##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-K


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(Mark One)

|    |  |                                                                                                    
|--- |  | ---------------------------------------------------------------------------------------------------
|[X] |  | Annual Report pursuant to Section 13 or 15 of the Securities Exchange Act
of 1934 (no fee required)

For the fiscal year ended June 30, 2001

OR

|      |  |                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------
|[   ] |  | Transition report pursuant to Section 13 or 15 of the Securities
Exchange Act of 1934 (no fee required)



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ProBusiness Services, Inc.

(Exact name of Registrant as specified in its charter)




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|                                                        |  |                                                
|------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(State or other jurisdiction of incorporation) |  | 94-2976066
(I.R.S. Employer Identification No.)

4125 HOPYARD ROAD
PLEASANTON, CA 94588

(Address of principal executive offices)


(925) 737-3500
(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange
on which registered
|                    |  |                                          
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
(Title of Class)



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

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

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $470 million as of June 29, 2001 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date.

As of September 7, 2001, there were 24,218,850 shares of the Registrants
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 2001 are incorporated by reference into Part II. Portions of the
Proxy Statement for Registrants 2001 Annual Meeting of Stockholders to be held
November 30, 2001 are incorporated by reference into Part III.



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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.          
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II.         
|                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership                                                                  
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                    
|Signatures       
|Index to Exhibits
|EXHIBIT 13.1     
|EXHIBIT 23.1     

ProBusiness Services, Inc.
INDEX TO ANNUAL REPORT
ON FORM 10-K

|         |  |                                                                                       |  |   
|-------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I   |  |                                                                                       |  |   
|        
|        
|        
|        
|Item 1.  |  | Business                                                                              |  | 3 
|        
|        
|        
|        
|Item 2.  |  | Properties                                                                            |  | 14
|        
|        
|        
|        
|Item 3.  |  | Legal Proceedings                                                                     |  | 14
|        
|        
|        
|        
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 14
|        
|        
|        
|        
|PART II  |  |                                                                                       |  |   
|        
|        
|        
|        
|Item 5.  |  | Market for Registrants Equity and Related Stockholder Matters                        |  | 15
|        
|        
|        
|        
|Item 6.  |  | Selected Financial Data                                                               |  | 16
|        
|        
|        
|        
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  | 16
|        
|        
|        
|        
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 16
|        
|        
|        
|        
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 16
|        
|        
|        
|        
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure  |  | 16
|        
|        
|        
|        
|PART III |  |                                                                                       |  |   
|        
|        
|        
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 17
|        
|        
|        
|        
|Item 11. |  | Executive Compensation                                                                |  | 18
|        
|        
|        
|        
|Item 12. |  | Security Ownership                                                                    |  | 18
|        
|        
|        
|        
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 18
|        
|        
|        
|        
|PART IV  |  |                                                                                       |  |   
|        
|        
|        
|        
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8K                       |  | 19
|        
|        
|        
|        
|         |  | Signatures                                                                            |  | 20

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PROBUSINESS SERVICES, INC.




PART I.


This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations, estimates and
projections about our industry, managements beliefs, and certain assumptions
made by management. Words such as anticipates, expects, intends, plans,
believes, seeks and estimates and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and actual actions or results may differ materially. These
statements are subject to certain risks, uncertainties and assumptions that are
difficult to predict, including those set forth herein under Additional
Factors That May Affect Future Results as well as those noted in the documents
incorporated herein by reference. We undertake no obligation to update
publicly any forward-looking statements as a result of new information, future
events or otherwise, unless required by law. Readers should, however, carefully
review the risk factors included in other reports or documents filed by us from
time to time with the Securities and Exchange Commission.




Item 1. Business

Overview

We are a leading provider of comprehensive administrative outsourced
services to large employers nationwide, providing solutions that include
corporate employee payroll processing, payroll tax filing and other critical
human resources (or HR) and benefits administration functions. As our roster
of payroll and tax clients has risen to approximately 775 companies,
representing over 4 million employees, and which include relationships with
over 10% of the Fortune 1000 companies, we have successfully grown our revenues
114% and 442% over the past two and four years, respectively, as of June 30,
2001. In FY2001, we generated approximately $150 million in revenue, an
increase of 44% over the prior year. Our comprehensive and integrated
outsourced payroll processing and tax filing solution has expanded to include a
multitude of other similarly integrated products including payroll
administration, Web-based self-service for employees, HR software and
integrated administration of health and welfare benefits, COBRA benefits and
flexible spending accounts. These services are combined into a single,
technology platform combining sophisticated transaction processing and
Internet-enabled workstations to form a comprehensive HR outsourcing product.

As a leading provider of comprehensive payroll processing and tax filing
services, during FY2001, we processed 37 million paychecks for employees, filed
over 3.5 million Form W-2s with the Internal Revenue Service and managed the
flow of over $90 billion in payroll and tax collections. Our services and
technology platform are integrated with the clients existing in-house and
third-party processing systems, thereby assuming one or more of the clients HR
administrative functions and creating what we believe to be a highly
differentiated and client-driven solution. This allows our clients to
streamline their administrative processes, including the elimination of complex
and costly functions, while ensuring the use of industry-wide best practices.
By leveraging our significant scale, experience and depth of cross-functional
skills, our clients achieve higher levels of service and efficiency.

Our growth strategy focuses primarily on serving the large employer
segment of the market, which we define as organizations with more than 1,000
employees. We estimate that approximately 70% of this market continues to
process their payroll internally. As companies recognize the cost and service
benefits of outsourcing these functions, the continued penetration of this
market represents a significant opportunity for us. We believe that our
business model, which requires upfront investment in acquisition costs to
develop long-term client relationships with large employers, allows us to
establish highly integrated, tailored and long-term client solutions which
result in substantial initial and recurring revenue streams which yield
significant returns on this investment over time.

We were incorporated in California in October 1984 and reincorporated in
Delaware in September 1997. Our executive offices are located at 4125 Hopyard
Road, Pleasanton, California 94588, and our telephone number is (925) 737-3500.

Industry Background

Businesses face significant and increasingly difficult challenges in
managing the multitude, complexity and substantial costs of the administrative
functions in their internal HR operations. With administrators of internal
corporate functions facing a combination of (i) increasing regulatory
complexity, (ii) penalties for non-compliance, (iii) rapid changes in their
employee bases, (iv) a need to maintain industry-wide best practices, and (v) a
lack of scale in their operations, companies have increasingly turned to
outsourcing to allow them to focus greater resources on their core operations.
Administrative outsourcing has traditionally focused on HR functions such as
payroll processing and payroll tax filing. These functions lend themselves to
outsourcing because they are technologically complex and continually evolving
and the systems required are costly for employers to design, maintain and
administer with limited

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internal resources and, often, without scale. As a result, the demand for
outsourcing of employee administrative services and business processes has
grown significantly over the last several years.

In addition to payroll processing and payroll tax filing, other
employee-related administrative functions such as benefits administration
including health and welfare administration, Web-enabled applications and HR
management services have similarly become increasingly complex and difficult
for employers to manage effectively. As a result, and in large part due to the
success employers experienced with payroll based outsourcing solutions,
companies have begun to shift from outsourcing of discrete functions to
comprehensive HR solutions that are integrated into a single technology
platform. A common technology platform permits companies to leverage data
elements that are common to payroll processing, payroll tax filing, benefits
administration and other HR operations.

Third-party HR outsourcers often focus on varying segments of the market
and may not adequately serve the specific needs of companies. Problems
associated with outsourcers include a lack of centralized data, the integration
of multiple technology platforms and an overall lack of sufficient levels of
client service. To achieve long-term success, we believe that successful HR
outsourcers must provide a strong and dynamic technology platform, a
comprehensive and integrated suite of HR services, superior HR administrative
process expertise and premium levels of client service by focusing on a defined
segment of the market. The demand for HR and business process outsourcing,
stemming from a large and increasing number of employers looking to outsource
for the first time and those looking to expand into more comprehensive
outsourcing solutions, is creating opportunities for outsourcers who can meet
the evolving needs of employers.

Our Solution and Competitive Strengths

We offer our large employer target market a comprehensive and integrated
suite of HR outsourcing services which we believe adds significant long-term
value to our clients. We have built upon our position as a leading provider of
payroll processing and tax filing services to expand the breadth of services
offered. We accomplish this with a proprietary technology platform that
integrates with clients existing in-house and third-party processing systems.
We believe this proprietary technology, our suite of service offerings and
focus on premier levels of client service, together with the following
competitive strengths, distinguishes us in the marketplace.



Advanced, Proprietary, Highly Scalable Technology
Platform.Our advanced technology platform is highly scalable,
configurable, and designed to combine multiple service offerings
into a single platform that integrates with the clients other
systems. This platform reduces errors, speeds development of
add-on services, improves timeliness of issue resolution, and
significantly reduces processing and servicing costs. This
technology is applicable across all service offerings.

Internet Delivery Platform. The Internet is playing an increasingly
important role in the delivery of outsourcing services to large employers. The
Internet enables us to transmit processes, transactions and information to the
appropriate client contacts, including applications for employee and
administrator self-service. Our platform allows clients to reduce costs by
moving transactions to the lowest-cost processing method and by eliminating
paper and other redundancies. For example, we offer our clients an
Internet-based solution that permits us to process an entire payroll and
distribute related checks, reports and other documentation on a fully
electronic basis.

Proven Track Record.We are a leading provider of payroll processing and
payroll tax filing services. For FY2001, we processed 37 million paychecks for
employees, filed over 3.5 million Form W-2s with the Internal Revenue Service
and managed the flow of over $90 billion in payroll and tax collections. As of
June 30, 2001, we had approximately 625 payroll and tax clients and
approximately 150 tax-only clients, together representing over 4 million
employees. We intend to continue to build upon both our significant presence
in the large employer market and our existing client base in an effort to
improve our competitive position, as well as to increase our financial and
operational scale and cross-selling opportunities. Furthermore, we believe
that the 10 years that we have invested in the development and refinement of
our products and services makes our success difficult for others to replicate.
Given the critical nature of their HR services, companies in our target market
are more likely to select an outsourcing partner that is service oriented and
has demonstrated its ability to reliably deliver accurate and high quality
services.

Comprehensive Outsourced Service Offering.In addition to our corporate
employee payroll processing and tax filing service offerings, we provide a more
comprehensive suite of HR administrative functions, including comprehensive
benefits administration, health and welfare administration, web-based self
service for employees, HR software, COBRA administration and flexible spending
administration. In particular, we assume the management of our clients
transaction administration functions including the recording and verification
of time, the issuance of manual checks, the enrollment of employees in flexible
spending benefit programs and the auditing and balancing of payroll which
allows our clients to significantly reduce or eliminate in-house HR personnel
to gain maximum efficiency. We expect to add functionality to our existing
service offerings and to develop, acquire or partner to increase the breadth of
services offered in the future. This may include the acquisition of
technologies that complement

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our existing offerings and add new best-in-class features to our suite of
products that provide our clients with greater flexibility to select the
services that address their individual needs.

Value-Added Solution. We deliver value to our clients by designing a
comprehensive suite of services that improve the efficiency of the clients HR
administration. A significant amount of the value of our services is derived
from helping our clients to streamline organizational processes and implement
best practices, which typically lead to significant cost savings, establishing
the foundation upon which we may provide additional services in the future. To
accomplish this, we identify and build industry-wide best practices into our
systems and provide expert consultation during the sales and implementation
process to facilitate integration of our technology with a clients legacy
systems.

Success in Serving a Substantial and Diverse Client Base of Large
Employers. We have over 10 years of in-depth experience delivering our proven
solutions to large employers, which we define as organizations with over 1,000
employees, and have developed a suite of services specifically designed to
satisfy their unique needs. As of June 30, 2001, we provided services to over
10% of the Fortune 1000 companies, spanning a wide variety of business segments
and resulting in a significant recurring revenue stream from established
clients. For the year ended June 30, 2001, no single client represented more than 3% of our
revenues.

Experienced, Highly Motivated Workforce and Management Team. We believe
that our highly skilled, diverse and well-trained workforce is one of our
greatest assets. We strive to develop leadership and client service excellence
at all levels of our organization. We seek to hire individuals with
significant industry experience, whether these hires are account managers,
research and development personnel or integration professionals. Our officers
and directors maintain a significant ownership stake in our company that, as of
June 30, 2001, was approximately 30%, including ownership by General Atlantic
Partners, LLC (GAP). In addition, almost all of our employees have an
ownership interest in the company via option grants and participation in our
employee stock purchase plan. We believe that these equity stakes
significantly contribute to our ability to provide what we believe to be the
highest level of client service in the industry.

Premier Client Service Organization. We believe that our focus on
providing high-quality, responsive and professional client service is a major
competitive advantage and one of our clear differentiators in the marketplace.
We deliver superior client service by striving to establish a long-term
business partnership with each client. With a low client-to-account manager
ratio, we assign each client a personal account manager who manages the account
and marshals the resources of a strategic team of specialists to meet the
clients specific needs. Additionally, we have built high-quality service
features into our technology platform such as providing redundant client site
data access, mirror-image customer service terminal technology and automated
processes enabling our professionals to monitor client issues to ensure
consistent services. Additionally, we promote our client service culture
through incentive compensation and recognition of achievements that are based
on providing high-quality service to clients. This service culture translates
into operational excellence, as evidenced by the fact that over the last four
years we have produced over 99.5% of our payrolls without error and maintained
what we believe to be an industry-leading retention rate of approximately 90%.

Service Offerings

We have over 10 years of in-depth experience serving large employers and
have developed a suite of services specifically designed to satisfy their
unique needs. We provide a broad range of employee administrative services,
including:



| |  | payroll processing;              
|- |  | ---------------------------------
| 
| |  | payroll tax filing;              
| 
| |  | benefits administration services;
| 
| |  | HR software;                     
| 
| |  | Comprehensive Outsourcing; and   
| 
| |  | Web-based self-service.          

We intend to develop enhancements to our existing services internally. We also
intend to expand our service offerings through future acquisitions, alliances
and investments.

Payroll Processing.We process time and attendance data to calculate and
produce employee paychecks, direct deposits and reports for our clients. Our
clients receive paychecks and reports within approximately 24 to 48 hours of
our receipt of their electronically submitted data. Our system is highly
configurable to meet the specialized and, often times, complex needs of large
employers, yet maintains the ability to provide high-volume processing. The
system integrates easily with the clients general ledger, HR, and time and
attendance systems. In addition, we offer

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many sophisticated features, including the automatic enrollment and
tracking of paid time off, prorating of compensation for new hires and
integrated garnishment processing.

Payroll Tax Filing.We collect contributed employer and employee payroll
tax funds from clients and deposit such funds with tax authorities when due.
We also file all payroll tax returns and reconcile the clients account.
Additionally, we will represent the client before tax authorities in disputes
or inquiries. A substantial portion of our existing payroll clients utilize
our payroll tax service.

Benefits Administration Services.Our benefits administration services
include flexible benefits enrollment and processing, COBRA administration, and
consolidated billing and eligibility tracking. These services include data
management, reconciliation, transaction processing, employee inquiry management
and client service.

HR Software.Our HR software tracks and reports general employee
information, including compensation, benefits, skills, performance, training,
job titles and medical history. For clients who also use our payroll service,
the HR data can be transferred to the payroll services system to eliminate the
need for duplicate data entry.

Comprehensive Outsourcing.Our Comprehensive Outsourcing service
offering, which includes payroll administration, serves as an extension of our
clients business as we fully manage employee inquiries and other departmental
administrative functions for payroll, HR and benefits in addition to our
traditional back-office processing services. When a client adopts
Comprehensive Outsourcing service offering, we assume the management of such
transactional administration as the recording and verification of time, the
issuance of manual checks, the enrollment of employees in flexible spending
benefit programs and the auditing and balancing of payroll.

Web-Based Self-Service Applications.Our self-service applications
provide employers with a complete range of employee relationship management
applications. Employers have a Web-based tool, which not only facilitates HR
and payroll processes, but also allows employees to utilize self-directed
administration services. We lead the industry with Web-based self-service as a
result of our employee services and client services portals.

Technology

We differentiate ourselves through our proprietary technology platform.
This platform integrates substantially all technologies required to deliver
high-quality employee services to clients at low transaction costs. It
consists of five layers that provide services across all administrative
processes:



| |  |  | Applications payroll, tax, HR management systems and benefits;                                                                                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Production high-speed data processing, printing and finishing systems;                                                                                              
|
| |  |  | Internet employee and administrator self-service integrated into the platform;                                                                                      
|
| |  |  | Service integrated client relationship management,
knowledge-base, imaging, interactive voice response and
telephony systems; and                                   
|
| |  |  | Information Technology integrated data center
services (such as database hosting, maintenance and backup), Web
hosting, security and business interruption services.

These layers constitute an integrated data processing system that is
highly flexible, reliable and serviceable. The integrated platform eliminates
data duplication, reduces system latency, reduces steps and errors, improves
reliability, and provides integrated end-to-end process outsourcing.

To build the layers, we utilize industry-standard technologies that are
highly scalable and redundant. Client data is stored on a high-availability
storage area network comprised of multiple logical servers on a high-speed
Nortel and Cisco network. Processing services are provided by an array of
inexpensive microprocessors, which are easily extensible and highly redundant.
Service technologies include third-party technologies from Siebel, FileNet,
Genesys, Periphonics, and Nortel. We build our own integrated application
technologies, including payroll processing, payroll tax filing and benefits
administration, and our own Internet self-service and portal technologies, with
developers located in Pleasanton and Atlanta.

Our focus is on an integrated data processing system that assures data
flows easily across applications, between clients and our company, and to and
from third-party systems. This enables us to provide high levels of service to
clients, because both clients and our service providers work with the same data
and applications. As a continuation of this focus, we are currently developing
the next generation proprietary integrated technology and service platform,
GOLDEN GATE. GOLDEN GATE, a highly leverageable and flexible technology
platform which may be utilized with our Comprehensive Outsourcing solution.

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Client Service

We believe that our focus and dedication to providing high levels of
client service is a competitive advantage in the large employer market. Beyond
developing a business partnership with each client, we assess each clients
payroll processing needs and reengineer and design the clients payroll systems
and processes. In doing so, we implement a value-added solution for the
client. We also maintain an ongoing relationship with each client through the
use of a strategic team that includes a sales representative, a sales analyst,
a senior project manager, an account manager and numerous functional,
regulatory and technical support specialists. We intend to continue providing
our clients with a high level of service by hiring professionals who are
experienced in their fields. Most of our service personnel have experience in
payroll, accounting, HR or financial services industries, and many hold
Certified Public Accountant or Certified Payroll Professional accreditation.

We continually monitor the quality of our service via client feedback
mechanisms. We obtain valuable insights into the needs of our clients through
our partnership with each client and from client responses to surveys, which
are conducted semiannually. We use this information to help develop, identify
and optimize new service offerings and to improve the level of service provided
to clients. We also use client feedback as a basis for incentive compensation
and for recognition of achievements. Our client service focus, supported by
our advancements in technology, was recognized by CIO magazine through the
presentation of the CIO-100 Award for Customer Service Excellence in August
2000.

Sales.We believe that client service begins with the sales process. A
sales representative and a sales analyst work together to assess a potential
clients processing needs. Based on this assessment, the sales team then
identifies opportunities for reengineering the prospective clients processes
and for designing a solution that integrates effectively with their prospective
clients other systems. The sales cycle typically ranges from three to twelve
months or longer.

Implementation.Upon engagement by a client, we assign a team of
technical support specialists headed by a senior project manager. The senior
project manager leads the transition from the clients former system to our
system. The senior project manager also works with the client, the sales
analyst and technical support specialists to integrate our applications with
the clients other systems and to customize the system to improve the clients
processes. We use our systems integration expertise to facilitate the
integration of our processing system with the clients existing hardware and
software. The implementation process generally takes three to nine months or
longer, depending on the complexity of the clients processes and systems and
the size of the client.

Account Management.We assign an account manager to each client during
the implementation process. The account manager serves as the clients
day-to-day contact with us. The account manager coordinates the efforts of our
functional, regulatory and technical support specialists as needed. The
account manager visits each client regularly and establishes an annual business
plan with the client that details scheduled payroll events, such as open
enrollment periods for employee benefits plans or software system changes. This
annual business plan allows us to provide clients with uninterrupted payroll
services during these periods. Account managers use a comprehensive client
relationship management system to record and track all client calls, record
client feedback and to help ensure that the clients needs are addressed
promptly and thoroughly. We maintain a low client-to-account manager ratio in
an effort to offer clients accessible and responsive account management.

Support Specialist.We support each client with functional and regulatory
specialists in payroll, payroll tax and employee benefits, as well as pay data
interfaces, general ledger interfaces, paid time off, report writing and system
integration. Clients can speak directly with each of these specialists as
needed. These specialists also meet with clients onsite or support clients
indirectly through the account manager.

Clients

We target large companies with complex and changing business needs in
diverse industries. As of June 30, 2001, we provided payroll services to 625
clients, who had an aggregate of approximately 1.4 million active employees and
an average of approximately 2,300 employees. As of June 30, 2001, we provided
national tax filing services to approximately 150 clients with an aggregate of
more than 2.6 million employees and an average of more than 18,000 employees.

We have maintained an industry-leading client retention rate of
approximately 90% for the last four years. We believe that our low
client-to-account manager ratio and our focus on client service are key factors
in enabling us to achieve a high payroll client retention rate. Historically,
our client retention rates have been negatively impacted by clients ceasing to
use our services following a merger or sale of the client. We generally execute
multi-year contracts that contain penalties for early termination.

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Sales and Marketing

We employ a direct sales force to gain new clients and to increase the
number of services provided to existing clients. We currently target large
employers through direct marketing, trade shows and active participation in
local chapters of the American Payroll Association. We use a team-selling
approach in which sales analysts and sales representatives collaborate to
assess a potential clients needs and to develop a cost-effective solution. The
payroll processing and tax filing sales cycle typically ranges from three to
twelve months.

As part of our strategy to provide a comprehensive suite of employee
administrative services, we have entered into strategic alliances with such
industry leaders as Oracle Corporation, Peoplesoft and SAP AG. These alliances
enable us to provide full connectivity between our payroll processing and
payroll tax filing solution and our strategic partners HR application
programs. We have also formed an alliance with Sheakly UniService, a leading
provider of unemployment cost control and employment verification services, to
jointly provide services to clients.

Competition

The market for our services is intensely competitive. It is also subject
to rapid change and significantly affected by new service introductions and
other market activities of industry participants. In payroll processing and
tax filing, we primarily compete with Automatic Data Processing, Inc. and
Ceridian Corporation. We also compete with in-house employee services
departments.

We believe that the 10 years we have invested in the development and
refinement of our products and services makes our success difficult for others
to replicate. Given the critical nature of their HR services, companies in our
target market are more likely to select an outsourcing partner that is well
established and has demonstrated its ability to reliably deliver accurate and
high quality services.

We believe that the principal competitive factors affecting our market include the following:



| |  | system functionality and performance;
|- |  | -------------------------------------
| 
| |  | system and service flexibility;      
| 
| |  | breadth of service offering;         
| 
| |  | client service;                      
| 
| |  | reputation and experience; and       
| 
| |  | service cost.                        

Proprietary Rights

We rely on a combination of contract, copyright and trade secret laws to
establish and protect our proprietary technology. We distribute our services
under software license agreements that grant clients licenses to use our
services and that contain various provisions protecting our ownership and the
confidentiality of the applicable technology. We generally enter into
confidentiality agreements with our employees and confidentiality and/or
license agreements with existing and potential clients. We also limit access
to and distribution of our software, documentation and other proprietary
information.

Employees

As of June 30, 2001, we had approximately 1,400 full-time employees. We
believe that relations with our employees are good.

Additional Factors That May Affect Future Results

We have sustained a history of operating losses and may not achieve
profitability in the future.We have experienced significant operating losses
since our inception. We expect to incur significant operating losses in the
future due to continued client acquisition costs and investments in research
and development. We will also incur costs associated with expanding our sales
efforts, service offerings and operations to new geographic regions. As of
June 30, 2001, we had an accumulated deficit of $96.4 million. While our
current target is to achieve profitability in fiscal year 2003, we may fail to
achieve profitability by such time and it is possible that we may never achieve
or sustain profitability in the future. Failure to achieve or sustain
profitability would harm our financial condition and results of operations.

We may choose to raise additional capital to fund our investments and/or
operations through public or private equity or debt financing. We cannot
assure you that additional financing will be available if needed on acceptable
terms, or at all. If additional capital is needed and not available, we may
need to change our business strategy or reduce our operations. If we raise
additional funds by issuing equity securities, our stockholders will experience
dilution.

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Investment risks, such as interest rate fluctuations, could harm our
business.We invest funds, including payroll tax funds transferred to us by
our clients, in short-term, top-tier, high quality financial instruments.
Among other instruments, we invest in overnight U.S. government direct and
agency obligations, commercial paper and institutional money market funds. Our
investments are subject to credit risks and interest rate fluctuations. For
example, if borrowers fail to meet the terms of their obligations under
financial instruments in which we have invested, we would be liable for any
losses on those investments.

Interest income earned from the investment of client payroll tax funds
represents a significant portion of our revenue. As a result, interest rate
fluctuations could significantly impact our results of operations. For
example, our future results may be adversely affected as a result of recent
declines in interest rates. We enter into interest rate
swap agreements to minimize the impact of interest rate fluctuations. However,
these swap agreements will not protect us from all interest rate risks. In
some circumstances, if interest rates rise, we would have payment obligations
under our interest rate swap agreements, and these payments may exceed the
interest we earn on deposited funds. Any payment obligation under our swap
agreements could harm our results of operations. If we default under our swap
agreements, the default could result in acceleration and setoff by the bank of
all outstanding contracts under the swap agreements and could result in
cross-defaults of other debt agreements. Additionally, if the
party to our swap agreements fails to meet the terms of its obligations under our
executed swap agreements, all amounts hedged under the swap
agreements would then be subject to market interest rate fluctuation and
the swap agreements could become ineffective. Any of these consequences could
harm our business and financial condition.

Our operating results have fluctuated, and will continue to fluctuate,
from quarter to quarter, and negative fluctuations could materially lower the
price of our common stock.Our quarterly operating results have fluctuated in
the past and will continue to fluctuate in the future depending on a variety of
factors, including the following:



| |  |  the number and size of new clients starting services;                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  the decision of one or more clients to delay or cancel implementation or ongoing services;                         
|
| |  |  interest rates;                                                                                                    
|
| |  |  seasonality;                                                                                                       
|
| |  |  our ability to timely
design, develop, introduce and implement services and features for
new and existing services;
|
| |  |  services offerings provided by competitors:                                                                        
|
| |  |  costs associated with strategic acquisitions and alliances or investments in technology;                           
|
| |  |  the success of strategic acquisitions, alliances or investments;                                                   
|
| |  |  costs to transition to new technologies;                                                                           
|
| |  |  expenses incurred for geographic expansion;                                                                        
|
| |  |  risks associated with payroll tax and benefits administration;                                                     
|
| |  |  price competition;                                                                                                 
|
| |  |  a reduction in the number of employees of our clients; and                                                         
|
| |  |  general economic factors.                                                                                          

A substantial majority of our operating expenses, particularly personnel
and related costs, depreciation and rent, are relatively fixed in advance of
any particular quarter. As a result, we may not be able to timely cut costs in
response to any decrease in revenue. For example, any decision by a client to
delay or cancel our services, or our under-utilization of personnel, may cause
significant variations in operating results and could result in losses for the
applicable quarters. Additionally, as we secure larger clients, the time and
expense required to implement our services increases, which could contribute to
larger fluctuations in revenue.

The general condition of the United States economy, and the current
weakness in the economy, has and will continue to affect our business. These
effects have taken the forms of declines in interest rates, client staff
reductions, strikes, and acquisitions of our clients by other companies, among
others. In addition, potential clients and existing clients are also less
likely to switch service providers and in some cases are delaying or postponing
purchasing decisions. These factors could result in the reduction of the
aggregate amount of payroll that we process and the amount of interest that we
earn on such funds. In addition, the general condition of the United States
economy is affected by social, political and military conditions. It is not
possible to predict the outcome of the recent escalation of hostilities between
the United States and certain countries and persons related to terrorist events
including the ones that took place on September 11, 2001. Any
response by the United States could result in further weakness in the United
States economy which would have an adverse impact on our operating results and
financial condition. Our future revenue and results of operations may vary
substantially. In some future quarter our results of operations could be below
the expectations of public market analysts and investors, which could cause the
market price of our common stock to decrease dramatically.

We need to incur substantial expenses to gain more clients and expand our
offerings, but we may not realize profits from these expenses.Our ability to
achieve profitability will depend in part upon our ability to attract and
retain new clients, offer new services and features and achieve market
acceptance of new services. Establishing new client relationships is a
time-consuming and expensive process. It generally takes three to twelve
months or longer, and

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implementing our services generally takes an additional three to nine months or
longer. These sales cycles may lengthen as the economy continues to
weaken. As we acquire each new client, we incur substantial client acquisition
costs, which consist primarily of sales and implementation expenses and, to a
lesser extent, marketing expenses. We incur these costs in advance of revenue,
and we cannot guarantee that we will fully recoup these costs. If we cannot
maintain our historically high client retention rate, our return on customer
acquisition cost will be significantly lower. As we expand our service
offerings, we incur substantial operating costs associated with hiring the
management and building the operational infrastructure. We may not realize
profits from these investments, and failure to do so would harm our financial
condition and results of operations.

We incur substantial costs investing in new technologies but may fail to
successfully introduce new offerings.We will incur substantial costs in
developing or acquiring new technologies and in deploying new services and
features to our clients. These costs include costs associated with acquiring
in-process technology and amortization expenses related to intangible assets
and costs of additional personnel. If we cannot develop or acquire and
successfully introduce new services and new features of existing services in a
cost-effective manner, our business will suffer. We have spent and will
continue to spend significant time and money in the development of our next
generation proprietary integrated technology and service platform, GOLDEN
GATE, and in the development and staffing of our outsourced employee
administrative services offering, Comprehensive Outsourcing. We may not
successfully develop this service or the underlying platform on a timely basis.
Even if successfully developed, our ability to realize profits from these
investments still depend on our ability to acquire and retain a critical number
of clients. We only recently began offering Comprehensive Outsourcing on a
limited basis to certain clients based on their needs and have minimal
experience in selling, implementing and providing the related services. Our
inability to successfully sell, implement or provide these and other new
services on a timely basis to existing or potential clients could harm our
growth strategy as well as our core operations. For example, potential new
clients may delay their purchase of our existing services to wait to purchase
Comprehensive Outsourcing and other potential new clients may choose services
offered by other companies. In addition, existing clients may postpone their
purchase of additional services from us in anticipation of Comprehensive
Outsourcing.

Failure to adapt to evolving technologies and standards will render our
offerings obsolete and harm our business.The technologies in which we have
invested to date are rapidly evolving and have short life cycles. This means
that we have to anticipate and rapidly adapt to technological changes. In
addition, our industry involves increasingly sophisticated and varied needs of
clients, frequent new service and feature introductions and emerging industry
standards. The introduction of services with new technologies and the
emergence of new industry standards and practices can render existing services
obsolete and unmarketable in a short period of time. Our future success will
depend in part on our ability to develop or acquire advanced technologies and
enhance our existing services with new features. We will also need to add new
services that address the changing needs of our clients and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. If we cannot meet these needs in a timely
manner, our business will suffer. In addition, several of our competitors
invest substantially greater amounts in research and development than we do,
which may allow them to introduce new services or features before we do and
therefore capture additional market share.

Our revenue and expenses vary seasonally, and our stock price may
fluctuate correspondingly.We face significant seasonality in our industry.
Our revenue has fluctuated dramatically from quarter to quarter. We realize
the largest percentage of annual revenue in our third and fourth fiscal
quarters, primarily due to new clients beginning services in the beginning of
the tax year (our third fiscal quarter) and higher interest income earned on
higher amounts of payroll tax funds invested. Our operating expenses typically
are higher as a percentage of revenue in the first and third fiscal quarters.
This results partly from our increasing personnel to acquire new clients and to
implement and provide services to these new clients, particularly a large
percentage of new clients that begin services in the third quarter. Seasonal
fluctuation in our revenue and expenses, especially unexpected fluctuation,
could cause volatility or a decrease in the price of our common stock

Major catastrophes and other similar problems may cause us to lose client
data and materially adversely interrupt our operations.We currently conduct
substantially all of our payroll and payroll tax processing at our headquarters
in Pleasanton, California. We divide the payroll printing and finishing
between our Pleasanton and Irvine, California facilities. The Irvine facility
serves both as an alternative processing center and a backup payroll center.
We conduct our Comprehensive Outsourcing operations in Bothell, Washington. We
do not have a benefits administration back-up facility. For each payroll
client, we establish a complete set of payroll data at our Pleasanton
processing center, as well as at the clients site. In the event of a disaster
in Pleasanton, each client would have the ability to process payroll checks
based on the data they have at their own site, if necessary. In addition, we
have developed business continuity plans for each of our mission-critical
business units. Our disaster recovery procedures, however, may not be
sufficient, and the payroll data recovered at the client site may not be
sufficient to allow the client to calculate and produce payroll in a timely
fashion.

Our operations depend on our ability to protect our computer systems
against damage from a major catastrophe (such as an earthquake or other natural
or man-made disaster), fire, power loss, security breach, telecommunications
failure or similar event. Our facilities in California may be subject to
electrical blackouts as a

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consequence of a shortage of available electrical power. If these
blackouts continue or increase in severity, they could disrupt the operations
of our affected facilities. The precautions we have taken to protect ourselves
from or minimize the impact of these and other events may be inadequate. Any
damage to our data centers, failure of telecommunications links or breach of
the security of our computer systems could result in an interruption of our
operations, including a loss of data. Our insurance may not cover these
losses.

The loss of key personnel may lead to loss of clients and proprietary
information.Our success depends on the performance of our senior management
and other key employees. The loss of the services of any senior management or
other key employees could harm our business. If one or more of our key
employees resigns to join or form a competitor, our business could suffer due
to the loss of personnel and any resulting loss of existing or potential
clients. If we lose any key personnel, we may be unable to prevent the
unauthorized disclosure or use of our technical knowledge, practices,
procedures or client lists by the former employee. Disclosure of this
information could harm our business.

Our success depends on our ability to compete effectively in the
marketplace.The market for our services is intensely competitive. It is also
subject to rapid change and significantly affected by new service introductions
and other market activities of industry participants. In payroll processing
and tax filing, we primarily compete with several public and private service
providers such as Automatic Data Processing, Inc. and Ceridian Corporation.
Many of these companies have longer operating histories, greater financial,
technical, marketing and other resources, greater name recognition and a larger
number of clients than we do. In addition, some of these companies offer more
services or features than we do and have processing facilities located
throughout the United States. We also compete with in-house employee services
departments and, to a lesser extent, banks and local payroll companies. With
respect to benefits administration services, we compete with insurance
companies, benefits consultants and other local benefits outsourcing companies.
We may also compete with companies that market related products and services
that may offer payroll or administrative services in the future. We have
experienced, and expect to continue to experience, competition from new
entrants into our markets. We have begun to see increased competition in
certain portions of our business from Big 5 accounting firms who market
complete outsourcing solutions to clients and then purchase payroll and other
services from us and our competitors. Increased competition from these and
other competitors will result in pricing pressures, loss of market share or
loss of clients, any of which could harm our business.

We believe the principal competitive factors affecting our market include
the following:



| |  |  | system functionality and performance;
| | - |  | -------------------------------------
|
| |  |  | system and service flexibility;      
|
| |  |  | breadth of service offering;         
|
| |  |  | client service;                      
|
| |  |  | reputation and experience; and       
|
| |  |  | service cost.                        

Our inability to compete successfully will harm our business and results
of operations. Additionally, a significant portion of our historic revenue
growth resulted from new client acquisition. A majority of our new clients
have historically come from our competitors. If we do not have the same
success in winning clients from our competitors in the future, we would have to
rely more on clients that are moving from in-house operations to outsourcing.
This could increase our sales timeframe and our customer acquisition costs.

Our success depends on our ability to manage growing and changing
operations.Our business has grown significantly in size and complexity over
the past five years. This growth has placed, and will continue to place,
significant demands on our management, systems, internal controls and financial
and physical resources. In order to meet these demands, we intend to continue
to hire new employees and open new offices to attract and support new clients.
We also plan to continue spending on research and development, invest in new
equipment and make other capital expenditures. In addition, we expect that we
will need to develop further our financial and managerial controls and
reporting systems and procedures to accommodate future growth. Our failure to
expand successfully in any of these areas in an efficient manner would harm our
business.

Changes in governmental policies could reduce the need for our service
offerings or otherwise harm our business.Our services, particularly tax
filing and benefits plan administration, depend upon government regulations
that continually change. Failure to timely implement corresponding changes to
our services and technology would harm our business and results of operations.
Changes in regulations could also reduce or eliminate the need for our services
and substantially decrease our revenue. In addition, since we derive a
significant portion of our revenue from interest earned from investing
collected but unremitted payroll tax funds, changes in policies relating to
withholding federal or state income taxes, reductions in the time allowed to
remit tax payments owed to government authorities, or tax cuts harm our
business and results of operations. The federal governments recent disaster
relief for taxpayers, which delays the due date for certain taxes, as well as
recent tax cuts and other measures approved by the federal

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government, could harm our business and results of operations by reducing the
amount of collected but unremitted payroll tax funds and delaying the
collection of, and correspondingly, the interest we would earn on these funds.

We may make errors and omissions in performing our services, which could
subject us to fines and harm our reputation.We have made errors and omissions
in the past and may make errors and omissions in performing our services. For
example, we may underpay taxes on behalf of our clients, or we may file
benefits plan forms late. In addition to client liability, governmental
authorities may impose large cash penalties on our errors and omissions. These
errors and omissions are often not identified for several years following the
provision of the services, and there may be a significant delay between the
time an error or omission occurs and when a penalty is imposed. To date,
penalties have not been significant. However, liabilities associated with
penalties for errors and omissions which occurred in the past and those that
may occur in the future could harm our business and results of operations. Our
reserves or insurance for any penalties may not adequately protect us. Errors
and omissions may also damage our reputation and could harm our relationships
with existing clients and our ability to gain new clients.

Our employees may violate our relationship of trust with our clients and
lead to lawsuits against us.We have access to confidential information and
to client funds. Actions taken by our employees in breach of our relationships
with our clients may damage the clients businesses. For example, if one or
more of our employees violates confidentiality agreements or misappropriate
funds, our clients may assert claims against us. Our fidelity bond and errors
and omissions insurance may not adequately cover claims like these. Claims of
these types could damage our client relationships and harm our business and
financial condition.

Acquisitions and investments, especially unsuccessful ones, could harm our
financial results.We have in the past and intend in the
future to make additional acquisitions and investments. Future acquisitions
could result in the issuance of dilutive equity securities, the incurrence of
debt or contingent liabilities. Furthermore, strategic acquisitions or
investments may not be successfully integrated into our existing operations, or
we may not realize the anticipated benefits. If unsuccessful, they could harm
our business and financial condition.

We rely on third party couriers, whose failure to deliver paychecks to our
clients would harm our business.We depend on third-party courier services to
deliver paychecks to clients. We do not have formal written agreements with any
of the courier services that we use. These courier services have failed in the
past and may fail in the future to pick up or deliver the paychecks in a timely
fashion. This failure could occur as a result of many factors, including
employee strikes, storms or other adverse weather conditions, earthquakes or
other natural or man-made disasters, logistical or mechanical failures or
accidents. Failure to deliver client paychecks in a timely manner could damage
our reputation and harm our business.

We face substantial competition in attracting experienced personnel, and
we may be unable to grow as planned if we cannot hire the right people.Our
success depends to a significant degree on our ability to attract and retain
experienced employees. We expect competition for experienced personnel to
continue. We have in the past and may in the future experience difficulty in
recruiting sufficient numbers of qualified personnel. In particular, our
ability to hire and train implementation employees is critical to our ability
to achieve our growth objectives. Our inability to attract and retain
experienced personnel as required could harm our business.

Failure to improve our systems to accommodate our geographic expansion
would harm our business.Our ability to achieve significant future revenue
growth will in large part depend on our ability to gain new clients throughout
the United States. Growth and expansion have placed and will continue to place
a strain on our operating and financial systems. To accommodate the increased
number of transactions and clients and the increased size of our operations, we
need to continue to implement and improve our systems on a timely basis.

We may not have taken all necessary steps to protect our intellectual
property.Our success depends in part upon our proprietary software technology.
We rely on a combination of contract, copyright and trade secret laws to
establish and protect our proprietary technology. We have no patents, patent
applications or registered copyrights. We distribute our services under
software license agreements that grant clients licenses to use our services and
contain various provisions protecting our ownership and the confidentiality of
the applicable technology. We generally enter into confidentiality agreements
with our employees and confidentiality and/or license agreements with existing
and potential clients. We also limit access to and distribution of our
software, documentation and other proprietary information. The steps taken to
protect our proprietary technology may not be adequate to deter
misappropriation. Even if they are, third-parties may develop similar or
competing technologies independently.

Claims from third parties relating to infringement of intellectual
property could harm our business.We cannot guarantee that our services and
technology do not infringe any existing patents, copyrights or other
proprietary rights of others. Third parties may assert infringement claims
against us in the future, which could require us to incur substantial costs of
defense and divert management attention. Any resulting liabilities could also
harm our business or results of operations.

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Implementation of
Staff Accounting Bulletin No. 101. Effective July 1,
2000, we adopted the Securities and Exchange
Commission (SEC) staff issued Staff Accounting Bulletin No.101 Revenue
Recognition in Financial Statements (SAB 101). During the fourth quarter of
FY2001 and retroactive to July 1, 2000, we changed our method of
accounting to recognize revenue from non-refundable, upfront fees for
implementation services, ratably over the contractual term or the expected term
of the customer relationship, which is generally three years, using the
straight-line method. Also, as a result of the adoption of SAB 101, we
now treat the incremental direct costs of installation as deferred charges
that are amortized to implementation expense using the straight-line method
over the same term as the related revenue. Previously, we recognized
non-refundable, upfront fees as revenue when the clients began services and
certain related direct costs when incurred, primarily in advance of revenues.
We believe the change in accounting principle is in accordance with
the guidance in SAB 101. The cumulative effect of the change on prior years
resulted in a decrease to the net loss of $410,000 ($0.02 per share), which is
included in net loss for the year ended June 30, 2001. The effect of the change
of implementing SAB 101 for the year ended June 30, 2001 was to increase net
loss before the cumulative effect of the accounting change by $1.4 million
($0.06 per share). The pro forma effect of adopting SAB 101 in prior years was
not material. We cannot be certain that we will be able to accurately predict
the impact of SAB 101 on future quarters, however, we expect that SAB 101 will
likely have an adverse effect on our revenue recognition and may have an adverse
effect on our results of operations. However, we do not expect SAB 101 to have
an impact on our cash flow.

Our stock price has fluctuated and is likely to continue to fluctuate.
The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could fluctuate in response to various
factors, including the following:



| |  |  | quarterly variations in operating results;                                          
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | announcements of technological innovations or new services by us or our competitors;
|
| |  |  | market conditions in the information services industry; and                         
|
| |  |  | changes in securities analysts estimates of our financial performance.             

Many of these factors are outside our control. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
and services companies. These fluctuations are sometimes unrelated to the
operating performance of these companies. The market price of our common stock
could decline as a result of these broad market fluctuations.

A handful of our stockholders have significant control over our company,
and their interests may differ from yours.As of June 30, 2001, our directors,
executive officers, and principal stockholders together controlled
approximately 30% of our voting stock. If these stockholders acted or voted
together, they would have the power to exercise a significant influence over
the election of our directors. They would also have significant control over
other matters requiring stockholder approval, including the approval of major
corporate transactions. In addition, this concentration of ownership may delay
or prevent a change in control of our company, even when a change may be in the
best interests of the stockholders. Furthermore, the interests of these
stockholders may not always coincide with the interests of our company or other
stockholders.

Holders of our preferred stock have rights senior to holders of our common
stock, including the right to receive dividends that will dilute the ownership
of holders of common stock.In August 2000, we sold 1,132,075 shares of 6.9%
redeemable convertible preferred stock. In the event of a merger or
acquisition, the holders of the preferred stock will receive $26.50 per share
before any amounts may be paid to holders of our common stock. The holders of
the preferred stock also will receive cumulative dividends at an annual rate of
6.9% in the form of additional shares of preferred stock. Therefore, the longer
our preferred stock is outstanding, the more dilution the holders of our common
stock will experience.

Our charter documents and Delaware law could make an acquisition of our
company difficult, even if an acquisition may benefit our stockholders.
Provisions of our certificate of incorporation, bylaws and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
benefit our stockholders. In particular, our certificate of incorporation
provides for three classes of directors. Each director in each class is elected
for a three-year term, and a different class is elected each year. These
provisions make it difficult for a third party to gain control of our board of
directors.

We recently adopted a preferred stock rights plan which has anti-takeover
effects.We recently entered into a preferred stock rights plan. The plan has
the anti-takeover effect of causing substantial dilution to a person or group
that attempts to acquire us on terms not approved by our board of directors.
The existence of the plan could limit the price that certain investors might be
willing to pay in the future for shares of our common stock and could
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable.

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Item 2. Properties

Our headquarters are located in Pleasanton, California and consist of
approximately 205,000 square feet of office space leased through April 2015,
and 29,000 square feet of office space leased through May 2011. We also
maintain five satellite offices, located as follows:



| |  | Irvine, California, a 14,000 square foot implementation and backup payroll facility, leased through May 2002;
|- |  | -------------------------------------------------------------------------------------------------------------



| |  | Bothell, Washington, a 45,000 square foot operations center housing our Comprehensive Outsourcing and benefits administration center, leased through May 2006;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Norcross, Georgia, a 27,000 square foot sales, implementation and operations center, leased through June 2004;                                                
| 
| |  | Franklin Township, New Jersey, a 5,000 square foot sales and implementation center, leased through May 2006; and                                              
| 
| |  | Dayton, Ohio, a 1,000 square foot field sales office, leased through September 2001.                                                                          

We believe our existing facilities adequately serve our current needs. We
also believe we can lease additional facilities to meet future needs.




Item 3. Legal Proceedings

We face routine litigation incidental to our business. In the opinion of
management, no current or pending lawsuits, either individually or in the
aggregate, are likely to materially harm our financial condition, results of
operations or cash flows.




Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 2001.

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PART II.




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

(a)  Our Common Stock is quoted on the Nasdaq National Market under the
symbol PRBZ. The following table sets forth, for the fiscal periods
indicated, the high and low sales prices of our Common Stock as reported by the
Nasdaq National Market.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|FY2000:        |  |      |       |     |  |   |       | 
|              
|              
|              
|              
|First Quarter  |  | $    | 37.00 |     |  | $ | 25.25 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 39.00 |     |  | $ | 18.25 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 35.00 |     |  | $ | 21.50 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 28.88 |     |  | $ | 20.00 | 
|              
|FY2001:        |  |      |       |     |  |   |       | 
|              
|              
|              
|              
|First Quarter  |  | $    | 31.30 |     |  | $ | 17.25 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 35.69 |     |  | $ | 25.56 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 33.78 |     |  | $ | 20.06 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 26.55 |     |  | $ | 20.50 | 

On August 27, 2001, there were 4,310 beneficial holders of our Common
Stock. The last reported sale price per share of our Common Stock on September
24, 2001 on the Nasdaq National Market was $17.19.

On August 1, 2000, we authorized, issued and sold 1,132,075 shares of 6.9%
Redeemable Convertible Preferred Stock (Preferred Stock)
to General Atlantic Partners, LLC (GAP) and certain
affiliates of GAP at $26.50 per share and received approximately $30 million in
consideration.

We have never declared or paid any cash dividends on our capital stock.
We currently expect to retain future earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future. In
addition, our existing line of credit agreement prohibits the payment of cash
dividends without the lenders prior approval. If we do pay cash dividends to
the holders of common stock, we are required to provide a corresponding
adjustment to the conversion rate of our outstanding Preferred Stock.

The holders of Preferred Stock are entitled to receive cumulative
dividends at an annual rate of 6.9% in the form of additional shares of
Preferred Stock. The payment of these stock dividends commenced on October 1,
2000. We are obligated to pay these stock dividends quarterly on the first day
of October, January, April and July.

On August 1, 2001, our Board of Directors adopted a stockholders rights
plan. Under the plan, we issued a dividend of one right for each share of our
common stock held by stockholders of record as of the close of business on
August 30, 2001. The plan is designed to assure our stockholders fair value in
the event of a future unsolicited business combination or similar transaction.
Each right will initially entitle stockholders to purchase a fractional share
of our Series A Participating Preferred Stock for $170.00. However, the rights
are not immediately exercisable and will become exercisable only upon the
occurrence of certain events. Upon the occurrence of these events, unless
redeemed for $0.001 per right, the rights will become exercisable by holders,
other than rights held by an unsolicited third party acquirer, for our shares
or shares of the third party acquirer having a value of twice the rights
then-current exercise price.

(b)  We raised net proceeds of $80.7 million in connection with our
secondary public equity offering, commenced September 25, 1998 pursuant to
the registration statement (No. 333-60745) declared effective by the Securities and
Exchange Commission on September 25, 1998. As of June 30, 2001, none of these
net proceeds remain. During fiscal year 2001, we used $2.5 million to fund
operations and $25.1 million to fund investing activities.

15



---



##### Table of Contents






Item 6. Selected Financial Data

|                                                               |  |                     |         |      |  |      |         |      |  |      |         |   |  |   |           |   |  |   |           |  
|-------------------------------------------------------------- |  | ------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | --------- | - |  | - | --------- | -
|                                                               |  | Year ended June 30,
|                                                               |  |                    
|                                                               |  | 1997                |         | 1998 |  | 1999 |         | 2000 |  | 2001
|                                                               |  |                     |         |      |  |      |         |      |  |     
|Total revenue                                                  |  | $                   | 27,675  |      |  | $    | 46,534  |      |  | $    | 70,145  |   |  | $ | 104,072   |   |  | $ | 149,861   |  
|                                                              
|                                                              
|                                                              
|                                                              
|Loss from operations **                                        |  | $                   | (7,495  | )    |  | $    | (9,984  | )    |  | $    | (18,393 | ) |  | $ | (16,832   | ) |  | $ | (36,547   | )
|                                                              
|                                                              
|                                                              
|                                                              
|Net loss                                                       |  | $                   | (8,643  | )    |  | $    | (9,840  | )    |  | $    | (16,109 | ) |  | $ | (13,917   | ) |  | $ | (33,191   | )
|                                                              
|                                                              
|                                                              
|                                                              
|Net loss per share */ ***                                      |  | $                   | (0.78   | )    |  | $    | (0.60   | )    |  | $    | (0.77   | ) |  | $ | (0.60     | ) |  | $ | (1.45     | )
|                                                              
|                                                              
|                                                              
|                                                              
|Shares used in computing basic and
diluted net loss per share* |  |                     | 11,079  |      |  |      | 16,535  |      |  |      | 21,033  |   |  |   | 23,229    |   |  |   | 23,840    |  
|                                                              
|                                                              
|                                                              
|                                                              
|Gross margin ****                                              |  | $                   | 13,763  |      |  | $    | 22,484  |      |  | $    | 35,636  |   |  | $ | 54,694    |   |  | $ | 73,182    |  
|                                                              
|                                                              
|                                                              
|                                                              
|Operating profit before client
acquisition and merger costs    |  | $                   | 4,757   |      |  | $    | 8,836   |      |  | $    | 14,969  |   |  | $ | 26,930    |   |  | $ | 30,013    |  
|                                                              
|                                                              
|                                                              
|                                                              
|Total assets                                                   |  | $                   | 201,499 |      |  | $    | 377,475 |      |  | $    | 710,424 |   |  | $ | 1,182,221 |   |  | $ | 1,681,126 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Payroll tax funds invested                                     |  | $                   | 177,626 |      |  | $    | 332,667 |      |  | $    | 580,452 |   |  | $ | 1,054,903 |   |  | $ | 1,511,124 |  
|                                                              
|                                                              
|                                                              
|                                                              
|Redeemable convertible preferred stock                         |  | $                   |        |      |  | $    | 2,538   |      |  | $    |        |   |  | $ |          |   |  | $ | 31,246    |  



---

|*    |  | For 1997 and 1998, share data is pro forma and amounts have been restated
to reflect acquisition.                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|**   |  | For 1999 net loss includes a $3.5 million charge for merger related
costs. (See Note 11 of Notes to Consolidated Financial Statements.)
|    
|    
|    
|    
|***  |  | For 2001 net loss per share includes $0.02 resulting from a cumulative
effect of change in accounting principle.                       
|    
|    
|    
|    
|**** |  | Gross margin is defined as revenue less cost of providing services.                                                                    




Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The information required is set forth in our Annual Report under the
heading Managements Discussion and Analysis of Financial Condition and
Results of Operations and is incorporated herein by reference.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We invest funds from collected but unremitted payroll tax funds. In
FY2001, we held certain derivative-based products to mitigate interest rate
fluctuation risk. In FY2000 and 2001, we entered into various interest rate
swap agreements with a financial institution. The purpose of these agreements
is to convert a portion of the interest we earn from collected but unremitted
payroll tax funds from a variable to a fixed rate basis. We typically enter
into hedge instruments with notional amounts that cover the majority of our
average daily balance of the funds invested. Based on our derivative
positions at June 30, 2001, we reported a net asset of $14.2 million for the
fair value of our derivative portfolio and a corresponding offset in other
comprehensive income. In FY2001, the fair value of our derivative based
products increased as a result of the downward trend in interest rates
throughout the year. Assuming a hypothetical decrease in interest rates of 100
basis points given the June 30, 2001 derivative positions, the resulting
potential increases in fair value of the derivatives would be in the range of
$9 million to $11 million. Conversely, a corresponding increase in interest
rates would result in a comparable decrease in fair value. This hypothetical
decrease or increase in the fair value of the portfolio would be recorded as an
adjustment to the portfolios recorded value, with an offsetting amount
recorded as other comprehensive income (loss) in the statement of stockholders
equity, with no related or immediate impact to the results of operations.

The collateral exposure associated with our various interest rate swap
agreements are limited by interest rate caps we hold. As of
June 30, 2001, we
held two interest rate cap agreements with expiration dates of April 2002 and
January 2003, both with cap rates of 8.0%. The aggregate fair value of these
cap agreements at June 30, 2001 was $57,000.

Invested funds are primarily comprised of money market mutual funds and
other debt instruments carrying maturities of one to three days. The portion
of the invested funds that would be subject to changes in fair value, including
commercial paper, primarily carry maturities of less than 30 days and
represent less than 9% of the overall amount of invested funds. Changes in
prevailing interest rates can cause corresponding changes in the fair value of
our invested funds. Due to the composition of our invested funds, primarily
terms, instruments, and duration, changes in interest rates would not cause
material changes in the overall fair value of our invested funds. Our
investment policy guidelines limit the size and duration of our individual
investments.




Item 8. Financial Statements and Supplementary Data

The financial statements required are identified in Item 14(a), and are
set forth in our Annual Report and incorporated herein by reference.
Supplementary data required is set forth in our Annual Report under Quarterly
Financial Data (Unaudited) and is incorporated herein by reference.




Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There has been no change in accountants or reported disagreements on
accounting principles or practices or financial statement disclosures.

16



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##### Table of Contents






PART III




Item 10. Directors and Executive Officers of the Registrant

The following table sets forth certain information with respect to our
executive officers and directors as of June 30, 2001.

|                         |  |     |    |          |  |                                                                         
|------------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Thomas H. Sinton         |  |     | 53 |          |  | Chairman of the Board, President, Chief Executive Officer, Director     
|                        
|                        
|                        
|                        
|Jeffrey M. Bizzack       |  |     | 41 |          |  | Executive Vice President, Sales and Services                            
|                        
|                        
|                        
|                        
|Jerry W. Blalock         |  |     | 52 |          |  | Executive Vice President and Group General Manager                      
|                        
|                        
|                        
|                        
|Steven E. Klei           |  |     | 41 |          |  | Executive Vice President, Finance, Chief Financial Officer and
Secretary
|                        
|                        
|                        
|                        
|William T. Clifford(1)   |  |     | 55 |          |  | Director                                                                
|                        
|                        
|                        
|                        
|David C. Hodgson(2)      |  |     | 44 |          |  | Director                                                                
|                        
|                        
|                        
|                        
|Ronald W. Readmond(1)(2) |  |     | 58 |          |  | Director                                                                
|                        
|                        
|                        
|                        
|Thomas P. Roddy(1)       |  |     | 66 |          |  | Director                                                                



---

|(1) |  | Member of the Audit Committee.       
|--- |  | -------------------------------------
|   
|   
|   
|   
|(2) |  | Member of the Compensation Committee.

MR. SINTON, our founder, has served as one of our directors since we
incorporated in October 1984. Since March 1993, Mr. Sinton has served as our
President and Chief Executive Officer. Since December 1996, and for a period
between September 1989 and February 1993, Mr. Sinton served as Chairman of the
Board. Mr. Sinton holds a B.A. degree in English Literature, magna cum laude,
from Harvard University, an M.S. degree in Food Science from the University of
California at Davis and an M.B.A. degree from Stanford University. Mr. Sinton
received a Fulbright Fellowship to study at the University of Vienna in Vienna,
Austria.

MR. BIZZACK has served as our Executive Vice President, Sales and Services
since February 2000. From July 1993 to February 2000, Mr. Bizzack served as
our Senior Vice President, Sales and from October 1992 to July 1993, Mr.
Bizzack served as our Vice President, Sales. From October 1988 to October 1992,
Mr. Bizzack served as our District Sales Manager. Mr. Bizzack attended Saint
Marys College.

MR. BLALOCK has served as our Executive Vice President and General Manager
since February 2000. From August 1999 to February 2000, Mr. Blalock served as
our Senior Vice President, Operations and General Group Manager and as Senior
Vice President and General Manager, Payroll and Tax from August 1998 to August
1999. From October 1996 to August 1998, Mr. Blalock served as Vice President
and Regional General Manager for Anacomp Corporation, a provider of document
imaging services. From January 1995 to October 1996, Mr. Blalock served as
President and founder of the Axion Group, a provider of resume scanning
services. Mr. Blalock attended the University of La Verne.

MR. KLEI has served as our Executive Vice President, Finance since
February 2000. Mr. Klei served as our Senior Vice President, Finance from
August 1997 to February 2000. Mr. Klei has served as our Chief Financial
Officer since July 1995 and as our Secretary since August 1996. Mr. Klei served
as our Vice President, Finance from July 1995 to August 1997. Mr. Klei holds a
B.S. degree in Accounting from Central Michigan University and is a Certified
Public Accountant.

MR. CLIFFORD has served as one of our directors since August 1997. Mr.
Clifford has served as a Managing Member of New Vista Capital, a venture
capital firm, from April 2000 to present. Mr. Clifford also serves as Chairman
of Authentor Systems, Inc. a security management and authentication software
company. Mr.
Clifford served as President and Chief Executive Officer of Warrantycheck.com,
an internet provider, from November 1999 to April 2000. From January 1999 to
October 1999, Mr. Clifford served as the Chief Executive Officer of Gartner
Group, Inc., a provider of information and analysis on the technology
industries, and as the President there since October 1997. From April 1995 to
January 1999, he was the Chief Operating Officer of Gartner Group, Inc., and he
was Executive Vice President, Operations there from October 1993 to September
1997. From December 1988 to October 1993, Mr. Clifford held various positions
at Automatic Data Processing, Inc., including President of National Accounts
and Corporate Vice President, Information Services. Mr. Clifford holds a B.A.
degree in Economics from the University of Connecticut.

MR. HODGSON has served as one of our directors since March 1997. Mr.
Hodgson is a Managing Member of GAP, a private equity investment firm that
invests in Internet and information technology on a global basis, and has been
with GAP or its predecessor since 1982. Mr. Hodgson is also a director of
Atlantic Data Services, Inc., a provider of

17



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##### Table of Contents



professional computer services for the banking industry, ScreamingMedia, Inc.,
a developer of proprietary technologies for the aggregation and distribution of
digital content over the Internet, and several other privately-held information
technology companies, in which GAP or one of its affiliates is an investor. Mr.
Hodgson holds an A.B. degree in Mathematics from Dartmouth College and an
M.B.A. degree from Stanford University.

MR. READMOND has served as one of our directors since February 1997. From
January 2001 to June 2001, Mr. Readmond served as a director and Chief
Executive Officer of TruMarkets Inc., an automated bond trading company. Mr.
Readmond previously served as a director and Vice Chairman of Wit Soundview
Group, an investment bank, from June 2000 to October 2000 and as President and
Chief Operating Officer there from June 1998 to June 2000. From August 1989
to December 1996, Mr. Readmond held various positions at Charles Schwab & Co.
Inc., most recently serving as Vice Chairman. Mr. Readmond holds a B.A. degree
in Economics from Western Maryland College.

MR. RODDY has served as one of our directors since 1992. Since 1988, Mr.
Roddy has served as President and Chief Executive Officer of Lafayette
Investments Inc., an investment banking and investment advisory company. Mr.
Roddy holds a B.S. degree in Biochemistry from Villanova University.

Mr. Hodgson was nominated and elected as a Director pursuant to an
agreement entered into between us, GAP and Thomas H. Sinton and his affiliates,
in connection with the sale of our preferred stock to GAP. Under such
agreement, GAP and Mr. Sinton and his affiliates agreed to vote their shares to
elect one director to the Board of Directors designated by GAP until the third
annual meeting of stockholders after our initial public offering.

Under the terms of the August 2000 investment by affiliates of GAP in our
Preferred Stock, as long as GAP or its affiliates own a majority of the
Preferred Stock, the holders of the Preferred Stock are entitled to elect one
director to our Board of Directors. As of June 30, 2001, Mr. Hodgson, a
Partner of GAP, is a member of our current Board of Directors.

The Board of Directors presently consists of five members who hold office
until the annual meeting of stockholders or until a successor is duly elected
and qualified. The Board of Directors is divided into three classes. One class
of directors is elected annually and its members hold office for a three-year
term or until their successors are duly elected and qualified, or until their
earlier removal or resignation. The number of directors may be changed by a
resolution of the Board of Directors. Executive officers are elected by the
Board of Directors. There are no family relationships among any of our
directors and executive officers.

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the engagement of
auditors and reviews the results and scope of the audit and other services
provided by our independent auditors, reviews and evaluates our control
functions and reviews our investment policy. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for our employees and consultants. The Compensation Committee also
administers our 1996 Stock Option Plan and 1997 Employee Stock Purchase Plan.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors, and persons who own more than 10% of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than 10% stockholders are required by the
Securities and Exchange Commission rules to furnish us with copies of all forms
they file. Based solely on our review of the copies of such forms received by
us and written representations from certain reporting persons, we believe that,
during fiscal year 2001, all Section 16(a) filing requirements applicable to
our executive officers, directors and 10% stockholders were satisfied, except
that the Form 3 for Glenda Citragno, Chief Accounting Officer, for August 2000 and
Form 4 for January and April 2001, Form 5 for David C. Hodgson, Director, for
October 2000 and for each of GapStar, LLC and General Atlantic Partners 73,
L.P., both 10% stockholders, for March 2001 were filed late.




Item 11. Executive Compensation

The information required is set forth in our definitive Proxy Statement in
the sections entitled Executive Officer Compensation and Election of Class I
Directors and is incorporated herein by reference.




Item 12. Security Ownership

The information required is set forth in our definitive Proxy Statement in
the section entitled Security Ownership of Certain Beneficial Owners and
Management and is incorporated herein by reference.




Item 13. Certain Relationships and Related Transactions

The information required is set forth in our definitive Proxy Statement in
the section entitled Certain Transactions and is incorporated herein by
reference.

18



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##### Table of Contents






PART IV




Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.



|(a) |  | The following documents are filed as a part of this Report:
|--- |  | -----------------------------------------------------------



| | 1. |  | Financial Statements:The following Consolidated Financial
Statements of the Registrant and Report of Independent Auditors, are incorporated by reference from the 2001
Annual Report to Stockholders:                                                                            
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Consolidated Balance Sheets as of June 30, 2000 and 2001                                                                                                                                                                                                                         
|
| |    |  | Consolidated Statements of Operations for the years ended June 30,
1999, 2000 and 2001                                                                                                                                                                                           
|
| |    |  | Consolidated Statements of Stockholders Equity for the years
ended June 30, 1999, 2000 and 2001                                                                                                                                                                                 
|
| |    |  | Consolidated Statements of Cash Flows for the years ended June 30,
1999, 2000 and 2001                                                                                                                                                                                           
|
| |    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                       
|
| |    |  | Report of Independent Auditors                                                                                                                                                                                                                                                   
|
| | 2. |  | Financial Statement Schedule:The following financial
statement schedule of the Registrant for the fiscal years ended June
30, 1999, 2000 and 2001 is filed as part of this Report and should
be read in conjunction with the consolidated Financial Statements of
the Registrant.
|
| |    |  | Schedule II Valuation Allowance Schedule S-1                                                                                                                                                                                                                                     
|
| |    |  | Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.                                                      
|
| | 3. |  | Exhibits:The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedule are
filed as part of, or incorporated by reference into, this Report.                                                                                  



|(b) |  | Reports of Form 8-K.                                                     
|--- |  | -------------------------------------------------------------------------
|   
|    |  | No reports on Form 8-K were filed during the quarter ended June 30, 2001.
|   
|(c) |  | Exhibits:See Item (a) and (b) above.                                     
|   
|(d) |  | Financial Statement Schedules:See Item (a) above.                        

19



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##### Table of Contents






Signatures

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Pleasanton, state of California, on this 28th day of September, 2001.

| |                            |                                      
| | -------------------------- | -------------------------------------
| | ProBusiness Services, Inc.
|
| | By:                        | /s/  THOMAS H. SINTON                
| |                            | President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

|                        |  |                                                                   |  |                   
|----------------------- |  | ----------------------------------------------------------------- |  | ------------------
|SIGNATURE               |  | TITLE                                                             |  | DATE              
|                        |  |                                                                   |  |                   
|                       
|/s/ THOMAS H. SINTON    |  | President, Chief Executive Officer and
          Director         |  | September 28, 2001
|                        |  | (Principal Executive Officer)                                     |  |                   
|Thomas H. Sinton        |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ STEVEN E. KLEI      |  | Senior Vice President, Finance,
          Chief Financial Officer |  | September 28, 2001
|                        |  | and Secretary (Principal Financial and Accounting Officer)        |  |                   
|Steven E. Klei          |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ GLENDA M. CITRAGNO  |  | Vice President, Finance and Chief Accounting
          Officer    |  | September 28, 2001
|                        |  |                                                                   |  |                   
|Glenda M. Citragno      |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ WILLIAM T. CLIFFORD |  | Director                                                          |  | September 28, 2001
|                        |  |                                                                   |  |                   
|William T. Clifford     |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ DAVID C. HODGSON    |  | Director                                                          |  | September 28, 2001
|                        |  |                                                                   |  |                   
|David C. Hodgson        |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ RONALD W. READMOND  |  | Director                                                          |  | September 28, 2001
|                        |  |                                                                   |  |                   
|Ronald W. Readmond      |  |                                                                   |  |                   
|                        |  |                                                                   |  |                   
|/s/ THOMAS P. RODDY     |  | Director                                                          |  | September 28, 2001
|                        |  |                                                                   |  |                   
|Thomas P. Roddy         |  |                                                                   |  |                   

20



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##### Table of Contents



SCHEDULE II

ProBusiness Services, Inc.
(In thousands)

|                             |  |                     |        |      |  |      |        |  |  |   |        | 
|---------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|Valuation Allowance          |  |                     |        |      |  |      |        |  |  |   |        | 
|                             |  |                     |        |      |  |      |        |  |  |   |        | 
|                             |  | Year ended June 30,
|                             |  |                    
|Deferred Tax Assets:         |  | 1999                |        | 2000 |  | 2001
|                             |  |                     |        |      |  |     
|Balance at beginning of year |  | $                   | 10,864 |      |  | $    | 17,829 |  |  | $ | 23,476 | 
|                            
|                            
|                            
|                            
|Additions                    |  |                     | 6,965  |      |  |      | 5,647  |  |  |   | 7,521  | 
|                            
|                            
|                            
|                            
|Reductions                   |  |                     |       |      |  |      |       |  |  |   |       | 
|                            
|                            
|                            
|                            
|Balance at end of year       |  | $                   | 17,829 |      |  | $    | 23,476 |  |  | $ | 30,997 | 

|                                 |  |                     |     |      |  |      |       |  |  |   |       | 
|-------------------------------- |  | ------------------- | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                 |  | Year ended June 30,
|                                 |  |                    
|Allowance for Doubtful Accounts: |  | 1999                |     | 2000 |  | 2001
|                                 |  |                     |     |      |  |     
|Balance at beginning of year     |  | $                   | 443 |      |  | $    | 816   |  |  | $ | 1,685 | 
|                                
|                                
|                                
|                                
|Additions                        |  |                     | 397 |      |  |      | 990   |  |  |   | 704   | 
|                                
|                                
|                                
|                                
|Reductions                       |  |                     | 24  |      |  |      | 121   |  |  |   | 421   | 
|                                
|                                
|                                
|                                
|Balance at end of year           |  | $                   | 816 |      |  | $    | 1,685 |  |  | $ | 1,968 | 

S-1



---



##### Table of Contents






Index to Exhibits

|         |  |        |        |                     |  |                                                                                                                                                                                                                                                                           |  |  |  | 
|-------- |  | ------ | ------ | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Footnote |  | Number |        | Exhibit Description |  |                                                                                                                                                                                                                                                                           |  | 
|         |  |        |        |                     |  |                                                                                                                                                                                                                                                                           |  | 
|(1)      |  |        | 2.1    |                     |  | Agreement and Plan of Reorganization, dated May 23, 1996, between Registrant and Dimension
Solutions.                                                                                                                                                                    
|        
|        
|        
|        
|(1)      |  |        | 2.2    |                     |  | Stock Acquisition Agreement, dated January 1, 1997, between Registrant and BeneSphere
Administrators, Inc.                                                                                                                                                               
|        
|        
|        
|        
|(4)      |  |        | 2.3    |                     |  | Agreement and Plan of Reorganization, dated as of April 27, 1999, among Registrant, Runway
Acquisition Corp., Clemco, Inc. and certain other parties.                                                                                                                    
|        
|        
|        
|        
|(2)      |  |        | 3.1    |                     |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                                                                                       
|        
|        
|        
|        
|(1)      |  |        | 3.2    |                     |  | Bylaws of Registrant.                                                                                                                                                                                                                                                    
|        
|        
|        
|        
|(1)      |  |        | 4.1    |                     |  | Specimen Common Stock Certificate of Registrant.                                                                                                                                                                                                                         
|        
|        
|        
|        
|(1)      |  |        | 4.2    |                     |  | Amended and Restated Registration Rights Agreement, dated March 12, 1997, between Registrant,
General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P. and certain stockholders
of Registrant.                                                                
|        
|        
|        
|        
|(6)      |  |        | 4.2(a) |                     |  | Amendment to Amended and Restated Registration Rights Agreement, dated August 1, 2000, between
Registrant, General Atlantic Partners 39, L.P., GAP Coinvestment Partners, L.P., General
Atlantic Partners 70, L.P., GAP Coinvestment Partners II, L.P. and GapStar, LLC. 
|        
|        
|        
|        
|(1)      |  |        | 4.6(a) |                     |  | Warrant Purchase Agreement, dated November 14, 1996, between Registrant and certain purchasers.                                                                                                                                                                          
|        
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|(1)      |  |        | 4.6(b) |                     |  | Warrant to Purchase Series E Preferred Stock, dated July 31, 1996, between Registrant and T.J.
Bristow and Elizabeth S. Bristow.                                                                                                                                         
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|(1)      |  |        | 4.6(c) |                     |  | Warrant to Purchase Series E Preferred Stock, dated November 14, 1996, between Registrant and
SDK Incorporated.                                                                                                                                                          
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|(4)      |  |        | 4.9    |                     |  | Waiver and Amendment, dated as of April 27, 1999, among Registrant, General Atlantic Partners
39, L.P., GAP Coinvestment Partners, L.P. and certain stockholders of Registrant.                                                                                          
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|(4)      |  |        | 4.10   |                     |  | Registration Rights Agreement, dated as of April 27, 1999, between Registrant and certain
stockholders of Registrant.                                                                                                                                                    
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|(5)      |  |        | 4.11   |                     |  | Certificate of Designation of 6.9% Senior Redeemable Convertible Preferred Stock dated August
1, 2000.                                                                                                                                                                   
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|(7)      |  |        | 4.12   |                     |  | Preferred Stock Rights Agreement, dated as of August 8, 2001, between Registrant and Wells
Fargo Bank, MN N.A., including the Certificate of Designation, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B and C, respectively.
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|(5)      |  |        | 10.1   |                     |  | 6.9% Senior Redeemable Convertible Preferred Stock Purchase Agreement, dated as of August 1,
2000, between Registrant and General Atlantic Partners 70, L.P., GAP Coinvestment Partners II,
L.P. and GapStar, LLC.                                                       
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|(3)      |  |        | 10.28  |                     |  | Sublease agreement, dated December 9, 1998, between Registrant and Maritz, Inc.                                                                                                                                                                                          
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|         |  |        | 13.1   |                     |  | Certain sections
of Annual Report to Stockholders for the fiscal year ended June 30, 2001,
expressly incorporated herein by reference.                                                                                                                                   
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|         |  |        | 23.1   |                     |  | Consent and Report of Independent Auditors.                                                                                                                                                                                                                              
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|(4)      |  |        | 99.1   |                     |  | Press Release of Registrant dated April 27, 1999.                                                                                                                                                                                                                        



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|(1) |  | Incorporated by reference to the Registrants Registration Statement on
Form S-1, as amended (File No. 333-23189), declared effective on September
18, 1997.                 
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|(2) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-8 (File No. 333-37129) filed with the Securities and Exchange
Commission on October 3, 1997.
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|(3) |  | Incorporated by reference from the Registrants report on Form 10-Q for
the period ended December 31, 1998.                                                                  
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|(4) |  | Incorporated by reference from the Registrants report on Form 8-K filed
with the Securities and Exchange Commission on May 12, 1999.                                        
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|(5) |  | Incorporated by reference from the Registrants report on Form 8-K filed
with the Securities and Exchange Commission on August 16, 2000.                                     
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|(6) |  | Incorporated by reference from the Registrants report on Form 10-K filed
with the Securities and Exchange Commission on September 28, 2000.                                 
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|(7) |  | Incorporated by reference from the Registrants report on Form 8-K filed
with the Securities and Exchange Commission on August 17, 2001.