7,966     35,702       (2,978)           --        40,690
 Payroll and employment taxes                       14,873     40,608        1,713            --        57,194
                                                 ---------   --------     --------      --------     ---------

     Cost of revenues                              211,347    673,257       17,604            --       902,208
                                                 ---------   --------     --------      --------     ---------
     Gross profit                                   10,335     22,230        5,062            --        37,627

Selling, general and administrative expenses        26,005     10,076          147            --        36,228
Intercompany selling, general and
 administrative expense                                 --         --           --            --            --
Depreciation and amortization                        5,876      1,587           29            --         7,492
Goodwill impairment                                 33,089      8,802          314            --        42,205
                                                 ---------   --------     --------      --------     ---------

Loss from operations                               (54,635)     1,765        4,572            --       (48,298)

Other income (expense):
 Interest income                                       679        136          381            --         1,196
 Interest expense and other                         (8,828)        13           --            --        (8,815)
                                                 ---------   --------     --------      --------     ---------
 Income (loss) before benefit for income taxes     (62,784)     1,914        4,953            --       (55,917)

 Income tax provision, net                             145         --           --            --           145
                                                 ---------   --------     --------      --------     ---------
                                                   (62,929)     1,914        4,953            --       (56,062)
 Income from wholly-owned subsidiaries               6,867         --           --        (6,867)           --
                                                 ---------   --------     --------      --------     ---------

     Net (loss) income                           $ (56,062)  $  1,914     $  4,953      $ (6,867)    $ (56,062)
                                                 =========   ========     ========      ========     =========

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

(In thousands of dollars)                                        For the Year Ended December 31, 1998
-------------------------                        ---------------------------------------------------------------
                                                                             Non-
                                                  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-20
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================

(In thousands of dollars)                                          For the Year Ended December 31, 1997
-------------------------                         -------------------------------------------------------------
                                                                             Non-
                                                   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-21
<PAGE>
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
=====================================================================================================================

(In thousands of dollars)                                            For the Year Ended December 31, 1999
-------------------------                                ------------------------------------------------------------
                                                                                   Non-
                                                          Parent    Guarantors  Guarantors  Eliminating  Consolidated
                                                         --------    --------    --------     --------     --------
<S>                                                      <C>         <C>         <C>          <C>          <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
 PROVIDED BY (USED IN) OPERATING ACTIVITIES:
  Net income (loss)                                      $(56,062)   $  1,914    $  4,953     $ (6,867)    $(56,062)
                                                         --------    --------    --------     --------     --------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 Depreciation and amortization                              5,876       1,587          29           --        7,492
 Goodwill impairment                                       33,089       8,802         314           --       42,205
 Other non-cash expenses, net                                  41      (1,211)         --           --       (1,170)
 Decrease (increase) in accounts receivable, net            1,220      (1,017)        243           --          446
 Decrease in receivables from insurance companies              --          --          86           --           86
 Decrease in prepaid expenses and deposits                    509         689          17           --        1,215
 Decrease (increase) in other assets                        3,347      (2,515)        (48)          --          784
 (Decrease) increase from inter-company transactions       10,597      (7,251)    (10,213)       6,867           --
 Increase (decrease) in accrued salaries, wages,
   and payroll taxes                                         (325)      3,109        (328)          --        2,456
 (Decrease) increase in accrued workers'
  compensation and healthcare                              (3,136)        335         372           --       (2,429)
 Increase in other long-term liabilities                      347          --          --           --          347
 Increase (decrease) in accounts payable                     (618)        100         844           --          326
 Decrease (increase) in income taxes payable/receivable     4,710         (56)         (2)          --        4,652
 Increase (decrease) in other accrued expenses             (5,597)     (1,340)        538           --       (6,399)
                                                         --------    --------    --------     --------     --------

                                                           50,060       1,232      (8,148)       6,867       50,011
                                                         --------    --------    --------     --------     --------
    Net cash (used in) provided by operating activities    (6,002)      3,146      (3,195)          --       (6,051)
                                                         --------    --------    --------     --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment, net                    (927)        (82)          1           --       (1,008)
  Business acquisitions                                    (5,896)         --          --           --       (5,896)
  Change in investments and marketable securities, net      9,897          --          --           --        9,897
  Cash released from restricted accounts, net                  88          --          --           --           88
                                                         --------    --------    --------     --------     --------
    Net cash provided by (used in) investing
     activities                                             3,162         (82)          1           --        3,081
                                                         --------    --------    --------     --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of short-term borrowing           10,000          --          --           --       10,000
  Proceeds from issuance of common stock                        3          --          --           --            3
  Payment of deferred loan costs                           (1,051)         --          --           --       (1,051)
  Increase (decrease) in bank overdraft                     2,164     (13,419)         --           --      (11,255)
                                                         --------    --------    --------     --------     --------
  Net cash provided by (used in) financing activities      11,116     (13,419)         --           --       (2,303)
                                                         --------    --------    --------     --------     --------
       Net increase (decrease) in cash and cash
        equivalents                                         8,276     (10,355)     (3,194)          --       (5,273)

CASH AND CASH EQUIVALENTS,
  Beginning of year                                         8,176      24,503       6,608           --       39,287
                                                         --------    --------    --------     --------     --------
CASH AND CASH EQUIVALENTS,
  End of year                                            $ 16,452    $ 14,148    $  3,414     $     --     $ 34,014
                                                         ========    ========    ========     ========     ========

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

(In thousands of dollars)                                               For the Year Ended December 31, 1998
-------------------------                                 ------------------------------------------------------------
                                                                                    Non-
                                                           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                          (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-23
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================================

(In thousands of dollars)                                           For the Year Ended December 31, 1997
-------------------------                                 ------------------------------------------------------------
                                                                                    Non-
                                                           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-24
<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 1997, 1998 and 1999 was as follows:
================================================================================

                                                                  Weighted-
                                                                   Average
                                                      Number      Exercise
                                                    of Warrants     Price
                                                     --------       -----
     Outstanding at December 31, 1997                 120,000        1.88

         Granted                                      200,000        2.13
                                                     --------
     Outstanding at December 31, 1998                 320,000        1.93

         Granted                                       75,000        1.00
         Expired                                     (120,000)       1.88
                                                     --------
     Outstanding at December 31, 1999                 275,000        1.82
                                                     ========

================================================================================

None of the warrants  were  exercisable  at December 31, 1999.  Of the remaining
outstanding warrants,  200,000 expire on November 30, 2008, and 75,000 expire on
August 18, 2004.

STOCK OPTION PLANS

The Company has a 1993 Stock Option Plan and a 1995 Stock Option Plan. The plans
are  administered  by the Human  Resources  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,  net of  cancellations,  options of 877,958 shares and 3,028,239 shares
under the 1993 and 1995 plans,  respectively,  through  December 31, 1999. Under
both plans the option

                                      F-25
<PAGE>
exercise  price  must at least  equal 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 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,
1999:

================================================================================
                                                                       Weighted-
                                                                        Average
                                                       Number          Exercise
                                                     Of Options         Price
                                                     ----------         -----
  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
     Granted                                            544,940          3.47
     Exercised                                           (1,668)         1.88
     Canceled                                        (1,319,687)         4.46
                                                     ----------

  Outstanding at December 31, 1999                    2,818,485          3.03
                                                     ==========
  Exercisable options as of:
     December 31, 1997                                1,204,088          4.23
     December 31, 1998                                2,012,030          3.72
     December 31, 1999                                1,278,398          3.75

  Available for future grants at December 31, 1999    1,793,803
================================================================================

The  following  table is a summary of  selected  information  for the  Company's
compensatory stock option plans:

================================================================================
                                              December 31, 1999
                              --------------------------------------------------
                                 Weighted-Average               Weighted-Average
                              Remaining Contractual                 Exercise
                                 Life (Yrs.mths)      Number         Price
                                 ---------------      ------         -----
RANGE OF EXERCISE PRICES
  1993 Stock Option Plan
     $1.88
        Options outstanding             .1              89,337      $ 1.88
        Options exercisable                             89,337        1.88

  1995 Stock Option Plan
     $.84 - $3.94
        Options outstanding            5.9           2,402,303        2.17
        Options exercisable                            962,680        2.50

     $4.31 - $5.41
        Options outstanding            4.8             171,845        4.80
        Options exercisable                            111,381        4.57

     $14.50 - $16.25
        Options outstanding            2.8             155,000       15.14
        Options exercisable                            115,000       14.88
================================================================================

                                      F-26
<PAGE>
The weighted average fair value of options granted under the 1993 and 1995 Stock
Option Plans was $.97, $3.29 and $4.46 for 1999, 1998 and 1997, 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.

Net loss and loss per share  would have been  changed  to the pro forma  amounts
indicated below:

================================================================================
(In thousands of dollars,
  except per share data)                         Year Ended December 31,
-------------------------                  ------------------------------------
                                             1999         1998          1997
                                           ---------    ---------     ---------
Net loss:
    As reported                            $ (56,062)   $ (27,951)    $  (8,496)
    Pro forma                                (55,977)     (30,943)      (10,569)

Basic loss per share:
    As reported                                (1.55)        (.88)         (.27)
    Pro forma                                  (1.55)        (.97)         (.34)

Diluted loss per share:
    As reported                                (1.55)        (.88)         (.27)
    Pro forma                                  (1.55)        (.97)         (.34)
================================================================================

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 1999:  risk-free  interest  rate of 5.25%;
expected  dividend yield of 0%;  expected  option term of 3 years;  and expected
volatility of 108.48%.  The following weighted average assumptions were used for
grants  in  1998  and  1997:   risk-free   interest  rate  of  4.9%  and  5.92%,
respectively;  expected  dividend yield of 0%;  expected  lives of 2 years;  and
expected volatility of 117% and 98%, 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 first plan year in January 2000, whichever price is lower.
The plan has also  been  renewed  on  similar  terms in 2000.  The  Company  has
reserved  500,000  shares of its Common Stock for issuance under the plan. As of
December  31, 1999 and  February  28, 2000 the Company has issued -0- and 44,222
shares, respectively, 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,
                                              ---------------------------------
                                                1999        1998        1997
                                              ---------   ---------   ---------
Revenue
  Core PEO                                    $ 561,062   $ 569,394   $ 532,761
  US Xpress                                          --     121,323     180,403
  LPC                                           109,793     102,218     122,550
  TEAM                                          268,980     174,109      87,764
  Stand-Alone                                        --       1,865      10,339
                                              ---------   ---------   ---------
  Consolidated total                            939,835     968,909     933,817
                                              ---------   ---------   ---------
Gross profit
  Core PEO                                       24,450      23,713      17,749
  US Xpress                                          --         (66)        541
  LPC                                            10,443       9,919       8,981
  TEAM                                            2,734       2,029       1,742
  Stand-Alone                                        --      (1,370)      1,549
                                              ---------   ---------   ---------
  Total                                          37,627      34,225      30,562

Selling, general and administrative expense      36,228      49,293      33,411

Depreciation and amortization                     7,492       6,145       4,617
Goodwill impairment (core PEO)                   42,205          --          --
                                              ---------   ---------   ---------

Loss from operations                            (48,298)    (21,213)     (7,466)
                                              ---------   ---------   ---------
Other income (expense)
  Interest income                                 1,196       1,885       1,303
  Interest expense                               (8,854)     (8,541)     (5,102)
  Other                                              39        (193)        (50)
                                              ---------   ---------   ---------

Loss before provision for income taxes          (55,917)    (28,062)    (11,315)

Income tax provision (benefit)                      145        (111)     (2,819)
                                              ---------   ---------   ---------

Net loss                                        (56,062)    (27,951)     (8,496)
                                              =========   =========   =========
Depreciation and amortization
  Core PEO                                        6,388       5,062       3,608
  LPC                                               973         927         883
  TEAM                                              131         153         121
  Stand-Alone                                        --           3           5
                                              ---------   ---------   ---------
  Consolidated total                              7,492       6,145       4,617
                                              =========   =========   =========
Goodwill impairment
  Core PEO                                       42,205          --          --
                                              ---------   ---------   ---------
Total assets
  Core PEO                                       65,447      94,540     106,512
  LPC                                            34,976      35,192      36,825
  TEAM                                           21,904      29,380      14,926
  Stand-Alone                                        --      15,993      48,954
                                              ---------   ---------   ---------
  Consolidated total                          $ 122,327   $ 175,105   $ 207,217
                                              =========   =========   =========

================================================================================

                                      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>
1999
   Revenues                  $   198,909     $   206,088     $   222,418     $   312,420
   Gross profit                    7,736           8,575           9,282          12,034

   Basic
    Net loss (1)                  (3,462)         (3,436)         (3,423)        (45,741)
    Weighted average shares   32,421,263      33,266,969      34,534,260      38,926,531
    Net loss per share (2)          (.11)           (.10)           (.10)          (1.18)

   Diluted
    Net loss                      (3,462)         (3,436)         (3,423)        (45,741)
    Weighted average shares   32,421,263      33,266,969      34,534,260      38,926,531
    Net loss per share (2)          (.11)           (.10)           (.10)          (1.18)

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)
=========================================================================================
</TABLE>

(1)    Includes  impact of special  fourth quarter  charge  associated  with the
       $42.2 million goodwill impairment.

(2)    Net loss per share in 1999 is less than the sum of the applicable amounts
       for each quarter primarily because of the weighting of the fourth quarter
       loss.

(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).  The Company also issued
warrants to purchase  up to 200,000  shares of its common  stock that would have
become exercisable at $2.125 per share if earnings targets were achieved in each
of the three years following the closing of the acquisition. On February 3, 2000
the Company  issued an additional  2,206,258  shares of common stock so that the
aggregate  value of the 625,000  shares (as defined in the  purchase  agreement)
plus such  additional  consideration  equaled the final  purchase  price of $2.5
million.  On March 17,  2000,  the  sellers  agreed to the  cancellation  of the
200,000 outstanding warrants.

                                      F-30
<PAGE>
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  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.

On March 1, 1999 IPEO subsequently  purchased an exclusive  endorsement to offer
bundled human resources,  benefits and payroll management services to a national
franchise  organization.  On May 10, 1999 the Company  purchased the endorsement
from IPEO for $416,673 and IPEO  repurchased the Series B Preferred Stock at the
original purchase price of $.75 per share for a total payment of $1,000,000. The
Company  amortized  the  $416,673  over  the  remaining  life  of the  exclusive
endorsement, which expired on December 31, 1999.

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 was 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 Company has recorded the anticipated issuance of an additional
1,149,422 shares of common stock, for a total purchase price of $5,071,251.  The
Company has the right to withhold such shares as security for indebtedness  owed
to the  Company by the seller of the ERC  companies.  The Company  currently  is
conducting negotiations with the seller concerning these matters.

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.

                                      F-31
<PAGE>
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.  In
February 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,  which was recorded as
goodwill.  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.

(10) GOODWILL IMPAIRMENT

The Company  performs  quarterly  evaluations  of its goodwill by estimating the
future  cash flows  expected  to result from  customer  relationships  and other
assets acquired in previous  acquisitions.  Factors considered in estimating the
expected  cash flows  include  whether  there has been an adverse  change in the
business climate such as unusually high customer attrition, an adverse action or
assessment by a regulator,  a change in legal factors,  or a combination of such
factors that may have  resulted in an  accumulation  of costs  significantly  in
excess of what  ultimately may be recoverable  through the realization of future
cash flows.  The Company  experienced  several  different  adverse  developments
during 1999, particularly during the fourth quarter, that resulted in impairment
in the core PEO business  segment (see  footnote 7). The Company was not able to
offset the effects of client  attrition  experienced in 1999 primarily caused by
factors  including  customer concern  regarding ESI's financial  condition,  the
effect on 1999  revenue  following  the  closure  of  certain  field  offices in
connection with a restructuring  plan, and the Company's failure to add adequate
new revenue from  customers  meeting ESI's minimum  profitability  requirements,
particularly  in its  core  PEO  services.  While a  portion  of this  attrition
resulted from the Company's  proactive  elimination of unprofitable or high-risk
customers,  the Company also  experienced  unusually high  attrition  during the
fourth  quarter of 1999 based on the violation of  noncompetition  agreements by
former salespersons and other factors.

APB Opinion No. 17,  INTANGIBLE  ASSETS,  generally  requires a reduction in the
carrying  amount  of an  intangible  asset if it  exceeds  the  future  benefits
expected  to be  derived,  and  additional  guidance  is  provided  in SFAS 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED  ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. After  performing  the fourth quarter 1999 cash flow analysis it
was  determined  that  the  unamortized   goodwill  recorded  on  the  following
acquisitions  exceeded  management's  estimate  of  the  amount  expected  to be
realized, and an impairment write-down was recorded to adjust the estimated fair
values to the amounts indicated as follows:

================================================================================
                                                                  Estimated
                                             Impairment          Fair Value at
(In thousands of dollars)                    Write-down        December 31, 1999
-------------------------                    ----------        -----------------
Acquisition:
   McClary Trapp                               $ 6,435              $1,324
   CMGR                                          3,556                  --
   ESI Alabama                                     131                  --
   Phoenix Capital Management
      and affiliated companies                   7,333                 899
   ESI Midwest                                   1,423                  --
   Employee Solutions Midwest, Inc.              1,023                 118
   Hazar                                         5,613               1,779
   Employers Trust                               8,331                 353
  Prescott Group                                 1,284                 112
  ESI East                                       2,711                  --
  Fidelity Resources Corp.                       4,365                  --
                                               -------              ------
       Total                                   $42,205              $4,585
                                               =======              ======
================================================================================

                                      F-32
<PAGE>
Remaining  goodwill of $31.7 million  includes the unamortized  amounts of $26.4
million  recorded  for  Logistics  Personnel  Corp.  and  Team  Services,  which
management believes are not impaired as of December 31, 1999.

(11) CONTINGENCIES

The  Company  has  received a letter  from the  Arizona  Department  of Economic
Security   indicating  that  the  Company  has  been  assigned  a  higher  state
unemployment  tax rate for  calendar  year 1994 than the Company  believes it is
entitled.  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, 1999, the compounded interest totaled
approximately $315,000.

The Company has been named as a defendant  in an action filed by James E. Gorman
in Arizona  Superior  Court in August 1999 alleging  breach of contract,  fraud,
defamation and related  matters in connection with the termination of Mr. Gorman
as the Company's  president and chief  executive  officer in February  1999. The
complaint seeks contractual  damages of approximately  $588,000 plus unspecified
tort  damages.  The  Company  is  contesting  the  claim  vigorously.  The Court
dismissed the plaintiff's principal tort claims in November 1999.

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 County, 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 $500,000 plus attorneys
fees and costs and unspecified  punitive damages.  The Company is contesting the
claim vigorously.

Stirling Cooke Insurance  Services Inc. filed suit in the United States District
Court for the Middle  District of Florida  against the Company in December  1999
alleging  breach of contract and failure to pay insurance  premiums in violation
of Florida law.  Stirling  Cooke, in its capacity as managing and general agent,
placed  workers  compensation  insurance  for the Company  with three  insurance
companies  for calendar year 1998.  Stirling  Cooke alleges that ESI owes unpaid
premium in the amount of $2,797,905  to those  companies.  The Company  believes
that Stirling  Cooke's suit is without merit based on an explicit  Memorandum of
Understanding between the parties that defined the applicable rates for the 1998
workers' compensation program and intends to defend the suit vigorously.

The State of Ohio has issued an assessment  of $5.2 million  (plus  interest and
penalty) relating to sales taxes potentially  applicable to certain types of PEO
services  provided  by the  Company.  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  State of Ohio  further  issued a sales  tax  assessment  in the  amount  of
approximately  $16.5  million  (including  interest and  penalties) in July 1999
against  HDVT,  Inc.  (the seller of certain  assets  acquired by the Company in
February  1997) with respect to the  operations  of HDVT prior to the  Company's
acquisition  of  certain  assets  of HDVT  (then  known as  Employers  Trust) in
February 1997. The State of Ohio  concurrently  issued an assessment in the same
amount  against the Company as  successor  to HDVT.  The Company  believes  that
meritorious defenses are available to the assessment.  In addition, $6.0 million
of cash and  675,000  shares of the  Company's  Common  Stock are being  held in
escrow for payment of amounts, if any, ultimately  determined to be due pursuant
to such  assessment.  If the Company is held to have liability  pursuant to such
assessment,  the escrowed  assets prove  insufficient to satisfy such liability,
and HDVT is unable to pay any such shortfall,  the Company's  maximum  liability
with respect to the assessment is approximately $3.2 million.

Four individuals brought suit in Steuben County Superior Court, Angola,  Indiana
in 1998 alleging  that they were  employees of the Company and that they had not
been paid certain wages in connection  with the bankruptcy of a former  customer
with which the Company had commenced a limited service arrangement.

                                      F-33
<PAGE>
The individuals purport to represent a class of employees.  Plaintiffs seek from
the  Company  unpaid  wages,  vacation  and other  benefits  owed by the  former
customer  in a total  amount  for the  purported  class in excess  of  $600,000,
potentially subject to trebling under applicable wage statutes. The Company does
not believe that it has any  liability to the  plaintiffs  and has  successfully
obtained a dismissal of the suit. Plaintiffs have commenced an appeal process in
the Indiana Court of Appeals.

The Company  initiated an  arbitration  proceeding  and related suit in November
1999 in the United States  District Court for the District of Arizona seeking to
enjoin a former  executive  officer and director of the Company from violating a
noncompetition  agreement.  The  Company's  action  also seeks  collection  of a
promissory  note  from the  defendant  in the  amount  of  $350,000.  A  company
affiliated  with the  defendant has filed suit in Georgia state court seeking to
enjoin the Company's actions.  Counterclaims have been filed against the Company
for  unspecified  damages  based on various  tort  theories,  for a  declaratory
judgment  voiding the  noncompetition  agreement,  and for  cancellation  of the
promissory note. The Company believes that the  counterclaims  are without merit
and intends to defend them 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.

(12) RELATED PARTY TRANSACTIONS

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

================================================================================
(In thousands of dollars)                               1999     1998     1997
-------------------------                              -------  -------  -------
Processing fees paid to company owned by shareholder   $    --  $    --  $ 1,030
Consulting fees paid to company partially owned
  by director                                               53       --       --
================================================================================

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.

(13) 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 related to lease commitments and termination
penalties  associated  with the  closure of seven  offices.  Approximately  $1.3
million has been charged against the restructuring liability.

(14) 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. SFAS 137,  ACCOUNTING FOR
DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133, defers the effective date of SFAS 133, but encourages
early  application.  Adoption of SFAS No. 133 would have an immaterial effect on
the December 31, 1999 and 1998 financial statements.

                                      F-34
<PAGE>
(15) 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 1999 and none is
expected in future periods.

(16) GOING CONCERN MATTERS

The  accompanying  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liabilities  in the normal course of business.  The financial  statements do not
include any adjustments  relating to the  recoverability  or  classification  of
assets or  liabilities  that might be necessary  should the Company be unable to
continue as a going concern. The Company has incurred significant debt primarily
in connection with the October 1997 issuance of its $85 million 10% Senior Notes
due 2004 (the  "Notes")  and the October  1999 Loan  Agreement.  At December 31,
1999, the Company had  outstanding  indebtedness of $10.0 million under the Loan
Agreement,  outstanding  senior  indebtedness  of $85.0 million and a deficit in
stockholders' equity of approximately $28.7 million, respectively.

In an effort to improve cash flows and reduce the  Company's  indebtedness,  the
Company   has  begun   negotiations   with  the   holders   of  the  Notes  (the
"Noteholders"). The Company is seeking to negotiate the reduction or elimination
of the outstanding principal amount of the Notes in exchange for the issuance of
shares of its equity securities.  If the Company is able to reach agreement with
the  Noteholders  upon such a  transaction,  the  Company  anticipates  that the
percentage  ownership  of the then current  shareholders  of the Company will be
materially   reduced,   and  the  equity   securities  issued  to  participating
Noteholders also may have rights,  preferences or privileges  senior to those of
the holders of the Company's  Common  Stock.  The Company is seeking to complete
negotiations   with  the  Noteholders   and  currently   intends  to  submit  to
shareholders for approval on or before July 15, 2000 a proposal  relating to all
or a portion of the negotiations.

In  addition,  the Company is seeking to  accelerate  revenue  growth  through a
recent  refocus  of its sales and  marketing  efforts to target  industries  and
geographic  territories that it believes present the greatest  opportunities for
profitable growth, and to emphasize marketing through third-party alliances. The
Company  further  is  implementing  expense  reductions  to offset the effect of
delayed revenue growth.

There  can be no  assurance  whether  or when a  satisfactory  agreement  can be
reached with the Noteholders or whether anticipated operational improvements can
be made. If the Company is unable to complete a satisfactory  agreement with the
Noteholders,  the Company  will  remain  subject to the  current  principal  and
interest obligations (and other terms and conditions) associated with the Notes,
it will not  likely  be able to retain  certain  of its key  employees,  and its
liquidity position and ability to operate will be materially adversely affected.

                                      F-35
<PAGE>
                                   SCHEDULE II

                            EMPLOYEE SOLUTIONS, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

================================================================================

                                                        December 31,
                                              ---------------------------------
                                                1999         1998         1997
                                              -------      -------      -------
                                                       (in thousands)
Allowance for doubtful accounts:
   Balance at beginning of year               $ 8,493      $ 5,550      $ 1,729
   Provision charged to expense                 3,815        5,016        4,159
   Charge-offs                                 (2,808)      (2,073)        (338)
                                              -------      -------      -------
   Balance at end of year*                    $ 9,500      $ 8,493      $ 5,550
                                              =======      =======      =======

                                                         December 31,
                                              ---------------------------------
                                                1999         1998         1997
                                              -------      -------      -------
                                                       (in thousands)
Restructuring allowance:
   Balance at beginning of year               $   424      $    --      $    --
   Provision charged to expense                    --        1,400           --
   Payments/usage                                (367)        (976)          --
                                              -------      -------      -------
   Balance at end of year                     $    57      $   424      $    --
                                              =======      =======      =======

                                                        December 31,
                                              ---------------------------------
                                                1999         1998         1997
                                              -------      -------      -------
                                                        (in thousands)
Tax valuation allowance:
   Balance at beginning of year               $ 9,188      $    --      $    --
   Provision charged to expense                17,641        9,188           --
   Payments/usage                                  --           --           --
                                              -------      -------      -------
   Balance at end of year                     $26,829      $ 9,188      $    --
                                              =======      =======      =======

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

================================================================================

                                      F-36
<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 29th day of March, 2000

                                        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,           March 29, 2000
----------------------------     Chief Executive Officer,
Quentin P. Smith, Jr.            President and Director


/s/ David R. Carpenter           Director                         March 26, 2000
----------------------------
David R. Carpenter


/s/ Jeffrey A. Colby             Director                         March 28, 2000
----------------------------
Jeffrey A. Colby


/s/ Sara R. Dial                 Director                         March 24, 2000
----------------------------
Sara R. Dial


/s/ Kennard F. Hill              Director                         March 26, 2000
----------------------------
Kennard F. Hill


/s/ Robert L. Mueller            Director                         March 24, 2000
----------------------------
Robert L. Mueller


/s/ John V. Prince               Chief Financial Officer          March 29, 2000
----------------------------
John V. Prince
<PAGE>
                            EMPLOYEE SOLUTIONS, INC.
                               (THE "REGISTRANT")

                                EXHIBIT INDEX TO
                               REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

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

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

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

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

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

4.4       Amended and Restated Loan Agreement  dated     10/21/97 8-K
          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    Registration
          1998  between  the  Company  and  American     Statement dated February 19, 1998
          Securities  Transfer and Trust, Inc. which
          includes,   as  Exhibit  A  thereto,   the
          Certificate   of   Designation  of  Junior
          Participating  Preferred Stock,  Series A,
          of the  Company,  as Exhibit B thereto the
          Form of Rights  Certificate and as Exhibit
          C  thereto   the   Summary  of  Rights  to
          Purchase Preferred Shares

4.6**     Loan and  Security  Agreement  dated as of     Registrant's  Form  10-Q  for the  quarter
          October   26,   1999  by  and   among  the     ended September 30, 1999
          Registrant     and    certain    of    its
          subsidiaries, Foothill Capital Corporation
          and Ableco Finance LLC

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

10.2*     Employee Solutions, Inc. 1995 Stock Option     Registrant's  Form  10-Q  for the  quarter
          Plan, as amended through May 25, 1999          ended June 30, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit                                              Incorporated Herein                               Filed
 Number              Description                       by Reference to                                Herewith
 ------              -----------                       ---------------                                --------
<S>       <C>                                     <C>                                                <C>
10.3      Indemnification   Agreements  between  the
          Registrant and:

10.3.1*   Jeffery A. Colby                               1996 10-K

10.3.2*   Morris C. Aaron  (Agreements  in this form     1996 10-K
          were also entered into between the Company
          and each of John V. Prince, Bill C. Hollis
          and Lee E. Martin.)

10.3.3*   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,  Robert  L.
          Mueller and Kennard F. Hill)

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

10.5      Asset Purchase,  Joint Venture Termination     Registrant's  Form  10-Q  for the  quarter
          and Mutual Release  Agreement  dated as of     ended March 31, 1998
          April  7,  1998  between  ESI,   ESI-EAST,
          Edward  L.  Cain and the  Edward  L.  Cain
          Agency, Inc.

10.6      Reinsurance   Binder  for  Loss  Portfolio     Registrant's  Form  10-Q  for the  quarter
          Transfer                                       ended March 31, 1998

10.7*     Employment  agreement  dated as of May 11,     Registrant's  Report  on Form 10-Q for the
          1998  between   Registrant  and  James  E.     quarter ended September 30, 1998
          Gorman

10.8*     Severance  Agreement  dated July 31,  1997     Registrant's  Report  on Form 10-K for the
          between the Registrant and John V. Prince      year ended December 31, 1998 ("1998 10-K")

10.9*     Employment  Agreement  dated  February 15,     1998 10-K
          1999 between the Registrant and Quentin P.
          Smith, Jr.

10.10*    Employment  Agreement dated August 1, 1996     1998 10-K
          between   Logistics   Personnel  Corp.,  a
          subsidiary  of the  Registrant  (LPC)  and
          Bill C. Hollis

10.11*    Amendment to  Employment  Agreement  dated     1998 10-K
          March 3, 1999 between the Registrant,  LPC
          and Bill C. Hollis

10.12*    Employment  Agreement dated April 30, 1999     Registrant's  Form  10-Q  for the  quarter
          between Registrant and Lee E. Martin           ended June 30, 1999

10.13*    Agreement  dated  November 8, 1999 between                                                    X
          Registrant and Marvin D. Brody

10.14*    Employment  Agreement  dated  November 30,                                                    X
          1999  between  Registrant  and  Jeffery A.
          Colby

21.1      Subsidiaries of Registrant                     1998 10-K

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