<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

       For the quarterly period ended October 1, 2000

                                        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)

          FLORIDA                                              65-0675628
----------------------------                                ----------------
(State or Other Jurisdiction                                (I.R.S. Employer
of Incorporation or Organization)                          Identification No.)

              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 NOVEMBER 10, 2000
                  -----                      --------------------------------
Common Stock, par value $.001 per share                  8,687,488

<PAGE>   2









                          OUTSOURCE INTERNATIONAL, INC.
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                        PAGE
                                                                                                        ----
<S>                                                                                                        <C>

                         PART I - FINANCIAL INFORMATION


         Item 1 - Financial Statements

           Unaudited Condensed Consolidated Balance Sheets as of October 1, 2000
           and April 2, 2000...........................................................................    2

           Unaudited Condensed Consolidated Statements of Operations for the thirteen weeks
           ended October 1, 2000 and three months ended September 30, 1999.............................    3

           Unaudited Condensed Consolidated Statements of Operations for the twenty six
           weeks ended October 1, 2000 and six months ended September 30, 1999.........................    4

           Unaudited Condensed Consolidated Statements of Cash Flows for the twenty six
           weeks ended October 1, 2000 and six months ended September 30, 1999.........................    5

           Notes to Unaudited Condensed Consolidated Financial Statements..............................    6

           Item 2 - Management's Discussion and Analysis of Financial
           Condition and Results of Operations.........................................................   17

           Item 3 - Quantitative and Qualitative Disclosures about Market Risk.........................   35


                                            PART II - OTHER INFORMATION

         Item 1 - Legal Proceedings....................................................................   36

         Item 2 - Changes in Securities and Use of Proceeds............................................   36

         Item 3 - Defaults Upon Senior Securities......................................................   36

         Item 6 - Exhibits and Reports on Form 8-K.....................................................   37

         Signatures....................................................................................   40


</TABLE>


                                        i
<PAGE>   3


PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>


                                                                             OCTOBER 1, 2000          APRIL 2, 2000
                                                                             ---------------          -------------
<S>                                                                              <C>                   <C>
ASSETS
Current Assets:
      Cash                                                                       $   2,030             $   1,546
      Trade accounts receivable, net of allowance
           for doubtful accounts of $1,498 and $1,563                               36,837                42,118
      Funding advances to franchises                                                   696                   206
      Assets held for disposition                                                      215                 2,409
      Income tax receivable and other current assets                                 6,653                 5,043
                                                                                 ---------             ---------
           Total current assets                                                     46,431                51,322

Property and equipment, net                                                          7,424                 9,154
Goodwill and other intangible assets, net                                           44,316                45,783
Other assets                                                                         6,013                 2,310
                                                                                 ---------             ---------
           Total assets                                                          $ 104,184             $ 108,569
                                                                                 =========             =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
      Accounts payable                                                           $   7,219             $   8,887
      Accrued expenses:
           Payroll                                                                   4,767                10,518
           Payroll taxes                                                             1,912                 4,139
           Workers' compensation and insurance                                       5,285                 5,210
           Other                                                                     3,605                 4,499
      Accrued restructuring charges                                                  1,358                 2,255
      Other current liabilities                                                        982                   506
      Current maturities of long-term debt to related parties                           --                 1,195
      Current maturities of long-term debt                                           1,690                 7,635
      Revolving credit facility                                                         --                50,746
      Current maturities of term loans                                                 500                    --
                                                                                 ---------             ---------
           Total current liabilities                                                27,318                95,590

Non-Current Liabilities
      Senior facilities, net of current maturities                                  15,321                    --
      Term loans, net of current maturities                                         25,425                    --
      Long term debt, net of current maturities                                      1,204                    --
      Other long-term debt, less current maturities                                  6,636                 1,934
                                                                                 ---------             ---------
      Total liabilities                                                             75,904                97,524
                                                                                 ---------             ---------

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,
           8,687,488 shares issued and outstanding                                       9                     9
      Additional paid-in-capital                                                    54,170                53,546
      Accumulated deficit                                                          (25,899)              (42,510)
                                                                                 ---------             ---------
           Total shareholders' equity                                               28,280                11,045
                                                                                 ---------             ---------
           Total liabilities and shareholders' equity                            $ 104,184             $ 108,569
                                                                                 =========             =========
</TABLE>


                     See accompanying notes to the unaudited
                  condensed consolidated financial statements




                                        2
<PAGE>   4


                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                  FOR THE THIRTEEN WEEKS ENDED OCTOBER 1, 2000
                   AND THREE MONTHS ENDED SEPTEMBER 30, 1999

                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>

                                                                           OCTOBER 1, 2000    SEPTEMBER 30, 1999
                                                                           ---------------    ------------------
<S>                                                                         <C>                   <C>
Net revenues                                                                $     78,882          $    159,124
Cost of revenues                                                                  62,590               138,352
                                                                            ------------          ------------
Gross profit                                                                      16,292                20,772
                                                                            ------------          ------------
Selling, general and administrative expenses:
      Amortization of intangible assets                                              704                 1,013
      Other selling, general and administrative expenses                          12,550                24,211
                                                                            ------------          ------------
      Total selling, general and administrative expenses                          13,254                25,224
                                                                            ------------          ------------
Restructuring and impairment charges:
      Restructuring charges                                                          940                 5,104
      Impairment of goodwill and other long-lived assets                              --                 2,450
                                                                            ------------          ------------
      Total restructuring and impairment charges                                     940                 7,554
                                                                            ------------          ------------
Operating income (loss)                                                            2,098               (12,006)
                                                                            ------------          ------------
Other expense (income):
      Interest expense, net                                                        2,456                 1,852
      Gain on the disposition of assets and other income, net                       (144)                 (541)
                                                                            ------------          ------------
      Total other expense (income):                                                2,312                 1,311
                                                                            ------------          ------------
Loss before benefit for income taxes                                                (214)              (13,317)

Income tax benefit                                                                (1,283)               (4,998)
                                                                            ------------          ------------
Income (loss) before extraordinary item                                            1,069                (8,319)

Extraordinary item - gain on refinancing of senior debt facilities,
      net of provision for income tax of $5,304                                    8,456                    --
                                                                            ------------          ------------
Net income (loss)                                                           $      9,525          $     (8,319)
                                                                            ============          ============
Weighted average common shares outstanding:
      Basic                                                                    8,687,488             8,657,913
                                                                            ============          ============
      Diluted                                                                 10,292,236             8,657,913
                                                                            ============          ============
Earnings per share:
  Basic
      Income (loss) before extraordinary item                               $       0.13          $      (0.96)
      Extraordinary item, net of provision for income tax                           0.97                    --
                                                                            ------------          ------------
      Net income (loss)                                                     $       1.10          $      (0.96)
                                                                            ============          ============
  Diluted
      Income (loss) before extraordinary item                               $       0.11          $      (0.96)
      Extraordinary item, net of provision for income tax                           0.82                    --
                                                                            ------------          ------------
      Net income (loss)                                                     $       0.93          $      (0.96)
                                                                            ============          ============

</TABLE>


                     See accompanying notes to the unaudited
                  condensed consolidated financial statements



                                        3
<PAGE>   5


                 OUTSOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE TWENTY SIX WEEKS ENDED OCTOBER 1, 2000
                    AND SIX MONTHS ENDED SEPTEMBER 30, 1999

                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                           OCTOBER 1, 2000     SEPTEMBER 30, 1999
                                                                           ---------------     -------------------
<S>                                                                         <C>                   <C>
Net revenues                                                                $    160,500          $    302,578
Cost of revenues                                                                 128,021               261,461
                                                                            ------------          ------------
Gross profit                                                                      32,479                41,117
                                                                            ------------          ------------

Selling, general and administrative expenses:
      Amortization of intangible assets                                            1,438                 1,947
      Other selling, general and administrative expenses                          26,539                44,126
                                                                            ------------          ------------
      Total selling, general and administrative expenses                          27,977                46,073
                                                                            ------------          ------------

Restructuring and impairment charges:
      Restructuring charges                                                        1,818                 5,104
      Impairment of goodwill and other long-lived assets                              --                 2,450
                                                                            ------------          ------------
      Total restructuring and impairment charges                                   1,818                 7,554
                                                                            ------------          ------------
Operating income (loss)                                                            2,684               (12,510)
                                                                            ------------          ------------
Other expense (income):
      Interest expense, net                                                        4,369                 3,554
      Gain on disposition of assets and other income, net                           (867)                 (562)
                                                                            ------------          ------------
      Total other expense (income):                                                3,502                 2,992
                                                                            ------------          ------------

Loss before benefit for income taxes                                                (818)              (15,502)
Income tax benefit                                                                (8,973)               (5,934)
                                                                            ------------          ------------
Income (loss) before extraordinary item                                            8,155                (9,568)

Extraordinary item - gain on refinancing of senior debt facilities,
      net of provision for income tax of $5,304                                    8,456                    --
                                                                            ------------          ------------
Net income (loss)                                                           $     16,611          $     (9,568)
                                                                            ============          ============

Weighted average common shares outstanding:
      Basic                                                                    8,681,172             8,657,913
                                                                            ============          ============
      Diluted                                                                 10,086,221             8,657,913
                                                                            ============          ============

Earnings per share:
  Basic
      Income (loss) before extraordinary item                               $       0.94          $      (1.11)
      Extraordinary item, net of provision for income tax                           0.97                    --
                                                                            ------------          ------------
      Net income (loss)                                                     $       1.91          $      (1.11)
                                                                            ============          ============
  Diluted
      Income (loss) before extraordinary item                               $       0.81          $      (1.11)
      Extraordinary item, net of provision for income tax                           0.84                    --
                                                                            ------------          ------------
      Net income (loss)                                                     $       1.65          $      (1.11)
                                                                            ============          ============
</TABLE>

                     See accompanying notes to the unaudited
                   condensed consolidated financial statements



                                       4
<PAGE>   6



                 OUTSOURCE INTERNATIONAL INC. AND SUBSIDIARIES
           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE TWENTY SIX WEEKS ENDED OCTOBER 1, 2000
                    AND SIX MONTHS ENDED SEPTEMBER 30, 1999

                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>


                                                                                    OCTOBER 1, 2000    SEPTEMBER 30, 1999
                                                                                    ---------------    ------------------
<S>                                                                                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                      $ 16,611          $ (9,568)
      Adjustments to reconcile net income (loss) to net cash
        (used in) provided by operating activities:
           Depreciation and amortization                                                  2,784             3,741
           Impairment of goodwill                                                            --             2,450
           Write-down and losses from sale of assets held for disposition                   579             2,547
           Extraordinary gain on refinancing, net of income tax                          (8,456)               --
           Deferred income taxes                                                         (9,530)           (4,940)
           Notes received from franchises                                                    --              (107)
           Gain on the sale of the Company's clerical operations                                             (523)
           Gain on the sale of the Company's PEO operations                                (684)               --
           Loss on disposal of assets, net                                                  153                50
                                                                                       --------          --------
                                                                                          1,457            (6,350)
      Changes in assets and liabilities (excluding effects of acquisitions and
        dispositions):
           (Increase) decrease in:
                Trade accounts receivable                                                 5,839             3,966
                Prepaid expenses and other current assets                                   363              (975)
                Other assets                                                                (62)              756
           Increase (decrease) in:
                Accounts payable                                                           (100)           (1,004)
                Accrued expenses:
                   Payroll                                                               (5,778)            5,378
                   Payroll taxes                                                         (2,227)              818
                   Workers' compensation and insurance                                        6            (1,393)
                   Debt service and other accrued expenses                               (1,846)              934
                Accrued restructuring charges                                              (937)            1,227
                Other current liabilities                                                  (364)              479
                                                                                       --------          --------
      Net cash (used in) provided by operating activities                                (3,649)            3,836
                                                                                       --------          --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from asset sales as part of the Restructuring and related matters                  880             1,965
Proceeds from the sale of the Company's PEO operations                                    3,314                --
Funding repayments (advances) from franchises, net                                         (490)              229
Purchases of property and equipment                                                        (301)             (558)
Proceeds from sale of property and equipment                                                 --             1,600
                                                                                       --------          --------
      Net cash provided by investing activities                                           3,403             3,236
                                                                                       --------          --------

CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in excess of outstanding checks over bank balance,
  included in accounts payable                                                           (2,021)           (2,078)
Repayment of lines of credit and revolving credit facilities                              3,922            (2,913)
Proceeds from interest collar termination                                                    --               250
Related party debt repayments                                                                --              (145)
Repayment of other long-term debt                                                        (1,171)           (2,378)
                                                                                       --------          --------
      Net cash provided by (used in) financing activities                                   730            (7,264)
                                                                                       --------          --------
Net increase (decrease) in cash                                                             484              (192)
Cash, beginning of period                                                                 1,546             1,418
                                                                                       --------          --------
Cash, end of period                                                                    $  2,030          $  1,226
                                                                                       ========          ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid                                                                          $  4,970          $  2,432
                                                                                       ========          ========
</TABLE>



                     See accompanying notes to the unaudited
                  condensed consolidated financial statements




                                       5
<PAGE>   7


                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     NOTE 1. INTERIM FINANCIAL STATEMENTS

     The interim unaudited condensed consolidated financial statements and the
     related information in these notes as of October 1, 2000 and for the
     thirteen week period ("Q2 2001") and twenty six week period ("YTD 2001")
     ended October 1, 2000 and the three month period ("Q3 1999") and six month
     period ("YTD 1999") ended September 30, 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 the three months and six months ended September 30, 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 with the Securities and Exchange Commission
     ("SEC") on October 19, 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
     SEC on April 14, 2000, 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, and the financial statements in the Company's Form
     10-Q/A for the quarterly period ended July 2, 2000 ("Q1 2001") filed with
     the SEC on September 1, 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

     Effective August 15, 2000, the Company entered into a three-year agreement
     with a syndicate of lenders led by Ableco Finance LLC, as agent (the
     "Lenders"), which replaced the Company's previous senior credit facility
     (the "Fleet Facility") with a $33.4 million revolving credit facility (the
     "Ableco Facility") and two term loans of $17.6 million and $9.0 million,
     respectively. In connection with the repayment of the Fleet Facility, the
     Company issued a four-year, $5.3 million subordinated term note to the
     lenders of the Fleet Facility. Simultaneously with the closing of the
     Ableco Facility, the Company cured the defaults under certain of its
     outstanding subordinated acquisition notes payable. These notes were
     amended to provide for a five year term, interest only for three years and
     then two years of equal monthly payments of principal and interest, at the
     end of which those notes will be fully paid and then retired (see Note 5).

                                       6

<PAGE>   8

                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     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
     and six months ended September 30, 1999, were $1.3 million and $3.3
     million, respectively, and the loss before taxes for these operations, on a
     basis consistent with the segment information presented in Note 9, was
     approximately $0.1 million and $0.1 million for those same periods.

     (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 $3.3 million. 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 were $59.3 million during Q3 1999, and $114.4 million and $0.1
     million during YTD 1999 and YTD 2001, respectively. On a basis consistent
     with the segment information presented in Note 9, the Company reported net
     loss before taxes for the PEO operations of $0.2 million during YTD 2001
     and net income before taxes of $0.8 million during YTD 1999. The Company's
     net income before taxes for these operations during Q3 1999 was $0.3
     million.

     (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 59 employees
     through the second fiscal quarter of 2001. As of October 31, 2000, 48
     branch offices have been eliminated in connection with our restructuring
     plan, 41 of which had been sold, franchised, closed, or consolidated as of
     October 1, 2000. During Q2 2001 one office was removed from the held for
     disposition classification. Subsequently, during October 2000, seven
     offices, two of which were added to this classification during the quarter,
     were sold. The 48 offices sold, franchised, closed, or consolidated were
     not expected to be adequately profitable or were inconsistent with our
     operating strategy of clustering offices within specific geographic
     regions. In addition, during Q1 2001, when it became apparent that certain
     employees in offices sold and franchised to third parties would continue
     employment with such buyers, the expected reduction in staff was modified
     from 59 employees to 32 employees. Subsequently, in Q2 2001, in connection
     with the Restructuring, the Company reduced its workforce by an additional
     16 employees.




                                       7
<PAGE>   9
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

     The restructuring charge accrual and its utilization are as follows:


<TABLE>
<CAPTION>


                                                                                        FISCAL YEAR 2001
                                                                       -------------------------------------------------------
                                                                        CHARGES TO (REVERSALS
                                                                            OF) OPERATIONS       UTILIZATION
                                            ORIGINAL     BALANCE AT    ----------------------  -----------------   BALANCE AT
(Amounts in thousands)                       CHARGE        4/2/00      Q1 2001     Q2 2001     CASH     NON-CASH    10/1/00
                                           ----------   -------------  -------     -------     ----     --------  ------------
<S>                                             <C>        <C>        <C>         <C>        <C>        <C>        <C>
Employee severance and
    other termination benefits                  $ 4,040    $ 2,139    $   (89)    $   152    $   939    $    --    $ 1,263

Professional fees                                 1,205         34        369         401        764         --         40
Lease termination and write-down of
    leasehold improvements at closed offices        400         49         (2)         36         28         --         55

Other restructuring charges                         146         33        154         218        405         --         --
                                                -------    -------    -------     -------    -------    -------    -------

Accrued restructuring charges                     5,791      2,255        432         807      2,136         --      1,358

Write-down to fair value/loss on sale
    of assets identified for disposition          5,429         --        446         133         --        579         --
                                                -------    -------    -------     -------    -------    -------    -------

Total restructuring and asset
    impairment activity                         $11,220    $ 2,255    $   878     $   940    $ 2,136    $   579    $ 1,358
                                                =======    =======    =======     =======    =======    =======    =======
</TABLE>



     SEVERANCE AND OTHER RESTRUCTURING CHARGES

     The original $11.2 million restructuring charge (the "Restructuring
     Charge") included $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 the fact that certain employees of offices sold
     and franchised to third parties would continue employment with such buyers
     or franchisees and would not be paid the severance amounts that had been
     accrued. The Company recorded an additional $0.2 million in severance costs
     in Q2 2001 due to a reduction of headcount by 16 employees during the
     period whose severance payments were not accrued as part of the Company's
     original Restructuring Charge. The remaining liability consisted of $1.3
     million for severance and other termination benefits as of October 1, 2000
     for ten executive management employees who have been terminated during the
     period of August 1999 through August 2000, and will paid over a period
     ranging from one week to 18 months from the balance sheet date.

     The Company recorded professional fees of $0.4 million and $0.8 million as
     restructuring costs incurred during Q2 2001 and YTD 2001, respectively.
     These professional fees were comprised primarily of amounts paid to
     Crossroads LLC, a consulting firm based in Newport Beach, California
     ("Crossroads"), for its services related to the Restructuring.

     The Company utilized $0.2 million and $0.3 million of the Restructuring
     Charge during Q1 2001 and Q2 2001, respectively, for the costs of
     terminating real estate leases as well as for writing down the carrying
     value of leasehold improvements and other assets not usable in other
     Company operations.

     ASSETS HELD FOR DISPOSITION

     The Restructuring Charge included a $5.4 million write-down of assets,
     recorded in the Company's results of operations when 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. Subsequent to December 31, 1999, when actual
     sales prices of these assets were negotiated, the charge was increased by
     $0.1 million in Q1 2000, and subsequently increased by $0.4 million in Q1
     2001. Based on the negotiations of the actual sales prices of certain
     assets sold subsequent to October 1, 2000, the Company recorded an
     additional charge of $0.1 million during Q2 2001.

     During Q1 2001, the Company (i) sold one staffing office and closed
     another, in the state of Minnesota, effective



                                       8
<PAGE>   10

                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

     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) effective June 26, 2000, 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.

     No assets were sold in Q2 2001.

     Effective October 29, 2000, the Company sold its operations in the states
     of New Hampshire and Massachusetts, comprising five offices and two "vendor
     on premises" locations, for $125,000, comprised of cash proceeds of $50,000
     at closing and a two year $75,000 promissory note. In addition, the Company
     will receive additional amounts equal to 30% of EBITDA of the sold offices
     during the next two years. Excluded from the sale were cash, accounts
     receivable and deferred income taxes, as well as accrued liabilities and
     accounts payable. The Company recorded an additional $133,000 charge to
     restructuring as well as accrued liabilities and accounts payable during Q2
     2001 to reduce the carrying value of these assets to their net realizable
     value.

     During Q3 2001, the Company classified two additional offices as held for
     sale. All of the Company's offices classified as held for sale were sold or
     franchised by October 31, 2000.

     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 Q2 2001
     and $0.2 million YTD 2001.

     The Company's assets held for disposition as of October 1, 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 (amounts are 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               $  195            $1,045         $1,240         $  215
                                    ======            ======         ======         ======
</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 October 1, 2000, generated revenues and
     income before taxes as follows (amounts are in thousands):
<TABLE>
<CAPTION>

                               THIRTEEN WEEKS      THREE MONTHS          TWENTY SIX         SIX MONTHS
                                   ENDED              ENDED              WEEKS ENDED           ENDED
                                OCT 1, 2000        SEPT 30, 1999         OCT 1, 2000        SEPT 30, 1999
                              --------------     ----------------       -------------      --------------
<S>                              <C>                <C>                    <C>                <C>
Revenues                         $  2,560           $ 15,183               $ 10,487           $ 28,492
                                 ========           ========               ========           ========
Net loss before taxes            $   (151)          $   (251)              $     (6)          $   (880)
                                 ========           ========               ========           ========
</TABLE>



                                       9
<PAGE>   11
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     NOTE 4. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                            THIRTEEN WEEKS              THREE MONTHS
                                                          ENDED OCT 1, 2000          ENDED SEPT 30, 1999
                                                         --------------------        -------------------
                                                         AMOUNT          RATE         AMOUNT      RATE
                                                         ------          ----         ------      ----

<S>                                                      <C>            <C>         <C>            <C>
Statutory rate applied to income before income taxes
   and extraordinary item                                $   (75)       (35.0)%     $(4,662)       (35.0)%
Increase (decrease) in income taxes resulting from:
   State income taxes, net of federal benefit                171         79.9          (564)        (4.2)
   Employment tax credits                                   (139)       (65.0)         (106)        (0.8)
   Nondeductible expenses                                     20          9.3            --           --
   Other                                                     493        230.2           334          2.5
                                                         -------      -------       -------      -------
Total before valuation allowance                             470        219.5        (4,998)       (37.5)
Change in valuation allowance                             (1,753)      (819.2)           --           --
                                                         -------      -------       -------      -------
Total                                                    $(1,283)      (599.8)%     $(4,998)       (37.5)%
                                                         =======      =======       =======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                             TWENTY SIX WEEKS             SIX MONTHS
                                                            ENDED OCT 1, 2000         ENDED SEPT 30, 1999
                                                           ------------------         --------------------
                                                           AMOUNT        RATE          AMOUNT      RATE
                                                           ------        ----          ------      ----

<S>                                                       <C>            <C>         <C>            <C>
Statutory rate applied to income before income taxes
   and extraordinary item                                 $  (286)       (35.0)%     $(5,427)       (35.0)%
Increase (decrease) in income taxes resulting from:
   State income taxes, net of federal benefit                 191         23.4          (644)        (4.2)
   Employment tax credits                                    (220)       (26.9)         (270)        (1.7)
   Nondeductible expenses                                      49          6.0            --           --
   Other                                                      813         99.4           407          2.6
                                                          -------      -------       -------      -------
Total before valuation allowance                              547         66.9        (5,934)       (38.3)
Change in valuation allowance                              (9,520)    (1,165.2)           --           --
                                                          -------      -------       -------      -------
Total                                                     $(8,973)    (1,098.3)%     $(5,934)       (38.3)%
                                                          =======      =======       =======      =======
</TABLE>

     During Q1 2001, the Company reduced its deferred tax asset valuation
     allowance by $7.7 million, which was expected to be realized through
     utilization of the existing net operating loss carryforward, relating to
     the extinguishment gain that was recorded in Q2 2001 (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.
     During Q2 2001, the Company reduced the deferred tax valuation allowance by
     an additional $1.8 million based on improvements in the Company's operating
     results. 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". As of October 1,
     2000, the deferred tax asset of $10.8 million, offset by a valuation
     allowance of $6.5 million, was reflected in the Company's Consolidated
     Balance Sheets as follows: income tax receivable and other current assets
     includes $4.6 million of the deferred tax asset offset by a valuation
     allowance of $2.8 million. The other assets classification on the balance
     sheet includes $6.2 million of the deferred tax asset offset by a valuation
     allowance of $3.7 million.

     The employment tax credit carryforward of $3.7 million as of October 1,
     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.

     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. These subsidiaries were "S" corporations
     for the periods under examination. Since that time, and as a result of
     analysis and discussions among the IRS, the original shareholders of the
     subsidiaries and the Company, the proposed adjustments have been modified.
     The Company is currently evaluating the merits of these proposed
     adjustments with the original shareholders. 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 the Ableco Facility, a
     three-year financing agreement

                                       10
<PAGE>   12
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 5. DEBT (CONTINUED)

     which replaced the Fleet Facility with a $33.4 million revolving credit
     facility (the "Revolving Credit Facility"), which includes a subfacility
     for the issuance of standby letters of credit, 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 Revolving Credit Facility and
     the Term Loans are secured by all the assets of the Company and its
     subsidiaries. The Revolving Credit Facility bears interest at prime or
     9.0%, whichever is greater, plus 2%. The Term Loans 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, but
     only if any letter of credit issued by the Lenders on behalf of the Company
     is drawn upon.

     A portion of the Ableco Facility was used to satisfy the Fleet Facility
     with FleetNational 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 Revolving
     Credit Facility and Term Loans 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 the Fleet Term 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 $0.001 per warrant. In connection with the
     Refinancing and the termination of the Fleet Facility, the Company recorded
     an extraordinary gain of approximately $8.5 million, net of tax, in the
     quarter ending October 1, 2000.

     As of October 1, 2000, the Company had gross outstanding borrowings $18.8
     million under its Revolving Credit Facility, $26.0 million under the
     provisions of the Term Loans, and $5.3 million under the provisions of the
     Fleet Term Note. As of the end of the quarter, the Revolving Credit
     Facility bore interest at 11.5%. Term Loan A and Term Loan B bore interest
     at 13.0% and 14.5%, respectively, and the Fleet Term Note bore interest at
     13.0%. The weighted average interest rate payable on the outstanding
     balances during the period, exclusive of related fees and expenses, was
     approximately 12.7% per annum, compared to approximately 10.8% per annum in
     Q3 1999. In connection with the Refinancing on August 15, 2000, the Company
     recorded a debt discount of $9.0 million, which is being amortized as
     interest expense over the three year life of the borrowing agreements. The
     weighted average interest rate during the period, including the debt
     discount was 20.9%.

     In addition to the Revolving Credit Facility indebtedness discussed above,
     the Company had bank standby letters of credit outstanding in the aggregate
     amount of $2.3 million as of October 1, 2000, of which $1.7 million secured
     the pre-1999 portion of the workers' compensation obligations that are
     recorded as a current liability on the Company's Consolidated Balance
     Sheets. The remaining $0.6 million, which is supported by a $0.6 million
     cash escrow balance, is to secure future payments on a capital lease for
     furniture that was sold along with 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 subordinated 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 August 15, 2000. On August 15,
     2000, in connection with the Refinancing, the acquisition notes payable
     were



                                       11
<PAGE>   13
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 5. DEBT (CONTINUED)

     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 subordinated 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, may be
     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 negotiate a settlement
     with the Company's original shareholders of at least $2.0 million, in
     satisfaction of the Company's outstanding obligations to such original
     shareholders.

     LITIGATION: On September 13, 2000, a default final judgment in the amount
     of $0.8 million was entered against Synadyne III, Inc., a wholly-owned
     subsidiary of the Company ("Synadyne III"), in the County Court, Dallas
     County, Texas. The action was brought by an employee of an independent
     agency of the Allstate Insurance Company claiming that the owner of that
     agency discriminated against her in violatoin of the Texas Commission of
     Human Rights Act of 1983. Synadyne III was under contract with this
     insurance agency to provide PEO services. It is the Company's contention
     that the complaint in this action was never properly served on Synadyne III
     and; therefore, the Company has filed a motion to vacate this judgment on
     the grounds that it was obtained without due process to Synadyne III. The
     Company believes, based on the advice of counsel, that it will be
     successful in vacating the judgment and the ultimate resolution of this
     matter will not have a material adverse effect on its financial position or
     future operating results. Accordingly, the Company has not made any
     adjustments to the financial statements for this matter.

     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.

     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 October 1, 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.

     UNCLAIMED PROPERTY AUDIT: A state in which the Company conducts a
     significant portion of its operations has


                                       12
<PAGE>   14
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

     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. During Q2 2001, the Company paid $33,000 in
     settlement of this liability

     WORKERS' COMPENSATION: Since 1997, the Company's workers' compensation
     expense 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 fiscal year 2001 is consistent with that used
     for calendar year 1999 and YTD 2001 workers' compensation expense has been
     less than the cap.

     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 October 1, 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 August 2000, eleven 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 six 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 $3.1 million, of which $1.8 million has been
     paid as of October 1, 2000, and $1.3 million is accrued in the Company's
     October 1, 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 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 Restructuring plan and a
     revised business plan based on the restructured company (see Note 3),
     assisting in extending the Fleet 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



                                       13
<PAGE>   15
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

     services provided by Crossroads to assist in the Restructuring, the Company
     has incurred costs of $2.3 million through October 1, 2000, of which $0.4
     million and $0.8 million was for services provided during Q2 2001 and YTD
     2001. These amounts were included in the restructuring charge recorded by
     the Company in its results of operations.

     In connection with the Refinancing, the Company paid Crossroads $0.9
     million for its assistance in securing the new credit facility. This
     charge, along with other costs relating to the Refinancing, is being
     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 $2.25 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 122,277 shares were cancelled due
     to employee terminations, and 350,761 shares remain outstanding as of
     October 1, 2000. The Company also granted options to purchase 60,000 shares
     of the Company's common stock, at $1.25 per share, in August 2000. This
     grant vests over a four-year period from the grant date. As of October 1,
     2000, the Company had in aggregate, 1,716,754 stock options and 1,974,687
     warrants to purchase shares of the Company's common stock outstanding. On
     October 31, 2000, the Company completed a tender offer to cancel certain of
     its outstanding options to purchase the Company's common stock, resulting
     in the cancellation of 337,766 options at a cost to the Company of $103,842
     (see Note 10).

     The total number of shares of common stock reserved for issuance under the
     stock option plan as of October 1, 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.

     DELISTING FROM THE NASDAQ NATIONAL MARKET: On August 9, 2000, the Company
     was notified by Nasdaq-Amex that the Company was not in compliance with the
     minimum $4 million net tangible assets for continued listing on the Nasdaq
     National Market, and that 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 traded on the OTC Bulletin Board. As a result of
     completing the Refinancing (see Note 5), the Company believes it has taken
     the steps necessary to cure the net tangible asset deficiency and has
     appealed the delisting decision to the Nasdaq Listing and Review Council.

     NOTE 7. RELATED PARTY TRANSACTIONS

     The Company recognized revenue, which includes royalties and payments under
     buyout agreements, of $0.2 million in Q3 1999 and $0.5 million during YTD
     1999, respectively, from all franchises owned by significant shareholders
     of the Company. The Company recognized no revenue in YTD 2001 from these
     franchises. 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.

     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.



                                       14
<PAGE>   16
                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 7. RELATED PARTY TRANSACTIONS

     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 principal
     balance of the note, for three years, followed by two years of equal
     monthly payments of principal and interest, which will retire the note.

     NOTE 8. COMPUTATION OF 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 Q3 1999 and YTD 1999, respectively, 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. The Company recognized net income in Q2 2001
     and YTD 2001; therefore, the Company included the equivalent of 1,604,747
     and 1,405,048 shares, respectively, in its calculation of fully diluted
     earnings per share.

     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
     effective April 8, 2000.

     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 Q3 1999 and YTD 1999 to be
     consistent with current period presentation.



                                       15
<PAGE>   17

                          OUTSOURCE INTERNATIONAL, INC.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 9. OPERATING SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>

                                         THIRTEEN WEEKS      THREE MONTHS         TWENTY SIX        SIX MONTHS
                                            ENDED                ENDED           WEEKS ENDED           ENDED
                                         OCT 1, 2000         SEPT 30, 1999       OCT 1, 2000       SEPT 30, 1999
                                         -----------         -------------       -----------       -------------
                                                               (Amounts in thousands)
<S>                                          <C>                <C>                <C>                <C>
REVENUES

Tandem                                       $  78,055          $  93,010          $ 158,914          $ 172,865
Synadyne                                            --             59,325                 71            114,404
Franchising                                        727              1,036              1,381              3,505
Other Company revenues                             100              5,753                134             11,804
                                             ---------          ---------          ---------          ---------

Total Company revenues                       $  78,882          $ 159,124          $ 160,500          $ 302,578
                                             =========          =========          =========          =========

INCOME (LOSS) BEFORE TAXES

Tandem                                       $   5,824          $   1,900          $  10,439          $   2,387
Synadyne                                            --                284               (198)               807
Franchising                                        602                882              1,098              3,073
Other Company income (loss), net (1)            (6,640)           (16,383)           (12,157)           (21,769)
                                             ---------          ---------          ---------          ---------
The Company's loss before taxes              $    (214)         $ (13,317)         $    (818)         $ (15,502)
                                             =========          =========          =========          =========

</TABLE>


---------------
(1)   During Q2 2001 and FYTD 2001, the Company recognized restructuring charges
      of $0.9 million and $1.8 million, respectively, and a $0.7 million gain on
      the sale of the Company's PEO operations during YTD 2001

     NOTE 10. SUBSEQUENT EVENTS

     On October 31, 2000, the Company agreed to purchase for cancellation
     certain of its outstanding incentive stock options with an exercise price
     ranging from $10.38 to $18.88, for proceeds of $0.1 million.

     On November 10, 2000, the Company authorized the issuance of options to
     purchase 162,503 shares of the Company's common stock at $1.01 per share.

                                       16
<PAGE>   18




     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

     We offer our clients flexible industrial staffing services through our
     Tandem division, targeting opportunities in that fragmented, growing market
     which we believe 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
     and hiring functions and other logistical aspects of their staffing needs,
     as well as converting the fixed cost of employees to the variable cost of
     outsourced services.

     Flexible industrial staffing services include recruiting, hiring, training
     and deploying temporary industrial personnel as well as payroll
     administration, risk management and benefits administration services.
     Tandem delivers its flexible industrial staffing services through a
     nationwide network of 84 company-owned branch offices and 51 franchised
     offices. We aggregate our company-owned branches into 12 geographic
     districts, which we combine into three geographic zones: East, Midwest and
     West.

     Until we sold the operations of our Synadyne division in April 2000, we
     also provided professional employer organization, or PEO, services to small
     and medium-sized businesses (those with less than 500 employees). PEO
     services included payroll administration, risk management, benefits
     administration and human resource consultation.

     Our revenues are based on the salaries and wages of worksite employees. We
     recognize revenues, and the associated costs of wages, salaries, employment
     taxes and benefits related to worksite employees, in the period during
     which our employees perform the services. Since we are at risk for all of
     our direct costs, independent of whether we receive payment from our
     clients, we recognize as revenue all amounts billed to our clients for
     gross salaries and wages, related employment taxes, health benefits and
     workers' compensation coverage, net of credits and allowances, which is
     consistent with industry practice. Our primary direct costs are (1) the
     salaries and wages of worksite employees (trade payroll costs), (2)
     employment-related taxes, (3) health benefits, (4) workers' compensation
     benefits and insurance, and (5) worksite employee transportation.

     Our Tandem division generates significantly higher gross profit margins
     than our former Synadyne division. 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
     our relationship with the client.

     On August 6, 1999, we announced the following actions intended to improve
     our short-term liquidity, focus our efforts on flexible industrial staffing
     within our Tandem division and improve our operating performance within
     that division:

     o   the sale of Office Ours, our clerical staffing division, which was
         completed on August 30, 1999;

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

     o   a reduction of our 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 that
         existed as of June 30, 1999; an immediate reduction of the Tandem and
         corporate headquarters employee workforce by 110 employees,
         approximately 11% of our workforce; and an additional reduction of 48
         employees through the second fiscal quarter of 2001. As of October 31,
         2000, 48 branch offices have been eliminated in connection with our
         restructuring plan, 41 of which had been sold, franchised, closed, or
         consolidated as of October 1, 2000. During Q2 2001 one office was




                                       17
<PAGE>   19

         removed from the assets held for sale classification. Subsequently,
         during October 2000, seven offices, two of which were added to this
         classification during the quarter, were sold. The 48 offices sold,
         franchised, closed, or consolidated were not expected to be adequately
         profitable or were inconsistent with our operating strategy of
         clustering offices within specific geographic regions.

     RESULTS OF OPERATIONS

     The following tables set forth the amounts and percentages of net revenues
     of certain items in our consolidated statements of operations for the
     periods indicated. Certain reclassifications have been made to the
     presentation of the results of operations for the quarter ended and six
     months ended September 30, 1999 to conform to current presentation. The
     dollar amounts are presented in thousands:

<TABLE>
<CAPTION>

                                                      THIRTEEN WEEKS     THREE MONTHS       TWENTY SIX WEEKS    SIX MONTHS
                                                          ENDED              ENDED               ENDED             ENDED
                                                       OCT 1, 2000       SEPT 30,1999          OCT 1, 2000      SEPT 30,1999
                                                     ---------------    -------------       -----------------  --------------

<S>                                                     <C>                 <C>                 <C>                 <C>
Net revenues:
Tandem                                                  $  78,055           $  93,010           $ 158,914           $ 172,865
Synadyne                                                       --              59,325                  71             114,404
Franchising                                                   727               1,036               1,381               3,505
Other                                                         100               5,753                 134              11,804
                                                        ---------           ---------           ---------           ---------
Total net revenues                                      $  78,882           $ 159,124           $ 160,500           $ 302,578
                                                        =========           =========           =========           =========
Gross profit                                            $  16,292           $  20,772           $  32,479           $  41,117
Selling, general and adminstrative expenses (1)            13,254              25,224              27,977              46,073
Restructuring and asset impairment charges                    940               7,554               1,818               7,554
                                                        ---------           ---------           ---------           ---------
Operating income (loss) (1)                                 2,098             (12,006)              2,684             (12,510)
Net interest and other expense                              2,312               1,311               3,502               2,992
                                                        ---------           ---------           ---------           ---------
Loss before benefit for income taxes (1)                     (214)            (13,317)               (818)            (15,502)
Benefit for income taxes                                   (1,283)             (4,998)             (8,973)             (5,934)
                                                        ---------           ---------           ---------           ---------
Net income (loss) before extraordinary item (1)         $   1,069           $  (8,319)          $   8,155           $  (9,568)
                                                        =========           =========           =========           =========

Net revenues:
Tandem                                                       99.0%               58.5%               99.0%               57.1%
Synadyne                                                      0.0                37.3                 0.0                37.8
Franchising                                                   0.9                 0.7                 0.9                 1.2
Other                                                         0.1                 3.6                 0.1                 3.9
                                                        ---------           ---------           ---------           ---------
Total net revenues                                          100.0%              100.0%              100.0%              100.0%
                                                        =========           =========           =========           =========
Gross profit                                                 20.7%               13.1%               20.2%               13.6%
Selling, general and adminstrative expenses (1)              16.8                15.9                17.4                15.2
Restructuring and asset impairment charges                    1.2                 4.7                 1.1                 2.5
                                                        ---------           ---------           ---------           ---------
Operating income (loss) (1)                                   2.7                (7.5)                1.7                (4.1)
Net interest and other expense                                2.9                 0.8                 2.2                 1.0
                                                        ---------           ---------           ---------           ---------
Loss before benefit for income taxes (1)                     (0.3)               (8.4)               (0.5)               (5.1)
Benefit for income taxes                                     (1.6)               (3.1)               (5.6)               (2.0)
                                                        ---------           ---------           ---------           ---------
Net income (loss) (1)                                         1.4%               (5.2)%               5.1%               (3.2)
                                                        =========           =========           =========           =========
SYSTEM OPERATING DATA:
System Revenues (2)                                     $ 102,854           $ 176,143           $ 205,924           $ 335,494
                                                        =========           =========           =========           =========
System employees (number at the end of period)             23,800              38,200              23,800              38,200
                                                        =========           =========           =========           =========
System offices (number at the end of period)                  135                 161                 135                 161
                                                        =========           =========           =========           =========
</TABLE>



                                       18
<PAGE>   20

--------------------
(1)      During the twenty six weeks ended October 1, 2000, we recorded an
         increase to our restructuring reserve of $1.8 million (of which $0.9
         million was recorded in the quarter), a non-operating gain of $0.7
         million from the sale of the our PEO operations, a $9.5 million
         decrease to our deferred tax asset valuation allowance (of which $1.8
         million was recorded during Q2 2001) and an extraordinary gain from
         refinancing of $8.5 million (net of $5.3 million of income tax). During
         Q3 1999, we recorded restructuring and asset impairment charges of $7.6
         million and a $2.7 million loss on certain accounts receivable that
         were subsequently sold in Q4 1999. The following table sets forth the
         amounts (in thousands, except for per share data) and the percentage of
         certain items in the our consolidated statements of operations adjusted
         to exclude these items:
<TABLE>
<CAPTION>

                                                   THIRTEEN WEEKS   THREE MONTHS       TWENTY SIX       SIX MONTHS
                                                       ENDED            ENDED         WEEKS ENDED          ENDED
                                                    OCT 1, 2000     SEPT 30, 1999     OCT 1, 2000      SEPT 30, 1999
                                                  --------------   ---------------   --------------   ---------------

<S>                                                 <C>              <C>               <C>              <C>
Operating income (loss), as adjusted                $   3,038        $  (1,786)        $   4,501        $  (2,289)

As a percentage of net revenues                           3.9%            (1.1)%             2.8%            (0.8)%

Net income (loss), as adjusted                      $     256        $  (2,195)        $    (231)       $  (3,444)

As a percentage of net revenues                           0.3%            (1.4)%            (0.1)%           (1.1)%

Earnings (loss) per diluted share, as adjusted      $    0.02        $   (0.25)        $   (0.03)       $   (0.40)

EBITDA, as adjusted                                     4,567               84             7,485            1,491
</TABLE>



         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, other unusual expenses, and the non-operating gains and losses
         described above. 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 our 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 our penetration of the market for our services,
         as well as the scope and size of our 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 us, are derived from reports that are unaudited. System
         revenues consist of the following for the periods presented:

<TABLE>
<CAPTION>

                                  THIRTEEN WEEKS      THREE MONTHS        TWENTY SIX          SIX MONTHS
                                      ENDED              ENDED            WEEKS ENDED           ENDED
                                   OCT 1, 2000       SEPT 30, 1999        OCT 1, 2000       SEPT 30, 1999
                                 -----------------   ---------------     --------------    -----------------
<S>                                 <C>                <C>                <C>                <C>
Company's net revenues              $  78,882          $ 159,124          $ 160,500          $ 302,578
Less Company revenues from:
  Franchise royalties                    (727)            (1,036)            (1,381)            (3,505)
  Services to franchises                                  (4,468)                               (8,446)
Add: Franchise net revenues            24,699             22,523             46,805             44,867
                                    ---------          ---------          ---------          ---------
System revenues                     $ 102,854          $ 176,143          $ 205,924          $ 335,494
                                    =========          =========          =========          =========
</TABLE>



                                       19
<PAGE>   21


     THIRTEEN WEEKS ENDED OCTOBER 1, 2000 AS COMPARED TO THE THREE MONTHS ENDED
     SEPTEMBER 30, 1999

     NET REVENUES AND GROSS MARGIN:

     Revenues were $78.9 million for the quarter ended October 1, 2000 ("Q2
     2001"), a decrease of $80.2 million, or 50.4%, from $159.1 million for the
     quarter ended September 30, 1999 ("Q3 1999"). This decrease in revenues
     resulted primarily from our restructuring efforts during the last 12 months
     to focus on industrial staffing and to improve profitability. The
     restructuring included the disposition of Synadyne (our former professional
     employer organization, or PEO), Office Ours (our former clerical division)
     and certain under-performing Tandem industrial staffing offices, plus the
     termination of PEO services to certain of our franchisees.

     Our gross profit (margin) decreased by 21.6%, to $16.3 million in Q2 2001,
     from $20.8 million for Q3 1999 due primarily to sold or terminated
     operations. Gross profit as a percentage of net revenues increased to 20.7%
     in Q2 2001 from 13.1% in Q3 1999.

     The following table summarizes the change in our net revenues and gross
     margin during Q3 1999, as compared to Q2 2001:

<TABLE>
<CAPTION>
                                                                                                 GROSS MARGIN AS
                                                              NET                 GROSS          A PERCENTAGE OF
                                                            REVENUES             MARGIN            NET REVENUES
                                                         ---------------      --------------     -----------------
                                                                          (AMOUNTS IN THOUSANDS)

<S>                                                               <C>                    <C>            <C>
Q3 1999                                                        $ 159,124          $  20,772           13.1%
Increase (decrease)
      Tandem - ongoing offices                                    (2,215)                39             (2)
      Tandem - sold, franchised and closed offices (1)           (12,740)            (2,310)          18.1%
      Synadyne                                                   (59,325)            (1,645)           2.8%
      Office Ours                                                 (1,269)              (313)          24.7%
      PEO services                                                (4,468)                11             (2)
      Franchise royalties                                           (308)              (308)         100.0%
      Other                                                           83                 46           56.1%
                                                               ---------          ---------
Subtotal                                                         (80,242)            (4,480)           5.6%
                                                               ---------          ---------
Q2 2001                                                        $  78,882          $  16,292           20.7%
                                                               =========          =========
</TABLE>

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

(1)  Includes offices sold, franchised and closed as part of our restructuring
     efforts as of October 1, 2000.

(2)  Not meaningful as presented.


     The gross profit percentage increase to 20.7% in Q2 2001 from 13.1% in Q3
     1999 is the result of the sale of our Synadyne division at the beginning of
     Q1 2001 and price increases implemented over the last three quarters in our
     Tandem division, partially offset by the effect of the sale of our clerical
     staffing division in August 1999 and the decrease in royalties derived from
     franchise buyout payments. Synadyne, while generating 37.3% of our revenues
     in Q3 1999, produced a gross margin of only 2.8% of revenue, or 7.9% of our
     consolidated gross profit margin. Office Ours, our clerical division sold
     in Q3 1999, produced a gross margin of 24.7%, or 1.5% of our consolidated
     gross profit margin.

     TANDEM OPERATIONS

     Net revenues from our Tandem division decreased from $93.0 million in Q3
     1999 to $78.1 million in Q2 2001. The decrease in Tandem revenues was
     primarily due to the sale, franchise, closure, and consolidation of 41
     offices through October 1, 2000. On a same store basis, Tandem revenues
     decreased by $2.2 million due to cancellation of certain of our large
     customers that generated $4.8 million in Q3 1999 revenue and the lack of
     a ramp-up in revenues traditionally experienced by the staffing industry
     during the third calendar quarter of the year. One customer, which provided





                                       20
<PAGE>   22


     welfare to work services, made up $3.0 million of this decrease due to
     non-renewal of this customer's contracts with the federal and state
     governments. The lack of a sales ramp up was most evident with from our
     manufacturing and distribution customers. Partially offsetting these was
     revenue growth from new and existing customers in the construction and
     retail industries. We do not expect our revenues from manufacturing and
     distribution to improve in Q3 2001.

     Gross profit from our Tandem division declined from $17.8 million in Q3
     1999 to $15.5 million during Q2 2001, primarily due to offices restructured
     through October 1, 2000, which generated a gross margin of $2.3 million in
     Q3 1999. While gross profit dollars declined, Tandem's gross profit margin
     percent improved from 19.1% in Q3 1999 to 19.8% in Q2 2001. This increase
     in gross margin percent is due to price increases that we instituted in the
     past three quarters to reflect the value of services provided. These price
     increases have been partially offset by higher workers' compensation costs
     resulting from an increased average cost per claim in YTD 2001. This is in
     contrast to 1999, when we experienced low average cost per claim and better
     than anticipated development of open 1998 claims resulting in a reduction
     of workers' compensation costs.

     Although revenues generated by Tandem offices decreased by $2.3 million
     from Q3 1999 to Q2 2001 on a same store basis, gross margin generated by
     these offices remained steady at $15.5 million. Gross margin, as a percent
     of revenue, increased from 19.2% to 19.8%. This improvement in gross margin
     percent is primarily due to the price increases instituted over the last
     three quarters, partially offset by the higher workers' compensation costs,
     as previously discussed.

     Tandem's margins are affected by unemployment, competition for workers, the
     size of our customers, workers' compensation costs, transportation costs,
     and pricing. We were able to mitigate the effect of low unemployment and
     competition for workers by better pricing in Q2 2001 as compared to Q3
     1999. Although the average cost per labor hour increased by $0.09 during Q2
     2001 as compared to Q3 1999, the average price charged per labor hour
     increased by $0.35 compared to this period last year. In addition,
     beginning in Q1 2001 and continuing into Q2 2001, Tandem began to improve
     the margins of its large, lower-margin customers. Although Tandem's 100
     largest customers made up 45% of our revenues in Q2 2001 compared to 40% in
     Q3 1999, the average price charged per labor hour to these customers has
     increased by $0.28 while the average cost per labor hour increased by only
     $0.10.

     Workers' compensation costs will continue to be a significant factor
     affecting Tandem margins. Therefore, we are increasing the number of safety
     specialists we employ whose sole purpose is to promote safety training and
     awareness, approve job-sites and duties, and reduce workers' compensation
     costs. We are continuing to increase our focus on all margin-related
     performance criteria by providing rewards to field personnel commensurate
     with their accomplishments. Based on these initiatives, we hope to
     experience modest improvement in our staffing margins; however, our actual
     results during the remaining portion of fiscal 2001 may vary depending on,
     among other things, competition, unemployment, and general business
     conditions.

     FRANCHISE OPERATIONS

     Franchise royalty revenues from our franchising operations decreased from
     $1.0 million in Q3 1999 to $0.7 million for Q2 2001, due to a decrease in
     revenues from buyout payments received in connection with the early
     termination of certain franchises and to the same lack of a seasonal
     ramp-up that corporate owned stores experienced this year. We allowed the
     early termination of franchise agreements for 38 locations in 1998 and 1999
     to enable us to develop the related territories. When we agree to terminate
     a franchise agreement, we receive an initial buyout payment from the former
     franchisee. We continue 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 date of the
     franchise agreement. Although these gross revenues are not included in our
     net franchisee or system revenue totals, the initial buyout payment, as
     well as subsequent payments from the former franchisees, are reflected in
     our total reported royalties.




                                       21
<PAGE>   23


     We receive royalties from our franchisees and do 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 in
     franchise operations discussed above.

     Net revenues earned by Tandem franchisees, which are included in our system
     revenues, but are not available to us, increased slightly from $22.5
     million in Q3 1999 to $24.7 million in Q2 2001. As of October 1, 2000, we
     had 51 franchised locations, compared to 50 franchised locations as of
     September 30, 1999, and as part of our growth efforts, we expect to
     increase franchise net revenues by continuing to sell new franchises in
     secondary U.S. markets, subject to, among other factors, the success of our
     marketing efforts in this regard. We also expect 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.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
     administrative expenses decreased $12.0 million, or 47.5%, to $13.3 million
     in Q2 2001 from $25.2 million in Q3 1999 primarily due to our restructuring
     efforts and reduced bad debt expense. Compensation costs decreased $5.8
     million due to a reduction of 420 employees, plus we experienced a $3.0
     million reduction in our bad debt provision in Q2 2001 as compared to Q3
     1999. In Q3 1999, we recorded a $2.7 million bad debt provision related
     specifically to $4.3 million of receivables which were sold to a third
     party during the fourth quarter of 1999. Other selling, general and
     administrative costs, including telecommunications, professional fees,
     recruiting, and licensing costs, decreased by an aggregate of $2.8 million.
     Depreciation and amortization decreased by $0.5 million, due to the
     disposition of the assets sold in connection with our restructuring plan,
     and the $2.5 million impairment of goodwill during 1999.

     As part of our on-going efforts to improve the support of our customers,
     branch offices and service employees, we are currently analyzing the
     potential of decentralizing some of our support functions. We expect to
     complete the testing of our pilot concept in the next 120 days, after which
     we may decide to decentralize our branch support services.

     RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During Q2 2001, we recorded
     restructuring charges of $0.9 million. As part of the restructuring
     charges, we have (i) adjusted the carrying value of assets held for
     disposition by approximately $0.1 million to reflect the estimated fair
     value of those assets, (ii) increased accrued severance costs by
     approximately $0.2 million, and (iii) incurred professional fees and other
     costs of $0.7 million. During Q3 1999, we recorded restructuring costs of
     $5.1 million and asset impairment charges of $2.5 million, writing down the
     carrying value of our goodwill. As part of the Q3 1999 restructuring
     charges we (i) wrote down the carrying value of certain assets held for
     sale by $2.5 million to their then estimated net realizable value, (ii)
     recorded accrued severance costs of $1.4 million, (iii) incurred
     professional fees of $0.7 million, and (iv) wrote down the carrying value
     of certain leasehold improvements and other lease obligations by $0.5
     million.

     NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased
     from $1.3 million in Q3 1999 to $2.3 million in Q2 2001. Interest expense
     increased by $0.7 million due to (i) higher interest rates paid for our
     borrowing facilities in Q2 2001 as compared to Q3 1999, and (ii) increased
     amortization of loan fees in Q2 2001, offset by decreased interest accrued
     on certain subordinated debt and interest earned on a workers' compensation
     trust fund. In addition, net interest and other expense in Q3 1999 included
     a $0.5 million gain on the sale of our clerical division in Q3 1999. We
     have also earned approximately $0.1 million in other income from providing
     support services to the purchaser of our PEO division.

     INCOME TAXES. During Q1 2001, we reduced the deferred tax asset valuation
     allowance by $7.7 million, which was expected to be realized through
     utilization of net operating loss carryforwards, relating to the
     extinguishment gain that was recorded in Q2 2001 as well as taxable income
     from future operations. During Q2 2001, we reduced the deferred tax
     valuation allowance by an additional $1.8 million that we also expect to be
     able to utilize against tax on income in the future. 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 (LOSS) BEFORE EXTRAORDINARY ITEM. Income before extraordinary item
     for Q2 2001 was $1.1 million, as compared to a net loss of $8.3 million in
     Q3 1999. As discussed above, the change in the net loss is primarily due to
     decreased selling, general and administrative costs, reduced restructuring
     and asset impairment charges, and the recovery of the deferred tax asset
     valuation allowance, partially offset by reduced gross profit and increased
     interest costs. Adjusted to remove restructuring charges, the non-operating
     gain from the sale of our clerical division in Q3 1999, the bad debt
     provision for certain accounts receivable which were sold in Q4 1999, and
     the recovery of the deferred tax valuation allowance, our net income was
     $0.3 million in Q2 2001 compared to a net loss of $2.2 million in Q3 1999.



                                       22
<PAGE>   24


     TWENTY SIX WEEKS ENDED OCTOBER 1, 2000 AS COMPARED TO THE SIX MONTHS ENDED
     SEPTEMBER 30, 1999

     NET REVENUES AND GROSS MARGIN:

     Revenues were $160.5 million for the twenty six weeks ended October 1, 2000
     ("YTD 2001"), a decrease of $142.1 million, or 47.0%, from $302.6 million
     for the six months ended September 30, 1999 ("YTD 1999"). This decrease in
     revenues resulted primarily from our restructuring efforts during the last
     12 months to focus on industrial staffing and to improve profitability. The
     restructuring included the disposition of Synadyne (our former professional
     employer organization, or PEO), Office Ours (our former clerical division)
     and certain under-performing Tandem industrial staffing offices, plus the
     termination of PEO services to certain of our franchisees.

     Our gross profit (margin) decreased by 21.0%, to $32.5 million in YTD 2001,
     from $41.1 million in YTD 1999 due primarily to sold or terminated
     operations. Gross profit as a percentage of net revenues increased to 20.2%
     in YTD 2001 from 13.6% in YTD 1999.

     The following table summarizes the change in our net revenues and gross
     margin during YTD 1999, as compared to YTD 2001:

<TABLE>
<CAPTION>

                                                                                                        GROSS MARGIN AS
                                                                     NET                GROSS           A PERCENTAGE OF
                                                                   REVENUES             MARGIN            NET REVENUES
                                                                ---------------     ---------------     -----------------
                                                                                 (AMOUNTS IN THOUSANDS)

<S>                                                                      <C>                 <C>                   <C>
Q3 1999                                                              $ 302,578            $ 41,117                 13.6%
Increase (decrease)
       Tandem - ongoing offices                                          4,331               1,300                 30.0%
       Tandem - sold, franchised and closed offices (1)                (18,282)             (3,389)                18.5%
       Synadyne                                                       (114,334)             (3,651)                 3.2%
       Office Ours                                                      (3,323)               (865)                26.0%
       PEO services                                                     (8,446)                 69                    (2)
       Franchise royalties                                              (2,123)             (2,123)               100.0%
       Other                                                                99                  21                 21.2%
                                                                ---------------     ---------------
Subtotal                                                              (142,078)             (8,638)                 6.1%
                                                                ---------------     ---------------

Q2 2001                                                              $ 160,500            $ 32,479                 20.2%
                                                                ===============     ===============
</TABLE>

--------------
(1)  Includes offices sold, franchised and closed as part of our restructuring
     efforts as of October 1, 2000.

(2)  Not meaningful as presented.


     The gross profit percentage increase to 20.2% in YTD 2001 from 13.6% in YTD
     1999 is the result of the sale of our Synadyne division at the beginning of
     Q1 2001 and price increases implemented over the last three quarters in our
     Tandem division, partially offset by the effect of the sale of our clerical
     staffing division in August 1999 and the decrease in royalties derived from
     franchise buyout payments. Synadyne, while generating 37.8% of our revenues
     in YTD 1999, produced a gross margin of only 3.2% of revenue, or 8.9% of
     our consolidated gross profit margin. Office Ours, our clerical division
     sold in Q3 1999, produced a gross margin of 26.0%, or 2.1% of our
     consolidated gross profit margin.



                                       23
<PAGE>   25


     TANDEM OPERATIONS

     Net revenues from our Tandem division decreased from $172.9 million during
     YTD 1999 to $158.9 million during YTD 2001 primarily because of our
     restructuring and the resulting reduction of 41 offices through October 1,
     2000. On a same store basis, Tandem revenues increased by $4.3 million,
     primarily due to strong revenue growth from new customers in certain
     geographical markets in Q1 2001, offset by the cancellation or decline in
     revenues of certain of our large customers and the lack of the ramp-up in
     revenues traditionally experienced by the staffing industry during the
     third calendar quarter. The lack of a sales ramp-up was most evident with
     our manufacturing and distribution customers. Partially offsetting these
     was revenue growth from new and existing customers in the construction and
     retail industries. We do not expect our revenues from manufacturing and
     distribution to improve in Q3 2001.

     Gross profit for our Tandem division declined to $31.0 million during YTD
     2001 from $33.1 million during YTD 1999 primarily due to the offices sold,
     franchised, or consolidated through October 1, 2000, which generated gross
     margin of $4.4 million in YTD 1999 compared to $1.0 million prior to their
     disposition in YTD 2001. While gross profit dollars declined, Tandem's
     gross profit margin percent improved from 19.4% last year to 19.5% in YTD
     2001. This increase in gross margin percent is due to price increases that
     we instituted in the past three quarters to reflect the value of services
     provided. These price increases have been partially offset by higher
     workers' compensation costs resulting from an increased average cost per
     claim in YTD 2001. This is in contrast to 1999, when we experienced low
     average cost per claim and better than anticipated development of open 1998
     claims resulting in a reduction of workers' compensation costs.

     On a same store basis, Tandem's gross margin increased from $28.7 million
     in YTD 1999 to $30.0 million during YTD 2001, while gross margin, as a
     percent of revenue, increased from 19.3% to 19.6%. This improvement in
     gross margin percent is primarily due to the price increases instituted
     over the last three quarters, partially offset by the higher workers'
     compensation costs, as previously discussed. The $1.3 million improvement
     in gross profit margin is due to the increase in same-store revenues in YTD
     2001, as compared to the same period last year, and the aforementioned
     improvement in gross profit as a percentage of revenues.

     Tandem's margins are affected by unemployment, competition for workers, the
     size of our customers, workers' compensation costs, transportation costs
     and pricing. We were able to mitigate the effect of low unemployment and
     competition for workers by better pricing in YTD 2001 as compared to last
     year. Although the average cost per labor hour increased by $0.13 during
     YTD 2001 as compared to last year, the average price charged per labor hour
     increased by $0.35 compared to this period last year. In addition,
     beginning in Q1 2001 and continuing throughout Q2 2001, Tandem began to
     reduce the impact of large, low-margin customers which typically produce
     raw margin results (revenues less direct payroll costs) several hundred
     basis points below Tandem's average gross margin percent. Although Tandem's
     100 largest customers made up 43.1% of our revenues in YTD 2001 compared to
     39.6% during YTD 1999, the average price charged per labor hour has
     increased by $0.28 while the average cost per labor hour by only $0.14.

     As previously discussed, workers' compensation costs will continue to be a
     significant factor affecting Tandem margins. Therefore, we are increasing
     the number of safety specialists we employ whose sole purpose is to
     increase safety training and awareness, approve job-sites and duties, and
     reduce workers' compensation costs. We are continuing to increase our focus
     on all margin-related performance criteria by providing rewards to field
     personnel commensurate with their accomplishments. Based on these
     initiatives, we hope to experience modest improvement in our staffing
     margins; however, our actual results during the remaining portion of fiscal
     2001 may vary depending on, among other things, competition, unemployment,
     and general business conditions.



                                       24
<PAGE>   26


     FRANCHISE OPERATIONS

     Franchise royalty revenues from our franchising operations decreased from
     $3.5 million last year to $1.4 million for YTD 2001, primarily due to a
     $2.4 million decrease in revenues from buyout payments received in
     connection with the early termination of certain franchises.

     Net revenues earned by Tandem franchisees, which are included in our system
     revenues, but are not available to us, increased slightly from $44.9
     million in YTD 1999 to $46.8 million in YTD 2001. As of October 1, 2000, we
     had 51 franchised locations, compared to 50 franchised locations as of
     September 30, 1999, and as part of our growth efforts, we expect to
     increase franchisee net revenues by continuing to sell new franchises in
     secondary U.S. markets, subject to, among other factors, the success of our
     marketing efforts in this regard.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
     administrative expenses decreased $18.1 million, or 39.3%, to $28.0 million
     in YTD 2001 from $46.1 million during the same period last year. This
     decrease was primarily the result of the restructuring we described earlier
     and reduced bad debt expenses. Compensation costs decreased $9.3 million
     due to a reduction of 420 employees, and we experienced a $3.6 million
     reduction in our bad debt provision in YTD 2001 as compared to YTD 1999. In
     Q3 1999, we recorded a $2.7 million bad debt provision related specifically
     to $4.3 million of receivables which were sold to a third party during the
     fourth quarter of 1999. Other selling, general and administrative costs,
     including telecommunications, professional fees, recruiting, and licensing
     costs, decreased by an aggregate of $4.1 million. Depreciation and
     amortization decreased by $1.0 million, due to the disposition of the
     assets sold in connection with our restructuring plan, and the $2.5 million
     impairment of goodwill during 1999.

     As part of our on-going efforts to improve the support of our customers,
     branch offices and service employees, we are currently analyzing the
     potential of decentralizing some of our support functions. We expect to
     complete the testing of our pilot concept in the next 120 days, after which
     we may decide to decentralize our branch support services.

     RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During YTD 2001, we recorded
     restructuring charges of $1.8 million. As part of the restructuring
     charges, we have (i) adjusted the carrying value of assets held for
     disposition by approximately $0.6 million to reflect the estimated fair
     value of those assets, (ii) increased accrued severance costs by
     approximately $0.1 million and (iii) incurred $1.1 million in professional
     fees. During Q3 1999, when we announced our restructuring plan, we recorded
     restructuring costs of $5.1 million and asset impairment charges of $2.5
     million. As part of the YTD 1999 restructuring charges we (i) wrote down
     the carrying value of certain assets held for sale by $2.5 million to their
     then estimated net realizable value, (ii) recorded accrued severance costs
     of $1.4 million, (iii) incurred professional fees of $0.7 million, and (iv)
     wrote down the carrying value of certain leasehold improvements and other
     lease obligations by $0.5 million

     NET INTEREST AND OTHER EXPENSE. Net interest and other expense increased
     from $3.0 million in YTD 1999 to $3.5 million in YTD 2001. This increase
     was due to a $0.8 million increase in interest expense arising from higher
     interest rates paid for our borrowing facilities in YTD 2001 as compared to
     last year, offset by a $0.7 million gain from the sale of our PEO
     operations in Q1 2000, compared to a gain of only $0.5 million from the
     sale of our clerical division in Q3 1999.

     INCOME TAXES. During Q1 2001, we reduced the deferred tax asset valuation
     allowance by $7.7 million, which was expected to be realized through
     utilization of net operating loss carryforwards, relating to the
     extinguishment gain that was recorded in Q2 2001 as well as taxable income
     from future operations. During Q2 2001, we reduced the deferred tax
     valuation allowance by an additional $1.8 million that we also expect to be
     able to utilize against tax on income in the future. 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".



                                       25
<PAGE>   27


     INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income before extraordinary item
     for YTD 2001 was $8.2 million, as compared to a net loss of $9.6 million in
     YTD 1999. As discussed above, the change in the net loss is primarily due
     to decreased selling, general and administrative costs, reduced
     restructuring and asset impairment charges, and the recovery of the
     deferred tax asset valuation allowance, partially offset by reduced gross
     profit and increased interest costs. Adjusted to remove (i) restructuring
     charges, (ii) the non-operating gain from the sale of our clerical division
     in Q3 1999 and our PEO division in Q1 2001, (iii) the bad debt provision
     for certain accounts receivable which were sold in Q4 1999, and (iv) the
     recovery of the deferred tax valuation allowance, we incurred a net loss of
     $0.2 million during YTD 2001 compared to a net loss of $3.4 million in
     during the same period last year.

     LIQUIDITY AND CAPITAL RESOURCES

     SENIOR DEBT

     Effective August 15, 2000, we entered into a three-year financing agreement
     with a syndicate of lenders led by Ableco Finance LLC, as agent. The
     financing replaced our existing credit facility with a $33.4 million
     revolving credit facility, which includes a subfacility for the issuance of
     standby letters of credit, and a $17.6 million Term Loan A and a $9.0
     million Term Loan B. Both the revolving credit facility and the term loans
     are secured by all of our assets. The revolving credit facility bears
     interest at prime or 9.0%, whichever is greater, plus 2% per annum. 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, we issued warrants to our new lenders to purchase up to a
     maximum of 200,000 shares of common stock, exercisable for a term of five
     years, at $0.01 per share. The warrants are only exercisable if any letter
     of credit issued by the new lenders on our behalf is drawn, in which event,
     the number of warrants the lenders will receive will be based on the amount
     drawn under the letter of credit.

     We used a portion of our new credit facility to satisfy our prior credit
     facility with Fleet National Bank, for itself and as agent for three other
     banks. Prior to the closing of the Refinancing, the outstanding balance of
     our prior credit facility was approximately $52.0 million. We repaid the
     balance 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 term note
     is subordinated to the new revolving credit facility and term loans, and it
     includes interest only for four years, followed by a balloon payment for
     the entire principal amount. In addition, we are entitled to a 60% discount
     on the term note if it is satisfied within 18 months. This obligation bears
     interest at Fleet's prime rate plus 3.5% per annum. In connection with the
     refinancing and in satisfaction of our obligation to our old lenders, we
     issued 524,265 warrants to our old lenders to purchase that number of
     shares of our common stock which equals 5.0% of our common stock on a fully
     diluted basis. The warrants are exercisable for a term of 10 years at
     $0.001 per share. In connection with the refinancing and the termination of
     our prior credit facility, we recorded an extraordinary gain, net of tax,
     of approximately $8.5 million in the quarter ending October 1, 2000.

     Before August 15, 2000, our primary sources of funds for working capital
     and other needs were a $26.1 million credit line, including existing
     letters of credit of $4.8 million plus a $33.0 million credit facility,
     based on and secured by our accounts receivable. 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 August 15, 2000 while the Revolving Credit
     Facility bore interest at prime plus 5.0% per annum, which was 14.5% as of
     August 15, 2000.

     As of October 1, 2000, we had outstanding borrowings of $18.8 million under
     our Revolving Credit Facility, $26.0 million under the provisions of our
     Term Loans, and $5.3 million under the provisions of the Fleet Term Note.
     As of the end of the quarter, the Revolving Credit Facility bore interest
     at 11.5%. Term Loan A and Term Loan B bore interest at 13.0% and 14.5%,
     respectively, and the Fleet Term Note bore interest at 13.0%. The weighted
     average interest rate payable on the outstanding balances during the
     period, exclusive of related fees and expenses, was approximately 12.7% per
     annum, compared to approximately 10.8% per annum in Q3 1999. In connection
     with the Refinancing on August 15, 2000, we recorded a debt discount of
     $9.0 million, which is being amortized as interest expense over the three
     year life of the borrowing agreements with the Lenders. The weighted
     average interest rate during the period, including the debt discount was
     20.9%.



                                       26
<PAGE>   28


     In addition to the revolving credit facility indebtedness discussed above,
     we had bank standby letters of credit outstanding in the aggregate amount
     of $2.3 million as of October 1, 2000, of which $1.7 million secured the
     pre-1999 portion of our workers' compensation obligations that are recorded
     as a current liability on our consolidated balance sheet as of October 1,
     2000. The remaining $0.6 million, which is supported by a $0.6 million cash
     escrow balance, is to secure future payments on a capital lease for
     furniture that we sold as part of our corporate headquarters building.

     We are currently exploring alternatives to the $3.0 million trust fund
     intended to secure any liability for workers' compensation claims funding
     for 1999 and 2000. We expect to replace the trust fund with letters of
     credit prior to December 31, 2000. Should we finalize this alternative, the
     $2.1 million funded to the trust account as of October 1, 2000 would be
     used to pay down our senior facilities. See "Workers' Compensation
     Collateral".

     OTHER DEBT

     In order to remain in compliance with certain covenants in our prior
     financing facilities, and to reduce the cash impact of scheduled payments
     under our subordinated acquisition debt, we negotiated extensions of the
     payment dates and modified the interest rates and other terms of certain of
     our acquisition notes payable in 1999. We had not made substantially all of
     the scheduled payments due and; as a result, we were in default on
     acquisition notes payable having a total outstanding principal balance of
     $6.9 million as of August 15, 2000. Effective as of August 15, 2000, in
     connection with the refinancing, we amended certain acquisition notes
     payable to provide that we will pay interest only, at a rate of 10.0% per
     annum, on the notes for three years following the closing of the
     refinancing, followed by two years of equal monthly payments of principal
     and interest which will retire the debt by August 2005. In connection with
     the amendments to the acquisition notes payable, we paid $0.8 million of
     accrued interest to the relevant noteholders at the closing of the
     Refinancing.

     In addition to the debt previously discussed, we had, as of October 1,
     2000, (i) obligations under capital leases for property and equipment in
     the aggregate of $2.1 million; (ii) obligations under mortgages totaling
     $0.4 million and (iii) obligations for annual insurance premiums and other
     matters totaling $0.2 million, of which a portion represents prepayment for
     future benefits and would be refundable to us should the policy be
     cancelled.

     SUMMARY OF CASH FLOWS

     Our 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.

     Cash used in operating activities in YTD 2001 was $3.6 million, as compared
     with $3.8 million provided by operating activities in YTD 1999. The
     collection of our accounts receivable related to the sale of Tandem offices
     in connection with the restructuring and improved collections of our
     accounts receivable in this year generated $5.8 million in operating cash
     in YTD 2001. This operating cash was more than offset by the pay down of
     current liabilities due to (i) the sale of Tandem offices (ii) funding of
     our workers'compensation liability, (iii) payment of accrued interest on
     our subordinated debt in connection with our Refinancing on August 15,
     2000, and (iv) utilization of our restructuring reserve. Adjusted to remove
     the effects of the securitization agreement, cash used in operating
     activities was $3.6 million in YTD 2001 compared to $6.9 million in the
     same period last year. Cash used in operating activities in YTD 1999
     included increased accounts receivable associated with the volume increases
     traditionally experienced in the third calendar quarter of the year by our
     Tandem offices plus funding of our pre-funded workers' compensation
     program.

     We anticipate that accounts receivable will decrease by an additional $1.0
     million in Q3 2001 as we collect the outstanding accounts receivable from
     the Tandem offices sold in New Hampshire and Massachusetts on October 29,
     2000.

     Cash provided by investing activities during YTD 2001 was $3.4 million
     compared to $3.2 million during YTD 1999. Cash provided by investing
     activities in 2001 consisted of primarily of $4.2 million received in
     conjunction with a sale of our Synadyne division and Tandem offices, offset



                                       27
<PAGE>   29


     by expenditures for property, plant, and equipment, and funding to our
     franchisees. Cash provided by investing activities in 1999 included (i)
     $2.0 million from the sale of our clerical division and certain Tandem
     offices associated with the Restructuring, (ii) $1.6 million from a
     sale-leaseback transaction during the period, and (iii) a net decrease in
     funding provided to our franchisees, partially offset by (iv) expenditures
     for property, plant, and equipment.

     Cash provided by financing activities during YTD 2001 was $0.7 million, as
     compared to $7.3 million used in financing activities in the same period
     last year. Adjusted to remove the effects of the securitization facility in
     1999, cash provided by financing activities was $3.5 million, which was due
     to increased borrowings in 1999 to fund increased payroll costs arising
     from seasonal volume increases and the workers' compensation funding. Cash
     provided by financing activities in YTD 2001 of $0.7 million includes $3.9
     million in funds borrowed from our line of credit partially offset by a
     $2.0 million decrease in check float and a $1.2 million pay down of other
     debt.

     The table below sets forth our cash flows as presented in our consolidated
     financial statements for YTD 2001 and YTD 1999 and as adjusted to remove
     the effect of the sale of our uncollected accounts receivable under the
     securitization facility during YTD 1999, in thousands:

<TABLE>
<CAPTION>

                                                TWENTY SIX WEEKS         SIX MONTHS
                                                      ENDED                 ENDED
                                                   OCT 1, 2000          SEPT 30, 1999
                                                ----------------        -------------

<S>                                                     <C>              <C>
Cash flows (used in) provided by:

HISTORICAL CASH FLOW
Operating activities                                    $(3,649)         $ 3,836
Investing activities                                      3,403            3,236
Financing activities                                        730           (7,264)
                                                        -------          -------

Net decrease (increase) in cash                         $   484          $  (192)
                                                        =======          =======

CASH FLOW - WITHOUT SECURITIZATION FACILITY (1)
Operating activities                                    $(3,649)         $(6,923)
Investing activities                                      3,403            3,236
Financing activities                                        730            3,495
                                                        -------          -------
Net decrease (increase) in cash                         $   484          $  (192)
                                                        =======          =======
</TABLE>

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

(1)  As part of our borrowing facilities, in YTD 1999, we sold certain trade
     accounts receivable to obtain working capital for our operations. Under
     this agreement we had sold $46.9 million of trade accounts receivable as of
     September 30, 1999, which was excluded from the uncollected accounts
     receivable balance presented in our consolidated financial statements for
     Q2 2001. This agreement was subsequently terminated as of October 1, 1999.

     WORKERS' COMPENSATION COLLATERAL

     Before 1999, we secured our workers' compensation obligations by the
     issuance of bank standby letters of credit to our insurance carriers,
     minimizing the required current cash outflow for such items. In 1999, we
     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 our revolving credit facility.

     In January 2000, we renewed our pre-funded deductible program for one year.
     Under the new agreement, we will fund $10.5 million in 12 installments for
     projected calendar year 2000 claims expenses. This claim fund requirement
     will be adjusted upward or downward periodically based on the projected
     cost of the actual claims incurred during calendar year 2000, up to a
     maximum liability of $18.0 million. In addition, we agreed to provide extra





                                       28
<PAGE>   30

     collateral by establishing a $3.0 million trust account naming Hartford
     Insurance Company as beneficiary to secure any liability for claim funding
     for 1999 and 2000 that might exceed the pre-funded amounts up to the
     aggregate maximum cap for each year of $13.6 million and $18.0 million,
     respectively. We had planned to fund this trust account in 11 installments
     through December 2000; and as of October 1, 2000, we had funded $2.1
     million into the trust account. However, we are exploring alternatives to
     the trust fund discussed above, and we expect to replace the trust fund
     with letters of credit. Should we finalize this alternative, the $2.1
     million funded to the trust account would be used to pay down our senior
     borrowing facilities.

     ACCOUNTS RECEIVABLE

     A majority of our tangible assets are customer accounts receivable. Tandem
     employees are paid on a daily or weekly basis. We receive 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, we experienced an
     increase in the percentage of our Tandem accounts receivable that were past
     due. During calendar 1999 and the first two quarters of calendar 2000, we
     increased our focus on our accounts receivable collection process. As a
     result, the average number of days to collect Tandem accounts receivable
     from invoice presentation has decreased from 53 days at December 31, 1998
     to 45 days at October 1, 2000. Since we announced our restructuring plan in
     August 1999, accounts receivable decreased by approximately $5 million due
     to the sale of Tandem offices, the PEO division 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. As part of the sale of
     our PEO operations, accounts receivable decreased by approximately $6
     million. In addition, during the fourth quarter of 1999, we sold certain
     trade accounts receivable, with a face value of approximately $4.3 million
     and a carrying value of $2.9 million, to unrelated third parties for
     approximately $220,000. During Q3 1999, we wrote down these receivables,
     most of which were outstanding for more than 180 days, by $2.7 million. We
     anticipate that our accounts receivable will decrease by an additional $1.0
     million as we collect the outstanding receivables for the branches sold in
     the states of New Hampshire and Massachusetts in October 2000.

     CAPITAL EXPENDITURES

     We anticipate spending up to $2 million during the next twelve months to
     improve our management information and operating systems, upgrade existing
     locations and other capital expenditures including, but not limited to,
     opening new Tandem locations.

     FUTURE LIQUIDITY

     Effective August 15, 2000, as previously discussed, we entered into a three
     year financing agreement with a syndicate of lenders led by Ableco Finance
     LLC, as agent, whereby our 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. We believe that the funds provided by operations and borrowings
     under the new credit facilities will be sufficient to meet our needs for
     working capital, capital expenditures, and debt service for the foreseeable
     future.



                                       29
<PAGE>   31


     RESTRUCTURING

     On August 6, 1999, we announced actions to improve our short-term
     liquidity, concentrate our operations within our Tandem division, and
     improve our operating performance. In connection with these actions, we
     sold our PEO and clerical staffing divisions. In addition, we announced a
     specific plan to sell, franchise, close, or consolidate 47 Tandem offices
     and reduce headcount at 70 Tandem locations and corporate headquarters. As
     previously discussed, one office was removed during Q2 2001, and two
     offices were added during Q3 2001. As of October 31, 2000, our
     Restructuring plan was substantially complete. The restructuring charge
     accrual and its utilization are as follows:
<TABLE>
<CAPTION>

                                                                                      FISCAL YEAR 2001
                                                                     -----------------------------------------------------------
                                                                      CHARGES TO (REVERSALS
                                                                           OF) OPERATIONS           UTILIZATION
                                              ORIGINAL  BALANCE AT   ----------------------    ---------------------    BALANCE At
(Amounts in thousands)                        CHARGE      4/2/00       Q1 2001       Q2 2001    CASH        NON-CASH     10/2/00
                                              ------    ----------     -------       -------    ----        --------     -------
<S>                                            <C>        <C>        <C>           <C>          <C>          <C>          <C>
Employee severance and
    other termination benefits                 $ 4,040    $ 2,139    $   (89)      $   152      $   939      $    --      $ 1,263

Professional fees                                1,205         34        369           401          764           --           40
Lease termination and write-down of
    leasehold improvements at closed offices       400         49         (2)           36           28           --           55

Other restructuring charges                        146         33        154           218          405           --           --
                                               -------    -------    -------       -------      -------      -------      -------

Accrued restructuring charges                    5,791      2,255        432           807        2,136           --        1,358

Write-down to fair value/loss on sale
    of assets identified for disposition         5,429         --        446           133           --          579           --
                                               -------    -------    -------       -------      -------      -------      -------

Total restructuring and asset
    impairment activity                        $11,220    $ 2,255    $   878       $   940      $ 2,136      $   579      $ 1,358
                                               =======    =======    =======       =======      =======      =======      =======
</TABLE>


     SEVERANCE AND OTHER RESTRUCTURING CHARGES

     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 the fact that
     certain employees of offices sold and franchised to third parties would
     continue employment with such buyers or franchisees and would not be paid
     the severance that had been accrued. The Company recorded an additional
     $0.2 million in severance costs in Q2 2001 due to the additional 16
     employees terminated during the period whose severance payments were not
     accrued as part of the our original Restructuring plan. The remaining
     liability consisted of $1.3 million for severance and other termination
     benefits as of October 1, 2000 for ten employees who have been terminated
     during the period of August 1999 through August 2000, and will paid over a
     period ranging from one week to 18 months from the balance sheet date.

     Professional fees of $0.4 million and $0.8 million, recorded as
     restructuring costs, were incurred during Q2 2001 and YTD 2001,
     respectively. These professional fees were comprised primarily of amounts
     paid to Crossroads LLC, for its services related to the Restructuring.

     We utilized $0.2 million and $0.3 million of the restructuring charge
     during Q2 2000 and Q2 2001, respectively, for the costs of terminating
     leases as well as for writing down the carrying value of leasehold
     improvements and other assets not usable in other Company operations.

     ASSETS HELD FOR DISPOSITION

     The restructuring charge included a $5.4 million write-down of assets,
     recorded in our 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. Subsequent to December 31, 1999, when actual
     sales prices of these assets were negotiated, the charge was increased by
     $0.1 million in Q1 2000, and subsequently increased by $0.4 million in Q1
     2001. Based on the negotiations of the actual sales price of certain assets
     sold subsequent to October 1, 2000, we recorded an additional charge of
     $0.1 million during Q2 2001.




                                       30
<PAGE>   32


     During Q1 2001, we (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 our staffing offices in the state of Ohio, effective
     April 10, 2000, for cash proceeds of $20,000, and (iii) effective June 26,
     2000, sold our 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 our staffing
     offices in New Jersey and Pennsylvania, we 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.

     No assets were sold during Q2 2001.

     Effective October 29, 2000, we sold our Tandem operations in the states of
     New Hampshire and Massachusetts, comprising five offices and two "vendor on
     premise" locations, for $125,000, comprised of cash proceeds of $50,000 at
     closing and a two year $75,0000 promissory note. In addition, we will
     receive additional payments equal to 30% of EBITDA of the sold offices
     during the next two years. As previously discussed, we recorded an
     additional $133,000 charge to restructuring during Q3 2001 to reduce the
     carrying value of these assets to their net realizable value.

     We classified two additional offices as held for sale in Q3 2001. All of
     the assets held for sale were sold or franchised by October 31, 2000.

     Upon classification as assets held for disposition, we discontinued the
     related depreciation and amortization for these assets, which reduced
     operating expenses by approximately $0.1 million in Q2 2001 and $0.2
     million in YTD 2001.

     Our assets held for disposition as of October 1, 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 (amounts are
     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                                                 $ 195          $ 1,045         $ 1,240         $ 215
                                                                       ======         ========        ========        =====
</TABLE>


     The following table reflects our net revenues and gross profit margin
     segregating ongoing operations and operations from assets held for
     disposition or sold as part of our restructuring efforts and other disposed
     operations. Those operations include: (i) the Synadyne division, sold as of
     April 8, 2000, (ii) Office Ours, our 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 October 1, 2000. Ongoing operations include
     (i) the Tandem division, which provides flexible industrial staffing and
     (ii) franchising. Dollar amounts are in thousands, except for percentages:



                                       31
<PAGE>   33

<TABLE>
<CAPTION>

                                                              THIRTEEN WEEKS    THREE MONTHS     TWENTY SIX          SIX MONTHS
                                                                  ENDED             ENDED        WEEKS ENDED           ENDED
                                                               OCT 1, 2000      SEPT 30, 1999    OCT 1, 2000       SEPT 30, 1999
                                                               -----------      -------------    -----------       -------------

<S>                                                              <C>            <C>             <C>                 <C>
Net revenues:

    Total Company                                                $ 78,882       $ 159,124       $ 160,500           $ 302,578
    Less revenues from assets held for sale and
       disposed/ceased operations:
       Synadyne                                                        --         (59,325)            (71)           (114,404)
       Clerical, franchise PEO and other                           (2,560)        (20,920)        (10,487)            (40,262)
                                                                 --------       ---------       ---------           ---------

    Subtotal - revenues from assets held for sale
       and disposed/ceased operations                              (2,560)        (80,245)        (10,558)           (154,666)
                                                                 --------       ---------       ---------           ---------

    Net revenues from ongoing operations                         $ 76,322       $  78,879       $ 149,942           $ 147,912
                                                                 ========       =========       =========           =========

Gross profit margin:

    Total Company                                                $ 16,292       $  20,772       $  32,479           $  41,117
    Less gross profit from assets held for sale and
       disposed/ceased operations:
       Synadyne                                                        --          (1,645)             12              (3,638)
       Clerical, franchise PEO and other                             (281)         (3,045)         (1,486)             (5,949)
                                                                 --------       ---------       ---------           ---------

    Subtotal - gross profit from assets held for
       sale and disposed/ceased operations                           (281)         (4,690)         (1,474)             (9,587)
                                                                 --------       ---------       ---------           ---------

    Gross profit margin from ongoing operations                  $ 16,011       $  16,082       $  31,005           $  31,530
                                                                 ========       =========       =========           =========

Gross profit margin as a percentage of net revenues:

    Ongoing operations - Tandem                                      20.1%           19.3%           19.9%               19.4%
    Ongoing operations - franchising and other                      100.0%          100.0%          100.0%              100.0%
    Operations from assets held for sale and
       disposed/ceased operations                                    11.0%            5.8%           14.0%                6.2%
</TABLE>


     Tandem branches sold, franchised or held for sale as of October 1, 2000
     generated revenues of $2.6 million, and $15.2 million during Q2 2001 and Q3
     1999, respectively, and earned gross profit of $0.3 million and $2.7
     million for those periods. Those same branches incurred SG&A expenses of
     $0.3 million and $2.7 million, excluding depreciation and amortization
     costs, during Q2 2001 and Q3 1999, respectively, generated revenues of
     $10.5 million and $28.5 million during YTD 2001 and YTD 1999, respectively,
     earned gross profit of $1.5 million and $5.0 million, and incurred SG&A
     expenses of $1.4 million and $5.1 million, excluding depreciation and
     amortization costs. Results of flexible industrial staffing offices that
     were consolidated into existing offices, as part of our Restructuring
     efforts, are included in ongoing operations.

     Office Ours, our former clerical division which was sold on August 30,
     1999, generated revenues of $1.3 million and $3.3 million, gross profit of
     $0.3 million and $0.9 million, and incurred $0.4 million and $1.0 million
     in SG&A expense, excluding depreciation and amortization, during Q3 1999
     and YTD 1999, respectively. SG&A for the Synadyne division, excluding
     depreciation and amortization, was $1.3 million during Q3 1999 and $0.2
     million and $2.7 million during YTD 2001 and YTD 1999, respectively.

     SEASONALITY

     Traditionally our results of operations have reflected higher customer
     demand for industrial staffing services in the last two calendar quarters
     of the year, as compared to the first two quarters, and 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. We do
     not reduce the related core personnel and other operating expenses
     proportionally because most of our infrastructure is needed to support
     anticipated increased revenues in subsequent quarters. As a result of these
     factors, we historically have earned a significant portion of our annual
     operating income in the third and fourth calendar quarter. However, as
     previously discussed, we have experienced a slowdown in demand from our
     manufacturing and other services customers which may reduce the normal ramp
     up of sales volume that we had anticipated in the fourth calendar quarter
     of 2001 (Q3 2001).



                                       32
<PAGE>   34


     INFLATION

     The effects of inflation on our operations were not significant during the
     periods presented. 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. We intend to implement SFAS No. 133 in our
     consolidated financial statements on the first day of fiscal year 2001.
     Management does not believe that we are 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 we enter
     into any such transactions in the future.



                                       33
<PAGE>   35



     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 AND COSTS. 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; THE COMPANY'S 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 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; THE ABILITY TO REMAIN IN
     COMPLIANCE WITH THE TERMS AND COVENANTS OF THE COMPANY'S FINANCING
     AGREEMENTS; 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; 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 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, THE FORM 10-Q FOR THE TRANSITION
     PERIOD ENDED APRIL 2, 2000, AND THE FORM 10-Q/A FOR THE QUARTERLY PERIOD
     ENDED JULY 2, 2000.



                                       34
<PAGE>   36


     ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As a result of borrowings associated with our operating and investing
     activities, we are exposed to changes in interest rates that may adversely
     affect our results of operations and financial position. Of the $50.8
     million of short-term and long-term borrowings on our balance sheet as of
     October 1, 2000, approximately 19.8% represented fixed rate instruments.
     Effective August 15, 2000, we entered into a three-year financing agreement
     with a syndicate of lenders led by Ableco Finance LLC, as agent. The
     financing replaced our existing credit facility with a $33.4 million
     revolving credit facility and a $17.6 million Term Loan A and a $9.0
     million Term Loan B. Both the revolving credit facility and the term loans
     are secured by all of our assets. The revolving credit facility bears
     interest at prime or 9.0%, whichever is greater, plus 2% per annum. 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 addition, effective August 15, 2000, we renegotiated certain
     subordinated acquisition debt whereby we will pay interest only, at a rate
     of 10% per annum, on the debt for three years followed by two years of
     equal monthly payments of interest and principal, which will retire the
     debt by August 2005. Our acquisition debt, prior to its renegotiation on
     August 15, 2000, had effective interest rates varying between 8.75% and
     12.0%.

         A hypothetical 10% (about 123 basis points) adverse move in interest
     rates along the entire interest rate yield curve would increase our
     interest expense over the next twelve months by approximately $0.7 million,
     and would decrease net income after taxes for the same period by $0.5
     million, or $0.05 per diluted share. In addition, the hypothetical 10%
     adverse move in interest rates would have an immaterial impact on the fair
     market value of our fixed-rate debt.



                                       35
<PAGE>   37


     PART II - OTHER INFORMATION

     ITEM 1 - LEGAL PROCEEDINGS

     On September 13, 2000, a default final judgment in the amount of $0.8
     million was entered against Synadyne III, Inc., a wholly-owned subsidiary
     of the Company ("Synadyne III"), in the County Court, Dallas County, Texas.
     The action was brought by an employee of an independent agency of the
     Allstate Insurance Company claiming that the owner of that agency
     discriminated against her in violation of the Texas Commission of Human
     Rights Act of 1983. Synadyne III was under contract with this insurance
     agency to provide PEO services. It is the Company's contention that the
     complaint in this action was never properly served on Synadyne III and;
     therefore, the Company has filed a motion to vacate this judgment on the
     grounds that it was obtained without due process to Synadyne III. The
     Company believes, based on the advice of counsel, that it will be
     successful in vacating the judgment and the ultimate resolution of this
     matter will not have a material adverse effect on its financial position or
     future operating results. Accordingly, the Company has not made any
     adjustments to the financial statements for this matter.

     ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

     On August 15, 2000, in connection with the refinancing, the Company issued
     warrants to purchase an aggregate of 524,265 shares of its common stock to
     the lenders under the Company's previous credit facility, which constitutes
     5% of the Company's outstanding common stock on a fully-diluted basis. The
     warrants were issued in exchange for forgiveness of $14.4 million which the
     Company owed to the lenders. The warrants were issued in reliance on
     Section 4(2) of the Securities Act.

     On August 15, 2000, in connection with the refinancing, the Company issued
     warrants to purchase up to 200,000 shares of its common stock to Ableco
     Holding LLC. The warrants are only exercisable if any letter of credit
     issued by the new lenders on the Company's behalf is drawn, in which event,
     the number of warrants the lenders will receive will be based on the amount
     drawn under the letter of credit. The warrants were issued in reliance on
     Section 4(2) of the Securities Act.

     ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

     In order to remain in compliance with certain covenants in the Fleet
     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 August 15, 2000. The terms of these acquisition notes payable, which
     were subordinated to the Fleet 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 August 15,
     2000. On August 15, 2000, in connection with the Refinancing, certain of
     the subordinated acquisition notes payable were amended to provide for a
     five year term, interest only, at a rate of 10.0% per annum, for three
     years, followed by two years of equal monthly payments of interest and
     principal, which will retire the notes. In connection with the amendments
     to these subordinated acquisition notes payable, the Company paid $0.8
     million of accrued interest to the relevant noteholders at the closing.



                                       36
<PAGE>   38


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS:

EXHIBIT
NUMBER      DESCRIPTION
------      -----------

2.1         Amended and Restated Agreement Among Shareholders dated February 21,
            1997(1)

2.2         Articles of Share Exchange 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. and Outsource
            International of America, Inc. dated February 21, 1997(1)

3.1         Amended and Restated Articles of Incorporation of the Company(2)

3.2         Amended and Restated Bylaws of the Company(3)

4.3         Shareholder Protection Rights Agreement(3)

4.6         Warrant Dated February 21, 1997 Issued to Triumph-Connecticut
            Limited Partnership(1)

4.7         Warrant Dated February 21, 1997 Issued to Bachow Investment Partners
            III, L.P.(1)

4.8         Warrant Dated February 21, 1997 Issued to State Street Bank and
            Trust Company of Connecticut, N.A., as Escrow Agent(1)

10.1        Securities Purchase Agreement among Triumph-Connecticut Limited
            Partnership, Bachow Investment Partners III, L.P., 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. and Outsource International of America, Inc. dated as
            of February 21, 1997(1)

10.3        Registration Rights Agreement among Outsource International, Inc.,
            Triumph-Connecticut Limited Partnership, Bachow Investment Partners
            III, L.P., and shareholders of Outsource International, Inc. dated
            as of February 21, 1997(1)

10.4        Agreement among Shareholders and Investors in Outsource
            International, Inc. dated as of February 21, 1997(1)

10.11       Employment Agreement between Paul M. Burrell and the Company dated
            as of February 21, 1997(1)

10.12       Employment Agreement between Robert A. Lefcort and the Company dated
            as of March 3, 1997(1)

10.13       Employment Agreement between Robert E. Tomlinson and the Company
            dated as of March 3, 1997(1)

10.15       Employment Agreement between Brian Nugent and the Company dated as
            of March 11, 1997(5)

10.16       Employment Agreement between Carolyn Noonan and the Company dated as
            of July 22, 1999(6)

10.17       Employment Agreement between Scott R. Francis and the Company dated
            as of April 1, 1998(4)

10.18       Stock Option Plan, As Amended Effective May 8, 1998(4)

10.33       Form of Accumulated Adjustments Account Promissory Note dated
            February 20, 1997 issued by Capital Staffing Fund, Inc., Outsource
            Franchising, Inc. and Outsource International of America, Inc. to
            the following shareholders of the Company and Schedule of Allocation
            of AAA Distribution to such shareholders: Lawrence H. Schubert
            Revocable Trust; Robert A. Lefcort Irrevocable Trust; Nadya I.
            Schubert Revocable Trust; Louis J. Morelli S Stock Trust; Margaret
            Ann Janisch S Stock Trust; Matthew Schubert Outsource Trust; Jason
            Schubert Outsource Trust; Alan E. Schubert; Louis A. Morelli; Louis
            J. Morelli; Raymond S. Morelli; Matthew B. Schubert; Mindi Wagner;
            Margaret Morelli Janisch; Robert A. Lefcort; and Paul M. Burrell(1)

10.80       Employment agreement between Jon Peterson and the Company dated as
            of February 14, 2000(7)

10.81       Employment agreement between Garry E. Meier and the Company dated as
            of February 7, 2000(7)


                                       37
<PAGE>   39


10.82       Separation Agreement and Release between Paul Burrell and the
            Company effective February 14, 2000(8)

10.83       Separation Agreement and Release between Robert Lefcort and the
            Company effective April 6, 2000(8)

10.84       Separation Agreement and Release between Brian Nugent and the
            Company effective April 21, 2000(8)

10.85       Asset Purchase Agreement by and between Team Staff, Inc., Teamstaff
            V, Inc. and Outsource International, Inc., Synadyne I, Inc.,
            Synadyne II, Inc., Synadyne III, Inc., Synadyne IV, Inc., Synadyne
            V, Inc., Guardian Employer East LLC and Guardian Employer West LLC,
            dated as of April 7, 2000(7)

10.86       Shared Services Agreement by and between Team Staff, Inc. and
            Outsource International, Inc., dated as of April 7, 2000(7)

10.90       Engagement Letter between Outsource International, Inc. and
            Crossroads Capital Partners LLC, dated as of May 7, 1999 and three
            addenda dated June 18, July 1 and August 2, 1999(6)

10.91       Finder Services Agreement between Outsource International, Inc. and
            Crossroads Capital Partners LLC, dated as of June 30, 1999(6)

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(9)

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(9)

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(9)

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(9)

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.(9)

10.92(f)    Warrant, dated August 15, 2000, issued to Ableco Holding LLC(10)
            10.92(g) Registration Rights Agreement, dated as of August 15, 2000,
            between Outsource International, Inc. and Ableco Holding LLC(9)

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(9)

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)(9)

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(9)

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)(9)

27          Financial Data Schedule**


                                       38
<PAGE>   40


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

**     Filed herewith

(1)    Incorporated by reference to the Exhibits to the Company's Registration
       Statement on Form S-1 (Registration Statement No. 333-33443), as filed
       with the Securities and Exchange Commission on August 12, 1997

(2)    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

(3)    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

(4)    Incorporated by reference to the Exhibits to the Company's Form 10-Qfor
       the quarterly period ended June 30, 1998, as filed with the Securities
       and Exchange Commission on August 14, 1998

(5)    Incorporated by reference to the Exhibits to the Company's Form 10-Kfor
       the year ended December 31, 1998, as filed with the Securities and
       Exchange Commission on March 30, 1999

(6)    Incorporated by reference to the Exhibits to the Company's Form 10-Qfor
       the quarterly period ended June 30, 1999, as filed with the Securities
       and Exchange Commission on August 16, 1999

(7)    Incorporated by reference to the exhibits to the Company's Form 10-K/Afor
       the year ended December 31, 1999, as filed with the Securities and
       Exchange Commission on April 20, 2000

(8)    Incorporated by reference to the exhibits to the Company's Form 10-Qfor
       the transition period ended April 2, 2000, as filed with the Securities
       and Exchange Commission on May 17, 2000

(9)    Incorporated by reference to the exhibits to the Company's Form 10-Qfor
       the quarterly period ended July 2, 2000, as filed with the Securities and
       Exchange Commission on August 21, 2000


(b) REPORTS ON FORM 8-K:

No reports were filed on Form 8-K during the fiscal quarter ended October 1,
2000.



                                       39
<PAGE>   41



                                   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: November 15, 2000          BY: /s/ GARRY E. MEIER
                                     ----------------------------------
                                     Garry E. Meier
                                     Chairman of the Board of Directors,
                                     President and Chief Executive Officer

Date: November 15, 2000          BY: /s/ SCOTT R. FRANCIS
                                     ----------------------------------
                                     Scott R. Francis
                                     Vice President and Chief Financial Officer
                                     (Principal Financial Officer)





                                       40
<PAGE>   42


     EXHIBIT INDEX

     EXHIBIT
     NUMBER       DESCRIPTION
     ------       -----------

     27           Financial Data Schedule





                                       41