<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    Form 10-Q

(x)   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 1997
                                       OR
( )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
        EXCHANGE ACT OF 1934

      For the transaction period from                  to
                                     ------------------  ------------------

                           Commission File No. 1-12677

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                   ------------------------------------------
             (Exact name of registrant as specified in its charter)

        Delaware                                      65-0698779
-------------------------------           ------------------------------------
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)

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

                                      33161
                                    --------
                                   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes   X   No
                                   -------  -------

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

Indicate by a check mark whether Registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15 (d) if the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.

                                Not Applicable X

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of each of the issuer's classes of common
stock, as of September 30, 1997 was:

                    Common Stock                  4,725,000 shares
                           (Par value $.01 per share)
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.

                                    FORM 10-Q

                                      INDEX


PART     I    -   FINANCIAL INFORMATION                            PAGE
---------------------------------------                            ----

Item-1        -   Quarterly Financial Statements

         Consolidated Balance Sheets                                4

         Consolidated Statements of Operations                      5 & 6

         Consolidated Statements of Cash Flows                      7  &  8

         Notes to Consolidated Financial Statements                 9  -  15

Item-2        -   Management's Discussion and Analysis of
                  Financial Condition and Results of Operations    16  -  23



PART     II   -   OTHER INFORMATION
-----------------------------------

Item-1        -   Legal Proceedings                                24

Item-2        -   Changes in Securities                            24

Item-3        -   Defaults Upon Senior Securities                  24

Item-4        -   Submission of Matters to a Vote of
                  Security Holders                                 24

Item-5        -   Other Materially Important Events                24

Item-6        -   Exhibits and Reports on Form 8-K                 24


SIGNATURE                                                          25
---------
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                           Consolidated Balance Sheets
              September 30, 1997 (unaudited) and December 31, 1996

<TABLE>
<CAPTION>
                                                              September 30,          December 31,
ASSETS:                                                           1997                  1996
                                                              ------------          ------------
<S>                                                            <C>                    <C>       
Cash and invested cash                                         $25,687,006            $5,591,140
Commissions and premiums receivable, net                         $136, 204            $3,929,416
Accrued interest receivable                                       $234,756                    $0
Security deposits                                                  $26,706               $23,136
Property and equipment, net                                       $498,503              $529,956
Other assets                                                       $49,879              $228,794
                                                              ------------          ------------
Total assets                                                   $26,633,056           $10,302,442
                                                              ============          ============
STOCKHOLDERS' EQUITY:

Liabilities:
   Premiums payable                                             $3,772,303            $3,585,590
   Accounts payable                                             $2,464,359              $372,690
   Stockholder loan                                                $73,728              $283,466
   Commissions payable                                            $318,659              $509,357
   Reserve for unpaid claims                                    $4,295,140              $199,390
   Unearned premiums                                                    $0            $1,888,977
   Deferred reinsurance income, net                               $279,980            $1,334,401
   Other liabilities                                            $3,775,312            $1,733,902
                                                              ------------          ------------
   Total liabilities                                           $14,979,482            $9,907,773
                                                              ------------          ------------
Stockholders' equity:
   Common stock, $.01 par value.  Authorized
   10,000,000 shares; issued 5,254,412 shares                      $52,544               $35,294
   in 1997 and 3,529,412 in 1996
Paid-in capital                                                $10,367,074                 $0.00
Retained earnings                                               $1,739,513              $864,932
                                                              ------------          ------------
Total stockholders' equity                                     $12,159,131              $900,226
Treasury stock, at cost - 529,412 shares                        ($505,557)            ($505,557)
                                                              ------------          ------------
Net stockholders' equity                                       $11,653,574              $394,669
Commitments and contingencies
                                                              ------------          ------------
Total liabilities and stockholders' equity                     $26,633,056           $10,302,442
                                                              ============          ============
</TABLE>
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations
       For the three months ended September 30, 1997 and 1996 (unaudited)

<TABLE>
<CAPTION>
                                                          September 30,            September 30,
                                                               1997                    1996
                                                          -------------           --------------
<S>                                                        <C>                     <C>     
Revenues:
Commission income, net                                         $648,522                 $650,252
Premiums earned                                              $3,368,045                       $0
Investment income                                              $383,855                  $28,653
Other income                                                   $138,538                       $0
                                                           ------------             ------------
Total revenue                                                $4,538,990                 $678,905
                                                           ------------             ------------
Expenses:
Personnel expenses                                             $647,774                 $463,086
Professional fees                                              $127,833                  $12,792
Occupancy expenses                                              $80,205                  $63,518
Interest expense                                                 $3,178                  $10,811
Claims and claim settlement expenses                         $1,831,305                       $0
Amortization of deferred policy acquisition
  costs                                                      $1,227,047                       $0
Other operating expenses                                       $297,017                 $133,212
                                                           ------------             ------------
Total expenses                                               $4,214,359                 $683,419
                                                           ------------             ------------
Operating income (loss)                                        $324,630                 ($4,514)
Nonoperating income                                                  $0                       $0
                                                           ------------             ------------
Income (loss) before income taxes                              $324,630                 ($4,517)
Income taxes                                                    $41,719                       $0
                                                           ------------             ------------
Net income (loss)                                              $282,911                 ($4,514)
                                                           ============             ============
Income per share                                                  $0.06
                                                           ============
Weighted average shares outstanding                           4,725,000
                                                           ============
Proforma information (unaudited):
   Historical (loss) before income taxes                                                ($4,514)
   Proforma income tax benefit                                                          ($1,684)
   Proforma net (loss)                                                                   ($2,830
   Proforma (loss) per share                                                                  $0
   Weighted average shares outstanding                                                 3,000,000
</TABLE>
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations
        For the nine months ended September 30, 1997 and 1996 (unaudited)

<TABLE>
<CAPTION>
                                                       September 30,            September 30,
                                                           1997                     1996
                                                       -------------            -------------
<S>                                                    <C>                      <C>       
Revenues:
Commission income, net                                   $1,779,908               $1,829,667
Premiums earned                                          $8,037,839                       $0
Investment income                                        $1,103,531                  $79,605
Other income                                               $426,599                       $0
                                                       ------------             ------------
Total revenue                                           $11,347,877               $1,909,272
                                                       ------------             ------------
Expenses:
Personnel expenses                                       $1,802,472               $1,490,947
Professional fees                                          $187,101                  $80,160
Occupancy expenses                                         $235,706                 $164,750
Interest expense                                            $15,262                  $33,069
Claims and claim settlement expenses                     $4,357,452                       $0
Amortization of deferred policy acquisition
  costs                                                  $2,916,611                       $0
Other operating expenses                                   $746,150                 $401,524
                                                       ------------             ------------
Total expenses                                          $10,260,754               $2,170,450
                                                       ------------             ------------
Operating income (loss)                                  $1,087,122               ($261,178)
Nonoperating income                                              $0                 $190,000
                                                       ------------             ------------
Income (loss) before income taxes                        $1,087,122                ($71,175)
Income taxes                                               $212,542                       $0
                                                       ------------             ------------
Net income (loss)                                          $874,580                ($71,178)
                                                       ============             ============
Income per share                                              $0.20
                                                       ============
Weighted average shares outstanding                       4,442,308
                                                       ============
Proforma information (unaudited):
   Historical (loss) before income taxes                                           ($71,178)
   Proforma income tax benefit                                                     ($26,549)
   Proforma net (loss)                                                             ($44,629)
   Proforma (loss) per share                                                         ($0.01)
   Weighted average shares outstanding                                             3,000,000
</TABLE>
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
                For the nine months ended September 30, 1997 and
                                1996 (unaudited)

<TABLE>
<CAPTION>
                                                               September 30,           September 30,
                                                                   1997                    1996
                                                               --------------          --------------
<S>                                                            <C>                     <C>        
Cash flows from operating activities:
   Premiums collected                                            $15,278,703             $16,800,971
   Reinsurance premiums collected, net                           $11,539,806                      $0
   Nonoperating income                                                    $0                $190,000
   Interest received                                                $970,431                 $79,605
   Premiums paid                                               ($13,651,007)           ($12,807,698)
   Expenses paid                                                ($2,830,376)            ($1,721,462)
   Dividend trust funds received                                  $2,120,347                      $0
   Dividend trust funds paid                                    ($2,578,285)                      $0
   Other income                                                   ($426,599)                      $0
   Other, net                                                     ($445,507)                (46,521)
                                                                ------------            ------------
Net cash provided by operating activities                         $9,977,513              $2,494,895
                                                                ------------            ------------
Cash flows used in investing activities:
   Purchase of property and equipment                              ($40,971)               ($95,173)
                                                                ------------            ------------
Net cash used in investing activities                              ($40,971)               ($95,173)
                                                                ------------            ------------
Cash flows provided by (used in) financing activities:
   Issuance common stock, net                                    $10,384,324                      $0
   Repayment of stockholder loan                                  ($225,000)              ($200,000)
                                                                ------------            ------------
Net cash provided by (used in) financing
  activities                                                     $10,159,324              ($200,000)
                                                                ------------            ------------
Net increase in cash                                             $20,095,866              $2,199,722

Cash and invested cash beginning of period                        $5,591,140              $2,819,829
                                                                ------------            ------------
Cash and invested cash end of period                             $25,687,006              $5,019,551
                                                                ============            ============
</TABLE>
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                Consolidated Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                        September 30,         September 30,
                                                            1997                  1996
                                                        ------------          -------------
<S>                                                     <C>                   <C>
Reconciliation of net income (loss) to net cash
  provided by operating activities:
   Net income (loss)                                       $874,580             ($71,178)
                                                        -----------             -----------
Adjustments to reconcile net income (loss)                                   
  to net cash provided by operating activities:                              
   Depreciation expense                                     $72,424              $82,882
   Amortization of note discount                            $15,262              $33,069
   Amortization of deferred policy acquisition                               
      costs                                              $2,916,611                   $0
   Changes in assets and liabilities:                                        
   Decrease (increase) in:                                                   
      Commission and premiums receivable                 $3,793,212             ($35,546)
      Accrued interest receivable                         ($234,756)                  $0
      Deferred policy acquisition costs                 ($2,916,611)                  $0
      Security deposits                                     ($3,570)                $850
      Other assets                                         $178,915             ($55,640)
   Increase (decrease) in:                                                   
      Premiums payable                                     $186,713           $2,101,395
      Accounts payable                                   $2,091,669             $182,317
      Commissions payable                                 ($190,698)            $351,451
      Reserve for unpaid claims                          $4,095,750                   $0
      Unearned premiums                                 ($1,888,977)                  $0
      Deferred reinsurance income, net                  ($1,054,421)                  $0
      Other liabilities                                  $2,041,410             ($94,705)
                                                        -----------           ----------
       Total adjustments                                 $9,102,933           $2,566,073
                                                        -----------           ----------
Net cash provided by operating activities                $9,977,513           $2,494,895
                                                        ===========           ==========
</TABLE>
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

              September 30, 1997 (Unaudited) and December 31, 1996

(1)      Business and Summary of Significant Accounting and Reporting Policies

         (a)    Organization

                Preferred Employers Holdings, Inc. (the "Company") is the
                successor company to Preferred Employers Group, Inc. ("PEGI").
                Immediately prior to the Company's initial public offering,
                effective February 4, 1997, the Company and the stockholders of
                PEGI (the "Exchanging Stockholders") effected a recapitalization
                whereby the Company exchanged 17,647.06 shares of Common Stock
                for each share of common stock of PEGI held by the "Exchanging
                Stockholders" (the "Exchange"). As a result of the Exchange,
                PEGI became a wholly owned subsidiary of the Company. Except as
                otherwise specified or when the context otherwise requires,
                references to the Company herein, include Preferred Employers
                Holdings, Inc. and PEGI, through which the Company conducts
                certain of its business.

                The accompanying unaudited consolidated financial statements
                have been prepared in accordance with generally accepted
                accounting principles for interim financial information and with
                instructions to Form 10-Q and Article 10 of Regulation S-X.
                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 three-month and nine-month periods ended
                September 30, 1997 are not necessarily indicative of the results
                that may be expected for the year ending December 31, 1997.
                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, 1996, which were filed with the
                Securities and Exchange Commission of Form 10-K on May 9, 1997.

                The Company was appointed as a general agent ("GA") by the
                American International Group ("AIG"), a major international
                insurance carrier, 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; as a result, the Company is currently writing
                package business with another carrier.

                                                                         Page 9
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                The Company writes business by direct solicitation and through
                brokers and sub-producers, and in turn is compensated via a
                commission based on a percentage of the premiums it writes. The
                reinsurance subsidiary reinsures certain workers' compensation
                and employer's liability insurance policies written on behalf of
                AIG. As a result, the reinsurance subsidiary is entitled to
                retain the underwriting profits on business it reinsures.

         (b)    Basis of Consolidated Financial Statement Presentation
         
                The consolidated financial statements have been prepared in
                conformity with generally accepted accounting principles in the
                United States. All intercompany balances and transactions have
                been eliminated in consolidation.

         (c)    Cash and Invested Cash
            
                The Company considers cash in banks, money market accounts and
                other invested cash as cash and invested cash.
            
         (d)    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.
            
         (e)    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.

         (f)    Commission Income

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

                                                                        Page 10
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to consolidated Financial Statements

         (g)    Insurance Operations

                The Company formed a reinsurance subsidiary (the "Reinsurer")
                and entered into a reinsurance agreement (the "Agreement") with
                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 will assume 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 percent 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 contract and formation of the Reinsurer are
                accounted for as retroactive reinsurance.

                The principal difference between the accounting for retroactive
                and prospective reinsurance is that revenues and costs of
                retroactive reinsurance are deferred and accreted into income
                over the claims settlement period, rather than over the period
                for which contractual coverage is provided, as would be the case
                under prospective reinsurance.

                Retroactive reinsurance 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 reinsurance
                accounting treatment is illustrated below. The prospective
                method assumed that the Agreement incepts on January 1, 1996,
                has 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 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 Agreement was not executed until October 1996,

                                                                        Page 11
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                any investment income on net cash flows earned for the period
                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 periods reflected at left follows:

<TABLE>
<CAPTION>
                                                                              Composite
                                                            Prospective      Retroactive/
                                                              Method         Prospective         Income
                                                            (Pro Forma)        (Actual)          Deferred
                                                             ----------       ----------       -----------
<S>                                                          <C>              <C>              <C>       
               Year ended December 31, 1996                  $1,658,000       $  324,000       $1,334,000
                                                             ----------       ----------       -----------
               Quarter ended March 31, 1997                     559,000          360,000          199,000
               Quarter ended June 30, 1997                      360,000          372,000          (12,000)
               Quarter ended September 30, 1997                 240,000          360,000         (120,000)
               Quarter ended December 31, 1997                  129,000          280,000         (151,000)
                                                             ----------       ----------       ----------
               Year ended December 31, 1997                   1,288,000        1,372,000          (84,000)
                                                             ----------       ----------       ----------
               Years ended December 31,
               1998-2001                                      1,314,000        2,564,000       (1,250,000)
                                                             ----------       ----------       -----------

               Total                                         $4,260,000       $4,260,000       $    - 0 -
                                                             ==========       ==========       ===========
</TABLE>

                It should be noted that the table presented above is for
                illustrative purposes only to highlight that the basis of
                accounting used only imparts the timing of the net revenue
                recognition and not the aggregate economic results.

                Furthermore, it should be noted that the illustration above is
                based on estimates as to the amount and timing of aggregate 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.

                                                                        Page 12
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                Claims and claim settlement 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 revenue
                are continually reviewed and updated. Adjustments, if any,
                resulting therefrom are reflected in income currently. The
                Company does not discount its loss revenues.

         (h)    Income Taxes

                Prior to the formation of the Company, PEGI had elected to be
                taxed as an S Corporation under the provision of the Internal
                Revenue Code. PEGI's stockholders included in their tax returns
                the Company's income or loss. Subsequent to the Company's
                initial public offering the Company became a C Corporation under
                the provision of the Internal Revenue Code. Accordingly, a
                provision for income taxes is provided for in the 1997
                consolidated financial statements.

         (i)    Use of Estimates
         
                Management of the Company has made a number of estimates and
                assumptions relating to the reporting of assets and liabilities
                and the disclosure of contingent assets and liabilities to
                prepare these consolidated financial statements in conformity
                with general accepted accounting principles. Actual results
                could differ from those estimates. The more significant of these
                assumptions relate to the liability for unpaid claims and the
                period over which claims will be settled.

         (j)    Accounting for Stock-Based Compensation
         
                Statement of Financial Accounting Standard ("SFAS") Number 123,
                "Accounting for Stock-Based Compensation" was recently issued
                and is effective for the Company beginning January 1, 1996. SFAS
                Number 123 requires expanded disclosures of equity-based
                compensation arrangements with employees and does not require,
                but encourages compensation cost to be measured based on fair
                value of the equity instrument when awarded. The Company awarded
                stock options to certain of its key employees and officers with
                an option price equal to the Initial Public Offering Price. As a
                result, there is no compensation cost to be measured.

                                                                        Page 13
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(2)      Property and Equipment, Net

                Property and equipment, net consists of the following at
                September 30, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
                                                                  September 30,        December 31,
                                                                       1997                1996
                                                                  -------------        ------------
<S>                                                                <C>                    <C>    
                Computer equipment                                 $  346,863             305,109
                Office equipment                                      109,445             109,445
                Furniture and fixtures                                268,719             258,640
                Leasehold improvements                                184,528             170,595
                                                                   ----------            --------
                                                                   $  909,555             843,789
                Less accumulated depreciation and
                amortization                                         (411,052)           (313,833)
                                                                   ----------            --------
                                                                   $  498,503             529,956
                                                                   ==========            ========
</TABLE>

(3)      Stockholder Loan

                In May 1995, the Company entered into a repurchase agreement
                (the "Agreement") with stockholders whereby the Company agreed
                to repurchase from them an aggregate of 30 shares (529,412
                shares as adjusted) of common stock (the "Shares") of the
                Company. The purchase price for the Shares was $600,000
                (including interest) to be paid in 24 installments of $25,000.
                The closing of this 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.

                At September 30, 1997 and December 31, 1996 the outstanding
                balance of the above-referenced stockholder loan consists of the
                following:

                                                 September 30,    December 31,
                                                     1997            1996

                Principal                        $   75,000         300,000
                Unamortized discount (10%)           (1,272)        (16,534)
                                                 ----------         -------
                                                 $   73,728         283,466
                                                 ==========         =======

                                                                        Page 14
<PAGE>

                       PREFERRED EMPLOYERS HOLDINGS, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                Per 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.

(4)      Major Suppliers and Industry Concentration

                Substantially all of the Company's customers are fast food and
                family-style restaurant franchises and convenience stores. In
                addition, substantially all insurance policies written by the
                Company are underwritten by two insurance carriers.

(5)      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 the companies filed income tax returns as
                taxable C Corporation for the three month and nine month periods
                ended September 30, 1996.









                                                                        Page 15
<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
Financial Statements and related Notes contained elsewhere in this Form 10-Q.

General

The Company is primarily engaged in the property and casualty insurance business
as a general agent ("GA") on behalf of the American International Group of
Companies ("AIG"), General Accident Insurance Company ("GAIC") and the Kemper
Insurance Companies ("Kemper") and as a reinsurer for certain workers'
compensation insurance policies written by the Company on behalf of the AIG.

Pursuant to the general agency agreement with these carriers, 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 placed by the Company. The Company receives, as
compensation pursuant to the terms of these general agency agreements, gross
commission of its business at rates which range from 5% to 20%. The Company has
written workers' compensation insurance since its inception 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 GA for GAIC. In June, 1996 GAIC advised the Company
that it would no longer accept Package insurance risks for fast food
restaurants, but would continue to do so for family style restaurants. As a
result, the Company became a GA for Kemper during March 1997, through which it
can write this, as well as other forms of property and casualty insurance and
workers' compensation insurance.

The Company also formed a Reinsurance Subsidiary under the laws of Bermuda and
entered into a reinsurance agreement with AIG in late 1996 pursuant to which the
reinsurance Subsidiary will act as the 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 AIG. The Reinsurance Subsidiary 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 the Reinsurance Subsidiary will
assume the risks associated with the reinsurer, the reinsurance agreement limits
the liability of the Reinsurance Subsidiary for losses and certain defined
expenses to the first $300,000 per occurrence. In addition, the reinsurance
agreement limits the aggregate liability of the Reinsurance Subsidiary for all
coverage to an amount not to exceed 70% of the gross written premium 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 the Reinsurance Subsidiary are accounted for as
retroactive reinsurance. Refer to note 1 (g) in the Notes to the Consolidated
Financial Statements for a more detailed explanation of the accounting.

                                                                        Page 16
<PAGE>

The Company collects workers' compensation premiums from the insureds and remits
the ceding commission (net of the Company's commission) and reinsurance charge
to AIG and remits the net premium to the Reinsurance Subsidiary. Commission
income on workers' compensation business is recognized as income when premiums
are collected. Package insurance premiums are principally collected by the
insurance carrier. The Package insurance carrier remits commissions on Package
premiums it collects to the Company monthly. Commission income on Package
business is recognized as income when premiums are due.

Reinsurance premiums received by the Reinsurance Subsidiary are earned on a
pro-rata basis over the term of the related coverage.












                                                                        Page 17
<PAGE>

RESULTS OF OPERATIONS
For the three months ended September 30, 1997 and 1996:

Total Revenue

Total revenue for the three months ended September 30, 1997 was $4,540,000
compared to $679,000 for the three months ended September 30, 1996, representing
a net increase of $3,861,000. The following table provides a comparison of
income for the three month periods ended September 30, 1997 and 1996 by
category:

<TABLE>
<CAPTION>
                                                                                                Percentage
                                                   1997             1996         Net Change       Change
                                                   ----             ----         ----------       ------
<S>                                             <C>              <C>             <C>             <C>
Net commission income:
     Workers' compensation                        $330,000        $476,000       ($146,000)       (30.7%)
     Package                                      $208,000        $127,000          $81,000        63.8%
     Other, net                                   $111,000         $47,000          $64,000       136.2%
                                                ----------      ----------       ----------     -------
     Total net commission income                  $649,000        $650,000         ($1,000)          --

Premiums earned                                 $3,368,000              $0       $3,368,000          --
Investment income                                 $384,000         $29,000         $355,000          --
Other income                                      $139,000              $0         $139,000          --
                                                ----------      ----------       ----------     -------
     Total revenue                              $4,540,000        $679,000       $3,861,000       568.6%
                                                ==========      ==========       ==========     =======
Workers' compensation:
     Premiums collected                         $3,548,000      $4,569,000     ($1,021,000)       (22.3%)
                                                ==========      ==========       ==========     =======
     Ratio of net commission income/
     premiums collected                               9.3%           10.4%
                                                ==========      ==========
</TABLE>

Workers' compensation commission income decreased $146,000, or 30.7%, as a
result of the decrease in premiums collected of $1,021,000, which is
attributable to the decrease in the workers' compensation book of business. The
decrease in workers' compensation commission income is also due to an increase
in commission expense related to the mix of business produced by brokers.

Package commission income increased $81,000, or 63.8%, as a result of the
replacement of GAIC by Kemper and the re-entry into writing Package insurance
risks for fast food restaurants.

Other, net commission income increased $64,000 as a result of the introduction
of the Small Business Plan.

Premiums earned increased $3,368,000 as a result of the entry by the Reinsurance
Subsidiary into the reinsurance business.

Investment income increased $355,000, as a result of the investable funds raised
by the Company in its recently concluded initial public offering and premiums
received by the Reinsurance Subsidiary.

                                                                        Page 18
<PAGE>

Other income increased $139,000 as a result of the effects of the retroactive
insurance accounting treatment of the Reinsurance Subsidiary as discussed more
fully in note 1 (g) to the Consolidated Financial Statements.

Total Expenses

Total expenses for the three months ended September 30, 1997 were $4,214,000
compared to $684,000 for the comparative period ended September 30, 1996,
representing an increase of $3,530,000. The following table provides a
comparison of total expenses for the three month periods ended September 30,
1997 and 1996 by category:

<TABLE>
<CAPTION>
                                                                                                      %-age
                                                    1997             1996        Net Change           Change
                                                    ----             ----        ----------           ------
<S>                                                <C>             <C>              <C>                <C>  
Personnel expenses                                 $648,000        $463,000         $185,000           40.0%
Professional fees                                  $128,000         $13,000         $115,000             --
Occupancy expenses                                  $80,000         $64,000          $16,000           25.0%
Interest expense                                     $3,000         $11,000         ($8,000)          (72.7%)
Claims and claim settlement expense              $1,831,000              $0       $1,831,000             --
Amortization of deferred policy
     acquisition costs                           $1,227,000              $0       $1,227,000             --
Other operating expenses                           $297,000        $133,000         $164,000          123.3%
                                                 ----------      ----------       ----------         ------
     Total expenses                              $4,214,000        $684,000       $3,530,000          516.1%
                                                 ==========      ==========       ==========         ======
</TABLE>

Personnel expenses increased $185,000, or 40% as a result of the hiring of three
executives with aggregate annual compensation of $543,000 together with a 2%
aggregate annual salary increase for all other employees plus the retroactive
effects of the salary increases.

Professional fees increased $115,000, principally as a result of increased legal
fees associated with various corporate, reinsurance, and potential acquisition
matters.

Occupancy expenses increased $16,000 as a result of the Company's relocation to
larger quarters to accommodate the Company's expansion.

Interest expense decreased $8,000 as a result of a decrease in the principal
balance of a loan from a stockholder.

Claim and claim settlement expenses increased $1,831,000 as a result of the
Reinsurance Subsidiary's entry into the reinsurance business.

Amortization of deferred policy acquisition costs increased $1,227,000 as a
result of the Reinsurance Subsidiary's entry into the reinsurance business.

                                                                        Page 19
<PAGE>

Other operating expenses increased $164,000, primarily related to increased
insurance expense of $56,000, increased sales promotion expense of $42,000,
increased relocation expense of $28,000, increased depreciation expense of
$9,000, and increased travel expenses of $20,000. 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. Sales
promotion expense increased as a result of the Company's recent telemarketing
campaign. Relocation expense increased due to the two executives hired as
discussed above. Depreciation expense increased consistent with the Company's
relocation as discussed above. Travel expenses increased as a result of the
expansion of the business.















                                                                        Page 20
<PAGE>

RESULTS OF OPERATIONS
For the nine months ended September 30, 1997 and 1996:

Total Revenue

Total revenue for the nine months ended September 30, 1997 was $11,348,000
compared to $1,909,000 for the nine months ended September 30, 1996,
representing a net increase of $9,439,000. The following table provides a
comparison of income for the nine month periods ended September 30, 1997 and
1996 by category:

<TABLE>
<CAPTION>
                                                                                                Percentage
                                                   1997            1996          Net Change       Change
                                                   ----            ----          ----------       ------
<S>                                            <C>              <C>              <C>             <C>
Net commission income:
     Workers' compensation                      $1,121,000      $1,275,000       ($154,000)         (12.1%)
     Package                                      $378,000        $524,000       ($146,000)         (27.9%)
     Other, net                                   $281,000         $30,000         $251,000              --
                                               -----------     -----------       ----------      ----------
     Total net commission income                $1,780,000      $1,829,000        ($49,000)          (2.7%)

Premiums earned                                 $8,038,000              $0       $8,038,000              --
Investment income                               $1,104,000         $80,000       $1,024,000              --
Other income                                      $426,000              $0         $426,000              --
                                               -----------     -----------       ----------      ----------
     Total revenue                             $11,348,000      $1,909,000       $9,439,000          494.4%
                                               ===========     ===========       ==========      ==========
Workers' compensation:
     Premiums collected                        $11,515,000     $12,487,000       ($972,000)            7.8%
                                               ===========     ===========       ==========      ==========
     Ratio of net commission income/
     premiums collected                               9.7%           10.2%
                                               ===========     ===========       ==========      ==========
</TABLE>

Workers' compensation commission income decreased $154,000, or 12.1%, as a
result of the decrease in premiums collected of $972,000, which is attributable
to the decrease in the workers' compensation book of business. The decrease in
workers' compensation commission income is also due to an increase in commission
expense related to the mix of business produced by brokers.

Package commission income decreased  $146,000,  or 27.9%, as a result of GAIC's
decision to no longer accept Package insurance risks for fast food restaurants.

Other net commission income increased $251,000 as a result of the introduction
of the Small Business Plan which accounted for $203,000 of the increase together
with collection of $360,000 of audit premiums which generated an additional
$45,000 in commission income.

Premiums earned increased $8,038,000 as a result of the entry by the Reinsurance
Subsidiary into the reinsurance business.

                                                                        Page 21
<PAGE>

Investment income increased $1,024,000, as a result of the investable funds
raised by the Company in its recently concluded initial public offering and
premiums received by the Reinsurance Subsidiary.

Other income increased $426,000 as a result of the effects of the retroactive
insurance accounting treatment of the Reinsurance Subsidiary as discussed more
fully in note 1 (g) to the Consolidated Financial Statements.

Total Expenses

Total expenses for the nine months ended September 30, 1997 were $10,260,000
compared to $2,171,000 for the comparative period ended September 30, 1996,
representing an increase of $8,089,000. The following table provides a
comparison of total expenses for the nine month periods ended September 30, 1997
and 1996 by category:

<TABLE>
<CAPTION>
                                                                                                     %-age
                                                    1997             1996         Net Change         Change
                                                    ----             ----         ----------         ------
<S>                                              <C>             <C>                <C>                <C>  
Personnel expenses                               $1,802,000      $1,491,000         $311,000           20.9%
Professional fees                                  $187,000         $80,000         $107,000          133.8%
Occupancy expenses                                 $236,000        $165,000          $71,000           43.0%
Interest expense                                    $15,000         $33,000        ($18,000)         (54.5%)
Claims and claim settlement expense              $4,357,000              $0       $4,357,000              --
Amortization of deferred policy
     acquisition costs                           $2,917,000              $0       $2,917,000              --
Other operating expenses                           $746,000        $402,000         $344,000           85.6%
                                                -----------      ----------       ----------      ----------
     Total expenses                             $10,260,000      $2,171,000       $8,089,000          372.6%
                                                ===========      ==========       ==========      ==========
</TABLE>

Personnel expenses increased $311,000, or 20.9% as a result of the hiring of
three executives with aggregate annual compensation of $543,000 together with a
2% aggregate annual salary increase for all other employees plus the retroactive
effects of the salary increases.

Professional fees increased $107,000, principally as a result of increased legal
fees associated with various corporate, reinsurance and potential acquisition
matters.

Occupancy expenses increased $71,000, principally as a result of the Company's
relocation to larger quarters to accommodate the Company's expansion.

Interest expense decreased $18,000 as a result of a decrease in the principal
balance of a loan from a stockholder.

Claim and claim settlement expenses increased $4,357,000 as a result of the
Reinsurance Subsidiary's entry into the reinsurance business.

Amortization of deferred policy acquisition costs increased $2,917,000 as a
result of the Reinsurance Subsidiary's entry into the reinsurance business.

                                                                        Page 22
<PAGE>

Other operating expenses increased $344,000, primarily related to increased
insurance expense of $151,000, increased relocation expense of $60,000,
increased depreciation expense of $72,000, and increased travel expenses of
$58,000. 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. Relocation expense increased due to the three
executives hired as discussed above. Depreciation expense increased consistent
with the Company's relocation as discussed above. Travel expenses increased as a
result of the expansion of the business.

Nonoperating Income

Nonoperating income decreased $190,000 as a result of the settlement of a
lawsuit related to the cancellation of a broker contract in 1996.

Liquidity and Capital Resources

Historically the Company's principal source of cash has been from the collection
of workers' compensation insurance premiums from its insureds.

For the Nine Months Ended September 30, 1997

Net cash and invested cash was $21,915,000 at September 30, 1997 (net of
premiums payable of $3,772,000). Net cash provided by operating activities
increased to $9,978,000 in 1997 from $2,495,000 in 1996, an increase of
$7,483,000. This increase resulted primarily from an increase in reinsurance
premiums collected of $11,540,000 offset by an increase in net premiums paid of
$843,000, an increase in net dividend trust funds paid of $458,000, an increase
in expenses paid of $1,109,000, a decrease in premiums collected of $1,522,000
and a decrease in litigation proceeds of $190,000. The increase in reinsurance
premiums is a result of the commencement of reinsurance operations by the
Reinsurance Subsidiary. The increase in net premiums paid is the result of the
remitting of premiums payable by the Company to the Reinsurance Subsidiary on a
more timely basis so as to provide for a greater investment yield.

Cash flows used in investing activities increased to $10,159,000 in the nine
months ended September 30, 1997 from ($200,000) in the nine months ended
September 30, 1996, an increase of $10,359,0000. This increase resulted
primarily from the proceeds from the issuance of common stock of $10,384,000.

The Company believes that existing cash balances and cash flows from activities
will be sufficient to meet its financing needs, including expected capital
expenditures and working capital to fund operations.

                                                                        Page 23
<PAGE>

Item 1.  Legal Proceedings.

         Not Applicable


Item 2.  Changes in Securities.

         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 Materially Important Events.

         Not Applicable


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

         (27) Financial Data Schedule

         A Form 8-K was filed with the Securities and Exchange Commission on
July 9, 1997, which disclosed the execution of an Employment Agreement by the
Company with D. Mark Olson, Vice Chairman and Chief Operating Officer.










                                                                        Page 24
<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.


                                           Preferred Employers Holdings, Inc.
                                           ----------------------------------
                                                     (Registrant)
 

Date: November 14, 1997                   /s/ William R. Dresback
      -----------------                   --------------------------------------
                                          By: William R. Dresback
                                              Senior Vice President and
                                              Chief Financial Officer (and duly
                                              authorized to sign on behalf of
                                              the Registrant)

















                                                                        Page 25
<PAGE>

                                 EXHIBIT INDEX

Number      Exhibit
------      -------
 27         Financial Data Schedule