<PAGE>
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

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

                                   FORM 10-Q

<TABLE>
<S>      <C>
/X/      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
</TABLE>

               For the Quarterly Period Ended September 30, 1999

                           Commission file number 1-12677

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

                       PREFERRED EMPLOYERS HOLDINGS, INC.

             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
            DELAWARE                          65-0698779
<S>                                <C>
(State or other jurisdiction of    (I.R.S. Employer Identification
  incorporation or organization)   No.)
</TABLE>

                 10800 Biscayne Boulevard, Miami, Florida 33161
                    (Address of principal executive offices)

                                   (305) 893-4040
              (Registrant's telephone number, including area code)

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of each of the issuer's classes of common
equity as of November 18, 1999 was 2,261,581 shares of Common Stock.
<PAGE>
                       PREFERRED EMPLOYERS HOLDINGS, INC.

              FORM 10-Q--FOR THE QUARTER ENDED SEPTEMBER 30, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                                  --------
<S>                     <C>         <C>                                                           <C>

PART I                  --          FINANCIAL INFORMATION

Item-1                  --          Quarterly Financial Statements

                                    Consolidated Balance Sheets.................................      3

                                    Consolidated Statements of Operations.......................      4

                                    Consolidated Statements of Cash Flows.......................      6

                                    Notes to Consolidated Financial Statements..................      8

Item-2                  --          Management's Discussion and Analysis of Financial
                                    Condition and Results of Operations.........................     25

Item-3                  --          Quantitative and Qualitative Discussion about Market risk...     33

PART II                 --          OTHER INFORMATION

Item-1                  --          Legal Proceedings...........................................     34

Item-2                  --          Changes in Securities and Use of Proceeds...................     34

Item-3                  --          Defaults Upon Senior Securities.............................     34

Item-4                  --          Submission of Matters to a Vote of Security Holders.........     34

Item-5                  --          Other Information...........................................     34

Item-6                  --          Exhibits and Reports on Form 8-K............................     34

SIGNATURE                           ............................................................     35
</TABLE>

                                       2
<PAGE>
                         PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

              SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1999   DECEMBER 31, 1998
                                                              ------------------   -----------------
<S>                                                           <C>                  <C>
                           ASSETS
Investments:
  Available-for-sale securities, at fair value (amortized
    cost of $21,763,024 in 1999)............................      $21,554,901                 --
  Available-for-sale securities, at fair value-restricted
    (amortized cost of $9,283,237 in 1999)..................        9,200,420                 --
  Held-to-maturity securities, at amortized cost (fair value
    of $15,692,019 in 1998).................................               --         15,454,481
  Held-to-maturity securities, at amortized cost-restricted
    (fair value of $8,388,009 in 1998)......................               --          8,257,053
  Short-term investments....................................        3,910,194          7,032,027
                                                                  -----------         ----------
  Total investments.........................................       34,665,515         30,743,561
Cash........................................................        5,985,040          3,714,883
Accrued investment and interest income......................          424,100            408,538
Accounts, commissions and premiums receivables, net.........       12,361,216         11,200,923
Deferred acquisition costs..................................        1,806,286          1,807,841
Property and equipment, net.................................          930,393            897,625
Deferred tax assets, net....................................        1,188,001            447,878
Deposits....................................................          447,211            344,165
Goodwill and other intangible assets, net...................        4,630,564          4,805,560
Prepaid expenses............................................          565,371            427,502
Deferred convertible note issue costs.......................          807,797            979,137
Other assets................................................          502,236            629,814
                                                                  -----------         ----------
    Total assets............................................      $64,313,730         56,407,427
                                                                  -----------         ----------
            LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Notes payable.............................................      $10,535,000         12,430,000
  Unpaid losses and loss adjustment expenses................       19,852,869         13,878,892
  Premiums, commissions and other insurance balances
    payable.................................................        7,773,669          7,175,659
  Unearned premiums.........................................        5,239,114          5,463,405
  Accounts payable and accrued expenses.....................        2,953,665          1,588,326
  Escrow and trust funds....................................        3,194,554          1,891,966
  Other liabilities.........................................        1,019,577          1,002,317
                                                                  -----------         ----------
    Total liabilities.......................................       50,568,448         43,430,565
                                                                  -----------         ----------
Shareholders' equity:
  Common stock, $0.01 par value; authorized 20,000,000
    shares; issued 5,776,497 shares in 1999 and 5,771,497
    shares in 1998..........................................           57,765             57,715
  Additional paid-in capital................................        9,936,512          9,891,562
  Accumulated other comprehensive deficit...................         (183,292)                --
  Retained earnings.........................................        4,439,854          3,533,142
                                                                  -----------         ----------
    Total shareholders' equity..............................       14,250,839         13,482,419
  Treasury stock, at cost, 529,412 shares...................         (505,557)          (505,557)
                                                                  -----------         ----------
    Net shareholders' equity................................       13,745,282         12,976,862
                                                                  -----------         ----------
    Total liabilities and shareholders' equity..............      $64,313,730         56,407,427
                                                                  ===========         ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

    FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (RESTATED)

<TABLE>
<CAPTION>
                                                                                         (RESTATED)
                                                                 1999          1998         1997
                                                              -----------   ----------   ----------
<S>                                                           <C>           <C>          <C>
Revenues:
  Staffing income...........................................  $12,098,967    9,420,005   3,190,693
  Premiums earned...........................................    3,436,457    4,264,153   3,368,045
  Net commission income.....................................      339,873      452,747     648,522
  Net investment income.....................................      480,814      444,766     383,885
  Other income..............................................       77,713      120,582     138,538
                                                              -----------   ----------   ---------
    Total revenues..........................................   16,433,824   14,702,253   7,729,683
                                                              -----------   ----------   ---------
Expenses:
  Staffing costs............................................    9,291,741    7,392,163   2,522,458
  Losses and loss adjustment expenses incurred..............    1,790,052    2,196,591   1,831,305
  Amortization of deferred acquisition costs................    1,198,707    1,373,824   1,227,047
  Other operating expenses..................................    3,474,820    2,579,587   1,777,599
                                                              -----------   ----------   ---------
    Total expenses..........................................   15,755,320   13,542,165   7,358,409
                                                              -----------   ----------   ---------
Operating income before income taxes........................      678,504    1,160,088     371,274
                                                              -----------   ----------   ---------
Interest expense............................................      249,834      324,763     177,692
Amortization of intangible assets and other non-operating
  expenses..................................................       71,827      206,605          --
                                                              -----------   ----------   ---------
    Total non-operating expenses............................      321,661      531,368     177,692
                                                              -----------   ----------   ---------
Income before income taxes..................................      356,843      628,720     193,582
Income taxes................................................      171,859      180,705      41,719
                                                              -----------   ----------   ---------
  Net income................................................  $   184,984      448,015     151,863
                                                              -----------   ----------   ---------
Net income-basic............................................  $   184,984      448,015     151,863
Impact of potential common shares-convertible notes.........      153,826      155,169          --
                                                              -----------   ----------   ---------
Net income-diluted..........................................  $   338,810      603,184     151,863
                                                              ===========   ==========   =========
Weighted average outstanding shares-basic...................    5,247,085    5,242,085   5,242,085
Impact of potential common shares-convertible notes.........    1,170,000    1,175,000          --
                                                              -----------   ----------   ---------
Common shares and common shares equivalents used in
  computing net earnings per shares-diluted.................    6,417,085    6,417,085   5,242,085
                                                              ===========   ==========   =========
Net basic earnings per share................................  $      0.04         0.09        0.03
                                                              ===========   ==========   =========
Net diluted earnings per share..............................  $      0.04         0.09        0.03
                                                              ===========   ==========   =========
PRO FORMA INFORMATION (Note 6 and 13):
Historical income before income taxes.......................  $   356,843      628,720     193,582
Pro forma income tax provision..............................      171,859      239,882     (67,104)
                                                              -----------   ----------   ---------
Pro forma net income........................................  $   184,984      388,838     260,686
                                                              ===========   ==========   =========
Pro forma net income-basic..................................  $   184,984      388,838     260,686
Impact of potential common shares-convertible notes.........      153,826      155,169          --
                                                              -----------   ----------   ---------
Pro forma net income-diluted................................  $   338,810      544,007     260,686
                                                              ===========   ==========   =========
Weighted average outstanding shares-basic...................    5,247,085    5,242,085   5,242,085
Impact of potential common shares-convertible notes.........    1,170,000    1,175,000          --
                                                              -----------   ----------   ---------
Weighted average outstanding shares-diluted.................    6,417,085    6,417,085   5,242,085
                                                              ===========   ==========   =========
Pro forma net basic earnings per share......................  $      0.04         0.07        0.05
                                                              ===========   ==========   =========
Pro forma net diluted earnings per share....................  $      0.04         0.07        0.05
                                                              ===========   ==========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

     FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, 1998 (RESTATED) AND 1997
                                   (RESTATED)

<TABLE>
<CAPTION>
                                                                            (RESTATED)   (RESTATED)
                                                                 1999          1998         1997
                                                              -----------   ----------   ----------
<S>                                                           <C>           <C>          <C>
Revenues:
  Staffing income...........................................  $34,270,821   24,283,415    7,854,896
  Premiums earned...........................................   11,319,962   11,680,679    8,037,839
  Net commission income.....................................    1,061,697    1,522,462    1,779,908
  Net investment income.....................................    1,372,737    1,336,311    1,103,531
  Other income..............................................      288,422      384,913      426,599
                                                              -----------   ----------   ----------
    Total revenues..........................................   48,313,639   39,207,780   19,202,773
                                                              -----------   ----------   ----------
Expenses:
  Staffing costs............................................   26,352,704   18,989,081    6,382,069
  Losses and loss adjustment expenses incurred..............    6,125,979    6,201,515    4,357,452
  Amortization of deferred acquisition costs................    3,808,071    3,819,177    2,916,611
  Other operating expenses..................................    9,801,440    7,099,442    4,605,080
                                                              -----------   ----------   ----------
    Total expenses..........................................   46,088,194   36,109,215   18,261,212
                                                              -----------   ----------   ----------
Operating income before income taxes........................    2,225,445    3,098,565      941,561
                                                              -----------   ----------   ----------
Interest expense............................................      786,525      783,348      457,652
Amortization of intangible assets and other non-operating
  expenses..................................................      211,289      445,226           --
                                                              -----------   ----------   ----------
    Total non-operating expenses............................      997,814    1,228,574      457,652
                                                              -----------   ----------   ----------
Income before income taxes..................................    1,227,631    1,869,991      483,909
Income taxes................................................      320,919      322,673      212,542
                                                              -----------   ----------   ----------
  Net income................................................  $   906,712    1,547,318      271,367
                                                              ===========   ==========   ==========

Net income-basic............................................  $   906,712    1,547,318      271,367
Impact of potential common shares-convertible notes.........      460,460       75,378           --
                                                              -----------   ----------   ----------
Net income-diluted..........................................  $ 1,367,172    1,622,696      271,367
                                                              ===========   ==========   ==========
Weighted average outstanding shares-basic...................    5,247,085    5,242,085    4,959,393
Impact of potential common shares-convertible notes.........    1,170,000      589,652           --
                                                              -----------   ----------   ----------
Common shares and common shares equivalents used in
  computing net earnings per shares-diluted.................    6,417,085    5,831,737    4,959,393
                                                              ===========   ==========   ==========
Net basic earnings per share................................  $      0.17         0.30         0.05
                                                              ===========   ==========   ==========
Net diluted earnings per share..............................  $      0.17         0.28         0.05
                                                              ===========   ==========   ==========
PRO FORMA INFORMATION (Note 6 and 13):
Historical income before income taxes.......................  $ 1,227,631    1,869,991      483,909
Pro forma income tax provision..............................      320,919      647,134     (174,861)
                                                              -----------   ----------   ----------
Pro forma net income........................................  $   906,712    1,222,857      658,770
                                                              ===========   ==========   ==========
Pro forma net income-basic..................................  $   906,712    1,222,857      658,770
Impact of potential common shares-convertible notes.........      460,460       75,378           --
                                                              -----------   ----------   ----------
Pro forma net income-diluted................................  $ 1,367,172    1,298,235      658,770
                                                              ===========   ==========   ==========
Weighted average outstanding shares-basic...................    5,247,085    5,242,085    4,959,393
Impact of potential common shares-convertible notes.........    1,170,000      589,652           --
                                                              -----------   ----------   ----------
Weighted average outstanding shares-diluted.................    6,417,085    5,831,737    4,959,393
                                                              ===========   ==========   ==========
Pro forma net basic earnings per share......................  $      0.17         0.23         0.13
                                                              ===========   ==========   ==========
Pro forma net diluted earnings per share....................  $      0.17         0.22         0.13
                                                              ===========   ==========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

    FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 (RESTATED)

<TABLE>
<CAPTION>
                                                                                      (RESTATED)
                                                              1999          1998         1997
                                                          ------------   ----------   ----------
<S>                                                       <C>            <C>          <C>
Cash flow from operating activities:
  Net Income............................................  $    184,984      448,015      151,863
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization.......................       525,697      331,616        9,325
    Net gain on sale of available-for-sale securities...       (60,791)          --           --
    Loss on sale of property and equipment and equipment
      impairment........................................        13,494           --           --
    Amortization of deferred acquisition costs..........     1,198,707    1,373,824    1,227,047
    Deferred income taxes...............................      (252,759)   1,115,372           --
    Provision for uncollectible accounts, net...........        14,156      (23,345)      36,075
  Change in:
    Accrued investment and interest income..............        47,000      (44,083)     (60,815)
    Accounts, commissions and premiums receivable.......      (476,127)     502,707     (474,315)
    Deferred acquisition costs..........................      (921,937)    (750,636)  (1,227,047)
    Unpaid losses and loss adjustment expenses..........     1,739,733    2,205,983    1,744,071
    Unearned premiums...................................    (1,056,006)  (1,842,116)    (937,081)
    Premiums, commissions and other insurance
      balances..........................................       530,234     (602,141)    (105,154)
    Accounts payable and accrued expenses...............       829,570    1,464,845    1,321,252
    Other, net..........................................      (236,575)  (2,794,838)     111,924
                                                          ------------   ----------   ----------
      Net cash provided by operating activities.........     2,079,380    1,385,203    1,797,145
                                                          ------------   ----------   ----------
Cash flow from investing activities:
  Purchase of available-for-sale securities.............   (15,727,650)          --           --
  Proceeds from sale of available-for-sale securities...     8,311,550           --           --
  Sale (purchase) of short-term investments, net........     5,106,684    1,883,884     (792,493)
  Purchase of property and equipment....................       (84,042)     (98,951)     (51,354)
                                                          ------------   ----------   ----------
      Net cash (used in) provided by investing
        activities......................................    (2,393,458)   1,784,933     (843,847)
                                                          ------------   ----------   ----------
Cash flow from financing activities:
  Repayment of shareholder loan.........................            --           --      (75,000)
  Borrowings from revolving line of credit, net.........            --           --      172,116
                                                          ------------   ----------   ----------
  Repayment of line of credit...........................      (486,417)  (2,440,000)          --
  Other, net............................................            --        5,660       93,430
                                                          ------------   ----------   ----------
      Net cash (used in) provided by financing
        activities......................................      (486,417)  (2,434,340)     190,546
                                                          ------------   ----------   ----------
Net (decrease) increase in cash.........................      (800,495)     735,796    1,143,844
Cash at beginning of period.............................     6,785,535    3,700,595    4,015,400
                                                          ------------   ----------   ----------
Cash at end of period...................................  $  5,985,040    4,436,391    5,159,244
                                                          ============   ==========   ==========
Supplemental disclosure of cash flow information:
  Income taxes paid.....................................  $         --           --           --
                                                          ============   ==========   ==========
  Interest paid.........................................  $    194,124      240,683      171,425
                                                          ============   ==========   ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

     FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999, 1998 (RESTATED) AND 1997
                                   (RESTATED)

<TABLE>
<CAPTION>
                                                                       (RESTATED)    (RESTATED)
                                                            1999          1998          1997
                                                         -----------   -----------   -----------
<S>                                                      <C>           <C>           <C>
Cash flow from operating activities:
  Net Income...........................................  $   906,712     1,547,318       271,367
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization......................      898,129       702,260       114,297
    Net gain on sale of available-for-sale
      securities.......................................      (60,791)           --            --
    Loss on sale of property and equipment and
      equipment impairment.............................       36,293            --            --
    Amortization of deferred acquisition costs.........    3,808,071     3,819,177     2,916,611
    Deferred income taxes..............................     (632,475)      285,971            --
    Provision for uncollectible accounts, net..........       20,430       (45,765)       80,503
  Change in:
    Accrued investment and interest income.............      (15,562)       10,438      (234,756)
    Accounts, commissions and premiums receivable......   (1,180,723)   (6,746,190)    2,611,460
    Deferred acquisition costs.........................   (3,806,516)   (4,690,965)   (2,916,611)
    Unpaid losses and loss adjustment expenses.........    5,973,977     6,017,588     4,095,750
    Unearned premiums..................................     (224,291)    2,576,966    (1,888,977)
    Premiums, commissions and other insurance
      balances.........................................      598,010      (659,130)   (1,058,406)
    Accounts payable and accrued expenses..............    1,365,339     3,000,591     2,689,093
    Other, net.........................................    1,527,578    (2,909,185)    2,156,421
                                                         -----------   -----------   -----------
      Net cash provided by operating activities........    9,214,181     2,909,074     8,836,752
                                                         -----------   -----------   -----------
Cash flow from investing activities:
  Purchase of subsidiary...............................           --    (5,000,000)           --
  Purchase of available-for-sale securities............  (15,727,650)           --            --
  Proceeds from sale of available-for-sale
    securities.........................................    8,311,550            --            --
  Sale (purchase) of short-term investments, net.......    3,121,834    (6,587,693)  (20,527,887)
  Proceeds from disposal of property and equipment.....        6,000            --            --
  Purchase of property and equipment...................     (287,712)     (153,848)     (223,806)
                                                         -----------   -----------   -----------
      Net cash used in investing activities............   (4,575,978)  (11,741,541)  (20,751,693)
                                                         -----------   -----------   -----------
Cash flow from financing activities:
  Proceeds from sale of common stock...................           --            --    10,384,324
  Proceeds from subordinated convertible notes
    payable............................................           --     9,621,914            --
  Repayment of shareholder loan........................           --            --      (225,000)
  Borrowings from revolving line of credit, net........           --     2,000,000     1,182,324
  Repayment of line of credit..........................   (1,850,000)   (2,440,000)           --
  Bank overdraft.......................................     (518,046)      (38,327)           --
  Other, net...........................................           --            --        87,770
                                                         -----------   -----------   -----------
      Net cash (used in) provided by financing
        activities.....................................   (2,368,046)    9,143,587    11,429,418
                                                         -----------   -----------   -----------
Net increase (decrease) in cash........................    2,270,157       311,120      (485,523)
Cash at beginning of period............................    3,714,883     4,125,271     5,644,767
                                                         -----------   -----------   -----------
Cash at end of period..................................  $ 5,985,040     4,436,391     5,159,244
                                                         ===========   ===========   ===========
Supplemental disclosure of cash flow information:
  Income taxes paid....................................  $   523,000       950,000            --
                                                         -----------   -----------   -----------
  Interest paid........................................  $   611,968       584,666       439,301
                                                         ===========   ===========   ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       7
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    (A) BASIS OF PRESENTATION

    The accompanying unaudited consolidated financial statements of Preferred
Employers Holdings, Inc. (the "Company") and its subsidiaries have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the nine months period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes included
in the audited consolidated financial statements of the Company for the year
ended December 31, 1998.

    The accompanying unaudited consolidated financial statements of the Company
and its subsidiaries are prepared in accordance with generally accepted
accounting principles. These principles vary in certain respects from statutory
accounting practices prescribed or permitted by regulatory authorities. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, based on
information available, in recording transactions resulting from business
operations. The balance sheet amounts that involve a greater extent of
accounting estimates and actuarial determinations subject to future changes are
the Company's liabilities for unpaid losses and loss adjustment expenses. As
additional information becomes available (or actual amounts are determinable),
the recorded estimates may be revised and reflected in operating results. While
management believes that the liability for unpaid losses and loss adjustment
expenses is adequate to cover the ultimate liability, such estimates may be more
or less than the amounts actually paid when claims are settled.

    (B) ORGANIZATION

    Preferred Employers Holdings, Inc. is the successor company to Preferred
Employers Group, Inc. ("PEGI"). Except as otherwise specified or when the
context otherwise requires, references to the Company herein includes Preferred
Employers Holdings, Inc. and PEGI, through which the Company conducts certain of
its business operations.

    In March 1998, the Company, through a wholly-owned subsidiary, consummated
the purchase of substantially all the assets of HSSI Travel Nurse
Operations, Inc. ("Travel Nurse"), a wholly-owned subsidiary of Hospital
Staffing Services, Inc., for $5.0 million in cash. Based in Ft. Lauderdale,
Florida since 1981, Travel Nurse has provided registered nurses and other
professional medical personnel, often referred to as "Travelers," primarily to
client hospitals in the United States and the Caribbean on a contractual basis
for periods generally ranging from 8 to 52 weeks.

    In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of National Explorers and
Travelers Healthcare, Inc. ("NET Healthcare"), an employee staffing company and
provider of temporary registered nurses and other professional medical
personnel, primarily to client hospitals. This business combination was
accounted for as a pooling-of-interests combination and, accordingly, the
Company's consolidated financial statements for applicable periods prior to the
combination have been restated to include the accounts and results of operations
of NET Healthcare.

                                       8
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    The Company was appointed as a general agent ("GA") by the American
International Group of Companies ("AIG"), a major group of international
insurance carriers, on January 1, 1993. In this regard, the Company is
authorized to write workers' compensation as well as other forms of "property
and casualty" business (such other forms of insurance being hereinafter referred
to as "Package") on behalf of AIG. In addition, the Company was appointed as a
GA by General Accident Insurance Company of America ("GAIC") on September 1,
1994, with the authority to write all forms of commercial property and casualty
business for family style and fast-food restaurants. On June 11, 1996, GAIC
advised the Company that it would no longer write Package insurance for
fast-food restaurants; however, on March 20, 1997, the Company was appointed as
a GA by the Kemper Group of Insurance Companies with the authority to write
workers' compensation and other forms of commercial property and casualty
business for family style and fast-food restaurants and convenience stores. In
September 1998, Kemper advised the Company that they would no longer accept
Package insurance risks for fast food restaurants, but retained its contract
with the Company to serve as a program administrator for certain risks. On
June 1, 1999, the Company entered into an agreement with a division of United
States Fidelity and Guaranty Company to provide Package insurance for franchise,
fast food and family style restaurants.

    (C) INSURANCE OPERATIONS

    In 1996, the Company formed a Bermuda licensed reinsurance subsidiary (the
"Reinsurer") and entered into a reinsurance agreement (the "Agreement") with
certain affiliates of AIG during the fourth quarter of 1996. The Agreement
provides that the Reinsurer assume certain workers' compensation and employer's
liability insurance policies from AIG with policy inception dates as of
January 1, 1996 and subsequent. Although the Reinsurer assumes the risks
associated with being a reinsurer, the Agreement limits the liability of the
Reinsurer for losses and certain defined expenses to the first $300,000 per
occurrence. In addition, the Agreement limits the aggregate liability of the
Reinsurer for all coverage to an amount not to exceed 70% of the gross written
premium for each individual underwriting year.

    Because the Agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the Agreement
and formation of the Reinsurer are accounted for as retroactive reinsurance. The
principal difference between the accounting for retroactive and prospective
reinsurance is that revenue and costs of retroactive reinsurance are deferred
and accreted into income over the claim-settlement period rather than over the
period for which contractual coverage is provided, as would be the case under
prospective reinsurance. Retroactive insurance accounting does not change the
amount of income to be recognized, but rather extends the period of recognition
from one year--the period of coverage, to six years--the period over which
claims liabilities from the business are expected to be settled. Cash flows from
the reinsurance transactions are not affected by the accounting treatment.

    The accompanying financial statements reflect a composite
retroactive/prospective accounting treatment with business written prior to
October 1, 1996, being accounted for as retroactive and business written
subsequent thereto accounted for as prospective.

    The effects of prospective and retroactive insurance accounting treatment
are illustrated below. The prospective method assumes that the Agreement
incepted on January 1, 1996, and provides for a loss ratio of 51.5%, acquisition
costs of 33.83%, aggregate net premiums written of approximately $15 million
($12,600,000 relating to the period from January 1 through September 30, 1996)
and an investment yield of 6.5% on net cash flows. The retroactive (deposit)
method uses the same assumptions except that since the

                                       9
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Agreement was not executed until October 1996, any investment income on net cash
flows earned for the period from January through September 1996 are deferred and
recognized as "other income" over the payment period of the remaining claim
liabilities.

    Income before income taxes recognized, and estimated to be recognized in the
calendar year indicated below is as follows:

<TABLE>
<CAPTION>
                                                        PROSPECTIVE          COMPOSITE
                                                          METHOD      RETROACTIVE/PROSPECTIVE
YEARS                                                   (PRO FORMA)          (ACTUAL)
-----                                                   -----------   -----------------------
<S>                                                     <C>           <C>
1996..................................................  $1,658,000             324,000
1997..................................................   1,288,000           1,372,000
1998..................................................     400,000             840,000
1999..................................................     332,000             658,000
2000..................................................     300,000             563,000
2001..................................................     282,000             503,000
                                                        ----------           ---------
                                                        $4,260,000..         4,260,000
                                                        ==========           =========
</TABLE>

    The table presented above is for illustrative purposes only to highlight
that the basis of accounting used only impacts the timing of the net revenue
recognition and not the aggregate economic results. Further, it should be noted
that the above table is based on estimates as to the amount and timing of
aggregate loss and loss expense payments, available investment yields and
acquisition and other costs associated with the provision of insurance
protection. Actual results may vary, perhaps materially, from those illustrated
above. No assurance is given or may be taken that subsequent revisions of
estimates will not have a material impact on the illustration above.

    Prospective reinsurance premiums are earned on a pro-rata basis over the
term of the related coverage. The reserve for unearned premiums represents the
portion of the net premiums written relating to the unexpired term of coverage.

    Acquisition costs are deferred and amortized over the period in which the
related prospective reinsurance premiums are earned.

    Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid claims represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported. The methods
of determining such estimates and establishing resulting reserves are
continually reviewed and updated. Adjustments, if any, resulting therefrom are
reflected in income currently. The Company does not discount its loss reserves.

    (D) STAFFING OPERATIONS

    In March 1998, the Company purchased substantially all of the assets of
Travel Nurse for $5.0 million in cash. Based in Fort Lauderdale, Florida since
1981, Travel Nurse has provided registered nurses and other professional medical
personnel, often referred to as "Travelers," primarily to client hospitals in
the United States and the Caribbean on a contractual basis for periods generally
ranging from 8 to 52 weeks.

                                       10
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    In August 1998, the Company issued 517,085 shares of its common stock in
exchange for all the outstanding common stock of NET Healthcare, an employee
staffing company and provider of temporary registered nurses and other
professional medical personnel, primarily to client hospitals. This business
combination was accounted for as a pooling-of-interests combination.

    Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.

    Receivables include amounts due from healthcare organizations for services
provided by the staffing company through the placement of healthcare
professionals. These receivables are presented net of an estimated allowance for
uncollectible accounts based on an evaluation of expected collections resulting
from an analysis of current and past due accounts, past collection experience in
relation to amounts billed and other relevant information. Concentration of
credit risk relating to accounts receivable is limited by number, diversity and
geographic dispersion of the healthcare organizations serviced by the staffing
company.

    During 1995, NET Healthcare entered into a line of credit with a shareholder
to provide a total of $190,000 to fund the working capital requirements of NET
Healthcare. The line of credit bore interest at the rate of 5% per annum. In
March 1996, NET Healthcare entered into an additional line of credit with a
shareholder collateralized by outstanding accounts receivable. Interest was
payable at the rate of 2% per month on average outstanding balances. In
May 1996, the agreement was amended to allow for additional funding. In
May 1997, the agreement was further amended to increase the interest rate by .5%
per month on approximately $600,000 of the balance of the line of credit. The
amended line of credit, effective April 1, 1998, established a rate of interest
of 10% per annum and eliminated restrictive covenants included in the original
agreement. Interest expense related to the line of credit amounted to $240,884
and $439,576 for the nine months ended September 30, 1998 and 1997,
respectively. The aggregate outstanding balance together with its related
accrued interest expense was paid in full subsequent to the merger of NET
Healthcare and the Company.

    The goodwill associated with the Company's acquisition of substantially all
of the assets of Travel Nurse is amortized over 21 years.

    The former shareholders of NET Healthcare previously elected to have the
company treated as an "S Corporation" under the Internal Revenue Code and,
therefore, net income or loss was attributable directly to the former
shareholders. Accordingly, no pre-merger benefit for the federal or state income
taxes has been reflected in the accompanying combined financial statements. In
addition, an adjustment has been made to the restated stockholders' equity of
the Company as of December 31, 1998 to eliminate the untaxed effects of
including NET Healthcare's results of operations in the combined financial
statements of the Company.

    (E) INVESTMENTS

    Fixed maturity securities which the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and are
reported at amortized cost. Fixed maturity and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as

                                       11
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

"trading" and are reported at fair value, with unrealized gains and losses
included in income. Fixed maturity and equity securities not classified as
either held to maturity or trading are classified as "available for sale" and
are reported at fair value, with unrealized gains and losses (net of deferred
taxes) charged or credited as a separate component of shareholders' equity.

    Investment income is recorded as earned on the accrual basis and includes
amortization of premiums and accretion of discounts relating to investments
acquired at other than par value. Realized gains or losses on disposal of
investments are determined on a specific identification basis and are included
in revenues.

    The Company does not own any on-balance sheet or off-balance sheet
derivative instruments.

    (F) PROPERTY AND EQUIPMENT, NET

    Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method of depreciation over the
estimated useful lives of the related assets, which range from five to seven
years. Leasehold improvements are carried at cost less accumulated amortization
provided on the straight-line basis over the shorter of the lease term or the
estimated useful lives of the improvements.

    (G) PREMIUMS PAYABLE

    Premiums which are collected from insureds are reported as assets of the
Company and as corresponding liabilities to the insurance carriers. Premiums
received from insureds but not yet remitted to the carriers are held as invested
cash in a fiduciary capacity.

    (H) COMMISSION INCOME

    Commission income is recognized when premiums are billed. Any subsequent
commission adjustments, including policy cancellations, are recognized upon
notification from the insurance carrier or broker.

    (I) INCOME TAXES

    Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statement
of operations in the period that includes the enactment date.

    (J) EARNINGS PER SHARE

    Earnings per common share is based upon the weighted average number of
common shares outstanding during each period. On December 31, 1998, the Company
adopted SFAS No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 requires
specific computations, presentations and disclosures for earnings per share
(EPS) amounts in order to make EPS amounts more compatible with international

                                       12
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

accounting standards. Stock options outstanding at September 30, 1999, 1998 and
1997 of 1,038,000, 916,500 and 250,000, respectively, had no effect on diluted
earnings per share amounts.

    In May 1998, the Company concluded a private placement of 7% convertible
subordinated notes due May 12, 2003 in the aggregate principal amount of
$10,580,000. Principal balances outstanding as of September 30, 1999 and
December 31,1998 were $10,535,000 and $10,580,000, respectively. The effect on
diluted earnings per share amounts is presented in the accompanying consolidated
statements of operations.

    (K) COMPREHENSIVE INCOME (DEFICIT)

    On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. Comprehensive income (deficit) presents a measure of all
changes in shareholder's equity except for changes resulting from transactions
with shareholders in their capacity as shareholders. The Company's total
comprehensive income (deficit) presently consists of net income adjusted for the
change in net unrealized holding gains (losses) on fixed maturity securities
available-for-sale. The net change in net unrealized holding losses on fixed
maturity securities available-for-sale was ($183,292), $0 and $0 for the nine
months ended September 30, 1999, 1998, and 1997, respectively. Total
comprehensive income was $723,420, $1,547,318 and $271,367 for the nine months
ended September 30, 1999, 1998 and 1997, respectively.

    (L) RECLASSIFICATIONS

    Certain items in the 1998 and 1997 financial statements have been
reclassified to conform them with the presentation of the Company's financial
statements as of and for the three months and nine months ended September 30,
1999.

(2) INVESTMENTS

    At September 30, 1999 and December 31, 1998, the Company did not hold
fixed-maturity securities which individually exceeded 10% of shareholders'
equity except U.S. government and government agency securities.

    Bonds with an amortized cost of $9,283,237 and $8,257,053 were held in a
restricted account for the benefit of the ceding company (AIG) as unauthorized
reinsurance at September 30, 1999 and December 31, 1998, respectively, in
accordance with statutory requirements.

                                       13
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(2) INVESTMENTS (CONTINUED)

    The amortized cost and estimated fair values of the Company's investments at
September 30, 1999 and December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                            AMOUNT AT
                                                                                              WHICH
                                                                                              SHOWN
                                                       GROSS        GROSS                     IN THE
                                        AMORTIZED    UNREALIZED   UNREALIZED   ESTIMATED     BALANCE
                                          COST         GAINS        LOSSES     FAIR VALUE     SHEET
                                       -----------   ----------   ----------   ----------   ----------
<S>                                    <C>           <C>          <C>          <C>          <C>
SEPTEMBER 30, 1999:
-------------------------------------
Available-for-sale Securities:
Fixed maturities:
  Obligations of states and political
    subdivisions.....................  $21,763,024     31,195      (239,318)   21,554,901   21,554,901
  Obligations of states and political
    subdivisions--restricted.........    9,283,237      5,182       (87,999)    9,200,420    9,200,420
                                       -----------     ------      --------    ----------   ----------
Total fixed maturities...............  $31,046,261     36,377      (327,317)   30,755,321   30,755,321
                                       ===========     ======      ========    ==========   ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                            AMOUNT AT
                                                                                              WHICH
                                                                                              SHOWN
                                                       GROSS        GROSS                     IN THE
                                        AMORTIZED    UNREALIZED   UNREALIZED   ESTIMATED     BALANCE
                                          COST         GAINS        LOSSES     FAIR VALUE     SHEET
                                       -----------   ----------   ----------   ----------   ----------
<S>                                    <C>           <C>          <C>          <C>          <C>
DECEMBER 31, 1998:
-------------------------------------
Held to maturity securities:
Fixed maturities:
  Obligations of states and political
    subdivisions.....................  $15,454,481     241,667      (4,129)    15,692,019   15,454,481
  Obligations of state and political
    subdivisions--restricted.........    8,257,053     130,956          --      8,388,009    8,257,053
                                       -----------     -------      ------     ----------   ----------
Total fixed maturities...............  $23,711,534     372,623      (4,129)    24,080,028   23,711,534
                                       ===========     =======      ======     ==========   ==========
</TABLE>

    The amortized cost and fair value of securities at September 30, 1999 and
December 31, 1998, by contractual maturity date, are presented below:

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30, 1999
                                                              ------------------------
                                                               AMORTIZED       FAIR
                                                                 COST         VALUE
                                                              -----------   ----------
<S>                                                           <C>           <C>
Fixed maturities available-for-sale:
  Due in one year or less...................................  $        --           --
  Due after one year through five years.....................   20,715,146   20,532,031
  Due after one year through five years--restricted.........    9,283,237    9,200,420
  Due after five years through ten years....................    1,047,878    1,022,870
  Due after ten years.......................................           --           --
  Due after ten years--restricted...........................           --           --
                                                              -----------   ----------
                                                               31,046,261   30,755,321
  Short-term investments....................................       13,279       13,279
  Short-term investments--restricted........................    3,896,915    3,896,915
                                                              -----------   ----------
    Total...................................................  $34,956,455   34,665,515
                                                              ===========   ==========
</TABLE>

                                       14
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(2) INVESTMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                 DECEMBER 31, 1998
                                                              ------------------------
                                                               AMORTIZED       FAIR
                                                                 COST         VALUE
                                                              -----------   ----------
<S>                                                           <C>           <C>
Fixed maturities held-to-maturity:
  Due in one year or less...................................  $        --           --
  Due after one year through five years                        14,394,846   14,600,179
  Due after one year through five years--restricted.........    7,197,418    7,296,169
  Due after five years through ten years....................           --           --
  Due after ten years.......................................    1,059,635    1,091,840
  Due after ten years-restricted............................    1,059,635    1,091,840
                                                              -----------   ----------
                                                               23,711,534   24,080,028
  Short-term investments....................................    1,515,347    1,515,347
  Short-term investments-restricted.........................    5,516,680    5,516,680
                                                              -----------   ----------
    Total...................................................  $30,743,561   31,112,055
                                                              ===========   ==========
</TABLE>

    The Company no longer has the intent to hold its securities to maturity;
therefore, the entire portfolio of fixed maturities was reclassified from
"held-to-maturity" to "available-for-sale" securities at September 30, 1999. The
net adjustment to unrealized holding losses on available-for-sale securities is
included as a separate component of shareholders' equity and totaled $183,292 in
1999.

    During the nine months ended September 30, 1999 fixed maturities
available-for-sale securities with a fair value at the date of sale of
$8,372,000 were sold. The approximate gross realized gains and losses on such
sales totaled $90,000 and $29,000, respectively.

(3) FINANCIAL INSTRUMENTS

    The carrying amounts for short-term investments, cash, accounts, commissions
and premiums receivable, accrued investment and interest income, notes payable,
premiums, commissions and other insurance balances payable and accounts payable
and accrued expenses approximate their fair values due to the short-term nature
of these instruments.

    Estimated fair values for fixed maturities were provided by outside
consultants using market quotations, prices provided by market makers or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The carrying amount for the 7%
convertible subordinated notes at September 30, 1999 and December 31, 1998 were
$10,535,000 and $10,580,000, respectively, and the related estimated fair value
at September 30, 1999 and December 31, 1998 was $10,113,949 and $10,280,955,
respectively, which was determined by management based on available market
information and appropriate valuation methodologies.

                                       15
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         SEPTEMBER 30, 1999 (UNAUDITED)

(4) ACCOUNTS, COMMISSIONS AND PREMIUMS RECEIVABLE

    Accounts, commissions and premiums receivable consists of the following at
September 30, 1999 and December 31,1998:

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1999   DECEMBER 31, 1998
                                                              ------------------   -----------------
<S>                                                           <C>                  <C>
Staffing accounts receivable-billed.........................      $ 5,507,454          5,626,113
Staffing accounts receivable-unbilled.......................        1,189,463          1,000,370
                                                                  -----------         ----------
                                                                    6,696,917          6,626,483
Less allowance for uncollectible accounts...................          (96,054)          (116,484)
                                                                  -----------         ----------
Staffing accounts receivable, net...........................        6,580,433          6,530,429
Premiums receivable.........................................        4,412,696          3,652,463
Commissions receivable......................................        1,368,087          1,018,031
                                                                  -----------         ----------
      Total.................................................      $12,361,216         11,200,923
                                                                  ===========         ==========
</TABLE>

    The allowance for uncollectible accounts as of September 30, 1999 and
December 31, 1998 consists of the following:

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30, 1999   DECEMBER 31, 1998
                                                              ------------------   -----------------
<S>                                                           <C>                  <C>
Beginning balance...........................................       $ 96,054             125,367
Provision for uncollectible accounts........................         47,116              96,624
Write-offs..................................................        (26,686)           (125,937)
                                                                   --------            --------
Ending Balance..............................................       $116,484              96,054
                                                                   ========            ========
</TABLE>

(5) STOCKHOLDERS LOAN

    In May 1995, the Company entered into a repurchase agreement with PEGI
stockholders (the "Agreement") whereby the Company agreed to repurchase from
them an aggregate of 30 shares of common stock (529,412 shares as adjusted to
give effect to the recapitalization of the Company in February 1997 whereby the
Company exchanged 17,647.06 shares of Common Stock for each share of PEGI Common
Stock held by the stockholders of PEGI) (the "Shares") of the Company. The
aggregate purchase price for the Shares was $600,000 (including interest) to be
paid in 24 installments of $25,000. The closing of the Agreement was subject to
the Company's completion of a $600,000 distribution to the stockholders of the
Company, pro rata based on the number of shares of common stock of the Company
outstanding and paid to the stockholders of record on the Agreement date,
without giving effect to the repurchase. The $600,000 distribution was made by
the Company on May 26, 1995.

    Pursuant to a subsequent agreement made with the stockholders, the
outstanding loan balance at December 31, 1995 was to be repaid in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. The
outstanding balance of the above-referenced stockholder loan was paid in full
during 1997.

                                       16
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(6) INCOME TAXES

    U.S. Federal and state income tax expense (benefit) consists of the
following components:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED                       CURRENT    DEFERRED     TOTAL
--------------------------                      ---------   ---------   --------
<S>                                             <C>         <C>         <C>
September 30, 1999............................  $ 424,618    (252,759)  171,859
September 30, 1998............................   (934,667)  1,115,372   180,705
September 30, 1997............................     41,719          --    41,719
</TABLE>

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED                       CURRENT    DEFERRED     TOTAL
-------------------------                       --------   ---------   --------
<S>                                             <C>        <C>         <C>
September 30, 1999............................  $953,394    (632,475)  320,919
September 30, 1998............................    36,702     285,971   322,673
September 30, 1997............................   212,542          --   212,542
</TABLE>

    Income tax expense for the three and nine months ended September 30, 1999,
1998 and 1997 differed from the amount computed by applying the U.S. Federal
income tax rate of 34% to income before Federal income taxes as a result of the
following:

<TABLE>
<CAPTION>
                                                 FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                 ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                            ------------------------------   ------------------------------
                                              1999       1998       1997       1999       1998       1997
                                            --------   --------   --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>
Expected income tax expense...............  $121,327    213,765    65,818     417,394    635,797    164,529
State income tax, net.....................    24,656     18,481       594      56,496     48,059     12,436
Tax-exempt investment income..............   (97,567)  (102,466)  (87,379)   (280,245)  (227,064)  (174,313)
Travel and entertainment expense..........     1,947     37,299        --      25,531     37,299         --
Tender offer expenses.....................   127,500         --        --     127,500         --         --
"S" corporation (income) expense..........        --   (107,914)   46,507          --   (252,903)   205,093
Other, net................................    (6,004)   121,540    16,179     (25,757)    81,485      4,797
                                            --------   --------   -------    --------   --------   --------
      Total income tax expense
        (benefit).........................  $171,859    180,705    41,719     320,919    322,673    212,542
                                            ========   ========   =======    ========   ========   ========
</TABLE>

    As a result of the August 1998 business combination of NET Healthcare, an
"S" corporation, with the Company, a "C" corporation, NET Healthcare's "S"
corporation status ceased to exist. The unaudited pro forma information in the
consolidated statements of operations reflect income tax expense (benefit)had
NET Healthcare been taxed as a "C" corporation, of $239,882 and ($67,104) for
the three months ended September 30, 1998 and 1997, respectively, and $647,134
and ($174,861) for the nine months ended September 30, 1998 and 1997,
respectively.

                                       17
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(6) INCOME TAXES (CONTINUED)

    Deferred income taxes are based upon temporary differences between the
financial statement and tax bases of assets and liabilities. The following
deferred taxes are recorded for September 30, 1999, and December 31, 1998:

<TABLE>
<CAPTION>
                                                           1999        1998
                                                        ----------   ---------
<S>                                                     <C>          <C>
Deferred tax assets:
  Unearned premiums...................................  $  394,296     411,176
  Reserve for unpaid losses and loss adjustment
    expenses..........................................   1,387,375     971,252
  Other, net..........................................     183,371      59,105
                                                        ----------   ---------
    Gross deferred tax assets.........................   1,965,042   1,441,533
                                                        ----------   ---------
Deferred tax liabilities:
  Cash to accrual change..............................     (97,336)   (284,575)
  Deferred acquisition costs..........................    (679,705)   (680,291)
  Other, net..........................................          --     (28,789)
                                                        ----------   ---------
    Gross deferred tax liabilities....................    (777,041)   (993,655)
                                                        ----------   ---------
      Net deferred tax assets.........................  $1,188,001     447,878
                                                        ==========   =========
</TABLE>

    A valuation allowance has not been established as the Company believes it is
more likely than not that the net deferred tax asset will be realized.

    The Company's reinsurance subsidiary is a Bermuda domiciled corporation. The
reinsurance subsidiary is a "controlled foreign corporation" ("CFC") for United
States federal income tax purposes. As a result, the Company includes in its
gross income for United States federal income tax purposes its pro-rata share of
the CFC's "subpart F income," even if such subpart F income is not distributed.
Substantially all of the income of the reinsurance subsidiary's income is
subpart F income.

    The Company has elected under section 953(d) of the Internal Revenue Code to
tax its reinsurance subsidiary as a domestic corporation for U.S. Income Tax
purposes. The Company does not believe this election has a material effect on
its income tax expense.

(7) ANNUAL STATUTORY SOLVENCY REQUIREMENTS

    The Bermuda Insurance Act of 1978 and related regulations (the "Act")
requires the Company's reinsurance subsidiary to meet a minimum solvency margin.
Statutory capital and surplus as of December 31, 1998 was $10,531,208 and the
amount required to be maintained by the Company's was $3,163,000. In addition, a
minimum liquidity ratio must be maintained whereby relevant assets, as defined
by the Act, must exceed 75% of relevant liabilities. Once these requirements
have been met, there is no restriction on the retained earnings available for
distribution. At September 30, 1999 and December 31, 1998, the Company was in
compliance with this requirement.

                                       18
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(8) LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

    Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows for the nine months ended September 30, 1999, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                 1999          1998        1997
                                                              -----------   ----------   ---------
<S>                                                           <C>           <C>          <C>
Net unpaid losses and loss adjustment expenses at beginning
  of period.................................................  $13,878,892    6,107,613     199,390
Incurred related to
    Current year............................................    5,498,166    5,800,280   4,357,452
    Prior year..............................................      627,813      401,235          --
                                                              -----------   ----------   ---------
      Total incurred........................................    6,125,979    6,201,515   4,357,452
                                                              -----------   ----------   ---------
Paid related to:
    Current year............................................      150,340      183,928     261,702
    Prior year..............................................        1,662           --          --
                                                              -----------   ----------   ---------
      Total paid............................................      152,002      183,928     261,702
                                                              -----------   ----------   ---------
Net unpaid losses and loss adjustment expenses at end of
  period....................................................  $19,852,869   12,125,200   4,295,140
                                                              ===========   ==========   =========
</TABLE>

    Incurred losses are established for each underwriting year as a result of
the application of an estimated loss ratio to the related underwiting year
earned premiums. The distinction between "current year" and "prior year"
incurred losses relates to the underwriting year to which the earned premiums
relate.

(9) UNSECURED REVOLVING LINE OF CREDIT

    In May 1998, the Company obtained a $3 million unsecured revolving line of
credit from a bank. The terms of the loan provide for monthly interest payments
at the bank's prime lending rate (currently 8 1/4% per annum at September 30,
1999). The loan is renewable on an annual basis. The outstanding balance of the
line of credit was paid in September 1999, as discussed in Note 15. As of
December 31, 1998, the aggregate amount outstanding under the line of credit was
$1,850,000.

(10) SUBORDINATED CONVERTIBLE NOTES

    In May 1998, the Company concluded a private placement of $10,580,000 of 7%
convertible subordinated notes (the "Notes") due May 2003. The principal amount
of the Notes is convertible at the option of the noteholders into shares of the
Company's common stock at a conversion price of $9.00 per share (the "Conversion
Price") at any time prior to the earlier of the maturity date (May 12, 2003) or
10 business days after receipt of a termination notice. In the event (i) the
closing bid price of the Company's common stock equals or exceeds $13.50 per
share for twenty consecutive trading days during any period commencing upon
satisfaction of one of the conditions contained in clause (ii) described herein
and (ii) either a registration statement covering the shares of common stock
issuable upon conversion of the Notes has been declared effective by the
Securities and Exchange Commission and remains effective or at least two years
has elapsed since the issuance date of the Notes and the shares of common stock
issuable upon conversion of the notes are saleable, without restriction, under
Rule 144(k) promulgated under the Securities Act of 1933, as amended, then the
holders' right to convert the outstanding principal amount of the Notes shall be
terminated by the Company by delivering to the holders a notice of termination
(the "Termination Notice"), in which event (a) the holders will have the right
at any time during 10 business days after receipt of the Termination Notice, in
their sole discretion, to convert the outstanding principal amount of the Notes
into shares of common stock of the Company at the Conversion Price, and
(b) thereafter, the holders' option to convert shall terminate and the Notes may
be prepaid by the Company, at any time prior to the Maturity Date, in whole or
in part for the face amount thereof, together with all accrued and unpaid
interest through the date of prepayment. As of September 30, 1999, the aggregate
principal amount of Notes outstanding was $10,535,000. Notes in an aggregate
principal amount of $45,000 were converted into 5,000 shares of common stock of
the Company during the first quarter of 1999.

                                       19
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(11) SEGMENT REPORTING

    The Company's reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels. They are managed separately because of their unique marketing and
distribution requirements.

    There are two reportable segments: insurance and employee staffing. The
insurance segment sells, on behalf of others, business insurance principally to
the franchise industry and provides reinsurance of certain workers' compensation
and employers' liability insurance policies sold by the Company. The employee
staffing segment provides temporary registered nurses and other professional
medical personnel primarily to client hospitals.

    The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management evaluates segment
performance based on profit or loss from operations before income taxes not
including non-recurring gains and losses and intersegment transactions. Sales
and services between segments are accounted for as if the sale or services were
provided to third parties, that is at current market prices.

    Certain information concerning the Company's reporting segments for the
three months and nine months ended September 30, 1999, 1998 and 1997 is as
follows:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
<S>                                                        <C>          <C>          <C>
                                                                         EMPLOYEE
                                                           INSURANCE     STAFFING      TOTALS
                                                           ----------   ----------   ----------
1999
Revenues from external customers.........................  $3,849,972   12,098,967   15,948,939
Intersegment revenue.....................................       4,299           --        4,299
Interest revenue.........................................     483,130           85      483,215
Segment profit...........................................     631,862    1,119,603    1,751,465
1998
Revenues from external customers.........................  $4,837,482    9,420,005   14,257,487
Intersegment Revenue.....................................      25,933           --       25,933
Interest revenue.........................................     322,868          620      323,488
Segment profit...........................................     671,795      560,128    1,231,923
1997
Revenues from external customers.........................  $4,155,105    3,190,693    7,345,798
Interest revenue.........................................     307,348          191      307,539
Segment profit...........................................     368,676     (131,049)     237,627
</TABLE>

                                       20
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(11) SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
<S>                                                       <C>           <C>          <C>
                                                                         EMPLOYEE
                                                           INSURANCE     STAFFING      TOTALS
                                                          -----------   ----------   ----------
1999
Revenues from external customers........................  $12,670,081   34,270,821   46,940,902
Intersegment revenue....................................       20,641           --       20,641
Interest revenue........................................    1,347,538          387    1,347,925
Segment profit..........................................    1,816,336    2,887,761    4,704,097
Segment assets..........................................   49,008,205   13,180,356   62,188,561
1998
Revenues from external customers........................  $13,588,054   24,283,415   37,871,469
Intersegment Revenue....................................       25,933           --       25,933
Interest revenue........................................    1,224,400          620    1,225,020
Segment profit..........................................    1,992,766    1,217,682    3,210,448
Segment assets..........................................   36,884,774   12,527,705   49,412,479
1997
Revenues from external customers........................  $10,244,346    7,854,896   18,099,242
Interest revenue........................................      913,843          275      914,118
Segment profit..........................................    1,040,828     (603,214)     437,614
Segment assets..........................................   21,344,302    2,245,397   23,589,699
</TABLE>

    Information for the Company's reportable segments relates to the
enterprise's consolidated totals as follows:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
<S>                                                        <C>           <C>          <C>
                                                              1999          1998        1997
                                                           -----------   ----------   ---------
REVENUES:
Total revenues for reportable segments...................  $16,436,453   14,606,908   7,653,337
Intersegment revenue.....................................       (4,299)     (25,933)         --
Unallocated corporate interest revenue...................        1,670      121,278      76,346
                                                           -----------   ----------   ---------
Total consolidated revenues..............................  $16,433,824   14,702,253   7,729,683
                                                           ===========   ==========   =========
PROFIT OR LOSS:
Total profit or loss for reportable segments.............  $ 1,751,465    1,231,923     237,627
Unallocated amounts:
  General corporate expenses.............................   (1,396,292)    (724,481)   (120,391)
  Corporate interest revenue.............................        1,670      121,278      76,346
                                                           -----------   ----------   ---------
Income before income taxes...............................  $   356,843      628,720     193,582
                                                           ===========   ==========   =========
</TABLE>

                                       21
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(11) SEGMENT REPORTING (CONTINUED)

    Other items:

<TABLE>
<CAPTION>
                                                             REPORTABLE   UNALLOCATED
                                                              SEGMENT      CORPORATE    CONSOLIDATED
                                                               TOTAL         TOTAL         TOTAL
                                                             ----------   -----------   ------------
<S>                                                          <C>          <C>           <C>
1999
Depreciation and amortization..............................  $ 133,002       4,824          137,826
Amortization of deferred acquisition costs.................  1,198,707          --        1,198,707
1998
Depreciation and amortization..............................  $ 263,014       5,236          268,250
Amortization of deferred acquisition costs.................  1,373,824          --        1,373,824
1997
Depreciation and amortization..............................  $  41,358          --           41,358
Amortization of deferred acquisition costs.................  1,227,047          --        1,227,047
</TABLE>

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
<S>                                                       <C>           <C>          <C>
                                                             1999          1998         1997
                                                          -----------   ----------   ----------
REVENUES:
Total revenues for reportable segments..................  $48,309,468   39,122,422   19,013,360
Intersegment revenue....................................      (20,641)     (25,933)          --
Unallocated corporate interest revenue..................       24,812      111,291      189,413
                                                          -----------   ----------   ----------
Total consolidated revenues.............................  $48,313,639   39,207,780   19,202,773
                                                          ===========   ==========   ==========
PROFIT OR LOSS:
Total profit or loss for reportable segments............  $ 4,704,097    3,210,448      437,614
Unallocated amounts:
  General corporate expenses............................   (3,501,278)  (1,451,748)    (143,118)
  Corporate interest revenue............................       24,812      111,291      189,413
                                                          -----------   ----------   ----------
Income before income taxes..............................  $ 1,227,631    1,869,991      483,909
                                                          ===========   ==========   ==========
<CAPTION>
ASSETS AS OF SEPTEMBER 30:
Total assets for reportable segments.                     $62,188,561   49,412,479   23,589,699
<S>                                                       <C>           <C>          <C>
Elimation of intersegment receivables...................     (223,857)    (569,003)          --
Unallocated general corporate assets....................    2,555,667    6,038,654    5,490,394
Elimination of receivable from corporate................     (206,641)    (716,709)    (201,641)
                                                          -----------   ----------   ----------
Total consolidated assets...............................  $64,313,730   54,165,421   28,878,452
                                                          ===========   ==========   ==========
</TABLE>

                                       22
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(11) SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>
Other items:
<S>                                                         <C>          <C>         <C>
                                                            REPORTABLE   UNALLOCATED
                                                             SEGMENT     CORPORATE   CONSOLIDATED
                                                              TOTAL       TOTAL        TOTAL
                                                            ----------    ------     ---------
1999
Depreciation and amortization.............................  $  373,873    13,773       387,646
Amortization of deferred acquisition costs................   3,808,071        --     3,808,071
1998
Depreciation and amortization.............................  $  604,969     5,236       610,205
Amortization of deferred acquisition costs................   3,819,177        --     3,819,177
1997
Depreciation and amortization.............................  $  123,830        --       123,830
Amortization of deferred acquisition costs................   2,916,611        --     2,916,611
</TABLE>

    The Company does not attribute revenues or long-lived assets by geographic
areas. The Company does not have any single customer that can be identified as
material when considering the Company's consolidated revenues.

(12) LITIGATION

    The Company is a defendant in various litigation matters. While the outcome
of these matters cannot be estimated with certainty, it is the opinion of
management (after consultation with legal counsel) that the resolution of such
litigation will not have a material adverse effect on the Company's financial
statements.

(13) UNAUDITED PRO FORMA INFORMATION

    Pro forma adjustments for income taxes represent the difference between
historical income taxes and income taxes that would have been reported had NET
Healthcare filed income tax returns as a taxable "C" corporation for 1998 and
1997.

(14) YEAR 2000

    Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year. The Company developed and
executed a plan to address and resolve Year 2000 issues. The plan was based on
the Company's primary software vendors having advised the Company that the
necessary programming changes related to Year 2000 issues had been made and
tested and that the software used by the Company has been upgraded to be Year
2000 compliant. The costs associated with the implementation of the above
project were not material.

    It is management's belief that for any suppliers who may not be fully Year
2000 compliant, such non-compliance will not have a material adverse effect on
the Company's business. However, each major supplier's compliance will be
assessed in light of their response.

(15) SUBSEQUENT EVENTS

    On November 5, 1999, the Company concluded a tender offer which resulted in
the purchase by the Company of 3,224,392 shares of its common stock at a price
of $5 per share. The shares tendered included

                                       23
<PAGE>
              PREFERRED EMPLOYERS HOLDINGS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                         SEPTEMBER 30, 1999 (UNAUDITED)

(15) SUBSEQUENT EVENTS (CONTINUED)

238,888 shares issued as a result of the conversion of $2,150,000 in convertible
notes. The Company utilized approximately $8.6 million of its unrestricted cash
balances together with $7.5 million of financing to consummate the tender offer.
As a result of the tender offer, there are presently 2,261,581 shares
outstanding as of November 18, 1999, of which 1,604,706 are held by management
and other Company insiders.

    The $7.5 million of financing referred to above included the conversion of
the Company's existing $3.0 million unsecured revolving line of credit into a
new $7.5 million line of credit. The new line of credit provides for monthly
interest payments at the bank's prime lending rate plus 2%. The line of credit
is secured by the accounts receivable of its wholly owned subsidiary, Preferred
Healthcare Staffing, Inc. All unpaid principal and interest under the line of
credit is due on October 10, 2000.

                                       24
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes related thereto contained
elsewhere in this Form 10-Q. In August 1998, the Company consummated the merger
of NET Healthcare with and into one of the Company's wholly-owned subsidiaries,
and in connection therewith issued 517,085 shares of common stock in exchange
for all the outstanding common stock of NET Healthcare. The business combination
was accounted for as a "pooling-of-interests" and, accordingly, our consolidated
financial statements for applicable periods prior to the combination have been
restated to include the accounts and results of operations of NET Healthcare.

GENERAL

    The Company engages in the following activities:

    - it provides temporary registered nurses and other professional medical
      personnel primarily to client hospitals;

    - it sells, on behalf of others, business insurance, including workers'
      compensation, property, liability, casualty, and other types of coverage,
      and provides risk management services, including cost containment, safety
      management and claims management services, designed for segments of the
      franchise industry (particularly fast food restaurants, family-style
      restaurants and convenience stores); and

    - it provides reinsurance for certain workers' compensation and employers'
      liability insurance policies it sells.

    EMPLOYEE STAFFING.  In March and August of 1998, the Company acquired
businesses providing temporary registered nurses and other professional medical
personnel (often referred to as "Travelers") mainly to client hospitals.
Travelers serve clients for periods ranging from 8 to 52 weeks and function
essentially as permanent hospital staff rather than short-term, supplemental
staff. The Company believes that the ability of Travelers to function as
permanent staff improves the continuity and consistency of patient care and
reduces its clients' overall administration, orientation and supervisory
requirements relating to permanent staff, as well as reducing turnover of their
temporary staff.

    Staffing income is recognized at the time the staffing services are
provided. In most instances, the staffing company's temporary healthcare
professionals are considered employees of the staffing company while under
assignment and costs of employment are the responsibility of the staffing
company and are included in the accompanying statements of operations.

    INSURANCE.  The Company is engaged in the property and casualty insurance
business and has conducted business as a general agent on behalf of AIG, General
Accident Insurance Company ("General Accident") and Kemper Insurance Companies
("Kemper") and as a reinsurer for certain workers' compensation insurance
policies written by the Company on behalf of affiliates of AIG. Pursuant to our
general agency agreements, the Company is authorized to solicit and bind
insurance contracts on behalf of the insurers, collect and account for premiums
on business it writes, and request cancellation or nonrenewal of any policy it
places. The Company receives, as compensation pursuant to the terms of these
general agency agreements, gross commissions on its business at rates which
range from approximately 5% to 20%. The Company has written workers'
compensation insurance since its inception in 1988 and in late 1995 began
writing other forms of property and casualty insurance (such other forms of
insurance being hereinafter referred to as "Package") for family style and fast
food restaurants as a general agent for General Accident. In June 1996, General
Accident advised the Company that it would no longer accept Package insurance
risks for fast food restaurants. As a result, the Company became a general agent
for Kemper during March 1997, through which it wrote Package as well as other
forms of property and

                                       25
<PAGE>
casualty insurance and workers' compensation insurance. In September 1998,
Kemper advised the Company that it would no longer accept Package insurance
risks for fast food restaurants but retained its contract with the Company to
serve as a program administrator for certain risks. On June 1, 1999, the Company
entered into an agreement with a division of United States Fidelity and Guaranty
Company to provide Package insurance for franchise, fast food and family style
restaurants.

    REINSURANCE.  In December 1996, the Company formed Preferred Reinsurance and
entered into a reinsurance agreement with affiliates of AIG pursuant to which
Preferred Reinsurance acts as a reinsurer with respect to certain workers'
compensation and employer's liability insurance policies in force with policy
inception dates as of January 1, 1996 and subsequent which are written by the
Company on behalf of affiliates of AIG. Preferred Reinsurance is required to
provide affiliates of AIG, as security for the payment of losses, a combination
of cash, United States government securities and/or an irrevocable letter of
credit in an aggregate amount equal to 51.5% of the net written premiums ceded
to Preferred Reinsurance pursuant to the insurance agreement less the amount of
losses paid. Preferred Reinsurance receives, as compensation pursuant to the
terms of the reinsurance agreement, the related net written premiums less
certain program expenses and commissions and the losses paid associated with the
business. Although Preferred Reinsurance assumes the risks associated with being
a reinsurer, the reinsurance agreement limits the liability of Preferred
Reinsurance for losses and certain defined expenses to the first $300,000 per
occurrence. In addition, the reinsurance agreement limits the aggregate
liability of Preferred Reinsurance for all coverage to an amount not to exceed
70% of the gross written premiums for each individual underwriting year. Because
the reinsurance agreement is effective for all business written on or after
January 1, 1996, the policies written prior to the execution of the contract and
formation of Preferred Reinsurance were accounted for as retroactive
reinsurance. The reinsurance agreement with Preferred Reinsurance is terminable
by either party upon the occurrence of certain events. In the event the
Company's reinsurance agreement is terminated, the Company, in all likelihood,
would be materially and adversely affected.

    The Company utilizes a Third Party Administrator ("TPA") for its claims
processing. In this regard, the TPA is responsible for: (i) establishing initial
individual claim reserve amounts for all reported claims; (ii) periodic review
of all open claims making the necessary upward or downward reserve adjustment
based on the most current and up-to-date information; (iii) authorizing payments
to claimants from previously established reserve amounts; and (iv) closing
claims as a result of payment thereof or closing claims without payment due to
insufficient proof of loss coverage by the claimant or any combination thereof.

    As per the reinsurance agreement, the "fronting" company has the contractual
responsibility for the initial funding of all claims payments made by the TPA
and is subsequently entitled to seek reimbursement from the Company for claims
it funded in accordance with the terms of the reinsurance agreement. To date,
the fronting company has not sought reimbursement under the terms of the
reinsurance agreement. Although timely payments have been made to claimants by
the TPA, the Company's financial statements do not reflect such payments since
it has not yet reimbursed the fronting company for such payments. Instead, the
unreimbursed claim payments are included in the Company's balance sheet as
Unpaid Losses and Loss Adjustment Expenses.

    The Company collects workers' compensation premiums from the insureds and
remits the ceding commission (net of its commission) and reinsurance charges to
affiliates of AIG and remits the net premium to Preferred Reinsurance.
Commission income on workers' compensation business is recognized as income when
premiums are billed. Package insurance premiums are principally collected by the
insurance carrier. The package insurance carrier remits commissions to the
Company monthly on package premiums it collects. Commission income on package
business is recognized as income when premiums are due. Reinsurance premiums
received are earned on a pro-rata basis over the term of the related coverage.

    For the three months ended September 30, 1999, the Company's total revenues
were $16,434,000 as compared to $14,702,000 for the 1998 comparable period,
representing a net increase of $1,732,000.

                                       26
<PAGE>
    For the three months ended September 30, 1998, the Company's total revenues
were $14,702,000 as compared to total revenues of $7,730,000 for the 1997
comparable period, representing a net increase of $6,972,000. For the three
months ended September 30, 1999, approximately, 74%, 24% and 2% of the Company's
total revenues were derived from its staffing, reinsurance captive and general
agency businesses, respectively. For the three months ended September 30, 1998,
approximately 64%, 33%, and 3% of the Company's total revenues were derived from
its staffing, reinsurance captive and general agency businesses, respectively.
For the three months ended September 30, 1997, approximately 41%, 50% and 9% of
the Company's total revenues were derived from its staffing, reinsurance captive
and general agency businesses, respectively.

    For the nine months ended September 30, 1999, the Company's total revenues
were $48,314,000 compared to $39,208,000 for the 1998 comparable period,
representing a net increase of $9,106,000. For the nine months ended
September 30, 1998, the Company's total revenues were $39,208,000 as compared to
total revenue of $19,203,000 for the 1997 comparable period, representing a net
increase of $20,005,000. For the nine months ended September 30, 1999,
approximately, 71%, 27% and 2% of the Company's total revenues were derived from
its staffing, reinsurance captive and general agency business, respectively. For
the nine months ended September 30, 1998, approximately 62%, 34%, and 4% of
Company's total revenue were derived from its staffing, reinsurance captive and
general agency business, respectively. For the nine months ended September 30,
1997, approximately 41%, 50% and 9% of the Company's total revenues were derived
from its staffing, reinsurance captive and general agency business,
respectively.

    Historically, our employee staffing business has been seasonal with the
demand for Travelers being the highest in fourth and first quarters of the
calendar year (September through March), due largely to increased demand
particularly during the peak tourist and winter home period in Florida.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

    TOTAL REVENUES.  Total revenues for the three months ended
September 30,1999 were $16,434,000 compared to $14,702,000 for the 1998
comparable period, representing a net increase of $1,732,000 or 11.8%. Total
revenues for the three months ended September 30, 1998 were $14,702,000 compared
to $7,730,000 for the 1997 comparable period, representing a net increase of
$6,972,000 or 90.2%.

    The following tables provide a comparison of revenues for the three months
ended September 30, 1999 and 1998 by category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                     1999          1998       CHANGE       CHANGE
                                                  -----------   ----------   ---------   ----------
<S>                                               <C>           <C>          <C>         <C>
Staffing Income.................................  $12,099,000    9,420,000   2,679,000       28.4%
Premiums earned.................................    3,436,000    4,264,000    (828,000)     (19.4)%
Net commission income:
  Workers' compensation.........................      290,000      261,000      29,000       11.1%
  Package.......................................                   151,000    (151,000)    (100.0)%
  Other, net....................................       50,000       41,000       9,000       22.0%
                                                  -----------   ----------   ---------     ------
    Total net commission income.................      340,000      453,000    (113,000)     (24.9)%
Net investment income...........................      481,000      445,000      36,000        8.1%
Other income....................................       78,000      120,000     (42,000)     (35.0)%
                                                  -----------   ----------   ---------     ------
    Total revenues..............................  $16,434,000   14,702,000   1,732,000       11.8%
                                                  ===========   ==========   =========     ======
Workers' compensation:
  Premiums collected............................  $ 3,767,000    3,361,000
                                                  ===========   ==========
Ratio of net commission income/premiums
  collected.....................................          7.7%         7.8%
                                                  ===========   ==========
</TABLE>

                                       27
<PAGE>
    Staffing income increased $2,679,000 or 28.4% as a result of the increase in
business related to the competitive advantage created by the merger of NET
Healthcare. Premiums earned decreased $828,000 or 19.4% for the three months
ended September 30, 1999 as compared to the 1998 comparable period as a result
of the decrease in the book of business. Workers' compensation commission income
increased $29,000 or 11.1% for the three months ended September 30, 1999 as
compared to 1998 comparable period as a result of the increase in the mix of
business produced by brokers. Package commission income decreased $151,000 or
100.0% for the three months ended September 30, 1999 as compared to 1998
comparable period as a result of a cancellation of the Kemper Contract for the
business written for fast food restaurants. Other net commission income increase
$9,000 or 22.0% for the three months ended September 30, 1999 as compared to
1998 comparable period as a result of the increase in volume of small business
plan premiums collected. Net investment income increased $36,000 or 8.1% as a
result of net realized gains on sale of available-for-sale securities. Other
income decreased $42,000 or 35.0% for the three months ended September 30, 1999
as compared to the 1998 comparable period as a result of the effects of the
retroactive insurance accounting treatment of Preferred Reinsurance as discussed
more fully in Note 1 (c) to the Company's consolidated financial statements.

    TOTAL OPERATING EXPENSES.  Total operating expenses for the three months
ended September 30, 1999 were $15,755,000 compared to $13,542,000 for the 1998
comparable period, representing an increase of $2,213,000 or 16.3%. Total
operating expenses for the three months ended September 30, 1998 were
$13,542,000 compared to $7,358,000 for the 1997 comparable period, representing
an increase of $6,184,000 or 84.0%.

    The following table provides a comparison of total expenses for the three
months ended September 30, 1999 and 1998 by category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                     1999          1998       CHANGE       CHANGE
                                                  -----------   ----------   ---------   ----------
<S>                                               <C>           <C>          <C>         <C>
Staffing costs..................................  $ 9,292,000    7,392,000   1,900,000       25.7%
Losses and loss adjustment expenses incurred....    1,790,000    2,197,000    (407,000)     (18.5)%
Amortization of deferred acquisition costs......    1,198,000    1,374,000    (176,000)     (12.8)%
Other operating expenses........................    3,475,000    2,579,000     896,000       34.7%
                                                  -----------   ----------   ---------      -----
    Total operating expenses....................  $15,755,000   13,542,000   2,213,000       16.3%
                                                  ===========   ==========   =========      =====
</TABLE>

    Staffing costs increased $1,900,000 or 25.7% consistent with the increase in
staffing revenues for the three months ended September 30, 1999 as discussed
above. The major risk associated with the Company's entry into the reinsurance
business is that the Company may experience an adverse loss ratio. In an effort
to minimize such risk, the Company has obtained aggregate liability reinsurance
coverage which limits its exposure to a maximum 70% loss ratio as more fully
discussed in Note 1 (c) to the Company's consolidated financial statements. The
underwriting gains recognized by the Company is the most significant benefit
realized by the Company as a result of its entry into the reinsurance business.
Losses and loss adjustment expenses incurred (i) decreased $407,000 or 18.5%
which is consistent with the decrease in premiums earned for the three months
ended September 30,1999 as discussed above and (ii) were 52.0% of premiums
earned for the three month periods ended September 30, 1999 and September 30,
1998. Amortization of deferred acquisition costs (i) decreased $176,000 or 12.8%
which is also consistent with the decrease in premiums earned during the three
months ended September 30, 1999 as discussed above and (ii) were 34.9% and 32.2%
of premiums earned for the three month periods ended September 30, 1999 and
1998, respectively. As a result, the underwriting gain, expressed as a
percentage of premiums earned, was 13.0% and 16.3% for the three month periods
ended September 30, 1999 and 1998, respectively. Other operating expenses
increased $896,000 or 34.7%.

                                       28
<PAGE>
    The following table provides a comparison of other operating expenses for
the three months ended September 30, 1999 and 1998 by category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                        1999        1998       CHANGE      CHANGE
                                                     ----------   ---------   --------   ----------
<S>                                                  <C>          <C>         <C>        <C>
Personnel costs....................................  $1,879,000   1,641,000   238,000        14.5%
Occupancy costs....................................     219,000     181,000    38,000        21.0%
Professional fees..................................     601,000     169,000   432,000       255.6%
Other operating expenses...........................     776,000     588,000   188,000        32.0%
                                                     ----------   ---------   -------       -----
    Total other operating expenses.................  $3,475,000   2,579,000   896,000        34.7%
                                                     ==========   =========   =======       =====
</TABLE>

    Personnel costs increased $238,000 or 14.5% as a result of annual salary
increases together with the growth in the business of NET Healthcare. Occupancy
expenses increased $38,000 or 21.0% principally as a result of the leasing of
additional office space and relocation of our subsidiary Preferred Healthcare
Staffing, Inc. Professional fees increased $432,000 or 255.6% principally as a
result of increased legal, accounting and actuarial fees associated with various
corporate and acquisition matters and the tender offer as discussed more fully
in Note 15 to the Company's consolidated financial statements. Other operating
expenses increased $188,000 or 32.0% primarily related to the increased
corporate fees and services which increased as a result of the expansion of the
staffing business and the tender offer as discussed more fully in Note 15 to the
Company's consolidated financial statements.

    TOTAL NON-OPERATING EXPENSES.  Total non-operating expenses for the three
months ended September 30, 1999 were $322,000 compared to $531,000 for the 1998
comparable period. Amortization of intangible assets and other non-operating
expenses decreased $135,000, primarily related to the expenses incurred in
relation to the merger of NET Healthcare in 1998.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

    TOTAL REVENUES.  Total revenues for the nine months ended September 30, 1999
were $48,314,000 compared to $39,208,000 for the 1998 comparable period,
representing a net increase of $9,106,000 or 23.2%. Total revenues for the nine
months ended September 30, 1998 were $39,208,000 compared to $19,203,000 in the
1997 comparable period, representing a net increase of $20,005,000 or 104.2%.

    The following table provides a comparison of revenues for the nine months
ended September 30, 1999 and 1998 by category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                     1999          1998       CHANGE       CHANGE
                                                  -----------   ----------   ---------   ----------
<S>                                               <C>           <C>          <C>         <C>
Staffing Income.................................  $34,271,000   24,283,000   9,988,000       41.1%
Premiums earned.................................   11,320,000   11,681,000    (361,000)      (3.1)%
Net commission income:
  Workers' compensation.........................      860,000    1,035,000    (175,000)     (16.9)%
  Package.......................................       71,000      360,000    (289,000)     (80.3)%
  Other, net....................................      131,000      128,000       3,000        2.3%
                                                  -----------   ----------   ---------      -----
    Total net commission income.................    1,062,000    1,523,000    (461,000)     (30.3)%
    Net investment income.......................    1,373,000    1,336,000      37,000        2.8%
    Other income................................      288,000      385,000     (97,000)     (25.2)%
                                                  -----------   ----------   ---------      -----
    Total revenues..............................  $48,314,000   39,208,000   9,106,000       23.2%
                                                  ===========   ==========   =========      =====
Workers' compensation:
  Premiums collected............................  $10,133,000   11,343,000
                                                  ===========   ==========
  Ratio of net commission income/premiums
    collected...................................          8.5%         9.1%
                                                  ===========   ==========
</TABLE>

                                       29
<PAGE>
    Staffing income increased $9,988,000 or 41.1% as a result of the increase in
business related to the competitive advantage created by the merger of NET
Healthcare. Premiums earned decreased $361,000 or 3.1% for the nine months ended
September 30, 1999 as compared to the prior year as a result of the decrease in
the book of business. Workers' compensation commission income decreased $175,000
or 16.9% for the nine months ended September 30,1999 as compared to the prior
year as a result of the decrease in the workers' compensation book of business.
Package commission income decreased $289,000 of 80.3% for the nine months ended
September 30, 1999 as compared to the 1998 comparable period as a result of a
reduction in the business written for fast food restaurants. Other net
commission income increased $3,000 or 2.3% for the nine months ended
September 30, 1999 as compared to the 1998 comparable period as a result of the
increase in volume of small business plan premiums collected. Net investment
income increased $37,000 or 2.8% as a result of net realized gains on sale of
available for sale securities. Other income decreased $97,000 or 25.2% as a
result of the effects of the retroactive insurance accounting treatment of
Preferred Reinsurance as discussed more fully in Note 1(c) to the Company's
consolidated financial statements.

    TOTAL OPERATING EXPENSES.  Total operating expenses for the nine months
ended September 30, 1999 were $46,088,000 as compared to $36,109,000 for the
1998 comparable period, representing an increase of $9,979,000 or 27.6%. Total
operating expenses for the nine months ended September 30, 1998 were $36,109,000
compared to $18,261,000 for the 1997 comparable period, representing an increase
of $17,848,000 or 97.1%.

    The following table provides a comparison of total expenses for the nine
months ended September 30, 1999 and 1998 by category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                     1999          1998       CHANGE       CHANGE
                                                  -----------   ----------   ---------   ----------
<S>                                               <C>           <C>          <C>         <C>
Staffing costs..................................  $26,353,000   18,989,000   7,364,000      38.8%
Losses and loss adjustment expenses incurred....    6,126,000    6,202,000     (76,000)     (1.2)%
Amortization of deferred acquisition costs......    3,808,000    3,819,000     (11,000)      (.3)%
Other operating expenses........................    9,801,000    7,099,000   2,702,000      38.1%
                                                  -----------   ----------   ---------      ----
    Total operating expenses....................  $46,088,000   36,109,000   9,979,000      27.6%
                                                  ===========   ==========   =========      ====
</TABLE>

    Staffing costs increased $7,364,000 or 38.8% consistent with the increase in
staffing revenues for the nine months ended September 30, 1999 as discussed
above. The major risk associated with the Company's entry into the reinsurance
business is that the Company may experience an adverse loss ratio. In an effort
to minimize such risk, the Company has obtained aggregate liability reinsurance
coverage which limits its exposure to a maximum 70% loss ratio as more fully
discussed in Note 1 (c) to the Company's consolidated financial statements. The
underwriting gains recognized by the Company is the most significant benefit
realized by the Company as a result of its entry into the reinsurance business.
Losses and loss adjustment expenses incurred (i) decreased $76,000 or 1.2% which
is consistent with the decrease in premiums earned for the nine months ended
September 30, 1999 as discussed above and (ii) were 54.0% and 53% of premiums
earned for the nine month periods ended September 30, 1999 and September 30,
1998, respectively. Amortization of deferred acquisition costs (i) decreased
$11,000 or .3% which is also consistent with the decrease in premiums earned
during the nine months ended September 30, 1999 as discussed above and
(ii) were 33.6% and 32.7% of premiums earned for the nine months ended
September 30, 1999 and 1998, respectively. As a result, the underwriting gain,
expressed as a percentage of premiums earned, was 12.2% and 14.2% for the nine
month periods ended September 30, 1999 and 1998, respectively.

                                       30
<PAGE>
    Other operating expenses increased $2,702,000 or 38.1%. for the nine months
ended September 30, 1999. The following table provides a comparison of other
operating expenses for the nine months ended September 30, 1999 and 1998 by
category:

<TABLE>
<CAPTION>
                                                                                NET      PERCENTAGE
                                                       1999        1998       CHANGE       CHANGE
                                                    ----------   ---------   ---------   ----------
<S>                                                 <C>          <C>         <C>         <C>
Personnel costs...................................  $5,516,000   4,314,000   1,202,000       27.9%
Occupancy costs...................................     650,000     525,000     125,000      23.8.%
Professional fees.................................   1,338,000     501,000     837,000      167.1%
Other operating expenses..........................   2,297,000   1,759,000     538,000       30.6%
                                                    ----------   ---------   ---------     ------
    Total other operating expenses................  $9,801,000   7,099,000   2,702,000       38.1%
                                                    ==========   =========   =========     ======
</TABLE>

    Personnel costs increased $1,202,000 or 27.9% as a result of annual salary
increases together with the increased staff related to the growth in the
business of NET Healthcare. Occupancy expenses increased $125,000 or 23.8%
principally as a result of the leasing of additional office space and relocation
of our subsidiary Preferred Healthcare Staffing, Inc. Professional fees
increased $837,000 or 167.1% principally as a result of increased legal,
accounting and actuarial fees associated with various corporate and acquisition
matters and the tender offer as discussed more fully in Note 15 to the Company's
consolidated financial statement. Other operating expenses increased $538,000 or
30.6% primarily related to the following: (i) increased insurance expense of
$64,000, (ii) increased corporate fees and services of $301,000,
(iii) increased investment and service fees of $12,000, and (iv) increased
advertising and promotional expenses of $102,000. Insurance expense increased as
a result of the purchase of additional coverages (i.e., directors and officers
liability insurance) and increased premiums due to increased limits. Corporate
fees and services, advertising and promotional and investment and service fees
increased as a result of the expansion of the staffing business and the tender
offer as discussed more fully in Note 15 to the Company's consolidated financial
statements.

    TOTAL NON-OPERATING EXPENSES.  Total non-operating expenses for the nine
months ended September 30, 1999 were $998,000 compared to $1,229,000 for the
1998 comparable period. Amortization of intangible assets and other
non-operating expenses decreased $234,000, primarily related to the expenses
incurred in relation to the merger of NET Healthcare in 1998.

LIQUIDITY AND CAPITAL RESOURCES

    GENERAL.  Our principal source of cash is the collection of staffing
revenues from client hospitals and workers' compensation insurance premiums from
our insureds. In February 1997, we consummated an initial public offering of
1,725,000 shares of Common Stock (including the underwriters' over-allotment
option) and received gross cash proceeds of approximately $12,506,000. In
May 1998, we consummated a $10,580,000 private placement of 7% convertible
subordinated notes due May 2003.

    Net cash and investments were $38,686,000 (net of premiums payable of
$1,965,000) at September 30, 1999. Net cash provided by operating activities for
the nine months ended September 30, 1999 increased to $9,214,000 from $2,909,000
in the 1998 comparable period, an increase of $6,305,000. This increase resulted
primarily from decreases in accounts receivable, deferred acquisition costs,
unpaid losses and loss adjustment expenses and unearned premiums, of $5,565,000,
$884,000, $44,000 and $2,801,000 respectively, and increase in premiums,
commissions and other insurance balances of $1,257,000. The decrease in accounts
receivable was primarily associated with increased collection efforts of the
staffing company during 1999. The increase in premiums, commissions and other
insurance balances is consistent with the increase in the ratio of losses
incurred to premiums earned during 1999. The decreases in unearned premiums,
unpaid losses and loss adjustment expenses and deferred acquisition costs are
consistent with the decrease in reinsurance premiums receivable during 1999.

                                       31
<PAGE>
    Cash flows used in investing activities decreased to $4,576,000 for the nine
months ended September 30, 1999 from $11,742,000 for the nine months ended
September 30, 1998, a decrease of $7,166,000. This decrease resulted primarily
from the decrease of net investment purchases of $2,293,000 and the acquisition
of certain of the assets of Travel Nurse for $5,000,000 in cash during the first
quarter of 1998 as discussed in Note 1 (b) to our consolidated financial
statements included herein.

    The decrease in cash flows from financing activities for the nine months
ended September 30, 1999 reflects the repayment of the revolving line of credit
of $1,850,000 and payment of a bank overdraft of $518,000, compared to the net
proceeds received from the private placement of convertible subordinated notes
of $9,622,000 and borrowings under the revolving line of credit of $2,000,000
and the repayment of a line of credit of $2,440,000 related to NET Healthcare,
as discussed in Note 1 (d) to our consolidated financial statements included
herein, for the comparable period in 1998.

    FINANCINGS.  In May 1998, Preferred Staffing entered into a $3,000,000
unsecured revolving line of credit with a bank (the "Credit Facility").
Outstanding borrowings under the Credit Facility bear interest at the bank's
base rate of interest. Interest under the Credit Facility is due and payable
monthly and all unpaid principal and interest is due on May 2, 2000. Outstanding
borrowings under the Credit Facility are unsecured. The outstanding balance of
the line of credit was paid in September 1999.

    In May 1998, we also consummated a $10,580,000 private placement of 7%
convertible subordinated notes due May 2003. The principal amount of the notes
is convertible at the option of the holder into shares of common stock, at a
conversion price of $9.00 per share, at any time prior to the earlier of
May 12, 2003 or ten business days after the receipt of a termination notice (as
defined in the notes). The notes generally prohibit or restrict, among other
things, our ability to incur liens and indebtedness, make certain fundamental
corporate changes and specified investments and conduct certain transaction with
affiliates. At September 30, 1999, the principal amount outstanding under the 7%
convertible subordinated notes was $10,535,000.

    In October 1999, the Company converted the $3 million unsecured revolving
line of credit into a $7.5 million secured line of credit from the bank. The
terms of the $7.5 million credit facility provide for monthly interest payments
at the bank's prime lending rate plus 2%. All unpaid principal and interest is
due on October 10, 2000.

    We believe that our existing cash balances and cash flows from activities
will be adequate to meet our current operations, including expected capital
expenditures, for at least the next twelve months.

YEAR 2000

    The Year 2000 presents potential concerns for businesses. The consequences
of this issue may include system failures and business process interruption. In
addition to the well-known calculation problems with the use of 2-digit date
formats as the year changes from 1999 to 2000, the Year 2000 is a special case
leap year which may cause similar problems in many systems unless remediated.

    We previously developed and executed a plan with respect to evaluating and
upgrading our core information technology systems so that they are Year 2000
compliant. Two vendors primarily supply software to us for use in our
operations. One vendor supplies the software used by our insurance operations
and another vendor supplies the software used by our staffing operations. The
vendors have each advised us that the latest upgrades of the software used in
our operations are Year 2000 compliant. The implementation and testing phases
were completed and the upgraded softwares are Year 2000 compliant. The
historical costs associated with these upgrades and Year 2000 compliance were
not material.

    We developed a plan with respect to evaluating and upgrading our non-core
information technology systems and other systems using embedded technology so
that they will be Year 2000 compliant. We completed the implementation of the
plan during the third quarter of 1999.

                                       32
<PAGE>
    We made inquiries of other third parties supplying us with products and
services to receive assurances that they are Year 2000 complaint. We received
Year 2000 readiness disclosure statements from vendors of all current software
and hardware systems.

    We have not developed a "worst case" scenario with respect to Year 2000
issues. Although we have not done a cost analysis, we believe that no material
adverse effect on our business will occur if our non-core technology systems are
not Year 2000 compliant. We anticipate that the costs related to such
non-compliance, if any, will not be material.

    The Company, as part of its overall business operation, has developed a
disaster recovery plan, which includes electronic as well as non-electronic
processes. Additional internal resources will be focused to address each failure
on a case-by case basis. The recovery steps necessary will vary considerably
depending on the nature of the Year 2000 issue being addressed.

    If we or third parties with which we have relationships were to cease or not
successfully complete Year 2000 remediation efforts, we could encounter
disruptions to our business. In addition, we could be materially and adversely
impacted by widespread economic or financial market disruption, or by Year 2000
computer system failures of third parties, that may generally occur as a result
of the Year 2000 issues.

    Certain statements relating to the Year 2000 issues are forward-looking
statements and have been made pursuant to the safe harbor provision of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks and uncertainties which may cause the actual
results in future periods or plans for future periods to differ materially from
those described herein as anticipated, believed or estimated.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK

    Not Applicable.

                                       33
<PAGE>
                           PART II: OTHER INFORMATION

<TABLE>
<S>      <C>                                           <C>
ITEM 1.  LEGAL PROCEEDINGS.

         Not Applicable

ITEM 2.  CHANGES IN SECURITIES AND USE OF
         PROCEEDS.

         Not Applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         Not Applicable

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

         Not Applicable

ITEM 5.  OTHER INFORMATION.

         Not Applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>

<TABLE>
<S>      <C>           <C>
         (a)           The following exhibits are included in this Quarterly Report
                       a Form 10-Q:

         27.1          Financial Data Schedule

         (b)           Reports on Form 8-K. (i) The Company's Current Report on
                       Form 8-K dated May 7, 1999 (Filed on May 12, 1999) and
                       (ii) the Company's Current Report on Form 8-K dated
                       August 30, 1999 (Filed on August 30, 1999) and (iii) the
                       Company's Current Report on Form 8-K dated November 4, 1999
                       (Filed on November 17, 1999).
</TABLE>

                                       34
<PAGE>
                                   SIGNATURE

    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.

<TABLE>
<S>                                           <C>  <C>
                                              PREFERRED EMPLOYERS HOLDINGS, INC.
                                                                   (Registrant)

                                              By:  /s/ WILLIAM R. DRESBACK
                                                   -----------------------------------------
                                                   William R. Dresback
                                                   SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                                                   (principal and chief accounting officer and duly
Date: November 19, 1999                            authorized to sign on behalf of the Registrant)
</TABLE>

                                       35