<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                  ------------
                                    FORM 10-Q

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

     For the transition period from__________________ to___________________


                        Commission file number 000-23147

                          OUTSOURCE INTERNATIONAL, INC.
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<CAPTION>
                           FLORIDA                                                 65-0675628
                           -------                                                 ----------
<S>                                                                   <C>
(State or Other Jurisdiction of Incorporation or Organization)        (I.R.S. Employer Identification No.)
</TABLE>

              1690 South Congress Ave., Delray Beach, Florida 33445
              -----------------------------------------------------
               (Address of Principal Executive Offices, Zip Code)

Registrant's Telephone Number, Including Area Code:   (561) 454-3500

         Indicate 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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

         Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:

                  Class                       Outstanding at August 10, 2000
---------------------------------------       ------------------------------
Common Stock, par value $.001 per share                  8,657,913

<PAGE>   2


                         OUTSOURCE INTERNATIONAL, INC.
                               TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                          Page
                                                                                                          ----
         <S>                                                                                              <C>
         Item 1 - Financial Statements

           Consolidated Balance Sheets as of July 2, 2000 and April 2, 2000............................    2

           Consolidated Statements of Operations for the thirteen weeks
           ended July 2, 2000 and three months ended June 30, 1999.....................................    3

           Consolidated Statements of Cash Flows for the thirteen weeks
           ended July 2, 2000 and three months ended June 30, 1999.....................................    4

           Notes to Consolidated Financial Statements..................................................    5

         Item 2 - Management's Discussion and Analysis of Financial
           Condition and Results of Operations.........................................................   16

         Item 3 - Quantitative and Qualitative Disclosures about Market Risk...........................   31


                           PART II - OTHER INFORMATION

         Item 1 - Legal Proceedings....................................................................   32

         Item 2 - Changes in Securities and Use of Proceeds............................................   32

         Item 3 - Defaults Upon Senior Securities......................................................   32

         Item 4 - Submission of Matters to a Vote of the Security Holders..............................   33

         Item 5 - Other Information....................................................................   33

         Item 6 - Exhibits and Reports on Form 8-K.....................................................   40

         Signatures....................................................................................   42
</TABLE>


                                       1
<PAGE>   3

PART I: FINANCIAL INFORMATION
Item 1: Financial Statements

                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          JULY 2, 2000    APRIL 2, 2000
                                                                          ------------    -------------
<S>                                                                       <C>             <C>
ASSETS
Current Assets:
      Cash                                                                 $   1,043       $   1,546
      Trade accounts receivable, net of allowance
           for doubtful accounts of $1,498 and $1,574                         38,314          42,118
      Funding advances to franchises                                             427             206
      Assets held for disposition                                                426           2,409
      Income tax receivable and other current assets                          12,502           5,043
                                                                           ---------       ---------

           Total current assets                                               52,712          51,322

Property and equipment, net                                                    7,890           9,154
Goodwill and other intangible assets, net                                     45,049          45,783
Other assets                                                                   2,148           2,310
                                                                           ---------       ---------

           Total assets                                                    $ 107,799       $ 108,569
                                                                           =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
      Accounts payable                                                     $   6,898       $   8,887
      Accrued expenses:
           Payroll                                                             5,297          10,518
           Payroll taxes                                                       1,831           4,139
           Workers' compensation and insurance                                 6,386           5,210
           Other                                                               5,935           4,499
      Accrued restructuring charges                                            1,693           2,255
      Other current liabilities                                                  805             507
      Current maturities of long-term debt to related parties                  1,197           1,195
      Current maturities of long-term debt                                     6,995           7,635
      Revolving credit facility                                               50,626          50,746
                                                                           ---------       ---------

           Total current liabilities                                          87,663          95,591

Non-Current Liabilities
      Current maturities of long-term debt                                       454              --
      Other long-term debt, less current maturities                            1,552           1,934
                                                                           ---------       ---------

      Total liabilities                                                       89,669          97,525
                                                                           ---------       ---------

Commitments and Contingencies (Notes 5, 6 and 7)

Shareholders' Equity:
      Preferred stock, $.001 par value: 10,000,000 shares authorized,
           no shares issued and outstanding                                       --              --
      Common stock, $.001 par value: 100,000,000 shares authorized,
           8,657,913 shares issued and outstanding                                 9               9
      Additional paid-in-capital                                              53,546          53,546
      Accumulated deficit                                                    (35,425)        (42,511)
                                                                           ---------       ---------

           Total shareholders' equity                                         18,130          11,044
                                                                           ---------       ---------

           Total liabilities and shareholders' equity                      $ 107,799       $ 108,569
                                                                           =========       =========
</TABLE>

         See accompanying notes to the consolidated financial statements


                                       2
<PAGE>   4


                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999

                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                         JULY 2, 2000    JUNE 30, 1999
                                                                         ------------    -------------
<S>                                                                      <C>             <C>
Net revenues                                                               $  81,618       $ 143,454
Cost of revenues                                                              65,432         123,110
                                                                           ---------       ---------

Gross profit                                                                  16,186          20,344
                                                                           ---------       ---------

Selling, general and administrative expenses:
      Amortization of intangible assets                                          734             934
      Other selling, general and administrative expenses                      13,988          19,913
                                                                           ---------       ---------

      Total selling, general and administrative expenses                      14,722          20,847
                                                                           ---------       ---------

      Restructuring costs                                                        878              --
                                                                           ---------       ---------

Operating income (loss)                                                          586            (503)
                                                                           ---------       ---------

Other expense (income):
      Interest expense (net)                                                   1,913           1,702
      Disposition of assets and other income (net)                              (724)            (20)
                                                                           ---------       ---------

      Total other expense (income):                                            1,189           1,682
                                                                           ---------       ---------

Loss before benefit for income taxes                                            (603)         (2,185)
                                                                           ---------       ---------

Income taxes benefit                                                          (7,689)           (936)
                                                                           ---------       ---------

Net income (loss)                                                          $   7,086       $  (1,249)
                                                                           =========       =========

Weighted average common shares outstanding:
      Basic                                                                8,657,913       8,657,913
                                                                           =========       =========
      Diluted                                                              9,857,385       8,657,913
                                                                           =========       =========

Income (loss) per share:
      Basic                                                                $    0.82       $   (0.14)
                                                                           =========       =========
      Diluted                                                              $    0.72       $   (0.14)
                                                                           =========       =========
</TABLE>

         See accompanying notes to the consolidated financial statements


                                       3
<PAGE>   5

                  OUTSOURCE INTERNATIONAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000 AND THREE MONTHS ENDED JUNE 30, 1999
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         JULY 2, 2000     JUNE 30, 1999
                                                                         ------------     -------------
<S>                                                                      <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                          $   7,086       $  (1,249)
      Adjustments to reconcile net income (loss) to net cash
        (used in) provided by operating activities:
           Depreciation and amortization                                       1,406           1,889
           Loss on sale of  assets held for disposition                          446              --
           Deferred income taxes                                              (7,767)         (1,470)
           Notes received from franchises                                         --            (796)
           Gain on the sale of the Company's PEO operations                     (684)             --
           Loss on disposal of assets, net                                        92              --
                                                                           ---------       ---------

      Changes in assets and liabilities (excluding effects of acquisitions
        and dispositions):                                                       579          (1,626)

      (Increase) decrease in:
           Trade accounts receivable                                           4,387           1,594
           Prepaid expenses and other current assets                             943             239
           Other assets                                                          (59)            324
      Increase (decrease) in:
           Accounts payable                                                     (994)             24
           Accrued expenses:
                Payroll                                                       (5,248)          2,201
                Payroll taxes                                                 (2,309)          1,443
                Workers' compensation and insurance                            1,120            (993)
                Reserve for restructuring charges                               (562)             --
                Other                                                             53             101
           Other current liabilities                                            (112)            137
                                                                           ---------       ---------

      Net cash (used in) provided by operating activities                     (2,202)          3,444
                                                                           ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from asset sales as part of the Restructuring and related matters       880              --
Proceeds from the sale of the Company's PEO operations                         3,314              --
Funding repayments (advances) from franchises, net                              (220)            300
Purchases of property and equipment                                             (192)           (408)
Proceeds from sale of property and equipment                                      --           1,600
                                                                           ---------       ---------

      Net cash provided by investing activities                                3,782           1,492
                                                                           ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

(Decrease) increase in excess of outstanding checks over bank balance,
  included in accounts payable                                                (1,454)            102
Repayment of lines of credit and revolving credit facilities                    (120)         (2,512)
Proceeds from interest collar termination                                         --             250
Related party debt repayments                                                     --            (142)
Repayment of other long-term debt                                               (509)         (1,489)
                                                                           ---------       ---------

      Net cash used in financing activities                                   (2,083)         (3,791)
                                                                           ---------       ---------

Net (decrease) increase in cash                                                 (503)          1,145
Cash, beginning of period                                                      1,546           1,418
                                                                           ---------       ---------

Cash, end of period                                                        $   1,043       $   2,563
                                                                           =========       =========

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                                              $   1,699       $   1,823
                                                                           =========       =========
</TABLE>

         See accompanying notes to the consolidated financial statements


                                       4
<PAGE>   6

                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 1.  INTERIM FINANCIAL STATEMENTS

         The interim consolidated financial statements and the related
         information in these notes as of July 2, 2000 and for the thirteen
         weeks ended July 2, 2000 ("Q1 2001") and the three months ended June
         30, 1999 ("Q2 1999") have been prepared on the same basis as the
         audited consolidated financial statements and, in the opinion of
         management, reflect all adjustments (including normal accruals)
         necessary for a fair presentation of the financial position, results of
         operations and cash flows for the interim periods presented. The
         results of operations for the interim periods presented are not
         necessarily indicative of the results to be expected for the full year.
         Certain reclassifications have been made to the presentation of the
         financial position and results of operations for Q2 1999 to conform to
         current presentation. These reclassifications had no effect on
         previously reported results of operations or retained earnings.

         The Company filed a Form 8-K during the fourth calendar quarter of 1999
         indicating, among other things, its change for financial reporting
         purposes, effective January 1, 2000, from a fiscal year ended December
         31 to a fiscal year ending the 52 or 53 week period ending the Sunday
         closest to March 31. These interim financial statements should be read
         in conjunction with the audited financial statements for the year ended
         December 31, 1999, included in the Company's Form 10-K filed with the
         Securities and Exchange Commission ("SEC") on April 14, 2000 and the
         financial statements in the Company's Form 10-Q for the transition
         period ended April 2, 2000 ("Q1 2000") filed with the SEC on May 17,
         2000.

         In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
         133, "Accounting for Derivative Instruments and Hedging Activities" was
         issued. SFAS No. 133 defines derivatives and establishes accounting and
         reporting standards requiring that every derivative instrument
         (including certain derivative instruments embedded in other contracts)
         be recorded in the balance sheet as either an asset or liability
         measured at its fair value. SFAS No. 133 also requires that changes in
         the derivative's fair value be recognized currently in earnings unless
         specific hedge accounting criteria are met. Special accounting for
         qualifying hedges allows a derivative's gains and losses to offset
         related results on the hedged item in the income statement, and
         requires that a company must formally document, designate and assess
         the effectiveness of transactions that receive hedge accounting. SFAS
         No. 133, as modified by SFAS No. 137, is effective for all fiscal
         quarters of fiscal years beginning after June 15, 2000, and cannot be
         applied retroactively. The Company intends to implement SFAS No. 133 in
         its consolidated financial statements as of and for the fiscal quarter
         ending July 2, 2001. Although it has not determined the effects, if
         any, that implementation will have, management does not believe that
         the Company is a party to any transactions involving derivatives as
         defined by SFAS No. 133. SFAS No. 133 could increase volatility in
         earnings and other comprehensive income if the Company enters into any
         such transactions in the future.

         NOTE 2:  FUTURE LIQUIDITY

         As discussed in Note 5 to the Company's Consolidated Financial
         Statements, the Company's bank financing expired on August 15, 2000 and
         the Company was, until August 15, 2000, in default of certain
         acquisition debt subordinated to its bank financing.

         Effective August 15, 2000, the Company entered into a three-year
         agreement with a syndicate of lenders led by Ableco Finance, LLC, as
         agent, which replaced the Company's previous senior credit facility
         with a $33.4 million Revolving Credit Facility and two term loans of
         $17.6 million and $9.0 million, respectively. In connection with the
         repayment of the previous credit facility, the Company issued a
         four-year, $5.3 million subordinated term note to the lenders under the
         previous credit facility. Simultaneously with the closing of the new
         credit facility, the Company amended certain of its outstanding
         acquisition notes payable to provide for the payment of interest only
         for a period of three years followed by two years of equal monthly
         installments of principal and interest. As a result of the


                                       5
<PAGE>   7

                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 2:  FUTURE LIQUIDITY (CONTINUED)

         amendments to the acquisition notes payable the Company is no longer in
         default under those notes (see Note 5).

         NOTE 3:  RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
         DISPOSITION

         On August 6, 1999, the Company announced the following actions to
         improve its short-term liquidity, concentrate its operations within one
         core segment (Tandem, its flexible industrial staffing division) and
         improve its operating performance within that segment:

         (i)      the sale of Office Ours, the Company's clerical staffing
         division, effective August 30, 1999. Revenues of Office Ours, for the
         three months ended June 30, 1999, were $2.1 million, and the loss
         before taxes for these operations, on a basis consistent with the
         segment information presented in Note 9, was approximately $19,000;

         (ii)     the engagement of an investment banking firm to assist in the
         evaluation of strategic options, including the possible sale, of
         Synadyne, the Company's PEO division. Effective April 8, 2000, the
         Company sold the operations of Synadyne for net proceeds at closing of
         $3.1 million. Effective in May 2000, $0.2 million of the closing
         proceeds, which was being held in escrow, were released to the Company.
         In addition, if the Company meets certain performance criteria for the
         one-year period subsequent to the sale, it will receive additional
         proceeds of $1.25 million. In connection with the sale of its PEO
         operations, the Company recorded a pre-tax non-operating gain of $0.7
         million in its results of operations for the quarter ended July 2,
         2000. Revenues of Synadyne, prior to the sale effective April 8, 2000,
         were approximately $71,000 and $55.1 million for Q1 2001 and Q2 1999,
         respectively. On a basis consistent with the segment information
         presented in Note 9, the Company reported a net loss before taxes for
         the PEO operations of $0.2 million and income before taxes for the PEO
         operations of $0.5 million for Q1 2001 and Q2 1999, respectively; and

         (iii)    a reduction of the Company's flexible industrial staffing and
         support operations (the "Restructuring") consisting primarily of: the
         sale, franchise, closure or consolidation of 47 of the 117 Tandem
         branch offices existing as of June 30, 1999; an immediate reduction of
         the Tandem and corporate headquarters employee workforce by 110
         employees (approximately 11% of the Company's workforce); and an
         additional reduction of 32 employees through Q2 2001. A total of 47
         branch offices have been or will be eliminated in connection with the
         Restructuring, 41 of which have been sold, franchised, closed, or
         consolidated as of August 15, 2000. These offices were not or are not
         expected to be adequately profitable in the near future or are
         inconsistent with the Company's operating strategy of clustering
         offices within specific geographic regions. The restructuring charge
         accrual and its utilization are as follows:


                                       6
<PAGE>   8

                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 3:  RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
         DISPOSITION (CONTINUED)


<TABLE>
<CAPTION>
                                                                                                  UTILIZATION
                                                          ORIGINAL    BALANCE AT  CHARGES TO    ----------------  BALANCE AT
         (AMOUNTS IN THOUSANDS)                            CHARGE       4/2/00    OPERATIONS    CASH    NON-CASH    7/2/00
                                                          --------    ----------  ----------    ----    --------  ----------
         <S>                                              <C>         <C>         <C>           <C>     <C>       <C>
         Employee severance and
             other termination benefits                    $ 4,040      $2,139      $ (89)      $483      $ --      $1,567

         Professional fees                                   1,205          34        369        362        --          41

         Lease termination and write-down of
             leasehold improvements at closed offices          400          49         (2)        21        --          26

         Other restructuring charges                           146          33        154        128        --          59
                                                           -------      ------      -----       ----      ----      ------

         Accrued restructuring charges                       5,791       2,255        432        994        --       1,693

         Write-down to fair value/loss on sale
             of assets identified for disposition            5,429          --        446         --       446          --
                                                           -------      ------      -----       ----      ----      ------

         Total restructuring and asset
             impairment activity                           $11,220      $2,255      $ 878       $994      $446      $1,693
                                                           =======      ======      =====       ====      ====      ======
</TABLE>

         The original $11.2 million restructuring charge includes $4.0 million
         for severance and other termination benefits, $1.2 million for
         professional fees, and $0.6 million in lease termination and other
         charges. Severance and other termination benefits were decreased by
         $0.2 million and $0.1 million during Q1 2000 and Q1 2001, respectively,
         to reflect a reduction of amounts to be paid in connection with certain
         severance packages accrued in 1999 since certain employees of offices
         sold and franchised to third parties would continue employment with
         such buyers or franchisees. The remaining liability of $1.6 million for
         severance and other termination benefits as of July 2, 2000 consists of
         $1.4 million for 23 employees who have been or will be terminated
         during the period of August 1999 through September 2000, and paid over
         a period ranging from one week to 21 months from the balance sheet
         date.

         Professional fees of $0.5 million and $0.4 million were recorded as
         restructuring costs incurred during Q1 2000 and Q1 2001, respectively.
         These professional fees were comprised primarily of amounts paid to
         Crossroads LLC, formerly Crossroads Capital Partners, LLC
         ("Crossroads"), for its services related to the Restructuring. The
         Company expects to complete these restructuring activities during the
         quarter ending October 1, 2000.

         The Company utilized $0.1 million and $0.1 million of the restructuring
         charge during Q1 2000 and Q1 2001, respectively, for the costs of
         terminating leases as well as writing down the carrying value of
         leasehold improvements and other assets not usable in other Company
         operations.

         The restructuring charge includes a $5.4 million write-down of assets,
         recorded in the Company's results of operations at such time as these
         assets were classified as held for disposition, to their estimated net
         realizable value based on management's estimate of the ultimate sales
         prices that would be negotiated for these assets. The charge was
         increased by $0.1 million in Q1 2000 and $0.4 million during Q1 2001,
         and is subject to future adjustments as the Company negotiates the
         actual sales prices of the assets that remain to be sold as of July 2,
         2000.

         During Q1 2001, the Company (i) sold one staffing office and closed
         another, in the state of Minnesota, effective April 10, 2000, for cash
         proceeds of $60,000, (ii) franchised one of its staffing offices in the
         state of Ohio, effective April 10, 2000, for cash proceeds of $20,000,
         and (iii) sold its operations in the


                                       7
<PAGE>   9


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 3:  RESTRUCTURING, SALE OF OPERATIONS AND ASSETS HELD FOR
         DISPOSITION (CONTINUED)

         states of New Jersey and Pennsylvania, comprising six staffing offices
         and two "vendor on premises" locations, for $1.3 million (comprised of
         cash proceeds of $0.8 million and two promissory notes totaling $0.5
         million). In connection with the sale of its staffing offices in New
         Jersey and Pennsylvania, the Company recorded a $0.4 million loss on
         the sale, in addition to the original $2.1 million write-down of these
         assets to their estimated net realizable value upon their
         classification as assets held for disposition.

         As of July 2, 2000 there were six Tandem offices that remained to be
         sold as part of the Restructuring, and the Company had classified the
         related assets as assets held for disposition, excluding cash, accounts
         receivable and deferred income taxes. Upon classification as assets
         held for disposition, the Company discontinued the related depreciation
         and amortization for these assets, which reduced operating expenses by
         approximately $0.1 million in Q1 2001. The estimated fair market value
         of these assets held for disposition was based on management's judgment
         and as such, actual results could vary significantly from such
         estimates.

         The Company's assets held for disposition as of July 2, 2000, stated at
         the lower of original cost (net of accumulated depreciation or
         amortization) or fair value (net of selling and disposition costs),
         were as follows (presented in thousands):


<TABLE>
<CAPTION>
                                                     NET ORIGINAL COST
                                       ------------------------------------------
                                       PROPERTY        GOODWILL AND                      LOWER OF
                                          AND             OTHER                          COST OR
                                       EQUIPMENT    INTANGIBLE ASSETS       TOTAL       FAIR VALUE
                                       ---------    -----------------      ------       ----------
          <S>                          <C>          <C>                    <C>          <C>
          Tandem branch offices          $313             $1,005           $1,318          $426
                                         ====             ======           ======          ====
</TABLE>


         The Tandem operations held for disposition, as well as those sold,
         franchised or closed (excluding offices consolidated into existing
         offices) as part of the Restructuring as of July 2, 2000, had revenues
         of $8.8 million and $13.9 million in Q1 2001 and Q2 1999, respectively.
         On a basis consistent with the segment information presented in Note 9,
         the Company reported a $0.2 million net income and a ($0.7) million net
         loss for Q1 2001 and Q2 1999, respectively, for these operations.

         NOTE 4.  INCOME TAXES

         The Company's effective tax rate differed from the statutory federal
         rate of 35% as follows (amounts presented in thousands, except for
         percentages):


<TABLE>
<CAPTION>
                                                                                       FOR THE QUARTER ENDED
                                                                   ----------------------------------------------------------
                                                                          JULY 2, 2000                      JUNE 30, 1999
                                                                    AMOUNT             RATE             AMOUNT          RATE
                                                                   -------           --------           ------          -----
         <S>                                                       <C>               <C>                <C>             <C>
         Statutory rate applied to income before income taxes
            and extraordinary item                                 $  (211)             (35.0)%         $(765)          (35.0)%
         Increase (decrease) in income taxes resulting from:
            State income taxes, net of federal benefit                  20                3.3             (80)           (3.7)
            Employment tax credits                                     (81)             (13.4)           (165)           (7.5)
            Nondeductible expenses                                      29                4.9              --              --
            Other                                                     (101)             (16.7)             74             3.4
                                                                   -------           --------           -----           -----
         Total before valuation allowance                             (344)             (56.9)           (936)          (42.8)
         Change in valuation allowance                              (7,345)          (1,218.1)             --              --
                                                                   -------           --------           -----           -----
         Total                                                     $(7,689)          (1,275.0)%         $(936)          (42.8)%
                                                                   =======           ========           =====           =====
</TABLE>


                                        8
<PAGE>   10


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 4.  INCOME TAXES (CONTINUED)

         During Q1 2001, the Company reduced the deferred tax asset valuation
         allowance by $7.7 million, which is expected to be realized through
         utilization of the existing net operating loss carryforward, relating
         to the extinguishment gain to be recorded in the quarter ending October
         1, 2000 (see Note 5), and through taxable income from future
         operations. The Company's expectations of future taxable income are
         consistent with past operating history and do not incorporate operating
         improvements to achieve such income. The Company's provision for income
         taxes may be impacted by adjustments to the valuation allowance that
         may be required if management's assessment changes regarding the
         realizability of the deferred tax assets in future periods. The
         valuation allowance was established in 1999 and was increased by the
         tax benefits in the quarter ended April 2, 2000 because it was not
         clear that the tax benefits resulting from operating losses and other
         temporary differences were "more likely than not" to be realized, as
         required by SFAS No. 109, "Accounting for Income Taxes". Income tax
         receivable and other current assets at July 2, 2000 includes a $15.4
         million deferred tax asset offset by a valuation allowance of $7.7
         million, representing the amount of the deferred tax assets that may
         not be realizable.

         The employment tax credit carryforward of $2.5 million as of July 2,
         2000 will expire during the years 2012 through 2020. The employment tax
         credits recorded by the Company from February 21, 1997 through December
         31, 1999 include Federal Empowerment Zone ("FEZ") credits which
         represent a net tax benefit of $0.6 million. Although the Company
         believes that these FEZ credits have been reasonably determined, the
         income tax law addressing how FEZ credits are determined for staffing
         companies is evolving and, the Company's position with regard to the
         calculation of the FEZ credit has been challenged by the Internal
         Revenue Service.

         During 1999, the Company received a preliminary report from the IRS
         proposing adjustments to the previously reported taxable income and tax
         credits for certain of the Company's subsidiaries for the years ended
         December 31, 1994, 1995 and 1996. Since that time, and as a result of
         analysis and discussions with the Company, the proposed adjustments
         have been modified. The Company is currently evaluating the merits of
         these proposed adjustments with the original shareholders. Since the
         subsidiaries were "S" corporations for the periods under examination,
         the proposed adjustments, if ultimately accepted or proven to be
         appropriate, would not result in a materially unfavorable effect on the
         Company's results of operations, although additional shareholder
         distributions could result as discussed in Note 6.

         NOTE 5.  DEBT

         SENIOR DEBT FACILITIES

         Effective August 15, 2000, the Company entered into a three-year
         agreement with a syndicate of lenders led by Ableco Finance, LLC, as
         agent, an affiliate of Cerberus Capital Management, L.P. (the
         "Lenders"), which replaced the Company's existing credit facility with
         a $33.4 million Revolving Credit Facility, which includes a subfacility
         for the issuance of standby letters of credit ("Senior Facility"), and
         two term loans, Term Loan A and Term Loan B ("Term Loans"), of $17.6
         million and $9.0 million, respectively (the "Refinancing"). Both the
         Senior Facility and the Term Loans are secured by all the assets of the
         Company and its subsidiaries. The Senior Facility bears interest at
         prime or 9.0%, whichever is greater, plus 2%. Term Loan A and Term Loan
         B bear interest at prime or 9.0%, whichever is greater, plus 3.5% and
         5.0% per annum, respectively. In connection with the Refinancing, the
         Company issued warrants to the Lenders to purchase up to a maximum of
         200,000 common shares of the Company, exercisable for a term of five
         years, at $0.01 per warrant. The warrants are only exercisable if any
         letter of credit issued by the Lenders on behalf of the Company is
         drawn in proportion to the amount drawn under the letter of credit.

         A portion of the new credit facility was used to satisfy the credit
         facility (the "Fleet Facility") with Fleet


                                       9
<PAGE>   11


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 5.  DEBT (CONTINUED)

         National Bank, for itself and as agent for three other banks (the
         "Fleet Group"). Prior to the closing of the Refinancing, the
         outstanding balance of the Fleet Facility was approximately $52.0
         million. The balance was repaid in full with a cash payment of
         approximately $32.3 million and the issuance of a four-year, $5.3
         million subordinated term note (the "Fleet Term Note"). The Fleet Term
         Note is subordinated to the Senior Facility and Term Loans issued by
         the Lenders on behalf of the Company and includes interest only for
         four years, followed by a balloon payment for the entire principal
         amount. In addition, the Company is entitled to a 60% discount on this
         note if it is satisfied within 18 months. This obligation bears
         interest at Fleet's Alternative Prime Rate ("APR") plus 3.5% per annum.
         In connection with the Refinancing and in satisfaction of the Company's
         obligation to the Fleet Group, the Company has issued 524,265 warrants
         to the Fleet Group to purchase common shares of the Company, which
         constitutes 5.0% of the common stock of the Company on a fully diluted
         basis. The warrants are exercisable for a term of 10 years at $0.01 per
         warrant. In connection with the Refinancing and the termination of the
         Fleet Facility, the Company will record an extraordinary gain, net of
         tax, of approximately $8.5 million in the quarter ending October 1,
         2000.

         As of July 2, 2000, the Company's primary sources of funds for working
         capital and other needs were (i) a $26.1 million credit line (the
         "Revolving Credit Facility"), including existing letters of credit of
         $4.8 million and (ii) a $33.0 million credit facility, based on and
         secured by the Company's accounts receivable (the "Receivable
         Facility"), with the Fleet Group. Effective April 13, 2000, due in part
         to the sale of the Company's Synadyne operation, the maximum
         availability under the Receivable Facility was reduced from $50.0
         million to $33.0 million. Effective May 1, 2000, the maximum
         availability under the Revolving Credit Facility was reduced from $25.5
         million to $25.3 million (including existing letters of credit of $4.8
         million), and effective in June 2000, the maximum availability under
         the Revolving Credit Facility was increased to $26.1 million to provide
         for the Company's seasonal increase in working capital requirements.

         Prior to their expiration, the Receivable Facility, bore interest at
         Fleet's prime rate plus 2.0% per annum, which was 11.5% as of July 2,
         2000, while the Revolving Credit Facility bore interest at prime plus
         5.0% per annum, which was 14.5% as of July 2, 2000. The weighted
         average interest rate payable on the outstanding balances during the
         period, exclusive of related fees and expenses, was approximately 13.2%
         per annum, compared to approximately 6.7% per annum in Q2 1999. As of
         July 2, 2000, the Company had outstanding borrowings of $19.4 million
         and $31.3 million under the Revolving Credit Facility and the
         Receivable Facility, respectively.

         In addition to the Revolving Credit Facility indebtedness discussed
         above, the Company had bank standby letters of credit outstanding in
         the aggregate amount of $4.8 million as of July 2, 2000, of which $4.2
         million secured the pre-1999 portion of the workers' compensation
         obligations recorded as a current liability on the Company's
         Consolidated Balance Sheet. The remaining $0.6 million, which is
         supported by a $0.7 million cash escrow balance, is to secure future
         payments on a capital lease for furniture that was sold as part of the
         Company's corporate headquarters building.

         SUBORDINATED DEBT

         In order to remain in compliance with certain covenants in the
         Revolving Credit Facility, and to reduce the cash impact of scheduled
         payments under its subordinated acquisition debt, the Company
         negotiated extensions of the payment dates and modified the interest
         rates and other terms of certain of its acquisition notes payable in
         1999. The Company had not made substantially all of the scheduled
         payments due and, as a result, was in default on acquisition notes
         payable having a total outstanding principal balance of $6.9 million as
         of July 2, 2000. The terms of the acquisition notes payable, which


                                       10
<PAGE>   12


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 5.  DEBT (CONTINUED)

         were subordinated to the Revolving Credit Facility and the Receivable
         Facility, allowed the payees to accelerate terms of payment upon
         default. Acceleration of this debt required prior written notice to the
         Company by the various payees, which was received from three payees as
         of July 2, 2000. On August 15, 2000, in connection with the
         Refinancing, the acquisition notes payable were amended to provide that
         the Company will pay interest only, at a rate of 10.0% per annum, on
         the debt for three years following the closing of the Refinancing,
         followed by two years of equal monthly payments of interest and
         principal, which will retire the debt. In connection with the
         amendments to the acquisition notes payable, the Company paid $0.8
         million of accrued interest to the relevant noteholders at the closing
         of the Refinancing.

         NOTE 6.  COMMITMENTS AND CONTINGENCIES

         SHAREHOLDER DISTRIBUTION: Effective February 21, 1997, the Company
         acquired all of the outstanding capital stock of nine companies under
         common ownership and management, in exchange for shares of the
         Company's common stock and distribution of previously undistributed
         taxable earnings of those nine companies (the "Reorganization"). This
         distribution, supplemented by an additional distribution made in
         September 1998, is subject to adjustment based upon the final
         determination of taxable income through February 21, 1997. Although the
         Company has completed and filed its Federal and state tax returns for
         all periods through February 21, 1997, further cash distributions may
         be required in the event the Company's taxable income for any period
         through February 21, 1997 is adjusted due to audits or any other
         reason. As a result of the IRS audit of the years 1994 through 1996
         (see Note 4), the Company expects to make a distribution to the
         Company's original shareholders of at least $2.0 million. The final
         amount of the distribution has not been determined and could be up to
         $5.0 million; however, the Company expects the actual distribution to
         be significantly less.

         UNEMPLOYMENT TAXES: Federal and state unemployment taxes represent a
         significant component of the Company's cost of revenues. State
         unemployment taxes are determined as a percentage of covered wages.
         Such percentages are determined in accordance with the laws of each
         state and usually take into account the unemployment history of the
         Company's employees in that state. The Company has realized reductions
         in its state unemployment tax expense as a result of changes in its
         organizational structure from time to time. Although the Company
         believes that these expense reductions were achieved in compliance with
         applicable laws, taxing authorities of certain states may elect to
         challenge these reductions.

         The Company had made arrangements with several states to pay quarterly
         unemployment tax payments originally due in July and October 1999 in
         monthly installments over one year, bearing interest at rates ranging
         from 12.0% to 24.0% per annum. In addition, the Company contacted the
         taxing agencies of certain states to arrange payment of payroll taxes
         owed, primarily for the quarter ended April 2, 2000, of approximately
         $0.5 million. As of July 2, 2000, all of these accumulated tax
         obligations had been remitted to the appropriate taxing authorities.

         FEDERAL EMPLOYMENT TAX REPORTING PENALTIES: During September 1999, the
         Company was notified by the IRS of its intent to assess penalties of
         $500,000 related to W-2s filed by the Company for 1997 for employees
         with invalid Social Security numbers. The Company has requested an
         abatement of the penalty and does not currently expect that the penalty
         ultimately charged will exceed $300,000, which amount was included in
         selling, general and administrative expenses in 1999, and is reflected
         as a current liability on the Company's July 2, 2000 Consolidated
         Balance Sheet. However, there can be no assurance that the Company will
         not be required to ultimately pay a higher penalty in connection with
         this matter.


                                       11
<PAGE>   13


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 6.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

         UNCLAIMED PROPERTY AUDIT: A state in which the Company conducts a
         significant portion of its operations has begun and substantially
         completed an audit of the Company's compliance with escheat (unclaimed
         property) statutes. The applicable state escheat laws cover a wide
         range of situations and property types and have a ten-year statute of
         limitations. In addition, it is common for states to share information
         in this area. At this time, the Company is unable to estimate any
         liability that may result from this audit and has made no provisions in
         its financial statements related to this matter.

         WORKERS' COMPENSATION: During 1997, and through 1999, the Company's
         workers' compensation expense for claims was effectively capped at a
         contractually-agreed percentage of payroll. In 1997 and 1998, the
         Company's expense was limited to the cap even though the estimated
         ultimate cost of the actual claims experience was greater than the cap.
         In 1999, the estimated ultimate cost of the actual claims experience
         was used as the basis of the Company's workers' compensation expense
         since it was approximately $1.7 million less than the cap (3.5% of
         payroll). The estimated ultimate cost of the 1999 claims experience was
         determined based on information from an independent third-party
         administrator employed by the Company plus an allowance for claims
         incurred but not reported, based on prior experience and other relevant
         data. The Company's methodology for determining workers' compensation
         expense in the quarter ended July 2, 2000 is consistent with that for
         calendar year 1999.

         The Company routinely adjusts the accruals made in prior years for
         workers' compensation claims and expenses, based on updated information
         from its insurance carriers, its independent third-party administrator
         and its own analysis. These adjustments are included as a component of
         cost of sales in the period in which it becomes apparent that an
         adjustment is required.

         EMPLOYMENT AGREEMENTS: As of July 2, 2000, the Company had certain
         obligations under employment agreements it had entered into with its
         Chief Executive Officer ("CEO"), its former CEO and thirteen other
         officers. Under the terms of those agreements, in the event that the
         Company terminates the employment of any of those officers without
         cause or the officer resigns for good reason, the terminated officer
         will receive, among other things, severance compensation, including a
         portion (ranging from three months to two years) of the officer's
         annual base salary and bonus prior to termination. In addition, all
         incentive stock options held by such employees would become immediately
         exercisable. More substantial severance provisions apply if any of
         those officers are terminated within two years (three years for the
         CEO) after the occurrence of a "change of control", as defined in the
         employment agreements.

         Between February 1999 and May 2000, ten of the fifteen officers
         referred to above separated from the Company, resulting in the
         Company's obligation to pay two of those officers' salary for two
         years, three of those officers' salaries for one year and five of those
         officers' salaries for six months, in exchange for their agreement to,
         among other things, not compete with the Company during that period.
         The aggregate costs of these severance agreements total $3.0 million,
         of which $1.5 million has been paid as of July 2, 2000, and $1.5
         million is accrued in the Company's July 2, 2000 Consolidated Balance
         Sheet.

         On June 1, 2000, pursuant to the terms of one of the severance
         agreements described in the preceding paragraph, the Company provided a
         $0.2 million advance on severance, which is being deducted by the
         Company in bi-monthly installments payable over two years to a former
         officer of the Company.

         CONSULTING CONTRACT: In May 1999, the Company engaged Crossroads, LLC,
         a consulting firm based in Newport Beach, California, to review the
         Company's existing business plan and make recommendations for
         adjustments to strategy as well as financial and operational
         improvements. In July 1999, the engagement was modified to add
         additional services, including working with management to develop the


                                       12
<PAGE>   14


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 6.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

         Restructuring plan and a revised business plan based on the
         restructured company (see Note 3), assisting in extending the existing
         Revolving Credit Facility and Securitization Facility, arranging for
         new financing, and periodically reporting to the Company's Board of
         Directors and lenders' syndicate. In August 1999, a representative of
         Crossroads was appointed as the Company's interim chief operating
         officer and the interim president of the Tandem division. In connection
         with services provided by Crossroads to assist in the Restructuring,
         the Company has incurred costs of $1.9 million through July 2, 2000, of
         which $0.4 million was for services provided during Q1 2001. These
         amounts were included in the restructuring charge recorded by the
         Company in its results of operations. The Company anticipates that it
         will record restructuring charges of approximately $0.5 million in Q2
         2001 for services to be rendered by Crossroads during that period.

         In connection with the Refinancing, the Company will pay Crossroads
         $0.9 million for their assistance in securing the new credit facility.
         This charge, along with other costs relating to the Refinancing, will
         be amortized in the Company's results of operations over the three-year
         term of the Refinancing agreements.

         STOCK OPTIONS AND WARRANTS: During February 2000, the Company granted
         options to purchase 400,000 shares of the Company's common stock to the
         Company's new CEO at $2.00 per share. In March 2000, the Company
         granted options to purchase 473,038 shares of the Company's common
         stock to various employees at $2.125 per share, of which 428,736 shares
         remain outstanding as of July 2, 2000. Both grants vest over a
         four-year period from the grant date. As of July 2, 2000, the Company
         had in aggregate, 1,856,277 stock options and 1,208,988 warrants to
         purchase shares of the Company's common stock outstanding.

         The total number of shares of common stock reserved for issuance under
         the stock option plan as of July 2, 2000 was 2,000,000, as agreed to by
         the Company's Board of Directors in April 1999 and approved by the
         Company's shareholders at their May 1999 annual meeting.

         NOTE 7.  RELATED PARTY TRANSACTIONS

         The Company recognized revenue of $0.3 million in Q2 1999 from all
         franchises owned by significant shareholders of the Company, which
         included royalties and payments under buyout agreements. Buyouts are
         early terminations of franchise agreements entered into by the Company
         in order to allow the Company to develop the related territories. At
         the time of the buyouts, the Company receives an initial payment from
         the former franchisee and continues to receive quarterly payments from
         the former franchisee based on the gross revenues of the formerly
         franchised locations for two years after the termination date. These
         buyout terms are generally consistent with the terms of buyout
         agreements between the Company and unrelated third parties.

         Effective February 16, 1998, the Company purchased certain staffing
         locations and the related franchise rights from certain shareholders
         for $6.9 million which included the issuance of a $1.7 million note
         bearing interest at 7.25% per annum payable quarterly over three years.
         Effective February 1, 1999, the note was renegotiated so that the
         remaining principal balance of $1.3 million would bear interest at
         8.50% per annum and would be payable in monthly installments totaling
         $0.3 million in the first year and $0.6 million in the second year,
         with a $0.4 million balloon payment due at the end of the two year
         term. As discussed in Note 5, the Company had not made the renegotiated
         payments on this subordinated acquisition note, and, as a result, was
         in default under this note. Effective August 15, 2000 this note was
         amended to provide that the Company will pay interest only, at a rate
         of 10.0% per annum, on the debt for three years, followed by two years
         at equal monthly installments of principal and interest, which will
         retire the debt.


                                       13
<PAGE>   15


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 8.  EARNINGS (LOSS) PER SHARE

         The Company calculates earnings (loss) per share in accordance with the
         requirements of SFAS No. 128, "Earnings Per Share". Certain of the
         outstanding options and warrants to purchase common stock of the
         Company were anti-dilutive for Q2 1999 and accordingly were excluded
         from the calculation of diluted weighted average common shares for that
         period, solely because the result of operations was a net loss instead
         of net income.

         NOTE 9.  OPERATING SEGMENT INFORMATION

         The Company's reportable operating segments are as follows:

         TANDEM: This segment derives revenues from recruiting, training and
         deploying temporary industrial personnel and from providing payroll
         administration, risk management and benefits administration services.

         SYNADYNE: This segment derived revenues from providing a comprehensive
         package of PEO services to its clients including payroll
         administration, risk management, benefits administration and human
         resource consultation. See Note 3 relating to the Company's disposition
         of these operations.

         FRANCHISING: This segment derives revenues under agreements with
         industrial staffing franchisees that provide those franchises with,
         among other things, exclusive geographic areas of operations,
         continuing advisory and support services and access to the Company's
         confidential operating manuals. Franchising revenues also include
         revenues from early terminations of franchise agreements, called
         "buyouts".

         Transactions between segments affecting their reported income are
         immaterial. Differences between the reportable segments' operating
         results and the Company's consolidated financial statements relate
         primarily to other operating divisions of the Company and items
         excluded from segment operating measurements, such as corporate support
         center expenses and interest expense in excess of interest charged to
         the segments based on their outstanding receivables. The Company does
         not regularly provide information regarding the reportable segments'
         net assets to the chief operating decision-maker. Certain
         reclassifications have been made between segments to Income (Loss)
         Before Taxes in Q2 1999 to be consistent with current period
         presentation.

<TABLE>
<CAPTION>
                                                           FOR THE QUARTER ENDED
                                                     ---------------------------------
                                                     JULY 2, 2000        JUNE 30, 1999
                                                     ------------        -------------
                                                          (Amounts in thousands)
         <S>                                         <C>                 <C>
         REVENUES

         Tandem                                        $ 80,859           $  79,855
         Synadyne                                            71              55,079
         Franchising                                        654               2,469
         Other Company revenues                              34               6,051
                                                       --------           ---------

         Total Company revenues                        $ 81,618           $ 143,454
                                                       ========           =========

         INCOME (LOSS) BEFORE TAXES

         Tandem                                        $  4,608           $     435
         Synadyne                                          (198)                523
         Franchising                                        495               2,191
         Other Company income (loss), net (1)            (5,508)             (5,334)
                                                       --------           ---------

         The Company's loss before taxes               $   (603)          $  (2,185)
                                                       ========           =========
         </TABLE>

         (1)      During Q1 2001, the Company recognized restructuring charges
                  of $0.9 million and a $0.7 million net gain on the sale of the
                  Company's PEO operations.



                                       14
<PAGE>   16


                          OUTSOURCE INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         NOTE 10. SUBSEQUENT EVENTS

         On August 9, 2000, the Company was notified by Nasdaq-Amex that,
         because the Company was not in compliance with the minimum $4 million
         net tangible assets for continued listing on the Nasdaq National
         Market, the Company's common stock would be delisted effective August
         10, 2000. Pursuant to the notification received from Nasdaq-Amex, the
         Company's common stock was delisted from the Nasdaq National Market and
         is now being traded on the OTC Bulletin Board.

         As a result of completing the Refinancing, the Company believes it has
         taken the steps necessary to cure the net tangible asset deficiency and
         intends to appeal the delisting decision.


                                       15
<PAGE>   17


         ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

         The following information should be read in conjunction with
         "Forward-looking information: certain cautionary statements".

         GENERAL

         The Company offers its clients flexible industrial staffing services
         through its Tandem division, targeting opportunities in that
         fragmented, growing market which the Company believes has to date been
         under-served by large full service staffing companies. Significant
         benefits of Tandem's services to clients include providing clients with
         the ability to outsource their recruiting function and other logistical
         aspects of their staffing needs, as well as converting the fixed cost
         of employees to the variable cost of outsourced services. Until the
         Company sold the operations of Synadyne, effective April 8, 2000, it
         also focused on providing professional employer organization ("PEO")
         services to small and medium-sized businesses (those with less than 500
         employees).

         Flexible industrial staffing services include recruiting, training and
         deployment of temporary industrial personnel as well as payroll
         administration, risk management and benefits administration services.
         PEO services included payroll administration, risk management, benefits
         administration and human resource consultation. Tandem delivers its
         flexible staffing services through a nationwide network of 84
         Company-owned and 51 franchised recruiting and dispatch branches.
         Company-owned branches are aggregated into 13 geographic districts,
         which are combined into three geographic zones: the East, Midwest and
         West.

         The Company's revenues are based on the salaries and wages of worksite
         employees. Revenues, and the associated costs of wages, salaries,
         employment taxes and benefits related to worksite employees, are
         recognized in the period during which those employees perform the
         services. Since the Company is at risk for all of its direct costs,
         independent of whether payment is received from its clients, all
         amounts billed to clients for gross salaries and wages, related
         employment taxes, health benefits and workers' compensation coverage
         are recognized as revenue by the Company, net of credits and
         allowances, which is consistent with industry practice. The Company's
         primary direct costs are (i) the salaries and wages of worksite
         employees (trade payroll costs), (ii) employment-related taxes, (iii)
         health benefits, (iv) workers' compensation benefits and insurance, and
         (v) worksite employee transportation.

         The Company's Tandem operations generate significantly higher gross
         profit margins than those of its former Synadyne operations. The higher
         staffing margins reflect compensation for recruiting, training and
         other services not required as part of many PEO relationships, where
         the employees have already been recruited by the client and are trained
         and in place at the beginning of the relationship.

         On August 6, 1999, the Company announced the following actions intended
         to improve its short-term liquidity, concentrate its operations within
         one core segment (Tandem, its flexible industrial staffing division)
         and improve its operating performance within that segment:

         (i)      the sale of Office Ours, the Company's clerical staffing
         division, which was completed on August 30, 1999;

         (ii)     the engagement of an investment banking firm to assist in the
         evaluation of strategic options for Synadyne which ultimately resulted
         in the sale of the operations of Synadyne on April 8, 2000; and

         (iii)    a reduction of the Company's flexible industrial staffing and
         support operations (the "Restructuring") consisting primarily of: the
         sale, franchise, closure or consolidation of 47 of the 117 Tandem
         branch offices existing as of June 30, 1999; an immediate reduction of
         the Tandem and corporate headquarters employee workforce by 110
         employees (approximately 11% of the Company's workforce); and an
         additional reduction of 32 employees through Q2 2001. A total of 47
         branch offices have been or will be


                                       16
<PAGE>   18


         eliminated in connection with the Restructuring, 41 of which have been
         sold, franchised, closed, or consolidated as of August 15, 2000. These
         offices were not or are not expected to be adequately profitable in the
         near future or are inconsistent with the Company's operating strategy
         of clustering offices within specific geographic regions. See
         "Restructuring."

         RESULTS OF OPERATIONS

         The following tables set forth the amounts and percentages of net
         revenues of certain items in the Company's consolidated statements of
         income for the indicated periods. Certain reclassifications have been
         made to the presentation of the results of operations for Q2 1999 to
         conform to current presentation. The dollar amounts presented are in
         thousands:

<TABLE>
<CAPTION>
                                                                                        FOR THE QUARTER ENDED
                                                                  ---------------------------------------------------------------
                                                                         JULY 2, 2000                        JUNE 30, 1999
                                                                  -------------------------            --------------------------
         <S>                                                      <C>                  <C>             <C>                   <C>
         Net revenues:

         Tandem                                                   $  80,859            99.1%           $  79,855             55.7%
         Synadyne                                                        71             0.1               55,079             38.4
         Franchising                                                    654             0.8                2,469              1.7
         Other                                                           34             0.0                6,051              4.2
                                                                  ---------          ------            ---------           ------

         Total net revenues                                       $  81,618           100.0%           $ 143,454            100.0%
                                                                  =========          ======            =========           ======

         Gross profit                                             $  16,186            19.8%           $  20,344             14.2%
         Selling, general and administrative expenses(1)             14,722            18.0               20,847             14.5
         Restructuring and asset impairment charges                     878             1.1                   --               --
                                                                  ---------          ------            ---------           ------

         Operating income (loss)(1)                                     586             0.7                 (503)            (0.4)
         Net interest and other expense                               1,189             1.5                1,682              1.2
                                                                  ---------          ------            ---------           ------

         Loss before benefit for income taxes(1)                       (603)           (0.7)              (2,185)            (1.5)
         Benefit for income taxes                                    (7,689)           (9.4)                (936)            (0.7)
                                                                  ---------          ------            ---------           ------

         Net income (loss)(1)                                     $   7,086             8.7%           $  (1,249)            (0.9)%
                                                                  =========          ======            =========           ======


         SYSTEM OPERATING DATA:

         System Revenues(2)                                       $ 103,070                            $  159,350
                                                                  =========                            ==========
         System employees (number at the end of period)              20,000                                35,000
                                                                  =========                            ==========
         System offices (number at the end of period)                   135                                   172
                                                                  =========                            ==========
</TABLE>

         (1)      During the quarterly period ended July 2, 2000, the Company
         recorded an increase to its restructuring reserve of $0.9 million, a
         non-operating gain of $0.7 million from the sale of the Company's PEO
         operations - see Note 3 to the Company's Consolidated Financial
         Statements, and a $7.7 million decrease to its deferred tax asset
         valuation allowance - see Note 4 to the Company's Consolidated
         Financial Statements. The following table sets forth the amounts (in
         thousands, except for per share data and percentages) and the
         percentage of certain items in the Company's consolidated statements of
         income, with 2001 amounts and percentages adjusted for the above items
         as follows: (i) operating income (loss) excludes the increase in the
         restructuring reserve, and (ii) net loss and loss per share excludes
         the restructuring reserve, gain from the sale of the Company's PEO
         operations, and the decrease in the deferred tax valuation allowance.

<TABLE>
<CAPTION>
                                                                           FOR THE QUARTER ENDED
                                                                  -------------------------------------------
                                                                  JULY 2, 2000                  JUNE 30, 1999
                                                                  ------------                  -------------
         <S>                                                      <C>                           <C>
         Operating income (loss), as adjusted                       $ 1,464                      $   (503)

         As a percentage of net revenues                                1.8%                         (0.4)%

         Net loss, as adjusted                                      $  (487)                     $ (1,249)

         As a percentage of net revenues                               (0.6)%                        (0.9)%

         Loss per diluted share, as adjusted                        $ (0.06)                     $  (0.14)

         EBITDA, as adjusted                                          2,918                         1,406
</TABLE>


                                       17
<PAGE>   19
         EBITDA is earnings (net income) before the effect of interest income
         and expense, income tax benefit and expense, depreciation expense and
         amortization expense. EBITDA as adjusted excludes the restructuring
         reserve and the non-operating gain on sale of the Company's PEO
         division. EBITDA is presented because it is a widely accepted financial
         indicator used by many investors and analysts to analyze and compare
         companies on the basis of operating performance. EBITDA is not intended
         to represent cash flows for the period, nor has it been presented as an
         alternative to operating income or as an indicator of operating
         performance and should not be considered in isolation or as a
         substitute for measures of performance prepared in accordance with
         generally accepted accounting principles.

         (2)      System revenues are the sum of the Company's net revenues
         (excluding revenues from franchise royalties and services performed for
         the franchisees) and the net revenues of the franchisees. System
         revenues provide information regarding the Company's penetration of the
         market for its services, as well as the scope and size of the Company's
         operations, but are not an alternative to revenues determined in
         accordance with generally accepted accounting principles as an
         indicator of operating performance. The net revenues of franchisees,
         which are not earned by or available to the Company, are derived from
         reports that are unaudited. System revenues consist of the following
         amounts reported in thousands (except for percentages):

<TABLE>
<CAPTION>
                                                            FOR THE QUARTER ENDED
                                           ---------------------------------------------------
                                                 JULY 2, 2000                JUNE 30, 1999
                                           ----------------------       ----------------------
         <S>                               <C>               <C>        <C>               <C>
         Company's net revenues            $  81,618         79.2%      $ 143,454         90.0%
         Less  Company revenues from:
            Franchise royalties                 (654)        (0.6)         (2,469)        (1.5)
            Services to franchises                --           --          (3,979)        (2.5)
         Add: Franchise net revenues          22,106         21.4          22,344         14.0
                                           ---------       ------       ---------       ------

         System revenues                   $ 103,070        100.0%      $ 159,350       100.00%
                                           =========       ======       =========       ======
</TABLE>

         SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
         Information", establishes standards for reporting information about
         operating segments in financial statements. Operating segments are
         defined as components of an enterprise about which separate financial
         information is available that is evaluated regularly by the chief
         operating decision maker, or decision making group, in deciding how to
         allocate resources and in assessing performance. The Company's
         reportable operating segments under SFAS No. 131 include the Tandem
         segment and the Synadyne segment. In prior filings of Form 10K and Form
         10Q with the Securities and Exchange Commission, the Company reported
         Flexible Staffing Revenues and PEO Revenues, Franchising Revenues, and
         Other Revenues. PEO revenues, as reported below, included certain
         staffing revenues generated by the Tandem division that the Company
         believed were operationally consistent with the PEO business and
         operational model, but were not includable in the Synadyne segment due
         to the way the Company was organized. The Company sold the operations
         of Synadyne effective April 8, 2000, and believes changing its
         presentation of Company revenues consistent with the above table is
         meaningful in terms of understanding operations and trends of the
         Company. The following table reconciles Flexible Staffing net revenues
         and PEO net revenues, as presented in past filings to the net revenues
         shown above, reported by the Company in accordance with the
         requirements of SFAS No. 131 - see Note 9 to the Company's Consolidated
         Financial Statements. The following amounts are presented in thousands
         (except for percentages):

<TABLE>
<CAPTION>
                                                                                     FOR THE QUARTER ENDED
                                                               -------------------------------------------------------------
                                                                      JULY 2, 2000                        JUNE 30, 1999
                                                               ------------------------            -------------------------
         <S>                                                   <C>                 <C>             <C>                 <C>
         Tandem segment revenues                               $ 80,859            99.1%           $  79,855            55.7%
         Less:  Industrial staffing client payrolling            (5,750)           (7.0)              (8,229)           (5.7)
                                                               --------           -----            ---------           -----

         Flexible staffing revenues                            $ 75,109            92.0%           $  71,626            49.9%
                                                               --------           -----            ---------           -----

         Synadyne segment revenues                                   71             0.1%              55,079            38.4%
         Add: Industrial staffing client payrolling               5,750             7.0                8,229             5.7
         Add: PEO services to Tandem franchises                      --              --                3,979             2.8
                                                               --------           -----            ---------           -----

         PEO revenues                                          $  5,821             7.1%           $  67,287            46.9%
                                                               --------           -----            ---------           -----

         Other revenues                                              34             0.0                6,051             4.2
         Less: PEO services to Tandem franchises                     --              --               (3,979)           (2.8)
                                                               --------           -----            ---------           -----

         Other revenues                                              34             0.0                2,072             1.4
                                                               --------           -----            ---------           -----

         Franchise revenues                                         654             0.8                2,469             1.7
                                                               --------           -----            ---------           -----

         Total net revenues                                    $ 81,618           100.0%           $ 143,454           100.0%
                                                               ========           =====            =========           =====
</TABLE>

                                       18
<PAGE>   20


         THIRTEEN WEEKS ENDED JULY 2, 2000 AS COMPARED TO THE THREE MONTHS ENDED
         JUNE 30, 1999

         NET REVENUES. Net revenues decreased $61.9 million, or 43.1%, from
         $143.5 million in the three months ended June 30, 1999 ("Q2 1999") to
         $81.6 million in the thirteen weeks ended July 2, 2000 ("Q1 2001").
         This decrease resulted from (i) the sale of Synadyne, the Company's
         former PEO division, which generated revenues of $55.0 million in Q2
         1999, compared to $0.1 million in Q1 2001, (ii) the sale of Office
         Ours, the Company's former clerical division, which generated revenues
         of $2.1 million in Q2 1999, (iii) the disposition of Tandem offices
         pursuant to the Restructuring (excluding offices consolidated into
         existing offices), which generated revenues of $13.9 million in Q2
         1999, as compared to $8.8 million in Q1 2001 - see "Restructuring",
         (iv) the termination of PEO services offered to Tandem franchises as of
         December 31, 1999, which generated revenues of $4.0 million in Q2 1999,
         and (v) a $1.8 million decrease in revenues derived from franchising
         activities. Offsetting these was a $6.1 million increase in revenues
         derived from Tandem branches not included in the Company's
         restructuring activities.

         Tandem

         Net revenues from the Company's Tandem division, which provides
         flexible staffing services, increased $1.0 million, to $80.9 million
         for Q1 2001 from $79.9 million for Q2 1999, or an increase of 1.3%,
         despite the fact that Tandem had 33 fewer operating locations at the
         end of Q1 2001 compared to Q2 1999. The increase in Tandem revenues was
         primarily due to new customers and increased revenues from existing
         customers in certain geographic markets that recorded double digit
         growth, although the Company also experienced lower growth or declining
         revenues in other geographic markets due to the loss or cancellation by
         the Company of certain large customers. After the sale, franchise,
         closure or consolidation of 41 Tandem offices due to the Restructuring,
         Tandem's revenue generation has strengthened. The Company contracted
         with 34 new large clients subsequent to Q2 1999 that generated revenues
         of approximately $9 million in Q1 2001. On a same-store basis, revenue
         growth was 9.3%.

         Franchising

         Franchise royalty revenues ("Royalties") from the Company's franchising
         operations decreased from $2.5 million in Q2 1999 to $0.7 million for
         Q1 2001, primarily due to a $2.0 million decrease in revenues from
         buyout payments received in connection with the early termination of
         certain franchises. The Company allowed the early termination of
         franchise agreements for 38 locations in 1998 and 1999 to enable the
         Company to develop the related territories. When the Company agrees to
         terminate a franchise agreement, it receives an initial buyout payment
         from the former franchisee. The Company continues to receive payments
         from some former franchisees based on a percentage of the gross
         revenues of the formerly franchised locations for up to three years
         after the termination dates of the franchise agreement. Although those
         gross revenues are not included in the Company's net franchisee or
         system revenue totals, the initial buyout payment, as well as
         subsequent payments from the former franchisees, are reflected in total
         Royalties reported by the Company.

         Net revenues earned by Tandem franchisees, which are included in the
         Company's system revenues, but are not available to the Company,
         decreased slightly from $22.3 million in Q2 1999 to $22.1 million in Q1
         2001. As of July 2, 2000, the Company had 51 locations, compared to 43
         locations as of June 30, 1999, and as part of its growth efforts, the
         Company expects to increase franchisee net revenues by continuing to
         sell new franchises in secondary U.S. markets, subject to, among other
         factors, the success of the Company's marketing efforts in this regard.
         The Company also expects to allow few, if any, remaining franchisees to
         buy out of their franchise agreements, since nearly all remaining
         franchises are in secondary U.S. markets.

         GROSS PROFIT. Gross profit (margin) decreased $4.2 million, from $20.3
         million in Q2 1999, to $16.2 million in Q1 2001. Gross profit as a
         percentage of net revenues increased to 19.8% in Q1 2001 from 14.2% in
         Q2 1999. This increase in margin percent was caused primarily by the
         sale of Synadyne at the beginning of Q1 2001, partially offset by the
         effect of the sale of Office Ours in August 1999 and the


                                       19
<PAGE>   21


         decrease in Royalties derived from franchise buyout payments. Synadyne,
         while generating 38.4% of the Company's revenues in Q2 1999, produced a
         gross margin of only 3.6%, or 9.8% of the Company's profit margin.

         Tandem

         Gross profit increased from $15.3 million in Q2 1999 to $15.5 million
         for Q1 2001. Tandem's gross profit margin percent was 19.2% of revenues
         in Q1 2001 and Q2 1999. Price increases that have been instituted in
         the past two quarters to reflect the value of services provided have
         resulted in a reduction of payroll costs as a percentage of net
         revenues, but were offset by higher workers' compensation costs due to
         increased claim rates in Q1 2001 and greater than anticipated expenses
         for claims still open from the calendar year ended December 31, 1999.
         In addition, transportation costs increased in Q1 2001, reducing margin
         accordingly. Gross profit before transportation costs improved from
         20.3% in Q2 1999 to 20.6% in Q1 2001.

         The Company's margins are affected by unemployment, competition for
         workers, the size of its customers, workers' compensation costs,
         transportation costs, and pricing. The Company was able to mitigate the
         effect of low unemployment and competition for workers by better
         pricing in Q1 2001. Although the average cost per labor hour increased
         by $0.18 during Q1 2001, the average price charged per labor hour
         increased by $0.35 in the period. Similarly Tandem began to reduce the
         impact of large, low-margin customers in Q1 2001. Over the last past
         three years, large lower margin customers had comprised an increasing
         part of Tandem's customer portfolio. Although Tandem's 100 largest
         customers made up 42% of the Company's revenues in Q1 2001 compared to
         39% in Q2 1999, this was lower than the 44% that the largest customers
         represented in the quarter ended April 2, 2000 ("Q1 2000"). In
         addition, the margins on these large customers increased slightly in Q1
         2001 compared to Q2 1999.

         Workers' compensation costs will continue to be a significant factor
         affecting Tandem margins. As such, the Company employs safety
         specialists whose sole purpose is to increase safety training and
         awareness, approve job-sites and duties, and reduce workers'
         compensation costs. The Company is continuing to increase its focus on
         all margin-related performance criteria by providing rewards to field
         personnel commensurate with their accomplishments. Based on these
         initiatives, the Company expects continued improvement in its staffing
         margins; however, the Company's actual results during the remaining
         portion of fiscal 2001 may vary depending on, among other things,
         competition, unemployment, and general business conditions.

         Franchising

         Royalties generated from franchising operations are received by the
         Company from its franchisees and the Company does not incur the expense
         for payroll and payroll-related taxes. Accordingly, gross profit equals
         Royalties and gross margin trends are consistent with the revenue
         trends discussed above.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
         administrative expenses ("SG&A") decreased $6.1 million, or 29.4%, to
         $14.7 million in Q1 2001 from $20.8 million in Q2 1999. This decrease
         was primarily the result of a $3.7 million decrease in compensation
         costs due to reduced employee headcount, and a $0.6 million reduction
         in the Company's bad debt provision in Q1 2001 as compared to Q2 1999 -
         see "Accounts Receivable". Other SG&A costs, including
         telecommunications, recruiting, and licensing costs decreased by an
         aggregate $1.3 million, while depreciation and amortization decreased
         by $0.5 million, due to the disposition of the assets sold in
         connection with the Restructuring, and the $2.5 million impairment of
         goodwill during 1999.

         As part of the Restructuring plan and other initiatives to improve
         profitability, the Company has (i) reduced headcount by over 370
         employees due to both voluntary and involuntary terminations, the sale
         and franchise of certain staffing offices, and the sale of the
         Company's PEO operations, (ii) improved its collection performance of
         trade accounts receivable, as discussed in "Accounts Receivable", and
         (iii)


                                       20
<PAGE>   22


         streamlined other support functions, all of which should continue the
         trend of decreased SG&A expenses during the remainder of fiscal year
         2001.

         RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q1 2001, the Company
         recorded restructuring charges of $0.9 million. As part of the
         restructuring charges, the Company has (i) adjusted the carrying value
         of assets held for disposition by approximately $0.4 to reflect the
         estimated fair value of those assets, (ii) decreased accrued severance
         costs by approximately $0.1 million and (iii) incurred $0.4 million in
         professional fees.

         NET INTEREST AND OTHER EXPENSE. Net interest and other expense
         decreased from $1.7 million in Q2 1999 to $1.3 million in Q1 2001. This
         decrease was due to a $0.7 million gain on the sale of the Company's
         PEO operations as discussed in the "Results of Operations" and other
         income of $0.1 million for support services provided to the purchaser
         of the Company's PEO operations, offset by a $0.3 million increase in
         interest expense arising from higher interest rates paid for the
         Company's borrowing facilities in Q1 2001 as compared to Q2 1999 (see
         "Liquidity and Capital Resources"). See Notes 3 and 5 to the Company's
         Consolidated Financial Statements.

         INCOME TAXES. During Q1 2001, the Company reduced the deferred tax
         asset valuation allowance by $7.7 million, which is expected to be
         realized through the utilization of the existing net operating loss
         carryforward to offset tax on the extinguishment gain that will be
         recorded in the quarter ending October 1, 2000, and tax on income from
         future operations - see Notes 2, 4 and 5 to the Company's Consolidated
         Financial Statements. The valuation allowance was established during
         the year ended December 31, 1999 and was increased by the tax benefits
         during the quarter ended April 2, 2000 because it was not clear that
         the tax benefits resulting from operating losses and other temporary
         differences were "more likely than not" to be realized, as required by
         SFAS 109, "Accounting for Income Taxes".

         NET INCOME (LOSS). Net income for Q1 2001 was $7.1 million, as compared
         to a net loss of $1.2 million in Q2 1999. As discussed above, the
         change in the net loss is primarily due to the reduction of the
         deferred tax asset valuation allowance, decreased SG&A costs, and the
         gain on the sale of the Company's PEO operations, partially offset by
         increased interest costs and restructuring charges. Adjusted to remove
         restructuring costs, the non-operating gain from the sale of the
         Company's PEO operations, and the reduction of the deferred tax
         valuation allowance, the Company's net loss in Q1 2001 was $0.5 million
         and in Q2 1999 was $1.2 million.

         LIQUIDITY AND CAPITAL RESOURCES

         SENIOR DEBT

         Effective August 15, 2000, the Company entered into a three-year
         agreement with a syndicate of lenders led by Ableco Finance, LLC, as
         agent, an affiliate of Cerberus Capital Management, L.P. (the
         "Lenders"), which replaced the Company's existing credit facility with
         a $33.4 million Revolving Credit Facility, which includes a subfacility
         for the issuance of standby letters of credit ("Senior Facility"), and
         two term loans, Term Loan A and Term Loan B ("Term Loans"), of $17.6
         million and $9.0 million, respectively (the "Refinancing"). Both the
         Senior Facility and the Term Loans are secured by all the assets of the
         Company and its subsidiaries. The Senior Facility bears interest at
         prime or 9.0%, whichever is greater, plus 2%. Term Loan A and Term Loan
         B bear interest at prime or 9.0%, whichever is greater, plus 3.5% and
         5.0% per annum, respectively. In connection with the Refinancing, the
         Company issued warrants the Lenders to purchase up to a maximum of
         200,000 common shares of the Company, exercisable for a term of five
         years, at $0.01 per warrant. The warrants are only exercisable if any
         letter of credit issued by the Lenders on behalf of the Company is
         drawn in proportion to the amount drawn under the letter of credit.

         A portion of the new credit facility was used to satisfy the credit
         facility (the "Fleet Facility") with Fleet National Bank, for itself
         and as agent for three other banks (the "Fleet Group"). Prior to the
         closing of the Refinancing, the outstanding balance of the Fleet
         Facility was approximately $52.0 million. The balance


                                       21
<PAGE>   23


         was repaid in full with a cash payment of approximately $32.3 million
         and the issuance of a four-year, $5.3 million subordinated term note
         (the "Fleet Term Note"). The Fleet Term Note is subordinated to the
         Senior Facility and Term Loans issued by the Lenders on behalf of the
         Company and includes interest only for four years, followed by a
         balloon payment for the entire principal amount. In addition, the
         Company is entitled to a 60% discount on this note if it is satisfied
         within 18 months. This obligation bears interest at Fleet's Alternative
         Prime Rate ("APR") plus 3.5% per annum. In connection with the
         Refinancing and in satisfaction of the Company's obligation to the
         Fleet Group, the Company has issued 524,265 warrants to the Fleet Group
         to purchase common shares of the Company, which constitutes 5.0% of the
         common stock of the Company on a fully diluted basis. The warrants are
         exercisable for a term of 10 years at $0.01 per warrant. The Company
         agreed to register with the Securities and Exchange Commission the
         shares of common stock of the Company issuable upon the exercise of the
         warrants issued to the Lenders and the Fleet Group in connection with
         the Refinancing. In connection with the Refinancing and the termination
         of the Fleet Facility, the Company will record an extraordinary gain,
         net of tax, of approximately $8.5 million in the quarter ending October
         1, 2000.

         As of July 2, 2000, the Company's primary sources of funds for working
         capital and other needs were (i) a $26.1 million credit line (the
         "Revolving Credit Facility"), including existing letters of credit of
         $4.8 million and (ii) a $33.0 million credit facility, based on and
         secured by the Company's accounts receivable (the "Receivable
         Facility"), with the Fleet Group. Effective April 13, 2000, due in part
         to the sale of the Company's Synadyne operation, the maximum
         availability under the Receivable Facility was reduced from $50.0
         million to $33.0 million. Effective May 1, 2000, the maximum
         availability under the Revolving Credit Facility was reduced from $25.5
         million to $25.3 million (including existing letters of credit of $4.8
         million), and effective in June 2000, the maximum availability under
         the Revolving Credit Facility was increased to $26.1 million to provide
         for the Company's seasonal increase in working capital requirements.

         Prior to their expiration, the Receivable Facility, bore interest at
         Fleet's prime rate plus 2.0% per annum, which was 11.5% as of July 2,
         2000, while the Revolving Credit Facility bore interest at prime plus
         5.0% per annum, which was 14.5% as of July 2, 2000. The weighted
         average interest rate payable on the outstanding balances during the
         period, exclusive of related fees and expenses, was approximately 13.2%
         per annum, compared to approximately 6.7% per annum in Q2 1999. As of
         July 2, 2000, the Company had outstanding borrowings of $19.4 million
         and $31.3 million under the Revolving Credit Facility and the
         Receivable Facility, respectively.

         In addition to the Revolving Credit Facility indebtedness discussed
         above, the Company had bank standby letters of credit outstanding in
         the aggregate amount of $4.8 million as of July 2, 2000, of which $4.2
         million secured the pre-1999 portion of the workers' compensation
         obligations recorded as a current liability on the Company's
         Consolidated Balance Sheet. The remaining $0.6 million, which is
         supported by a $0.7 million cash escrow balance, is to secure future
         payments on a capital lease for furniture that was sold as part of the
         Company's corporate headquarters building.

         OTHER DEBT

         In order to remain in compliance with certain covenants in the
         Revolving Credit Facility, and to reduce the cash impact of scheduled
         payments under its subordinated acquisition debt, the Company
         negotiated extensions of the payment dates and modified the interest
         rates and other terms of certain of its acquisition notes payable in
         1999. The Company had not made substantially all of the scheduled
         payments due and, as a result, was in default on acquisition notes
         payable having a total outstanding principal balance of $6.9 million as
         of July 2, 2000. The terms of the acquisition notes payable, which were
         subordinated to the Revolving Credit Facility and the Receivable
         Facility, allowed the payees to accelerate terms of payment upon
         default. Acceleration of this debt required prior written notice to the
         Company by the various payees, which was received from three payees as
         of July 2, 2000. On August 15, 2000, in connection with the
         Refinancing, the acquisition notes payable were amended to provide that
         the Company will pay interest only, at a rate of 10.0% per annum, on
         the debt for three years following the


                                       22
<PAGE>   24


         closing of the Refinancing, followed by two years of equal monthly
         payments of interest and principal, which will retire the debt. In
         connection with the amendments to the acquisition notes payable, the
         Company paid $0.8 million of accrued interest to the relevant
         noteholders at the closing of the Refinancing.

         In addition to the debt previously discussed, the Company had, as of
         July 2, 2000, (i) obligations under capital leases for property and
         equipment in the aggregate of $2.4 million; (ii) obligations under
         mortgages totaling $0.6 million and (iii) obligations for annual
         insurance premiums and other matters totaling $0.3 million, of which a
         portion represents prepayment for future benefits and would be
         refundable to the Company should the policy be cancelled.

         SUMMARY OF CASH FLOWS

         The Company's principal uses of cash are for wages and related payments
         to job-site employees, operating costs, capital expenditures and
         repayment of debt and interest thereon. In Q1 2001 cash used in
         operating activities was $2.2 million, as compared with $3.4 million
         provided by operating activities in Q2 1999. Cash provided by (i) a
         decrease in accounts receivable related to the sale of the Company's
         PEO operations and Tandem offices in connection with the Restructuring,
         (ii) improved collections of the Company's accounts receivable in Q1
         2001 - see "Accounts Receivable", and (iii) an increase in the
         Company's workers' compensation reserve - see "Workers' Compensation",
         was more than offset by the decrease in current liabilities due to the
         sale of the Company's PEO operations. Adjusted to remove the effects of
         the Securitization, cash used in operating activities was $2.8 million
         in Q2 1999 compared to $2.2 million in Q1 2001.

         The Company anticipates that accounts receivable will decrease by an
         additional $2.3 million in Q2 2001 as the outstanding accounts
         receivable from the Tandem offices sold in Pennsylvania and New Jersey
         on June 25, 2000 are collected, offset partially by the increase in
         accounts receivable from the seasonal increase in sales volume
         experienced by staffing companies that support the manufacturing
         sector.

         The tables below set forth the Company's cash flows, (i) as presented
         in the Company's Consolidated Financial Statements for Q1 2001 and Q2
         1999 and (ii) as adjusted to remove the effect of the sale of the
         Company's uncollected accounts receivable under the Company's previous
         $50.0 million securitization facility (the "Securitization Facility")
         during Q2 1999, in thousands:


<TABLE>
<CAPTION>
                                                                     FOR THE QUARTER ENDED
                                                                ------------------------------
                                                                JULY 2, 2000     JUNE 30, 1999
                                                                ------------     -------------
         <S>                                                    <C>              <C>
         Cash flows provided by (used in):

         Historical cash flow
         Operating activities                                     $(2,202)          $ 3,444
         Investing activities                                       3,782             1,492
         Financing activities                                      (2,083)           (3,791)
                                                                  -------           -------

         Net increase (decrease) in cash                          $  (503)          $ 1,145
                                                                  =======           =======

         Cash flow - without Securitization Facility (1)
         Operating activities                                     $(2,202)          $(2,836)
         Investing activities                                       3,782             1,492
         Financing activities                                      (2,083)            2,489
                                                                  -------           -------

         Net increase (decrease) in cash                          $  (503)          $ 1,145
                                                                  =======           =======
</TABLE>

         (1)      As part of the Company's borrowing facilities, in Q2 1999, the
         Company sold certain trade accounts receivable to obtain working
         capital for the Company's operations. Under this agreement the Company
         had sold $42.4 million of trade accounts receivable as of June 30,
         1999, which was excluded from the uncollected accounts receivable
         balance presented in the Company's Consolidated Financial Statements.
         This agreement was subsequently terminated as of October 1, 1999 and
         replaced by the Receivable Facility, under which the Company currently
         obtains working capital. See Note 5 to the Company's Consolidated
         Statements.


                                       23
<PAGE>   25


         Cash provided by investing activities during Q1 2001 was $3.8 million,
         consisting of $4.2 million from the sale of the Company's PEO
         operations and certain Tandem branches, offset by cash outlays of $0.4
         million for capital expenditures and funding advances to franchises.
         Cash provided by investing activities during Q2 1999 was $1.5 million,
         consisting primarily of $1.6 million received in conjunction with a
         sale-leaseback transaction and funding repayments of $0.3 million,
         offset by capital expenditures of $0.4 million.

         Cash used in financing activities during Q1 2001 was $2.1 million, as
         compared to $3.8 million used in financing activities in Q2 1999.
         Adjusted to remove the effects of the Securitization Facility in Q2
         1999, cash provided by financing activities was $2.5 million, which was
         due to increased borrowings in 1999 to fund increased payroll costs
         arising from cyclical seasonal increases of provided services - see
         "Seasonality". In Q1 2001, the seasonal increase in provided services
         historically experienced by the Company was offset by a decrease in the
         Company's outstanding payroll obligation at the end of the quarter due
         the sale of the Company's PEO operations and sale, franchise, closure,
         and consolidation of the aforementioned Tandem offices in connection
         with the Restructuring.

         WORKERS' COMPENSATION COLLATERAL

         Prior to 1999, the Company secured its workers' compensation
         obligations by the issuance of bank standby letters of credit to its
         insurance carriers, minimizing the required current cash outflow for
         such items. In 1999, the Company selected a pre-funded deductible
         program whereby expected claims expenses are funded in advance in
         exchange for reductions in administrative costs. The required advance
         funding is provided through either cash flows from operations or
         additional borrowings under the Revolving Credit Facility.

         In January 2000, the Company renewed its pre-funded deductible program
         for one year. Under the new agreement, the Company will fund $10.1
         million in 12 installments for projected calendar year 2000 claims
         expenses. This claim fund requirement will be adjusted upward or
         downward each quarter based on the projected cost of the actual claims
         incurred during calendar year 2000, up to a maximum liability of $19.0
         million. In addition, the Company has agreed to establish a $3.0
         million trust account naming Hartford Insurance Company ("Hartford") as
         beneficiary to secure any liability for claim funding for 1999 and/or
         2000 that might exceed the pre-funded amounts up to the aggregate
         maximum cap for each year of $13.6 million and $19.0 million,
         respectively. This trust account is being funded in 11 installments
         through December 2000 and as of July 2, 2000, the Company had funded
         $1.7 million into the trust account.

         ACCOUNTS RECEIVABLE

         The Company is a service business and therefore a majority of its
         tangible assets are customer accounts receivable. Flexible staffing
         employees are paid by the Company on a daily or weekly basis. The
         Company, however, receives payment from customers for these services,
         on average, 30 to 60 days from the date of the invoice. Beginning in
         the fourth quarter of 1998, the Company experienced an increase in the
         percentage of its staffing accounts receivable that were past due.
         During calendar 1999 and the first two quarters of calendar 2000, the
         Company increased its focus on its accounts receivable collection
         process. As a result, the average number of days to collect staffing
         accounts receivable from invoice presentation has decreased from 53
         days at December 31, 1998 to 42 days at July 2, 2000. Since the Company
         announced its restructuring plan in August 1999, accounts receivable
         decreased by approximately $3 million due to the sale of staffing
         offices and the clerical division to third parties; although the
         working capital benefit was substantially less due to the corresponding
         reduction in liabilities such as accrued payroll, payroll taxes and
         workers' compensation. The Company anticipates that its accounts
         receivable will decrease by an additional $2 million as the outstanding
         receivables for the branches sold in the states of New Jersey and
         Pennsylvania on June 25, 2000 are collected, and by approximately $1
         million when the assets held for disposition as of July 2, 2000 are
         disposed.


                                       24
<PAGE>   26

         As part of the sale of the Company's PEO operations, its accounts
         receivable decreased by approximately $6 million, although the working
         capital benefit was substantially offset by the corresponding reduction
         in liabilities such as accrued payroll, payroll taxes and workers'
         compensation. In addition, during the fourth quarter of 1999, the
         Company sold certain trade accounts receivable, with a face value of
         approximately $4.3 million, most of which was more than 180 days past
         due, to unrelated third parties for approximately $220,000.

         CAPITAL EXPENDITURES

         The Company anticipates spending up to $2 million during the next
         twelve months to improve its management information and operating
         systems, upgrade existing locations and other capital expenditures
         including, but not limited to, opening new staffing locations.

         FUTURE LIQUIDITY

         As shown in the Company's Consolidated Financial Statements, for the
         year ended December 31, 1999, the Company incurred a net loss of $30.9
         million, the Company's current liabilities exceeded its current assets
         by $42.0 million, and the Company was in default in repayment of
         certain acquisition debt subordinated to its bank financing. The
         Company's bank facilities and financial covenants were modified
         effective October 1, 1999, accelerating the date of maturity, which was
         subsequently extended by the syndicate of lenders on a monthly basis
         through August 15, 2000.

         Effective August 15, 2000, as previously discussed, the Company entered
         into a three year agreement with a syndicate of lenders led by Ableco
         Finance LLC whereby the Company's existing credit facility was replaced
         by a $33.4 million Senior Facility and a $17.6 million Term Loan A and
         a $9.0 Term Loan B. The Company believes that funds provided by
         operations and borrowings under the new credit facilities will be
         sufficient to meet its needs for working capital, capital expenditures,
         and debt service for the foreseeable future.

         RESTRUCTURING

         On August 6, 1999, the Company announced actions to improve its
         short-term liquidity, concentrate its operations within its core
         segment, Tandem, and improve its operating performance. In connection
         with these actions, the Company sold its PEO and clerical staffing
         divisions. In addition, the Company announced a specific plan (the
         "Restructuring") to sell, franchise, close, or consolidate 47 offices
         and reduce headcount at its other 70 locations and corporate
         headquarters. See "General" and Note 3 to the Company's Consolidated
         Financial Statements. The restructuring charge accrual and its
         utilization are as follows:


<TABLE>
<CAPTION>
                                                                                                  UTILIZATION
                                                           ORIGINAL  BALANCE AT   CHARGES TO    ----------------   BALANCE AT
         (AMOUNTS IN THOUSANDS)                             CHARGE     4/2/00     OPERATIONS    CASH    NON-CASH     7/2/00
                                                           --------  ----------   ----------    ----    --------   ----------
         <S>                                               <C>       <C>          <C>           <C>     <C>        <C>
         Employee severance and
             other termination benefits                    $ 4,040      $2,139      $ (89)      $483      $ --      $1,567

         Professional fees                                   1,205          34        369        362        --          41

         Lease termination and write-down of
             leasehold improvements at closed offices          400          49         (2)        21        --          26

         Other restructuring charges                           146          33        154        128        --          59
                                                           -------      ------      -----       ----      ----      ------

         Accrued restructuring charges                       5,791       2,255        432        994        --       1,693

         Write-down to fair value/loss on sale
             of assets identified for disposition            5,429          --        446         --       446          --
                                                           -------      ------      -----       ----      ----      ------

         Total restructuring and asset
             impairment activity                           $11,220      $2,255      $ 878       $994      $446      $1,693
                                                           =======      ======      =====       ====      ====      ======
</TABLE>


                                       25
<PAGE>   27


         The original $11.2 million restructuring charge includes $4.0 million
         for severance and other termination benefits, $1.2 million for
         professional fees, and $0.6 million in lease termination and other
         charges. Severance and other termination benefits were decreased by
         $0.2 million and $0.1 million during Q1 2000 and Q1 2001, respectively,
         to reflect a reduction of amounts to be paid in connection with certain
         severance packages accrued in 1999 as it became apparent that certain
         employees of offices sold and franchised to third parties would not
         receive severance packages, but would continue employment with the
         respective buyers or franchisees. The remaining liability of $1.6
         million for severance and other termination benefits as of July 2, 2000
         consists of $1.4 million for 23 employees who have been or will be
         terminated during the period of August 1999 through September 2000,
         which will be paid over a period ranging from one week to 21 months
         from the balance sheet date.

         Professional fees of $0.5 million and $0.4 million were recorded as
         restructuring costs incurred during Q1 2000 and Q1 2001, respectively.
         These professional fees were comprised primarily of amounts paid to
         Crossroads LLC, formerly Crossroads Capital Partners, LLC
         ("Crossroads"), for its services related to the Restructuring. The
         Company expects to complete these restructuring activities during the
         quarter ended October 1, 2000.

         The Company utilized $0.1 million of the restructuring charge during Q1
         2000 and $0.1 million of the restructuring charge during Q1 2001 for
         the costs of terminating leases as well as writing down the carrying
         value of leasehold improvements and other assets not usable in other
         Company operations.

         The restructuring charge includes a $5.4 million write-down of assets,
         recorded in the Company's results of operations at such time as these
         assets were classified as held for disposition, to their estimated net
         realizable value based on management's estimate of the ultimate sales
         prices that would be negotiated for these assets. The charge was
         increased by $0.1 million in Q1 2000 and $0.4 million during Q1 2001,
         and is subject to future adjustments as the Company negotiates the
         actual sales prices of the assets that remain to be sold as of July 2,
         2000.

         During Q1 2001 the Company (i) sold one staffing office and closed
         another, in the state of Minnesota, effective April 10, 2000, for cash
         proceeds of $60,000, (ii) franchised one of its staffing offices in the
         state of Ohio, effective April 10, 2000, for cash proceeds of $20,000,
         and (iii) sold its operations in the states of New Jersey and
         Pennsylvania, comprising six staffing offices and two "vendor on
         premises" locations, for $1.3 million (comprised of cash proceeds of
         $0.8 million and two promissory notes totaling $0.5 million). In
         connection with the sale of its staffing offices in New Jersey and
         Pennsylvania, the Company recorded a $0.4 million loss on the sale, in
         addition to the original $2.1 million write-down of these assets to
         their estimated net realizable value upon their classification as
         assets held for disposition.

         As of July 2, 2000 there were six Tandem offices that remained to be
         sold as part of the Restructuring, and the Company had classified the
         related tangible and intangible assets as assets held for disposition,
         excluding cash, accounts receivable and deferred income taxes. Upon
         classification as assets held for disposition, the Company discontinued
         the related depreciation and amortization for these assets, which
         reduced operating expenses by approximately $0.1 million in Q1 2001.
         The estimated fair market value of these assets held for disposition
         was based on management's judgment and as such, actual results could
         vary significantly from such estimates.

         The Company's assets held for disposition as of July 2, 2000, stated at
         the lower of original cost (net of accumulated depreciation or
         amortization) or fair value (net of selling and disposition costs), are
         as follows (presented in thousands):


                                       26
<PAGE>   28



<TABLE>
<CAPTION>
                                                     NET ORIGINAL COST
                                       ------------------------------------------
                                       PROPERTY        GOODWILL AND                      LOWER OF
                                          AND             OTHER                          COST OR
                                       EQUIPMENT    INTANGIBLE ASSETS       TOTAL       FAIR VALUE
                                       ---------    -----------------      ------       ----------
          <S>                          <C>          <C>                    <C>          <C>
          Tandem branch offices          $313             $1,005           $1,318          $426
                                         ====             ======           ======          ====
</TABLE>

         The following table reflects the Company's net revenues and gross
         profit margin segregating ongoing operations and operations from assets
         held for disposition or sold as part of the Company's restructuring
         efforts and other disposed operations. Those operations include: (i)
         the Synadyne division, sold as of April 8, 2000, (ii) Office Ours, the
         Company's clerical division, sold during the third quarter of calendar
         1999, (iii) franchise PEO operations, which ceased operations after
         December 31, 1999, and (iv) Tandem branch offices disposed or held for
         sale as of July 2, 2000. Ongoing operations include (i) the Tandem
         division, which provides flexible industrial staffing and (ii)
         franchising. Dollar amounts are in thousands, except for percentages:

<TABLE>
<CAPTION>
                                                                                                    FOR THE QUARTER ENDED
                                                                                              --------------------------------
                                                                                              JULY 2, 2000       JUNE 30, 1999
                                                                                              ------------       -------------
         <S>                                                                                  <C>                <C>
         Net revenues:

             Total Company                                                                      $ 81,618           $ 143,454
             Less revenues from assets held for sale and disposed/ceased operations
                Synadyne                                                                             (71)            (55,079)
                Clerical, franchise PEO and other                                                 (8,755)            (19,932)
                                                                                                --------           ---------

             Subtotal - revenues from assets held for sale and disposed/ceased operations         (8,826)            (75,011)
                                                                                                --------           ---------

             Net revenues from ongoing operations                                               $ 72,792           $  68,443
                                                                                                ========           =========

         Gross profit margin:

             Total Company                                                                      $ 16,186           $  20,344
             Less gross profit from assets held for sale and disposed/ceased operations
                Synadyne                                                                              12              (1,993)
                Clerical, franchise PEO and other                                                 (1,334)             (2,965)
                                                                                                --------           ---------

             Subtotal - gross profit from assets held for sale and disposed/ceased operations     (1,322)             (4,958)
                                                                                                --------           ---------

             Net revenues from ongoing operations                                               $ 14,864           $  15,386
                                                                                                ========           =========

         Gross profit margin as a percentage of net revenues:

             Ongoing operations - Tandem                                                          19.7 %                19.6%
             Ongoing operations - franchising and other                                          100.0 %               100.0%
             Operations from assets held for sale and disposed/ceased operations                  15.0 %                 6.6%
</TABLE>

         Tandem branches sold, franchised or held for sale as of July 2, 2000
         generated revenues of $8.8 million, and $13.9 million during Q1 2001
         and Q2 1999, respectively, and earned gross profit of $1.3 million and
         $2.4 million for those periods. Those same branches incurred SG&A
         expenses of $1.0 million and $2.7 million, excluding depreciation and
         amortization costs, during Q1 2001 and Q2 1999, respectively.

         Office Ours, the Company's former clerical division which was sold on
         August 30, 1999, generated revenues of $2.1 million, earned gross
         profit of $0.6 million, and incurred $0.5 million in SG&A expense,
         excluding depreciation and amortization, during Q2 1999. SG&A for the
         Synadyne division, excluding depreciation and amortization, was $0.2
         million and $1.3 during Q1 2001 and Q2 1999, respectively. Results of
         flexible industrial staffing offices that were consolidated into
         existing offices, as part of the Company's Restructuring efforts, are
         included in ongoing operations.


                                       27
<PAGE>   29


         SEASONALITY

         The Company's quarterly results of operations reflect the seasonality
         of higher customer demand for industrial staffing services in the last
         two calendar quarters of the year, as compared to the first two
         quarters. Even though there is a seasonal reduction of industrial
         staffing revenues in the first calendar quarter of a year as compared
         to the fourth calendar quarter of the prior year, the Company does not
         reduce the related core personnel and other operating expenses
         proportionally because most of that infrastructure is needed to support
         anticipated increased revenues in subsequent quarters. As a result of
         these factors, the Company anticipates that it will earn a significant
         portion of its annual operating income in the third and fourth calendar
         quarter (fiscal quarters Q2 2001 and Q3 2001), which historically
         exceeds the operating income earned during the first two calendar
         quarters of the year (fiscal quarters Q1 2000 and Q1 2001).

         INFLATION

         The effects of inflation on the Company's operations were not
         significant during the periods presented in the Company's Consolidated
         Financial Statements. Generally, throughout the periods discussed
         above, the increases in revenues and expenses have resulted from a
         combination of volume increases, price increases, and changes in the
         customer mix.

         NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
         133, "Accounting for Derivative Instruments and Hedging Activities" was
         issued. SFAS No. 133 defines derivatives and establishes accounting and
         reporting standards requiring that every derivative instrument
         (including certain derivative instruments embedded in other contracts)
         be recorded in the balance sheet as either an asset or liability
         measured at its fair value. SFAS No. 133 also requires that changes in
         the derivative's fair value be recognized currently in earnings unless
         specific hedge accounting criteria are met. Special accounting for
         qualifying hedges allows a derivative's gains and losses to offset
         related results on the hedged item in the income statement, and
         requires that a company must formally document, designate and assess
         the effectiveness of transactions that receive hedge accounting. SFAS
         No. 133, as modified by SFAS No. 137, is effective for all fiscal
         quarters of fiscal years beginning after June 15, 2000, and cannot be
         applied retroactively. The Company intends to implement SFAS No. 133 in
         its consolidated financial statements as of and for the thirteen weeks
         ending July 2, 2001. Although it has not determined the effects, if
         any, that implementation will have, management believes that the
         Company is not currently a party to any transactions involving
         derivatives. SFAS No. 133 could increase volatility in earnings and
         other comprehensive income if the Company enters into any such
         transactions in the future.


                                       28
<PAGE>   30


         FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS

         Certain statements contained in this "Management's Discussion and
         Analysis of Financial Condition and Results of Operations" and
         elsewhere in this Form 10-Q are forward-looking statements, including
         but not limited to, statements regarding the Company's expectations or
         beliefs concerning the Company's strategy and objectives, expected
         sales and other operating results, the effect of changes in the
         Company's gross margin, the Company's liquidity, anticipated capital
         spending, the availability of financing, equity and working capital to
         meet the Company's future needs, economic conditions in the Company's
         market areas, costs and the tax-qualified status of the Company's
         401(k) and 413(c) plans. The words "aim," "believe," "expect,"
         "anticipate," "intend," "estimate," "will," "should," "could" and other
         expressions which indicate future events and trends identify
         forward-looking statements. Such forward-looking statements involve
         known and unknown risks and are also based upon assumptions of future
         events, which may not prove to be accurate. Therefore, actual results
         may differ materially from any future results expressed or implied in
         the forward-looking statements. These known and unknown risks and
         uncertainties include, but are not limited to, changes in U.S. economic
         conditions, particularly in the manufacturing sector; its future cash
         flows, sales, gross margins and operating costs, including the
         Company's ability to implement and maintain cost reductions in
         connection with the Restructuring; the Company's ability to sell or
         otherwise dispose of non-strategic assets under satisfactory terms and
         timing; the effect of changing market and other conditions in the
         staffing industry; the ability of the Company to continue to grow;
         legal proceedings, including those related to the actions of the
         Company's temporary employees; the availability and cost of financing;
         the ability to maintain existing banking relationships and to establish
         new ones; the recoverability of the recorded value of goodwill and
         other intangible assets arising from past acquisitions; the general
         level of economic activity and unemployment in the Company's markets,
         specifically within the construction, manufacturing, distribution and
         other light industrial trades; increased price competition; changes in
         and the Company's ability to comply with government regulations or
         interpretations thereof, particularly those related to employment; the
         continued availability of qualified temporary personnel; the financial
         condition of the Company's clients and their demand for the Company's
         services (which in turn may be affected by the effects of, and changes
         in, U.S. and worldwide economic conditions); collection of accounts
         receivable; the Company's ability to retain large clients; the
         Company's ability to recruit, motivate and retain key management
         personnel; the costs of complying with government regulations
         (including occupational safety and health provisions, wage and hour and
         minimum wage laws and workers' compensation and unemployment insurance
         laws) and the ability of the Company to increase fees charged to its
         clients to offset increased costs relating to these laws and
         regulations; volatility in the workers' compensation, liability and
         other insurance markets; inclement weather; interruption, impairment or
         loss of data integrity or malfunction of information processing
         systems; changes in government regulations or interpretations thereof,
         and other risks detailed from time to time by the Company or in its
         press releases or in its filings with the Securities and Exchange
         Commission.

         In addition, the market price of the Company's stock may from time to
         time be volatile as a result of, among other things, the Company's
         operating results, the operating results of other temporary staffing
         companies, economic conditions, the proportion of the Company's stock
         available for active trading and the performance of the stock market in
         general.

         Any forward-looking statement speaks only as of the date on which such
         statement is made, and the Company undertakes no obligation to update
         any forward-looking statement or statements to reflect events or
         circumstances after the date on which such statement is made or to
         reflect the occurrence of unanticipated events. New factors emerge from
         time to time, and it is not possible for management to predict all of
         such factors. Further, management cannot assess the impact of each such
         factor on the business or the extent to which any factor, or
         combination of factors, may cause actual results to differ materially
         from those contained in any forward-looking statements.

         Subsequent written and oral forward-looking statements attributable to
         the Company or persons acting on


                                       29
<PAGE>   31


         its behalf are expressly qualified in their entirety by cautionary
         statements in this paragraph and elsewhere in this Form 10-Q, and in
         other reports filed by the Company with the Securities and Exchange
         Commission, including, but not limited to the Company's Form 10-K for
         the year ended December 31, 1999 and Form 10-Q for the transition
         period ended April 2, 2000.


                                       30
<PAGE>   32


         ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         There has been no material change in the Company's assessment of its
         sensitivity to market risk as of July 2, 2000 as compared to the
         information included in Part II, Item 7A, "Quantitative and Qualitative
         Disclosures About Market Risk", of the Company's Form 10-K for the year
         ended December 31, 1999, as filed with the Securities and Exchange
         Commission on April 14, 2000.


                                       31
<PAGE>   33


         PART II - OTHER INFORMATION

         ITEM 1 - LEGAL PROCEEDINGS

         None to report.

         ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

         None to report.

         ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

         In order to remain in compliance with certain covenants in the
         Revolving Credit Facility, and to reduce the cash impact of scheduled
         payments under its subordinated acquisition debt, the Company had
         negotiated extensions of the payment dates and modified the interest
         rates and other terms of certain of its acquisition notes payable in
         1999. The Company had not made substantially all of the scheduled
         payments due and, as a result, was in default on these debts having
         total principal outstanding of $6.9 million as of July 2, 2000. The
         terms of these acquisition notes payable, which are subordinated to the
         Revolving Credit Facility and the Receivable Facility, allowed the
         payees to accelerate terms of payment upon default. Acceleration of
         this debt required prior written notice to the Company by the various
         payees, which was received from three payees as of July 2, 2000. On
         August 15, 2000, in connection with the Refinancing, the acquisition
         notes payable were amended to provide that the Company will pay
         interest only, at a rate of 10.0% per annum, on the debt for three
         years following the closing of the Refinancing, followed by two years
         of equal monthly payments of interest and principal, which will retire
         the debt. In connection with the amendments to the acquisition notes
         payable, the Company paid $0.8 million of accrued interest to the
         relevant noteholders at closing.


                                       32
<PAGE>   34


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

         The annual meeting of the shareholders of the Company (the "Meeting")
         was held on May 18, 2000. The Company solicited proxies for the Meeting
         and there was no solicitation in opposition to management's nominees
         for directors. At the Meeting, the shareholders voted:

         (1a)     To elect director Garry E. Meier for a three-year term:

                           Votes For                 6,968,833
                           Votes Withheld               22,965

         (1b)     To elect director Lawrence Chimerine for a three-year term:

                           Votes For                 6,987,833
                           Votes Withheld                3,965

         There were no votes against, abstentions, or broker non-votes with
         respect to the election of the Directors. The names of other directors
         whose term of office continued after the Meeting are Scott R. Francis,
         Michael S. Fawcett, David S. Hershberg and Jay D. Seid.

         (2)      To ratify the appointment of Deloitte & Touche LLP as the
                  Company's independent auditors for the fiscal year ending
                  April 1, 2001:

                           Votes For                 6,991,298
                           Votes Against                   500
                           Votes Abstained                None

         ITEM 5 - OTHER INFORMATION

         Effective April 8, 2000, the Company sold certain of the assets of its
         Synadyne division to Teamstaff V, Inc., a Florida corporation
         ("Teamstaff V") and an affiliate of Teamstaff, Inc., a New Jersey
         corporation for $3.5 million cash, with up to an additional $1.25
         million to be paid to the Company by Teamstaff on April 30, 2001 based
         on the total number of employees, at each of the customer accounts sold
         to Teamstaff V, who are still employed by Teamstaff V on September 30,
         2000 and April 30, 2001. The assets included all of the customer
         accounts relating to the Company's PEO business, the trade name
         "Synadyne," certain desktop computers and marketing materials relating
         to the Company's PEO business.

         In connection with the sale of the Synadyne division, the Company is
         obligated to provide certain support services to TeamStaff V through
         July 31, 2000, including accounting and information systems services.
         The Company is currently providing such services and it is negotiating
         with TeamStaff V to extend the support services agreement. The Company
         has also contracted with TeamStaff V to provide PEO services to the
         Company and its employees for an initial term expiring on December 31,
         2001.

         During the first week of May 2000, the Company moved its corporate
         headquarters to 1690 South Congress Avenue, Suite 210, Delray Beach,
         Florida 33445.

         Separation Agreement and Release

         The Company entered into a Separation Agreement and Release with Paul
         Burrell, its former Chief Executive Officer on February 21, 2000, with
         Robert Lefcort, the former President of its Synadyne division on April
         6, 2000 and with Brian Nugent, former Vice President, Secretary and
         General Counsel of the Company on April 21, 2000.


                                       33
<PAGE>   35


         Pursuant to the terms of the agreement with Mr. Burrell, Mr. Burrell
         resigned as President, Chief Executive Officer and Chairman of the
         Board of Directors of the Company and as an officer, director and/or
         manager of any affiliates of the Company effective February 14, 2000.
         The Company agreed to pay Mr. Burrell total severance compensation of
         $750,000, payable in equal bi-weekly installments of $14,423.07. Mr.
         Burrell was granted the right to exercise any stock option previously
         granted to him through February 13, 2003; however, certain restrictions
         were placed on the amount of profit Mr. Burrell can realize on the sale
         of the underlying stock.

         Pursuant to the terms of the agreement with Mr. Lefcort, Mr. Lefcort
         resigned as President of the Company's Synadyne division effective
         April 6, 2000. The Company agreed to pay Mr. Lefcort total severance
         compensation of $395,286, payable in equal bi-weekly installments of
         $7,601.64 and a retention bonus in the amount of $80,000, which was
         paid on April 15, 2000. In connection with Mr. Lefcort's severance
         agreement, the Company agreed to provide an advance on severance to Mr.
         Lefcort in the amount of $200,000 on June 1, 2000. Mr. Lefcort was
         granted the right to exercise any stock option previously granted to
         him through April 5, 2003.

         Pursuant to the terms of the agreement with Mr. Nugent, Mr. Nugent
         resigned as Vice President, Secretary and General Counsel of the
         Company and any affiliates of the Company effective April 21, 2000. The
         Company agreed to pay Mr. Nugent total severance compensation of
         $229,500, payable in equal bi-weekly installments of $12,736.11. Mr.
         Nugent was granted the right to exercise any stock option previously
         granted to him through April 20, 2002; however, certain restrictions
         were placed on the amount of profit Mr. Nugent can realize on the sale
         of the underlying stock.

         Pro Forma Financial Information

         Effective August 15, 2000, the Company entered into a three-year
         agreement with a syndicate of lenders led by Ableco Finance, LLC, as
         agent, an affiliate of Cerberus Capital Management, L.P. (the
         "Lenders") which replaced the Company's previous credit facilities with
         a $33.4 million Revolving Credit Facility and two term loans of $17.6
         million and $9.0 million, respectively, plus a four-year, $5.3 million
         term loan, provided by the Company's former syndicate of lenders, led
         by Fleet National Bank subordinated to the borrowing facilities
         provided by the Lenders (the "Refinancing"). Simultaneously with the
         new arrangements, the Company renegotiated the payment schedules of its
         acquisition debt so that the defaults under those loans were cured.

         The following unaudited pro forma consolidated statements of operations
         for the year ended December 31, 1999 and the quarter ended July 2, 2000
         include the Company's historical results of operations adjusted to
         reflect (a) the Refinancing as if it had been consummated at the
         beginning of the periods presented and (b) the elimination of the
         revenues, costs of revenues, SG&A expenses and other items in
         connection with (i) the sale of the Company's Synadyne division
         effective April 8, 2000, (ii) the sale of the Company's clerical
         division, Office Ours, effective August 30, 1999, (iii) the
         discontinuance by the Company of PEO services offered to Tandem
         franchises as of December 31, 1999, (iv) the sale or pending sale of
         the assets of offices and (v) the corporate headquarters in connection
         with the Company's restructuring efforts (the "Disposed Operations").
         The unaudited pro forma results are not necessarily indicative of
         operating results that would have occurred had the aforementioned
         transactions been consummated as of the beginning of the periods
         presented. The unaudited pro forma balance sheet is presented as if the
         Company's Refinancing had been consummated on the balance sheet date of
         July 2, 2000. All amounts presented are in thousands:


                                       34
<PAGE>   36



                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
                 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
                               AS OF JULY 2, 2000

<TABLE>
<CAPTION>
                                                                                                  Pro forma

                                                                              HISTORICAL        ADJUSTMENTS(1)        PRO FORMA
                                                                              ----------        --------------        ---------
         <S>                                                                  <C>               <C>                   <C>
         ASSETS

         Current Assets
          Cash and cash equivalents                                           $   1,043           $     69           $   1,112
          Accounts receivable, net                                               38,314                 --              38,314
          Assets held for disposition                                               426                 --                 426
          Income tax receivable and other current assets                         12,929              2,302              15,231
                                                                              ---------           --------           ---------

          Total current assets                                                   52,712              2,371              55,083

         Property and equipment, net                                              7,890                 --               7,890
         Goodwill and other intangible assets, net                               45,049                 --              45,049
         Other assets                                                             2,148                 --               2,148
                                                                              ---------           --------           ---------

          Total assets                                                        $ 107,799           $  2,371           $ 110,170
                                                                              =========           ========           =========

         LIABILITIES AND SHAREHOLDERS' EQUITY

         Current Liabilities
          Accounts payable                                                    $   6,898           $     --           $   6,898
          Accrued expenses
           Payroll and related costs                                             13,514                 --              13,514
           Other                                                                  5,935               (761)              5,174
          Accrued restructuring charges                                           1,693                 --               1,693
          Other current liabilities                                                 805                 --                 805
          Current maturities of long-term debt                                    8,192                 --               8,192
          CIT Revolving Loan                                                     19,364             (2,949)             16,415
          Fleet receivable facility (old)                                        31,262            (31,262)                 --
                                                                              ---------           --------           ---------

          Total current liabilities                                              87,663            (34,972)             52,691

         Non-Current Liabilities
          Deferred tax liability - Fleet facility                                    --              5,304               5,304
          Ableco term loans                                                          --             26,600              26,600
          Ableco term loan discount                                                  --             (9,000)             (9,000)
          Fleet term loan (new)                                                      --              5,343               5,343
          Other long-term debt, less current maturities                           2,006                 --               2,006
                                                                              ---------           --------           ---------

          Total liabilities                                                      89,669             (6,725)             82,944
                                                                              ---------           --------           ---------

         Shareholders' Equity
          Common stock, $.001 par value: 10,000,000 shares authorized                 9                 --                   9
           8,657,913 shares issued and outstanding                                   --
          Additional paid-in-capital                                             53,546                624              54,170
          Accumulated deficit                                                   (35,425)             8,472             (26,953)
                                                                              ---------           --------           ---------

          Total shareholders' equity                                             18,130              9,096              27,226
                                                                              ---------           --------           ---------

           Total liabilities and shareholders' equity                         $ 107,799           $  2,371           $ 110,170
                                                                              =========           ========           =========

         Total shareholders' equity                                           $  18,130           $  9,096           $  27,226
         Less:  Net goodwill as of July 2, 2000                                 (21,614)                --             (21,614)
                                                                              ---------           --------           ---------

         Net Tangible Assets (2)                                              $  (3,484)          $  9,096           $   5,612
                                                                              =========           ========           =========
</TABLE>


                                       35
<PAGE>   37



                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
            UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                                          DISPOSED
                                                                         OPERATIONS                     REFINANCING    PRO FORMA
                                                          HISTORICAL   ADJUSTMENTS (3)    PRO FORMA    ADJUSTMENTS(4)  AS ADJUSTED
                                                         -----------   ---------------   -----------   --------------  -----------
          <S>                                            <C>           <C>               <C>           <C>             <C>
          Net revenues                                   $   594,047     $  (306,718)    $   287,329       $     --     $  287,329
          Cost of revenues                                   512,136        (288,153)        223,983             --        223,983
                                                         -----------     -----------     -----------       --------     -----------

          Gross profit                                        81,911         (18,565)         63,346             --         63,346
          Selling, general and administrative expenses        86,719         (18,711)         68,008             --         68,008
          Restructuring and asset impairment charges          13,823              --          13,823             --         13,823
                                                         -----------     -----------     -----------       --------     ----------

          Operating (loss) income                            (18,631)            146         (18,485)            --        (18,485)
          Interest expense, net                                8,604          (1,568)          7,036          3,775         10,811
          Other (income) expense                                (479)             --            (479)            --           (479)
                                                         -----------     -----------     -----------       --------     ----------

          Loss before benefit for income taxes               (26,756)          1,714         (25,042)        (3,775)       (28,817)
          Provision (benefit) for income taxes                 4,123             643           4,766         (1,416)         3,350
                                                         -----------     -----------     -----------       --------     ----------

          Net loss from continuing operations            $   (30,879)    $     1,071     $   (29,808)      $ (2,359)    $  (32,167)
                                                         ===========     ===========     ===========       ========     ==========

          Loss per share:
             Basic and diluted
                Loss from continuing operations          $     (3.57)                    $     (3.44)                   $    (3.72)

          Weighted average common shares
              Basic                                        8,657,913                       8,657,913                     8,657,913
              Diluted                                      8,657,913                       8,657,913                     8,657,913
</TABLE>


                                       36
<PAGE>   38


                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
            UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                    FOR THE THIRTEEN WEEKS ENDED JULY 2, 2000

<TABLE>
<CAPTION>
                                                                        DISPOSED
                                                                       OPERATIONS                   REFINANCING     PRO FORMA
                                                        HISTORICAL   ADJUSTMENTS (3)   PRO FORMA   ADJUSTMENTS(4)  AS ADJUSTED
                                                        ----------   ---------------  ----------   --------------  -----------
          <S>                                           <C>          <C>              <C>         <C>             <C>
          Net revenues                                  $   81,618       $(8,826)     $   72,792      $    --          $72,792
          Cost of revenues                                  65,432        (7,504)         57,928           --           57,928
                                                        ----------       -------      ----------      -------       ----------

          Gross profit                                      16,186        (1,322)         14,864           --           14,864
          Selling, general and administrative expenses      14,722        (1,201)         13,521           --           13,521
          Restructuring and asset impairment charges           878            --             878           --              878
                                                        ----------       -------      ----------      -------       ----------

          Operating (loss) income                              586          (121)            465           --              465
          Interest expense, net                              1,913          (120)          1,793          890            2,683
          Other (income) expense                              (724)           --            (724)          --             (724)
                                                        ----------       -------      ----------      -------       ----------

          Loss before benefit for income taxes                (603)           (1)           (604)        (890)          (1,494)
          Benefit for income taxes                          (7,689)           --          (7,689)        (334)          (8,023)
                                                        ----------       -------      ----------      -------       ----------

          Income from continuing operations             $    7,086       $    (1)     $    7,085      $  (556)      $    6,529
                                                        ==========       =======      ==========      =======       ==========


          Earnings per share:
              Basic
                 Income from continuing operations      $     0.82                    $     0.82                    $     0.75

              Diluted
                 Income from continuing operations      $     0.72                    $     0.72                    $     0.66

          Weighted average common shares
              Basic                                      8,657,913                     8,657,913                     8,657,913
              Diluted (5)                                9,857,385                     9,857,385                     9,857,385
</TABLE>

         NOTE 1

         The adjustments reflect issuance of two term loans by a syndicate of
         lenders led by Ableco Finance, LLC, as agent (the "Lenders") of $17.6
         million and $9.0 million, and a $33.4 million Revolving Credit
         Facility, of which $16.4 million would have been outstanding as of July
         2, 2000, and the discontinuance of the Revolving Credit and Receivable
         Facilities with a syndicate of lenders led by Fleet National Bank, as
         agent (the "Fleet Group"). The Fleet Group forgave $14.4 million of
         debt, of which $9.0 will be paid to Ableco, which is recorded as a
         discount on debt and will be amortized as interest expense in the
         Company's results of operations over a period of three years.

         In addition to the loans from the Lenders, a $5.3 million term loan,
         payable over four years, was issued to the Fleet Group (the
         "Subordinated Term Note"). In connection with the Subordinated Term
         Note, the Company issued 524,265 warrants to the Fleet Group,
         exercisable at $0.01 per share for a term of ten years, to purchase
         outstanding shares of the Company's common stock with a fair value of
         $0.6 million as of August 15, 2000. As a result of the above
         transactions, the Company recorded an extraordinary gain on
         extinguishment of debt, net of tax of $8.5 million ($13.8 million, less
         $5.3 million of income tax).

         As part of the Refinancing, the Company renegotiated its subordinated
         debt and paid accrued interest of $0.8 million at closing, which is
         included in Other Accrued Expenses.


                                       37
<PAGE>   39


         NOTE 2

         The Company's net tangible assets calculated in accordance with the
         Nasdaq National Market's listing requirements.

         NOTE 3

         Elimination of revenues, costs of revenues, SG&A expenses and other
         costs of the following disposed operations: (i) the Company's PEO
         division, Synadyne, which was sold effective April 8, 2000, (ii) the
         Company's clerical division, Office Ours, which was sold effective
         August 30, 1999, (iii) the discontinuance of PEO services offered to
         Tandem franchises after December 31, 1999, (iv) offices sold,
         franchised, closed, or held for sale as of July 2, 2000, and (v) the
         sale of the corporate headquarters building in connection with the
         Company's restructuring efforts.

         The following table summarizes the results of operations before income
         taxes of the Company's Disposed Operations that are reflected in the
         Company's pro forma results of operations.
         Amounts are in thousands:


FOR THE YEAR ENDED DECEMBER 31, 1999:

<TABLE>
<CAPTION>
                                                                                             RESTRUCTURING          DISPOSED
                                                    OFFICE OURS           SYNADYNE              & OTHER             OPERATIONS
                                                    -----------          ----------          -------------         ----------
         <S>                                        <C>                  <C>                 <C>                   <C>
         Revenues                                    $   5,244           $   22,450            $ 279,024           $  306,718
         Cost of revenues                                3,854               15,527              268,772              288,153
                                                     ---------           ----------            ---------           ----------

         Gross margin                                    1,390                6,923               10,252               18,565
         Selling, general and administrative             1,481                5,191               12,039               18,711
         Other expense (income), net                        57                  338                1,173                1,568
                                                     ---------           ----------            ---------           ----------

         (Loss) income before taxes                  $    (148)          $    1,394            $  (2,960)          $   (1,714)
                                                     =========           ==========            =========           ==========
</TABLE>

FOR THE QUARTER ENDED JULY 2, 2000:

<TABLE>
<CAPTION>
                                                                                             RESTRUCTURING          DISPOSED
                                                    OFFICE OURS           SYNADYNE              & OTHER             OPERATIONS
                                                    -----------          ----------          -------------         ----------
         <S>                                        <C>                  <C>                 <C>                   <C>
          Revenues                                   $      --           $       71            $   8,755           $    8,826
          Cost of revenues                                  --                   83                7,421                7,504
                                                     ---------           ----------            ---------           ----------

          Gross margin                                      --                  (12)               1,334                1,322
          Selling, general and administrative               --                  172                1,029                1,201
          Other expense (income), net                       --                   14                  106                  120
                                                     ---------           ----------            ---------           ----------

          (Loss) income before taxes                 $      --           $     (198)           $     199           $        1
                                                     =========           ==========            =========           ==========
</TABLE>


         NOTE 4

         Adjustments to reflect interest expense relating to (a) the
         Refinancing, and (b) debt extinguished as a result of the disposed
         operations, and (c) the sale of the Company's former corporate
         headquarters building during the fourth quarter of 1999.

         Interest expense was adjusted as follows, amounts are in thousands:


                                       38
<PAGE>   40


<TABLE>
<CAPTION>
                                                                                YEAR ENDED       QUARTER ENDED
                                                                            DECEMBER 31, 1999    JULY 2, 2000
                                                                            -----------------    ------------
         <S>                                                                <C>                  <C>
         Add:
                       Fleet Term Loan (at an effective rate of 11.5%)          $   613             $   169
                       Ableco Revolving Facility and Term Loans
                           (at an effective rate of 12.2%)                        5,301               1,329
                       Amortization of debt discount                              3,000                 750
                       Amortization of loan fees                                    767                 192
                                                                                -------             -------
                       Subtotal                                                   9,681               2,440
                                                                                -------             -------
         Less:
                       Fleet Revolver and Securitization Facilities              (5,192)             (1,646)
                       Amortization of loan fees                                 (1,887)                (24)
                       OSI corporate headquarters mortgage                         (286)                 --
                       Acquisition notes forgiven in connection with
                         the sale of certain restructured offices                  (109)                 --
                                                                                -------             -------
                       Subtotal                                                  (7,474)             (1,670)
                                                                                -------             -------

         Net change interest expense                                              2,207                 770
         Addback:  interest charged to disposed operations                        1,568                 120
                                                                                -------             -------
         Net interest expense change due to the refinancing                     $ 3,775             $   890
                                                                                =======             =======
</TABLE>

         NOTE 5

         Includes 8,657,913 outstanding common shares of the Company as of
         August 15, 2000, and the options and warrants to purchase common shares
         of the Company that would remain outstanding, and therefore be dilutive
         to the Company's earnings per share, after assumed repurchase using
         proceeds from the exercise of those options and warrants.


                                       39
<PAGE>   41
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

Number   Description
------   -----------

3.1      Amended and Restated Articles of Incorporation of the Company (1)

3.2      Amended and Restated Bylaws of the Company (2)

10.68    Ninth Amendment to Third Amended and Restated Credit Agreement among
         Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
         Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
         Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
         Services, Inc., Outsource International of America, Inc., Mass Staff,
         Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
         Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
         East, LLC, Guardian Employer West, LLC, each of the banks party to the
         Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
         of May 19, 2000.

10.69    Sixth Amendment to Revolving Credit Agreement among Outsource Funding
         Corporation, the banks from time to time parties thereto, and
         BankBoston, N.A., as agent for the banks, dated May 19, 2000.

10.70    Tenth Amendment to Third Amended and Restated Credit Agreement among
         Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
         Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
         Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
         Services, Inc., Outsource International of America, Inc., Mass Staff,
         Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
         Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
         East, LLC, Guardian Employer West, LLC, each of the banks party to the
         Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
         of May 31, 2000.

10.71    Seventh Amendment to Revolving Credit Agreement among Outsource Funding
         Corporation, the banks from time to time parties thereto, and
         BankBoston, N.A., as agent for the banks, dated May 31, 2000.

10.72    Eleventh Amendment to Third Amended and Restated Credit Agreement among
         Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
         Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
         Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
         Services, Inc., Outsource International of America, Inc., Mass Staff,
         Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
         Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
         East, LLC, Guardian Employer West, LLC, each of the banks party to the
         Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
         of June 26, 2000.

10.73    Eighth Amendment to Revolving Credit Agreement among Outsource Funding
         Corporation, the banks from time to time parties thereto, and
         BankBoston, N.A., as agent for the banks, dated June 26, 2000.

10.74    Twelfth Amendment to Third Amended and Restated Credit Agreement among
         Outsource International, Inc., Capital Staffing Fund, Inc., Outsource
         Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc., Synadyne III,
         Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees Insurance
         Services, Inc., Outsource International of America, Inc., Mass Staff,
         Inc., Staff All, Inc., Outsource of Nevada, Inc., Employment
         Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian Employer
         East, LLC, Guardian Employer West, LLC, each of the banks party to the
         Credit Agreement and BankBoston, N.A., as agent for the banks, dated as
         of July 14, 2000.

10.75    Ninth Amendment to Revolving Credit Agreement among Outsource Funding
         Corporation, the banks from time to time parties thereto, and
         BankBoston, N.A., as agent for the banks, dated July 14, 2000.

10.76    Thirteenth Amendment to Third Amended and Restated Credit Agreement
         among Outsource International, Inc., Capital Staffing Fund, Inc.,
         Outsource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc.,
         Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees
         Insurance Services, Inc., Outsource International of America, Inc.,
         Mass Staff, Inc., Staff All, Inc., Outsource of Nevada, Inc.,
         Employment Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc.,
         Guardian Employer East, LLC, Guardian Employer West, LLC, each of the
         banks party to the Credit Agreement and BankBoston, N.A., as agent for
         the banks, dated as of July 31, 2000.

10.77    Tenth Amendment to Revolving Credit Agreement among Outsource Funding
         Corporation, the banks from time to time parties thereto, and
         BankBoston, N.A., as agent for the banks, dated July 31, 2000.

10.78    Fourteenth Amendment to Third Amended and Restated Credit Agreement
         among Outsource International, Inc., Capital Staffing Fund, Inc.,
         Outsource Franchising, Inc., Synadyne I, Inc., Synadyne II, Inc.,
         Synadyne III, Inc., Synadyne IV, Inc., Synadyne V, Inc., Employees
         Insurance Services, Inc., Outsource International of America, Inc.,
         Mass Staff, Inc., Staff All, Inc., Outsource of Nevada, Inc.,
         Employment Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc.,
         Guardian Employer East, LLC, Guardian Employer West, LLC, each of the
         banks party to the Credit Agreement and BankBoston, N.A., as agent for
         the banks, dated as of August 2, 2000.

10.92(a) Financing Agreement, dated as of August 15, 2000, among Outsource
         International, Inc., Outsource International of America, Inc.,
         Outsource Franchising, Inc., Guardian Employer East, LLC and Guardian
         Employer West, LLC, as Borrowers, the other subsidiaries of Outsource
         International, Inc., as Guarantors, Ableco Finance, LLC, as agent for
         certain Lenders, and The CIT Group/Business Credit, Inc.

10.92(b) Term A Note, dated August 15, 2000, in the amount of $8,800,000, made
         by Outsource International, Inc., Outsource International of America,
         Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
         Guardian Employer West, LLC, as Borrowers, to the order of Ableco
         Finance, LLC.

10.92(c) Term A Note, dated August 15, 2000, in the amount of $8,800,000, made
         by Outsource International, Inc., Outsource International of America,
         Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
         Guardian Employer West, LLC, as Borrowers, to the order of A2 Funding
         LP.

10.92(d) Term B Note, dated August 15, 2000, in the amount of $9,000,000, made
         by Outsource International, Inc., Outsource International of America,
         Inc., Outsource Franchising, Inc., Guardian Employer East, LLC and
         Guardian Employer West, LLC, as Borrowers, to the order of Ableco
         Holding LLC.

10.92(e) Revolving Credit Note, dated August 15, 2000, in the amount of
         $33,400,000, made by Outsource International, Inc., Outsource
         International of America, Inc., Outsource Franchising, Inc., Guardian
         Employer East, LLC and Guardian Employer West, LLC, as Borrowers, to
         the order of The CIT Group/Business Credit, Inc.

10.92(f) Warrant, dated August 15, 2000, issued to Ableco Holding LLC.

10.92(g) Registration Rights Agreement, dated as of August 15, 2000, between
         Outsource International, Inc. and Ableco Holding LLC.

10.93(a) Restructuring Agreement, dated as of August 15, 2000, among Outsource
         International, Inc., Fleet National Bank, as agent, and each of the
         banks party thereto.

10.93(b) Notes, each dated August 15, 2000, totaling $5,343,262, made by
         Outsource International, Inc., as Borrower, to the order of Fleet
         National Bank ($2,200,168.28); LaSalle Bank National Association
         ($1,257,237.49); Comerica Bank ($1,257,237.49), and SunTrust Bank
         ($628,618.74).

10.93(c) Warrant Purchase Agreement, dated as of August 15, 2000, among
         Outsource International, Inc., Fleet National Bank, Comerica Bank,
         LaSalle Bank National Association and SunTrust Bank.

10.93(d) Form of Warrant, dated August 15, 2000, issued to Fleet National Bank
         (215,874 shares), Comerica Bank (123,356), LaSalle Bank National
         Association (123,356) and SunTrust Bank (61,679).

27       Financial Data Schedule

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

(1)  Incorporated by reference to the Exhibits to Amendment No. 3 to the
     Company's Registration Statement on Form S-1 (Registration Statement No.
     333-33443) as filed with the Securities and Exchange Commission on October
     21, 1997.

(2)  Incorporated by reference to the Exhibits to Amendment No. 1 to the
     Company's Registration Statement on Form S-1 (Registration Statement No.
     333-33443) as filed with the Securities and Exchange Commission on
     September 23, 1997.

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

(b)  REPORTS ON FORM 8 - K:

No reports were filed on Form 8-K during the fiscal quarter ended July 2, 2000.



                                       40
<PAGE>   42


                                   SIGNATURES

         Pursuant to the requirements 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.

                                   OUTSOURCE INTERNATIONAL, INC.

         Date: August 21, 2000     By:  /s/ Garry E. Meier
                                      -----------------------------------------

                                      Garry E. Meier
                                      Chairman of the Board of Directors,
                                      President and Chief Executive Officer

         Date: August 21, 2000     By:  /s/ Scott R. Francis
                                      -----------------------------------------

                                      Scott R. Francis
                                      Vice President and Chief Financial Officer
                                      (Principal Financial Officer)


                                       41
<PAGE>   43

                                  EXHIBIT INDEX

         Exhibit No.                    Description

         10.68    Ninth Amendment to Third Amended and Restated Credit Agreement
                  among Outsource International, Inc., Capital Staffing Fund,
                  Inc., Outsource Franchising, Inc., Synadyne I, Inc., Synadyne
                  II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V,
                  Inc., Employees Insurance Services, Inc., Outsource
                  International of America, Inc., Mass Staff, Inc., Staff All,
                  Inc., Outsource of Nevada, Inc., Employment Consultants, Inc.,
                  X-tra Help, Inc., Co-Staff, Inc., Guardian Employer East, LLC,
                  Guardian Employer West, LLC, each of the banks party to the
                  Credit Agreement and BankBoston, N.A., as agent for the banks,
                  dated as of May 19, 2000.

         10.69    Sixth Amendment to Revolving Credit Agreement among Outsource
                  Funding Corporation, the banks from time to time parties
                  thereto, and BankBoston, N.A., as agent for the banks, dated
                  May 19, 2000.

         10.70    Tenth Amendment to Third Amended and Restated Credit Agreement
                  among Outsource International, Inc., Capital Staffing Fund,
                  Inc., Outsource Franchising, Inc., Synadyne I, Inc., Synadyne
                  II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne V,
                  Inc., Employees Insurance Services, Inc., Outsource
                  International of America, Inc., Mass Staff, Inc., Staff All,
                  Inc., Outsource of Nevada, Inc., Employment Consultants, Inc.,
                  X-tra Help, Inc., Co-Staff, Inc., Guardian Employer East, LLC,
                  Guardian Employer West, LLC, each of the banks party to the
                  Credit Agreement and BankBoston, N.A., as agent for the banks,
                  dated as of May 31, 2000.

         10.71    Seventh Amendment to Revolving Credit Agreement among
                  Outsource Funding Corporation, the banks from time to time
                  parties thereto, and BankBoston, N.A., as agent for the banks,
                  dated May 31, 2000.

         10.72    Eleventh Amendment to Third Amended and Restated Credit
                  Agreement among Outsource International, Inc., Capital
                  Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
                  Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
                  Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
                  Outsource International of America, Inc., Mass Staff, Inc.,
                  Staff All, Inc., Outsource of Nevada, Inc., Employment
                  Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
                  Employer East, LLC, Guardian Employer West, LLC, each of the
                  banks party to the Credit Agreement and BankBoston, N.A., as
                  agent for the banks, dated as of June 26, 2000.

         10.73    Eighth Amendment to Revolving Credit Agreement among Outsource
                  Funding Corporation, the banks from time to time parties
                  thereto, and BankBoston, N.A., as agent for the banks, dated
                  June 26, 2000.

         10.74    Twelfth Amendment to Third Amended and Restated Credit
                  Agreement among Outsource International, Inc., Capital
                  Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
                  Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
                  Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
                  Outsource International of America, Inc., Mass Staff, Inc.,
                  Staff All, Inc., Outsource of Nevada, Inc., Employment
                  Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
                  Employer East, LLC, Guardian Employer West, LLC, each of the
                  banks party to the Credit Agreement and BankBoston, N.A., as
                  agent for the banks, dated as of July 14, 2000.

         10.75    Ninth Amendment to Revolving Credit Agreement among Outsource
                  Funding Corporation, the banks from time to time parties
                  thereto, and BankBoston, N.A., as agent for the banks, dated
                  July 14, 2000.

         10.76    Thirteenth Amendment to Third Amended and Restated Credit
                  Agreement among Outsource International, Inc., Capital
                  Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
                  Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
                  Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
                  Outsource International of America, Inc., Mass Staff, Inc.,
                  Staff All, Inc., Outsource of Nevada, Inc., Employment
                  Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
                  Employer East, LLC, Guardian Employer West, LLC, each of the
                  banks party to the Credit Agreement and BankBoston, N.A., as
                  agent for the banks, dated as of July 31, 2000.

         10.77    Tenth Amendment to Revolving Credit Agreement among Outsource
                  Funding Corporation, the banks from time to time parties
                  thereto, and BankBoston, N.A., as agent for the banks, dated
                  July 31, 2000.

         10.78    Fourteenth Amendment to Third Amended and Restated Credit
                  Agreement among Outsource International, Inc., Capital
                  Staffing Fund, Inc., Outsource Franchising, Inc., Synadyne I,
                  Inc., Synadyne II, Inc., Synadyne III, Inc., Synadyne IV,
                  Inc., Synadyne V, Inc., Employees Insurance Services, Inc.,
                  Outsource International of America, Inc., Mass Staff, Inc.,
                  Staff All, Inc., Outsource of Nevada, Inc., Employment
                  Consultants, Inc., X-tra Help, Inc., Co-Staff, Inc., Guardian
                  Employer East, LLC, Guardian Employer West, LLC, each of the
                  banks party to the Credit Agreement and BankBoston, N.A., as
                  agent for the banks, dated as of August 2, 2000. 10.92(a)
                  Financing Agreement, dated as of August 15, 2000, among
                  Outsource International, Inc., Outsource International of
                  America, Inc., Outsource Franchising, Inc., Guardian Employer
                  East, LLC and Guardian Employer West, LLC, as Borrowers, the
                  other subsidiaries of Outsource International, Inc., as
                  Guarantors, Ableco Finance, LLC, as agent for certain Lenders,
                  and The CIT Group/Business Credit, Inc. 10.92(a) Financing
                  Agreement, dated as of August 15, 2000, among Outsource
                  International, Inc., Outsource International of America, Inc.,
                  Outsource Franchising, Inc., Guardian Employer East, LLC and
                  Guardian Employer West, LLC, as Borrowers, the other
                  subsidiaries of Outsource International, Inc., as Guarantors,
                  Ableco Finance, LLC, as agent for certain Lenders, and The CIT
                  Group/Business Credit, Inc.

         10.92(a) Financing Agreement, dated as of August 15, 2000, among
                  Outsource International, Inc., Outsource International of
                  America, Inc., Outsource Franchising, Inc., Guardian Employer
                  East, LLC and Guardian Employer West, LLC, as Borrowers, the
                  other subsidiaries of Outsource International, Inc., as
                  Guarantors, Ableco Finance, LLC, as agent for certain Lenders,
                  and The CIT Group/Business Credit, Inc.

         10.92(b) Term A Note, dated August 15, 2000, in the amount of
                  $8,800,000, made by Outsource International, Inc., Outsource
                  International of America, Inc., Outsource Franchising, Inc.,
                  Guardian Employer East, LLC and Guardian Employer West, LLC,
                  as Borrowers, to the order of Ableco Finance, LLC.

         10.92(c) Term A Note, dated August 15, 2000, in the amount of
                  $8,800,000, made by Outsource International, Inc., Outsource
                  International of America, Inc., Outsource Franchising, Inc.,
                  Guardian Employer East, LLC and Guardian Employer West, LLC,
                  as Borrowers, to the order of A2 Funding LP.

         10.92(d) Term B Note, dated August 15, 2000, in the amount of
                  $9,000,000, made by Outsource International, Inc., Outsource
                  International of America, Inc., Outsource Franchising, Inc.,
                  Guardian Employer East, LLC and Guardian Employer West, LLC,
                  as Borrowers, to the order of Ableco Holding LLC.

         10.92(e) Revolving Credit Note, dated August 15, 2000, in the amount of
                  $33,400,000, made by Outsource International, Inc., Outsource
                  International of America, Inc., Outsource Franchising, Inc.,
                  Guardian Employer East, LLC and Guardian Employer West, LLC,
                  as Borrowers, to the order of The CIT Group/Business Credit,
                  Inc.

         10.92(f) Warrant, dated August 15, 2000, issued to Ableco Holding LLC.

         10.92(g) Registration Rights Agreement, dated as of August 15, 2000,
                  between Outsource International, Inc. and Ableco Holding LLC.

         10.93(a) Restructuring Agreement, dated as of August 15, 2000, among
                  Outsource International, Inc., Fleet National Bank, as agent,
                  and each of the banks party thereto.

         10.93(b) Notes, each dated August 15, 2000, totaling $5,343,262, made
                  by Outsource International, Inc., as Borrower, to the order of
                  Fleet National Bank ($2,200,168.28); LaSalle Bank National
                  Association ($1,257,237.49); Comerica Bank ($1,257,237.49),
                  and SunTrust Bank ($628,618.74).

         10.93(c) Warrant Purchase Agreement, dated as of August 15, 2000, among
                  Outsource International, Inc., Fleet National Bank, Comerica
                  Bank, LaSalle Bank National Association and SunTrust Bank.

         10.93(d) Form of Warrant, dated August 15, 2000, issued to Fleet
                  National Bank (215,874 shares), Comerica Bank (123,356),
                  LaSalle Bank National Association (123,356) and SunTrust Bank
                  (61,679).

         27       Financial Data Schedule