UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q



                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 1997


                        Commission file number 000-23343


                        NovaCare Employee Services, Inc.
             (Exact name of registrant as specified in its charter)

         Delaware                                         23-2866146
(State of incorporation)                    (I.R.S. Employer Identification No.)

2621 Van Buren Avenue, Norristown, PA                        19403
(Address of principal executive office)                   (Zip code)

                  Registrant's telephone number: (610) 650-4700


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[ ]


*     The Company has been subject to filing  requirements  under the Securities
      and Exchange Act of 1934, as amended,  since  November 11, 1997,  the date
      its initial public offering was consummated.

As of January 31, 1998, NovaCare Employee Services, Inc. had 27,116,079 shares
of common stock, $.01 par value, outstanding.



<PAGE>








              NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

                 FORM 10-Q - QUARTER ENDED DECEMBER 31, 1997


                                    INDEX


Part No.   Item No.            Description                          Page No.

   I                   FINANCIAL INFORMATION

               1       Financial Statements
                       -  Condensed Consolidated Balance
                          Sheets as of December 31, 1997
                          and June 30, 1997                             1

                       -  Condensed Consolidated Statements
                          of Operations for the Three Months
                          Ended December 31, 1997 and 1996              2

                       -  Condensed Consolidated Statements
                          of Operations for the Six Months
                          Ended December 31, 1997 and 1996              3

                       -  Condensed Consolidated Statements
                          of Cash Flows for the Six Months
                          Ended December 31, 1997 and 1996              4

                       -  Consolidated Statement of
                          Shareholders Equity for the Six
                          Months Ended December 31, 1997                5

                       Notes to Condensed Consolidated 
                       Financial Statements                            6-11

               2       Management's Discussion and
                       Analysis of Financial Condition and
                       Results of Operations                          12-17

  II                   OTHER INFORMATION

               6       Exhibits and Reports on Form 8-K                18

                       Signature                                       19










                                      i
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                   As of December 31, 1997 and June 30, 1997
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                     December 31,    June 30,
                                                         1997          1997
                                                     ------------   ------------
ASSETS                                                (Unaudited)   (See Note 1)
Current assets:
<S>                                                         <C>            <C>     
  Cash and cash equivalents .......................  $     5,860    $     1,782
  Accounts receivable:
     Related party ................................       37,129         27,607
     Unbilled .....................................        6,903          7,215
     Third parties, net of allowance for doubtful
      accounts at December 31, 1997 and at June 30,
      1997 of $94 and $26, respectively............        9,537          1,910
  Prepaid assets ..................................        2,268            567
  Deferred income taxes ...........................          643            296
  Other current assets ............................          902            502
                                                     ------------    -----------
     Total current assets .........................       63,242         39,879
Property and equipment, net .......................        4,005          1,326
Excess cost of net assets acquired, net ...........       71,632         53,691
Other assets, net .................................        1,128          1,102
                                                      ============   ===========
                                                      $   140,007    $   95,998
                                                      ============   ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of financing arrangements........   $     4,969    $      298
  Accounts payable and accrued expenses............         7,026         6,172
  Accrued salaries, wages and payroll taxes........        43,886        28,159
  Current portion of accrued workers' compensation 
  and health claims................................        10,063         5,423
  Note payable to related party....................            --        28,382
  Current portion of deferred purchase price       
    obligations....................................         2,733        18,905
  Income taxes payable.............................         3,115         1,382
                                                      ------------   -----------
     Total current liabilities.....................        71,792        88,721
  Financing arrangements, net of current portion...         1,133         1,068
  Accrued workers' compensation and health claims,    
    net of current portion.........................         3,813         1,910
  Deferred purchase price obligations, net of      
    current portion................................         5,856           856
  Other............................................           498           411
                                                      ------------  ------------
     Total liabilities.............................        83,092        92,966
Mandatorily redeemable common stock................            --         2,731
Commitments and contingencies......................            --            --
Shareholders' equity:
  Preferred stock, $.01 par value; authorized 1,000
   shares; no shares issued or outstanding..........           --            --
  Common stock, $.01 par value; authorized 60,000
   shares; issued 27,116 shares at December 31, 1997
   and 19,193 shares at June 30, 1997...............          271           192
  Additional paid-in capital........................       55,932         1,189
  Retained earnings.................................          871            --
                                                      ------------  ------------
                                                           57,074         1,381
  Less: Common stock in treasury (at cost), 563      
   shares at June 30, 1997..........................          --         (1,080)
      Deferred compensation, net....................        (159)           --
                                                      ------------  ------------
      Total shareholders' equity....................       56,915           301
                                                      ------------  ------------
                                                      $   140,007   $    95,998
                                                      ============  ============
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

                                      1


<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                      For The Three Months Ended
                                                             December 31,
                                                      --------------------------
                                                         1997           1996
                                                      -----------    -----------
Revenues:
<S>                                                        <C>           <C>     
  Related party ..................................    $  189,986     $       --
  Third parties ..................................       112,765         10,894
                                                      ----------     -----------
     Total revenues ..............................       302,751         10,894
Direct Costs:
  Related party:
     Salaries, wages and employment taxes of 
       worksite employees.........................       174,759             --
     Healthcare and workers' compensation,
       state unemployment and other...............        10,551             --
  Third parties:
     Salaries, wages and employment taxes of      
     worksite employees...........................        94,812          9,082
     Healthcare and workers' compensation,
      state unemployment and other................        13,217            970
                                                      ----------     -----------
      Gross profit ...............................         9,412            842
Selling, general and administrative expenses .....         6,456            660
Provision for uncollectible accounts .............            30              1
Amortization of excess cost of net assets 
  acquired........................................           639             27
                                                      ----------     -----------
     Income from operations ......................         2,287            154
Investment income ................................            59              4
Interest expense .................................           (57)            --
Interest expense--related party ..................          (197)           (34)
                                                      ----------     -----------
      Income before income taxes .................         2,092            124
Income taxes .....................................           973             63
                                                      ----------     -----------

     Net income ..................................    $    1,119     $       61
                                                      ==========     ===========
     Net income per share - basic ................    $      .05     $       --
                                                      ==========     ===========
     Net income per share - assuming dilution ....    $      .05     $       --
                                                      ==========     ===========
</TABLE>


















The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.



                                      2


<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                       For The Six Months Ended
                                                              December 31,
                                                      --------------------------
                                                         1997           1996
                                                      ----------     -----------
Revenues:
<S>                                                        <C>           <C>     
  Related party ..................................    $  366,078     $       --
  Third parties ..................................       203,430         10,894
                                                      ----------     -----------
     Total revenues ..............................       569,508         10,894
Direct Costs:
  Related party:
     Salaries, wages and employment taxes of 
       worksite employees.........................       336,196             --
     Healthcare and workers' compensation, 
       state unemployment and other...............        21,240             --
  Third parties:
     Salaries, wages and employment taxes of 
       worksite employees.........................       175,875          9,082
     Healthcare and workers' compensation,
       state unemployment and other...............        18,457            970
                                                      ----------     -----------
      Gross profit ...............................        17,740            842
Selling, general and administrative expenses .....        12,048            660
Provision for uncollectible accounts .............            68              1
Amortization of excess cost of net assets acquired         1,211             27
                                                      ----------     -----------
     Income from operations ......................         4,413            154
Investment income ................................           117              4
Interest expense .................................           (76)            --
Interest expense--related party ..................          (611)           (34)
                                                      ----------     -----------
      Income before income taxes .................         3,843            124
Income taxes .....................................         1,787             63
                                                      ----------     -----------

     Net income ..................................    $    2,056     $       61
                                                      ==========     ===========
     Net income per share - basic ................    $      .09     $       --
                                                      ==========     ===========
     Net income per share - assuming dilution ....    $      .09     $       --
                                                      ==========     ===========
</TABLE>















The accompanying Notes to Condensed  Consolidated  Financial Statements are an
integral part of these statements.


                                      3


<PAGE>
                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                       For The Six Months Ended
                                                             December 31,
                                                      --------------------------
                                                          1997           1996
                                                      -----------   ------------
Cash from operating activities:
<S>                                                     <C>            <C>      
Net income .......................................    $    2,056    $        61

Adjustments to reconcile net income to net cash
flows from operating activities, net of effects
from acquisitions:
   Depreciation and amortization .................         1,695             48
   Provision for uncollectible accounts ..........            68              1
   Changes in assets and liabilities, net of 
   effects from acquisitions:
     Accounts receivable--third parties ..........         1,709           (122)
     Accounts receivable--related party ..........       (11,940)            --
     Other current assets ........................        (1,604)            27
     Accounts payable and accrued expenses .......          (760)           141
     Accrued salaries, wages, and payroll taxes...        10,506            352
     Accrued interest--related party .............           611             34
     Accrued workers' compensation and health
       claims.....................................         4,922             --
     Income taxes payable ........................         1,679             --
     Other, net ..................................           467             61
                                                      -----------    -----------

       Net cash flows provided by operating
         activities...............................         9,409            603
                                                      -----------    -----------

Cash from investing activities:
Payments for businesses acquired, net of cash
  acquired........................................        (7,964)        (1,804)
Payment of deferred purchase price obligation.....       (16,172)            --
Additions to property and equipment...............        (1,908)           (11)
Other, net........................................          (515)            --
                                                      -----------    -----------

       Net cash flows (used in) investing
         activities...............................       (26,559)        (1,815)
                                                      -----------    -----------

Cash flows from financing activities:
Proceeds from revolving credit facility ..........         4,000             --
Net proceeds from the initial public offering of
  common stock....................................        45,941             --
Proceeds from financing arrangements with 
  related party...................................            --          2,000
Payment of financing arrangements with related
  party...........................................       (28,382)            --
Payment of long-term debt and financing
  arrangements....................................          (331)            --
                                                      -----------    -----------

       Net cash flows provided by financing
         activities...............................        21,228          2,000
                                                      -----------    -----------

Net increase in cash and cash equivalents ........         4,078            788
Cash and cash equivalents, beginning of period ...         1,782             --
                                                      -----------    -----------
Cash and cash equivalents, end of period .........    $    5,860    $       788
                                                      ===========    ===========

Supplemental disclosures of cash flow:
   Interest paid .................................    $      108    $        --
                                                      ===========    ===========
   Income taxes paid .............................    $       25    $        --
                                                      ===========    ===========
</TABLE>

The accompanying Notes to Condensed  Consolidated  Financial Statements are an
integral part of these statements.

                                      4
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                            Shares Issued   Common
                          ----------------   ($.01               Additional  Deferred
                                             Par      Treasury   Paid-In     Compen-  Retained
                          Common   Treasury  Value)     Stock    Capital     sation   Earnings
                         --------  --------  -------  --------  ----------  --------  --------

<S>                       <C>      <C>       <C>      <C>        <C>        <C>        <C>   
Balance at 
  June 30, 1997.......    19,193      (563)  $  192   $(1,080)  $   1,189   $    --   $    --
Issuance through
  initial public
  offering, net of
  offering costs
  of $5,810...........     5,750        --       58        --      45,883        --        --
Issuance in
  connection with 
  acquisitions........     1,360       563       13     1,080       4,781        --        --
Accretion of
  mandatorily         
  redeemable common
  stock...............        --        --       --        --          --        --    (1,185)
Conversion of
  mandatorily       
  redeemable common
  stock...............       813        --        8        --       3,907        --        --
Issued under stock  
  option plan.........        --        --       --        --         172      (172)       --
Amortization of
  deferred
  compensation........        --        --       --        --          --        13        --
Net income............        --        --       --        --          --        --     2,056
                         ========  ========  =======  ========  ==========  ========  ========
Balance at 
  December 31, 1997...    27,116        --   $  271    $   --   $  55,932   $  (159)  $   871
                         ========  ========  =======  ========  ==========  ========  ========
</TABLE>
























The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.


                                      5


<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)


1.    Basis of Presentation

      NovaCare   Employee   Services,   Inc.  (the   "Company")  is  a  national
   professional  employer  organization ("PEO") providing small and medium-sized
   businesses with  comprehensive,  fully  integrated  outsourcing  solutions to
   human  resource  issues,  including  payroll  management,   risk  management,
   benefits  administration,  unemployment  services,  rehabilitation  temporary
   staffing and human resource consulting services.

      The Company was established by NovaCare,  Inc. (the "Parent") in September
   1996 as a subsidiary and began operation in October 1996 with the acquisition
   of one PEO business.  In February 1997, the Company acquired three additional
   PEO  businesses  and  entered  into a contract  with the Parent to  co-employ
   substantially  all of the Parent's  workforce (the "NovaCare  Contract").  On
   July 1, 1997,  the  Company  acquired  NovaPro,  a  rehabilitation  temporary
   staffing business, from the Parent.

      The condensed  consolidated financial statements include the operations of
   NovaCare  Employee  Services,   Inc.,  and  its  wholly  owned  subsidiaries.
   Intercompany accounts and transactions have been eliminated in consolidation.

      The  accompanying  condensed  consolidated  financial  statements  of  the
   Company are  unaudited.  The balance  sheet as of June 30, 1997 is  condensed
   from the audited balance sheet of the Company at that date.  These statements
   have been  prepared  in  accordance  with the rules  and  regulations  of the
   Securities and Exchange Commission and should be read in conjunction with the
   Company's  consolidated financial statements and notes thereto for the period
   ended  June 30,  1997  contained  in the  Company's  final  prospectus  dated
   November 11, 1997.  Certain  information  and footnote  disclosures  normally
   included in  financial  statements  prepared  in  accordance  with  generally
   accepted  accounting  principles  have been condensed or omitted  pursuant to
   such  rules and  regulations.  In the  opinion  of  Company  management,  the
   condensed consolidated financial statements for the unaudited interim periods
   presented  include  all  adjustments  (consisting  of only  normal  recurring
   adjustments)  necessary for a fair  presentation  of the Company's  financial
   position and results of operations for the interim periods presented. Certain
   amounts in the fiscal 1996 condensed  consolidated  financial statements have
   been reclassified to conform with the fiscal 1997 presentation.

      Operating  results for the three and six-month  periods ended December 31,
   1997 are not necessarily indicative of the results that may be expected for a
   full year or any portion thereof.

2.    Initial Public Offering

      On November 11, 1997, the Company  completed an initial public offering of
   5,000  shares  of  its  common  stock  (the  "Offering").  Subsequent  to the
   Offering,  the  Company  issued an  additional  750  shares  pursuant  to the
   exercise  of an  over-allotment  provision,  for a total  issuance  of  5,750
   shares.  The net proceeds from the Offering,  (after deducting offering costs
   of $5,810), amounted to $45,941. The proceeds were used by the Company to pay
   (i) the  Company's  outstanding  revolving  credit  loan of $28,382  from the
   Parent, (ii) $1,000 to an affiliate of the Company who is a former owner of a
   business  acquired  by the  Company,  and (iii)  $16,172  to retire  deferred
   purchase  obligations,  $1,000  of which  was  paid  subsequent  to  December
   31,1997.  Simultaneously  with the completion of the Offering,  the Company's
   mandatorily  redeemable  common  stock was  converted  into 813 shares of the
   Company's common stock.




                                      6
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)

3.     Acquisitions

      The Company acquired all of the outstanding  stock of AmeriCare  Employers
   Group, Inc. ("AmeriCare"),  a PEO in Phoenix, Arizona,  effective December 1,
   1997,  for $9,000 in cash,  723 shares of the  Company's  common  stock,  the
   assumption of certain liabilities,  and future contingent payments.  The cash
   portion  of the  purchase  price  was  funded  through  borrowings  under the
   Company's   revolving   credit  facility  and  through  cash  generated  from
   operations.

      The acquisition has been accounted for as a purchase, and accordingly, the
   aggregate  purchase  price was allocated to assets and  liabilities  based on
   their fair  values at the date of  acquisition.  The  excess of the  purchase
   price  over the fair  market  value of the  underlying  assets  acquired  was
   approximately $19,348.

      In the third  quarter  of fiscal  1997,  the  Company  acquired  three PEO
   businesses.  In addition,  on July 1, 1997, the Company acquired  NovaPro,  a
   rehabilitation temporary staffing business, from the Parent.

      The following unaudited pro forma consolidated results of the Company give
   effect to each of the  acquisitions as if they occurred as of October 1, 1996
   (the date of inception):

<TABLE>
<CAPTION>
                                                      For the Six Months Ended
                                                            December 31,
                                                     ---------------------------
                                                         1997           1996
                                                     ------------   ------------
<S>                                                  <C>             <C>     
       Net revenues..............................    $   642,757     $  105,661
       Net income................................          2,192         (2,090)
       Net income per share - basic..............    $       .10     $     (.10)
       Net income per share - assuming dilution..    $       .10     $     (.10)
</TABLE>

      The above pro  forma  information  is not  necessarily  indicative  of the
   results of operations that would have occurred had the acquisitions been made
   as of October 1, 1996, or the results which may occur in the future.

4.    Net Income Per Share

      Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
   became  effective for periods ending after December 15, 1997.  This statement
   revised the  calculation  of earnings per share from the "primary" and "fully
   diluted" methods previously employed,  to the "basic" and "assuming dilution"
   methods. The Company had not previously presented  fully-diluted earnings per
   share  because  the  result was not  materially  different  than the  primary
   calculation.  Under the new statement,  basic  earnings per share  represents
   earnings divided by the weighted average number of shares  outstanding during
   the  period.  Earnings  per  share-assuming  dilution  represents  the  basic
   weighted average shares outstanding adjusted for the effects of stock options
   and contingently  issuable shares under certain acquisition  agreements.  The
   calculation  of the Company's  earnings per share assuming  dilution  closely
   resembles that used in prior calculations of primary earnings per share.

      In accordance with this statement, the Company has replaced its disclosure
   of primary  net income  per share  with net  income per  share-basic  and net
   income per share-assuming dilution.





                                      7
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)

4.    Net Income Per Share  (Continued)

      The following table sets forth the computation and  reconciliation  of net
   income per share-basic and net income per share-assuming dilution:

<TABLE>
<CAPTION>
                                    For the Three Months    For the Six Months
                                            Ended                  Ended
                                         December 31,           December 31,
                                    --------------------   ---------------------
                                      1997        1996       1997        1996
                                    ---------  ---------  ----------  ----------

<S>                                  <C>         <C>         <C>         <C>    
    Net income....................  $  1,119   $     61   $   2,056   $      61
                                    =========  =========  ==========  ==========

    Weighted average shares
       outstanding:

      Weighted average shares
       outstanding - basic.......     23,869     16,855      22,405      16,855

      Stock options..............        162         --         156          --
                                    ---------  ---------  ----------  ----------

      Weighted average shares
       outstanding - assuming       
       dilution..................     24,031     16,855      22,561      16,855
                                    =========  =========  ==========  ==========

      Net income per share - 
       basic.....................   $   .05    $     --   $     .09   $      --
                                    =========  =========  ==========  ==========
      Net income per share -
       assuming dilution.........   $    .05   $      --   $    .09   $      --
                                    =========  =========  ==========  ==========
</TABLE>

      Net income per share has been computed in accordance  with  Securities and
   Exchange  Commission  Staff  Accounting  Bulletin  No. 98 ("SAB 98").  SAB 98
   requires  that  common  shares  issued by the  Company in the  twelve  months
   immediately  preceding a proposed  public  offering plus the number of common
   equivalent  shares which became  issuable  during the same period pursuant to
   the grant of stock options at prices  substantially  less than the security's
   fair value (nominal issuances) be included in the calculation of common stock
   and common  stock  equivalent  shares,  as if they were  outstanding  for all
   periods presented. The Company determined there were no material issuances of
   nominal shares in the twelve months preceding the Offering.

      Options  to  purchase  809  shares of  common  stock for the three and six
   months ended December 31, 1997, were not included as common stock equivalents
   in the  computation  of net income per  share-assuming  dilution  because the
   effect would be  antidilutive.  As part of certain purchase  agreements,  the
   former  stockholders  are  eligible  to  receive  additional  shares  of  the
   Company's  common stock  contingent  upon  achieving  certain  financial  and
   operating  criteria.  Approximately  1,845 contingently  issuable shares were
   not  included in the computation  of net income  per share-assuming  dilution
   because  all specified  financial and  operating  conditions  have  not  been
   satisfied.











                                      8
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)


5.    Property and Equipment

      The components of property and equipment were as follows:

<TABLE>
<CAPTION>

                                                     December 31,     June 30,
                                                        1997            1997
                                                     ------------   ------------
<S>                                                  <C>             <C>     
       Land and buildings......................      $       70       $      70
       Property, equipment and furniture.......           2,416           1,019
       Leasehold improvements..................             291             162
       Computer equipment and capitalized
         software..............................           1,731             240
                                                     ------------   ------------
                                                          4,508           1,491
       Less: Accumulated depreciation and      
       amortization............................            (503)           (165)
                                                     ============   ============
                                                     $     4,005      $   1,326
                                                     ============   ============
</TABLE>

6.    Financing Arrangements

      Financing arrangements consisted of the following:

<TABLE>
<CAPTION>

                                                     December 31,     June 30,
                                                        1997            1997
                                                     ------------   ------------
<S>                                                  <C>            <C>                
       $25,000 revolving credit facility (Prime
          rate plus 0.125% to 1.25%), due           
          November 17, 2000.......................    $     4,000    $       --
       Subordinated promissory notes (6% to 10%),  
          through 2002............................          1,235         1,322
       $750 revolving credit facility (Prime
          rate plus 1.25%), due May 15, 1998......            750            --
       Other......................................            117            44
                                                      ------------  ------------
                                                            6,102         1,366
       Less:  current portion.....................         (4,969)         (298)
                                                      ============  ============
                                                      $     1,133   $     1,068
                                                      ============  ============
</TABLE>

      Subsequent  to the  November  1997  Offering,  the Company  entered into a
   $25,000 three-year revolving credit facility with a syndicate of lenders (the
   "Credit  Facility").  The  Credit  Facility  provides  for  revolving  credit
   available to fund working capital,  capital expenditures,  standby letters of
   credit and finance acquisitions. The Credit Facility includes a $5,000 letter
   of credit subfacility.

      The Credit Facility provides for interest at a variable rate, depending on
   certain  financial  ratios,  equal to (a) the EuroDollar rate plus a range of
   1.375% to 2.50% or (b) the lead lender's prime rate plus a range of 0.125% to
   1.25%.  In addition,  the Company has agreed to pay a commitment  fee ranging
   from 0.30% to 0.50% per annum on the unused portion of the commitment.  Loans
   made under the Credit Facility are  collateralized  by a pledge of all of the
   (i) Company's  interest in the common stock of its subsidiaries,  (ii) assets
   of the Company and its  subsidiaries,  and (iii) the Parent's interest in the
   common stock of the Company.




                                      9
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)

6.    Financing Arrangements (Continued)

      At December 31, 1997,  the Company had  outstanding  borrowings  of $4,000
   under  the  Credit  Facility.  In  January  1998,  the  Company  borrowed  an
   additional  $750  under the Credit  Facility  to pay off a  revolving  credit
   facility assumed in connection with the AmeriCare acquisition,  and assumed a
   letter of credit  from the Parent in the amount of $1,141,  which  guarantees
   payment  of  claims  to one of the  Company's  former  workers'  compensation
   insurance  carriers.  As of  December  31,  1997,  $21,000  of the  line  was
   available.

7.    Accrued Workers' Compensation and Health Claims

      The Company's accruals for claims are summarized as follows:

<TABLE>
<CAPTION>

                                                     December 31,     June 30,
                                                         1997           1997
                                                     ------------   ------------
<S>                                                  <C>            <C>        
       Accrued health benefit premiums payable       
          and claims reserves.....................   $     9,226    $     3,756
       Accrued workers' compensation premiums
           payable and claims reserves............         4,650          3,577
                                                     ------------   ------------
                                                          13,876          7,333
       Less: workers' compensation and health 
          claims expected to be settled in 
          more than one year......................        (3,813)        (1,910)
                                                     ============   ============
                                                     $    10,063    $     5,423
                                                     ============   ============
</TABLE>

8.    Mandatorily Redeemable Common Stock

      Mandatorily  redeemable  common  stock was  issued  in the  prior  year in
   connection with certain  acquisitions which provided certain registration and
   valuation  rights.  On  November  11,  1997,  all 813  shares of  mandatorily
   redeemable stock were automatically converted into common stock.

9.    Deferred Compensation

      On August 8 and September 5, 1997, the Company granted options to purchase
   shares of common stock at an exercise price of $4.50 per share.  There was no
   trading market for the common stock as of each respective date. For financial
   statement  purposes,  a fair  market  value  for the  common  stock  has been
   determined by the Board of Directors to be $7.12 on August 8, 1997, and $9.00
   on September 5, 1997.

      Accordingly,  the Company has recorded deferred compensation expense based
   on the difference between the exercise price and the fair market value of the
   common  stock on the date of grant,  in the  aggregate  amount of $172.  This
   amount is recognized as compensation  expense, on a straight line basis, over
   the  vesting  period of five  years.  The  unamortized  portion  of  deferred
   compensation is recorded as a reduction to shareholders'  equity. At December
   31, 1997, the remaining unamortized portion of deferred compensation amounted
   to $159.

10.  Commitments and Contingencies

      The Company is subject to legal  proceedings and claims which arise in the
   ordinary course of its business. In the opinion of management,  the amount of
   ultimate  liability,  if any,  with respect to these  actions will not have a
   materially  adverse effect on the financial position or results of operations
   of the Company.




                                      10
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
                                December 31, 1997
                      (In thousands, except per share data)
                                   (Unaudited)


10.   Commitments and Contingencies (Continued)

      Certain  purchase  agreements  require  additional  payments  if  specific
   financial and/or operating  conditions are met. Aggregate contingent payments
   in connection with these  acquisitions at December 31, 1997 of  approximately
   $1,100 in cash and 1,870 shares of common stock have not been included in the
   initial  determination of cost of the businesses acquired since the amount of
   such contingent consideration, if any, is not presently determinable.

      The Company's operations are subject to numerous Federal,  state and local
   laws related to employment,  taxes and benefit plan matters. Generally, these
   regulations  affect  all  companies  in  the  United  States.   However,  the
   regulatory  environment  for PEOs is an  evolving  area due to  uncertainties
   resulting from the non-traditional employment relationships. Many Federal and
   state laws relating to tax and  employment  matters were enacted prior to the
   development of PEO companies and do not specifically  address the obligations
   and responsibilities of these co-employer relationships. The Internal Revenue
   Service (the "IRS") is conducting a market  segment study of the PEO industry
   (the "Market  Segment  Study")  focusing on selected PEOs (not  including the
   Company) in order to examine the  relationship  among  PEOs,  their  clients,
   worksite  employees,  and the owners of  clients.  IRS  officials  previously
   indicated that the Market  Segment Study was expected to be completed  during
   the early months of 1998. However, more recent IRS statements suggest that an
   announcement of the IRS' position with respect to PEOs may be delayed. If the
   IRS concludes that PEOs are not "employers" of certain worksite employees for
   purposes of the Code,  the  Company's  benefit  plans  (including  cafeteria,
   health and  welfare,  and  retirement  plans) may lose  their  favorable  tax
   status,  and the Company may no longer be able to assume its clients' Federal
   employment tax withholding obligations.


























                                      11
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Overview

      NovaCare  Employee  Services,  Inc. (the  "Company") is one of the largest
professional employer  organizations  ("PEO"s) in the United States. The Company
commenced operations on October 1, 1996,  concurrent with the acquisition of one
PEO business.  In February  1997,  the Company  acquired  three  additional  PEO
businesses and signed an agreement with NovaCare, Inc. (the "Parent") to provide
traditional PEO services to principally all of the Parent's  worksite  employees
(the "NovaCare  Contract").  On July 1, 1997, the Company  acquired  NovaPro,  a
rehabilitation  temporary staffing business, from the Parent. Effective December
1, 1997 the Company acquired AmeriCare  Employers Group, Inc.  ("AmeriCare"),  a
PEO business.  As of December 31, 1997, the  Company served  2,455 organizations
with 46,430 employees at over 3,000 worksites  in 45 states,  principally  in 10
different industries. The Company is an employee services company which provides
small and  medium-sized  businesses   with comprehensive, fully  integrated out-
sourcing solutions  to  human  resource  issues, including  payroll  management,
risk  management,  benefits  administration,  unemployment  services  and  human
resource consulting services.

Results of Operations for the Three Months Ended December 31, 1997

      The Company commenced  operations  on October 1, 1996 with the acquisition
of one PEO business  which generated  $10.9 million of  revenues for the quarter
ended  December 31,  1996.  All material  increases in revenues,  direct  costs,
selling,  general and  administrative  expenses  and other  expense  categories,
between the quarter ended December 31, 1997 and 1996, are directly  attributable
to the completion of five additional  acquisitions  and the  consummation of the
NovaCare  Contract,  subsequent  to  December  31, 1996,  as  described   above.
Accordingly,  results for the quarter ended September 30, 1997 are presented and
used for additional comparative purposes. The following table sets forth certain
income  statement and statistical data for the quarters ended December 31, 1997,
September 30, 1997 and December 31, 1996.

<TABLE>
<CAPTION>

                                              For the period from
                            -------------------------------------------------------------
                              October 1, 1997       July 1, 1997       October 1, 1996
(Table in thousands,                 to                  to             (inception) to
 except percentages)         December 31, 1997   September 30, 1997    December 31, 1996
                            -------------------  -------------------  -------------------

Operating Results:              $         %          $         %          $         %
                            ---------  --------  ---------  --------  ---------  --------
<S>                         <C>        <C>      <C>         <C>      <C>         <C>   
  Revenues...............   $302,751    100.0%   $266,757    100.0%   $ 10,894    100.0%
  Direct costs:
  Salaries, wages and
   employment taxes of      
   worksite employees....    269,571     89.0     242,500     90.9      9,082      83.4
  Health care, workers'
   compensation, state     
   unemployment taxes
   and other.............     23,768      7.9      15,929      6.0        970       8.9
                            ---------  --------  ---------  --------  ---------  --------
   Gross profit..........      9,412      3.1       8,328      3.1        842       7.7
  Selling, general and
   administrative          
   expenses..............      6,486      2.1       5,630      2.1        661       6.1
  Amortization of excess
   cost of net assets        
   acquired..............        639      0.2         572      0.2         27       0.2
                            ---------  --------  ---------  --------  ---------  --------
   Income from 
     operations..........      2,287      0.8       2,126      0.8        154       1.4
  Interest expense, net..       (195)    (0.1)       (375)    (0.1)       (30)     (0.3)
                            ---------  --------  ---------  --------  ---------  --------
   Income before income   
   taxes.................      2,092      0.7       1,751      0.7        124       1.1
  Income tax expense.....        973      0.3         814      0.3         63       0.6
                            =========  ========  =========  ========  =========  ========
   Net income............   $  1,119      0.4%    $   937      0.4%    $   61       0.5%
                            =========  ========  =========  ========  =========  ========
</TABLE>

                                      12
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)


Results of Operations for the Three Months Ended December 31, 1997 (Continued)

<TABLE>
<CAPTION>

                                                 For the period from
                                       -----------------------------------------
                                                                     October 1,
                                                                        1996
                                        October 1,     July 1,      (inception)
                                         1997 to       1997 to          to
                                       December 31,  September 31,  December 31,
                                           1997           1997          1996
                                       ------------  -------------  ------------
<S>                                    <C>           <C>            <C>
    Statistical Data:
      EBITDA (in thousands) (1)......  $     3,192   $      2,916   $       202
      Number of clients at period
        end..........................        2,455          1,763           128
      Worksite employees at period
       end:
       Third parties.................       29,552         21,531         1,958
       Related party.................       16,878         15,135            --
                                       ============  =============  ============
       Total.........................       46,430         36,666         1,958
                                       ============  =============  ============
      Weighted average worksite
       employees paid during the
       period:
       Third parties.................       24,277         20,313         1,757
       Related party.................       16,384         14,889            --
                                       ------------  -------------  ------------
       Weighted average..............       40,661         35,202         1,757
                                       ============  =============  ============
      Quarterly gross profit per 
        weighted average worksite 
        employee (in whole $'s):
       Third parties.................  $       195   $        215   $       479
       Related party.................          285            266            --
        Weighted average.............          231            237           479
 
----------
<FN>

(1)EBITDA is defined as earnings  before  interest,  income taxes,  depreciation
   and  amortization.  EBITDA  is  presented  because  it is a  widely  accepted
   financial  indicator  of a  company's  ability  to incur  and  service  debt.
   However,  EBITDA should not be considered in isolation or as a substitute for
   net income or cash flow data prepared in accordance  with generally  accepted
   accounting  principles  or  as a  measure  of a  company's  profitability  or
   liquidity.  Also, the EBITDA  definition used herein may not be comparable to
   similarly titled measures reported by other companies.
</FN>
</TABLE>

   Revenues for the quarter ended December 31, 1997  increased  $36.0 million or
13.5% from the  quarter  ended  September  30,  1997.  The  revenue  increase is
attributed  to  internal  growth due to an increase in the number of clients and
worksite employees served and the AmeriCare  acquisition.  The number of clients
increased to 2,455 at December 31, 1997,  from 1,763 at September 30, 1997.  The
AmeriCare  acquisition  contributed  625 clients to this  growth.  The  weighted
average  number of worksite  employees  increased to 40,661 at December 31, 1997
from 35,202 at September 30, 1997 with AmeriCare contributing 2,465.








                                      13
<PAGE>



                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)


Results of Operations for the Three Months Ended December 31, 1997 (Continued)


   Gross profit  increased to $9.4  million for the quarter  ended  December 31,
1997 from $8.3  million  for the  quarter  ended  September  30, 1997 due to the
increased revenues. Gross profit as a percentage of revenues remained consistent
with  the  September  quarter at 3.1%. The second quarter gross profit per third
party weighted  average worksite  employee of $195 decreased  from $215  for the
first quarter  due to increased direct  costs to support growth, and seasonality
of state unemployment profit impact. The related party gross profit per weighted
average  worksite employee increased to $285 from $266 for the first quarter due
to improved  management  of employee  benefits program  costs.  For the  quarter
ended December 31, 1997,  gross profit percentage  has  decreased  from 7.7% for
the quarter ended December 31, 1996 to 3.1%, due to subsequent acquisitions  and
consummation  of the  NovaCare Contract,  both of  which produced  a lower gross
profit percentage versus the initial acquisition.

   Selling,  general and  administrative  expenses increased to $6.5 million for
the quarter  ended  December  31, 1997 from $5.6  million for the quarter  ended
September  30,  1997,  due to  increased  selling  and  administrative  expenses
required  to  carry  out the  Company's  growth  strategy.  As a  percentage  of
revenues,  selling,  general  and  administrative  expenses  were  2.1% for each
period.  For  the  quarter  ended  December  31,  1997,  selling,   general  and
administrative  expenses has decreased  from 6.1% for the quarter ended December
31,  1996  to  2.1%  due to a  more  favorable  cost  structure  resulting  from
subsequent acquisitions and the NovaCare Contract.

   Amortization of excess cost of net assets acquired  increased to $639,000 for
the  quarter  ended  December  31,  1997 from  $572,000  for the  quarter  ended
September 30, 1997 primarily as a result of amortization of goodwill  related to
the AmeriCare acquisition.

   Interest  expense,  net of interest  income,  decreased  to $195,000  for the
quarter ended  December 31, 1997 from  $375,000 for the quarter ended  September
30, 1997 primarily due to a reduction in debt obligations with proceeds from the
Offering.

   Income taxes as a percentage of pretax income were 46.5% for the three months
ended December 31, 1997 and September 30, 1997.

Results of Operations for the Six Months Ended December 31, 1997

   The Company commenced  operations  on  October  1, 1996  with the acquisition
of one PEO business which generated $10.9 million of revenues for the six months
ended  December 31, 1996.  All  material  increases in  revenues,  direct costs,
selling,  general  and  administrative expenses  and  other  expense categories,
between  the  six  months  ended   December  31,  1997  and 1996,  are  directly
attributable   to  the  completion  of  five  additional  acquisition   and  the
consummation  of  the  NovaCare  Contract,  subsequent  to December 31, 1996, as
described in the overview above.






                                      14
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)

Results of Operations for the Six Months Ended December 31, 1997 (Continued)

<TABLE>
<CAPTION>

                                                 For the period from
                                     -------------------------------------------
                                          July 1, 1997,       October 1, 1996
    (Table in thousands,                       to             (inception), to
     except percentages)              December 31, 1997      December 31, 1996
                                     --------------------  ---------------------

    Operating Results:                   $           %           $           %
                                     ----------  --------  ----------  ---------
<S>                                  <C>          <C>         <C>          <C>   
      Revenues..................     $ 569,508    100.0%   $  10,894     100.0%
      Direct costs:
      Salaries, wages and
       employment taxes of         
       worksite employees.......       512,071      89.9       9,082      83.4
      Health care, workers'
       compensation, state          
       unemployment taxes
       and other................        39,697       7.0         970       8.9
                                     ----------  --------  ----------  ---------
       Gross profit.............        17,740       3.1         842       7.7
      Selling, general and
       administrative 
       expenses.................        12,116       2.1         661       6.1
      Amortization of excess 
       cost of net assets         
       acquired.................         1,211       0.2          27       0.2
                                     ----------  ---------  ----------  --------
       Income from operations...         4,413       0.8         154       1.4
      Interest expense, net.....          (570)     (0.1)        (30)     (0.3)
                                     ----------  ---------  ----------  --------
 
       Income before income              3,843       0.7         124       1.1
       taxes.................
      Income tax expense.....            1,787       0.3          63       0.6
                                    ===========  =========  ==========  ========
       Net income............       $    2,056       0.4%   $     61       0.5%
                                    ===========  =========  ==========  ========
</TABLE>





















                                      15
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)

Results of Operations for the Six Months Ended December 31, 1997 (Continued)



<TABLE>
<CAPTION>
                                                       For the period from
                                                 -------------------------------
                                                                    October 1,
                                                                      1996
                                                  July 1, 1997     (inception)
                                                       to              to
                                                  December 31,     December 31,
                                                      1997             1996
                                                 --------------   --------------
<S>                                              <C>              <C>
      Statistical Data:
        EBITDA (in thousands)(1)........        $      6,108       $       202
        Number of clients at period end                2,455               128
        Worksite employees at period
        end:
          Third parties................               29,552             1,958
          Related party................               16,878                --
                                                ==============    ==============
            Total......................               46,430             1,958
                                                ==============    ==============
         Weighted average worksite
          employees paid during
          the period:
          Third parties................               22,295             1,757
          Related party................               15,637                --
                                                --------------    --------------
          Weighted average.............               37,932             1,757
                                                ==============    ==============
        Year-to-date  gross profit per 
          weighted average worksite employee
          (in whole $'s):
          Third parties................         $        408      $        479
          Related party................                  553                --
          Weighted average.............                  468               479
 
----------
<FN>

(1)EBITDA is defined as earnings  before  interest,  income taxes,  depreciation
   and  amortization.  EBITDA  is  presented  because  it is a  widely  accepted
   financial  indicator  of a  company's  ability  to incur  and  service  debt.
   However,  EBITDA should not be considered in isolation or as a substitute for
   net income or cash flow data prepared in accordance  with generally  accepted
   accounting  principles  or  as a  measure  of a  company's  profitability  or
   liquidity.  Also, the EBITDA  definition used herein may not be comparable to
   similarly titled measures reported by other companies.
</FN>
</TABLE>

Liquidity and Capital Resources

   The Company had $5.9 million in cash and cash  equivalents as of December 31,
1997.  As of the same date,  the Company had  negative  working  capital of $8.6
million  primarily  as a result of the Company  borrowing  $4.0 million from its
credit  facility for the December 1, 1997 AmeriCare  acquisition.  The Company's
primary  short-term  liquidity  requirements  relate to the  payment  of accrued
payroll and payroll  taxes of its  worksite  and  internal  employees,  accounts
payable  and the  payment of accrued  workers'  compensation  expense and health
benefit plan premiums.





                                      16
<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)


Liquidity and Capital Resources (Continued)

   The Company's cash flows provided by operating  activities  were $7.4 million
for the quarter ended  December 31, 1997  resulting  primarily  from net income,
amortization  and  depreciation  of $2.0  million  along  with an $11.3  million
liability increase for accrued salaries,  wages and payroll taxes, caused by the
timing of the payment of these  liabilities,  offset by a $3.4  million net cash
use for increased accounts  receivable and a $2.3 million liability decrease for
accrued workers'  compensation and health claims.  Accounts receivable,  accrued
salaries,  wages, payroll taxes, and health benefit premiums payable are subject
to  fluctuations  depending on the correlation  between the financial  reporting
cycle versus the payroll cycle.

   Cash  expended  for  investing  activities  during the same  period was $25.7
million primarily resulting from the payment of $16.2 million to retire deferred
purchase  obligations  and the  payment  of net  cash of  $8.0  million  for the
AmeriCare  acquisition,  along with $1.5  million for  additions  to  furniture,
equipment and other assets.  Although the Company  currently has no  significant
capital commitments, the Company anticipates the possible  acquisition of PEO or
other employee services  businesses in strategic markets during the remainder of
fiscal 1998.

   Net cash  provided by financing  activities  was $21.7  million for the three
months ended December 31, 1997.  During the quarter,  the Company  completed its
initial public offering and received proceeds of $45.9 million,  net of offering
costs,  from the sale of 5.8 million shares of common stock of the Company.  The
Company used $28.3 million of its proceeds to retire debt due to the Parent. The
increase in cash also  related to the $4.0 million  borrowing  on the  Company's
revolving credit facility.

   The Company  believes the cash flows  generated by the Company's  operations,
together  with its  existing  cash and  availability  of credit under the credit
facility,  will be sufficient to meet the  Company's  short- and long-term  cash
needs.

Year 2000 Compliance

      The  Company  is in the  process  of  assessing  the  effects of Year 2000
   software  issues  on its  present  information  technology  structure.  As of
   December 31, 1997, that assessment, including a determination of the exposure
   of the  Company's  business  processes  to these  issues and the need for and
   estimated  costs  associated  with  any  necessary  conversions  had not been
   completed.

Cautionary Statement

   Except for historical information, matters discussed above including, but not
limited to, statements concerning future growth, are forward-looking  statements
that are based on management's estimates, assumptions and projections. Important
factors that could cause  results to differ  materially  from those  expected by
management include management retention and development, management's success in
integrating acquired businesses,  in developing and introducing new products and
lines of business and in entering new markets,  adverse Internal Revenue Service
rulings and state  regulations  with respect to the employer  status of employee
services businesses and the Company's ability to implement its employee services
business model.










                                      17

<PAGE>

                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION



Item 6 - Exhibits and Reports on Form 8-K

(A)   Exhibit
      Number              Exhibit Description                      Page Number

      4(a)        Amendment No. 1 to the NovaCare
                  Employee Service, Inc. 1997 Stock
                  Option Plan, dated as of November 24,
                  1997.

      10(a)       Employment agreement dated as of
                  December 10, 1997 between the Company
                  and Kenneth J. Jankowski.

      27          Financial Data Schedule


(B) The Company filed report Form 8-K regarding  the  Americare  acquisition  on
    February 2, 1998.


























                                      18
<PAGE>


                NOVACARE EMPLOYEE SERVICES, INC. AND SUBSIDIARIES


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                  NOVACARE EMPLOYEE SERVICES, INC.
                                  --------------------------------
                                            (Registrant)




February 16, 1998                 By/s/Thomas D. Schubert
                                    -------------------------------
                                       Thomas D. Schubert
                                       Senior Vice President,
                                       Chief Financial Officer and Principal
                                       Accounting Officer



























                                      19