PROBUSINESS SERVICES INC, 424B4, 1997-09-19

PROBUSINESS SERVICES INC
424B4, 1997-09-19
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE> 1
Filed pursuant to Rule 424(b)(4)
Registration Statement No. 333-23189

LOGO

2,500,000 SHARES

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by
ProBusiness Services, Inc. ("ProBusiness" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the method of determining the
initial public offering price.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share......................... $11.00 $0.77 $10.23
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Total(2).......................... $27,500,000 $1,925,000 $25,575,000
=================================================================================================
</TABLE>

(1) Before deducting expenses payable by the Company, estimated at $1,585,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $31,625,000, $2,213,750 and $29,411,250,
respectively.

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

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about September 24, 1997.

ROBERTSON, STEPHENS & COMPANY WILLIAM BLAIR & COMPANY

The date of this Prospectus is September 19, 1997
<PAGE> 2

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR THE
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

UNTIL OCTOBER 14, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------

TABLE OF CONTENTS

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PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 15
Dividend Policy....................................................................... 15
Capitalization........................................................................ 16
Dilution.............................................................................. 17
Selected Financial Data............................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Business.............................................................................. 26
Management............................................................................ 35
Certain Transactions.................................................................. 42
Principal Stockholders................................................................ 43
Description of Capital Stock.......................................................... 44
Shares Eligible for Future Sale....................................................... 47
Underwriting.......................................................................... 48
Legal Matters......................................................................... 50
Experts............................................................................... 50
Change in Accountants................................................................. 50
Additional Information................................................................ 50
Index to Financial Statements......................................................... F-1
</TABLE>

ProBusiness(R) is a registered trademark of the Company. BeneSphere
Administrators(TM) and Enrollnet(TM) are trademarks of the Company. This
Prospectus also includes trade names and trademarks of companies other than
ProBusiness.

The Company was incorporated in California in October 1984 and
reincorporated in Delaware on September 11, 1997. The Company's executive
offices are located at 5934 Gibraltar Drive, Pleasanton, California 94588, and
its telephone number is (510) 734-9990. As of September 22, 1997 the Company's
executive offices will be located at 4125 Hopyard Road, Pleasanton, CA 94588,
and its telephone number will be (510) 737-3500.

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SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated,
all information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option and gives effect to (i) the conversion of all outstanding
shares of the Company's Preferred Stock into Common Stock automatically upon the
completion of this offering and (ii) the issuance of 160,956 shares of Common
Stock upon the net exercise of warrants (if the warrants are exercised for cash,
an additional 90,896 shares of Common Stock will be outstanding) upon the
completion of this offering. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

THE COMPANY

The Company is a leading provider of employee administrative services for
large employers, typically with over 250 employees. The Company's primary
service offerings are payroll processing, payroll tax filing, human resources
software and benefits administration, including the enrollment and processing of
flexible benefit plans and COBRA programs. The Company's proprietary PC-based
payroll system offers the cost-effective benefits of outsourcing and high levels
of client service, while providing the flexibility, control, customization and
integration of an in-house system. As of June 30, 1997, the Company provided
services to approximately 1,100 clients and provided payroll processing services
to 425 clients with an aggregate of approximately 380,000 employees and an
average of approximately 900 employees. For the quarter ended June 30, 1997, the
Company processed 2.9 million checks for the Company's payroll clients. The
Company's clients include: 3Com Corporation, Abbott Laboratories, Airtouch
Communications Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell
Computer Corporation, The Gillette Company, Kellogg USA Inc., LSI Logic
Corporation, Michaels Stores, Inc., Netscape Communications Corp., Sunglass Hut
International, Inc., TCI Cablevision, Toyota Motor Corporation, Watkins-Johnson
Company and Williams-Sonoma, Inc.

Many large businesses have found that outsourcing non-core functions
reduces costs, improves service, quality and efficiency, allows personnel to
focus on core competencies and enhances productivity through access to advanced
technologies. In recent years, payroll processing and benefits administration
have increased in complexity due to continual changes in regulations and
increasingly sophisticated employee benefits plans. As a result, the demand for
outsourcing employee administrative services has grown significantly and is
expected to continue to grow over the next several years. According to a
third-party industry study, it is estimated that third-party payroll and payroll
tax services alone generated approximately $3.4 billion in revenue in 1995 and
will generate approximately $7.4 billion in revenue in 2000.

The Company differentiates itself from its competitors through its
proprietary technology, high quality, responsive and professional client service
and focus on the needs of large employers. ProBusiness develops a business
partnership with each client by assessing each client's payroll processing
needs, reengineering and designing the client's payroll systems and processes
and implementing a cost-effective solution. The Company maintains an ongoing
relationship with each client using a strategic team of specialists led by a
personal account manager who proactively manages each client's account and
marshals the resources of the team to meet the client's specific needs.
ProBusiness maintains a low client-to-account manager ratio to offer clients
accessible and responsive account management. The Company believes that its low
client-to-account manager ratio and its focus on client service are key factors
in enabling the Company to achieve a high payroll client retention rate, which
was approximately 92% for fiscal year 1997.

The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy to
accomplish its objective includes expanding its client base by increasing its
direct sales force, offering additional services to existing clients, developing
a comprehensive and fully integrated suite of employee administrative services,
and increasing the breadth of its service offerings and features. The Company is
committed to maintaining the high levels of professional and personal service
that it believes have allowed it to establish a competitive advantage in its
industry.

In March 1997, entities affiliated with General Atlantic Partners, LLC
("General Atlantic") purchased $10.0 million of Preferred Stock of the Company.
In addition, these entities intend to purchase 300,000 shares in the offering on
the same terms as shares are being sold to other investors. As a result, General
Atlantic will own approximately 13.6% of the Company's outstanding Common Stock
upon the completion of this offering. General Atlantic is a private equity
investment firm.

4
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THE OFFERING

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<S> <C>
Common Stock offered by the Company............................ 2,500,000 shares
Common Stock to be outstanding after this offering............. 10,647,301 shares(1)
Use of proceeds................................................ To repay indebtedness and for working
capital and potential acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol.................................. PRBZ
</TABLE>

SUMMARY FINANCIAL DATA
(in thousands, except per share data)

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YEAR ENDED JUNE 30,
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PRO FORMA
1995 1996 1997 1997(2)
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STATEMENTS OF OPERATIONS DATA:
Revenue............................................ $7,095 $13,863 $27,374 $29,030
Operating expenses:
Cost of providing services....................... 2,703 6,435 13,659 14,541
General and administrative expenses.............. 1,304 2,054 4,282 5,719
Research and development expenses................ 1,038 1,257 2,841 2,841
Client acquisition costs......................... 2,943 5,388 11,706 12,514
Acquisition of in-process technology............. -- 711 -- --
------- ------ ------- -------
Total operating expenses........................... 7,988 15,845 32,488 35,615
------- ------ ------- -------
Loss from operations............................... (893) (1,982) (5,114) (6,585)
Interest expense................................... (86) (473) (1,190) (1,212)
Other income....................................... -- 69 59 59
------- ------ ------- -------
Net loss........................................... $ (979) $(2,386) $(6,245) $(7,738)
======= ====== ======= =======
Pro forma net loss per share(3).................... $ (0.74) $ (0.92)
======= =======
Shares used in computing pro forma net loss per
share(3)......................................... 8,451 8,451
======= =======
</TABLE>

<TABLE>
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JUNE 30, 1997
---------------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)(4)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 5,047 $ 22,887
Payroll tax funds invested............................................. 177,626 177,626
Working capital........................................................ 534 18,374
Total assets........................................................... 200,435 218,275
Payroll tax funds collected but unremitted............................. 177,626 177,626
Long-term debt and note payable to stockholder, less current portion... 8,917 2,858
Capital lease obligations, less current portion........................ 1,898 1,898
Total stockholders' equity............................................. 3,869 27,768
</TABLE>

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(1) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to
outstanding options; (ii) 171,892 shares of Common Stock issuable upon
exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan; and
(iv) 500,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan. Also excludes a warrant issued
after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock
and 350,250 shares of Common Stock issuable upon exercise of options granted
after June 30, 1997 with an exercise price of $9.00 per share. See
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.

(2) The pro forma statement of operations for the year ended June 30, 1997 has
been prepared as if the acquisitions of BeneSphere Administrators, Inc. and
Dimension Solutions, Inc. had occurred as of July 1, 1996. See Selected
Unaudited Pro Forma Condensed Consolidated Financial Information.

(3) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness
Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed
Consolidated Financial Information for explanations of the determination of
the shares used in computing pro forma net loss per share.

(4) Adjusted to reflect the sale of the 2,500,000 shares of Common Stock offered
hereby at the initial public offering price of $11.00 per share after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company and the receipt and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."

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<PAGE> 6

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered by this Prospectus.

OPERATING LOSSES; NEED TO COMMIT TO EXPENSES IN ADVANCE OF REVENUES

The Company has experienced significant operating losses since its
inception and expects to incur significant operating losses in the future due to
continued client acquisition costs, investments in research and development and
costs associated with expanding its sales efforts and operations to new
geographic regions. As of June 30, 1997, the Company had an accumulated deficit
of approximately $19.0 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process generally takes three to nine months or longer, and the implementation
process generally takes three to six months or longer. In connection with the
acquisition of each new client, the Company incurs substantial client
acquisition costs, which consist primarily of sales and implementation expenses
and, to a lesser extent, marketing expenses. The Company's ability to achieve
profitability will depend in part upon its ability to attract and retain new
clients, offer new services and features and achieve market acceptance of new
services. There can be no assurance that the Company will achieve or sustain
profitability in the future. The Company has made acquisitions in the past and
intends to pursue acquisitions in the future. In connection with acquisitions,
the Company has in the past incurred and will likely incur in the future costs
associated with adding personnel, integrating technology and increasing overhead
to support the acquired business, acquiring in-process technology and
amortization expenses related to goodwill. As a result, such acquisitions have
had and any future acquisition could have an adverse effect on the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS

The Company's business is characterized by significant seasonality. As a
result, the Company's revenue has been subject to significant seasonal
fluctuations, with the largest percentage of annual revenue being realized in
the third and fourth fiscal quarters, primarily due to new clients beginning
services in January (the beginning of the tax year and the Company's third
fiscal quarter) and higher interest income earned on tax funds. Further, the
Company's operating expenses are typically higher as a percentage of revenue in
the first and second fiscal quarters as the Company increases personnel to
acquire new clients and to implement and provide services to such new clients, a
large percentage of which begin services in January.

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particular quarter and could result in losses for such quarter. As the Company
secures larger clients, the time required for implementing the Company's
services increases, which could contribute to larger fluctuations in revenue.
Interest income earned from investing payroll tax funds, which is a significant
portion of the Company's revenue, is vulnerable to fluctuations in interest
rates. In addition, the Company's business may be affected by shifts in the
general health of the economy, client staff reductions, strikes, acquisitions of
its client by other companies and other downturns. There can be no assurance
that the Company's future revenue and results of operations will not vary
substantially. It is possible that in some future quarter the Company's results
of operations will be below the expectations of public market analysts and
investors. In either case, the market price of the Company's Common Stock could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

RISKS ASSOCIATED WITH ACQUISITIONS

In January 1997, the Company acquired BeneSphere Administrators, Inc.
("BeneSphere"), a provider of benefits administration services. The integration
of BeneSphere's business with the Company's business has placed and will
continue to place a significant burden on the Company's management. Such
integration is subject to risks commonly encountered in making such
acquisitions, including, among others, loss of key personnel of the acquired
company, the difficulty associated with assimilating the personnel and
operations of the acquired company, the potential disruption of the Company's
ongoing business, the maintenance of uniform standards, controls, procedures and
policies, and the impairment of the Company's reputation and relationships with
employees and clients. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with its acquisition of BeneSphere.

While the Company has no current agreements or negotiations underway with
respect to any acquisition, the Company intends to make additional acquisitions
of complementary services, technologies or businesses. There can be no assurance
that any future acquisition will be completed or that, if completed, will be
effectively assimilated into the Company's business. In addition, future
acquisitions could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities, and amortization expenses related
to goodwill and other intangible assets, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations or on the market price of the Company's Common Stock. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

RISKS ASSOCIATED WITH PAYROLL TAX SERVICE AND BENEFITS ADMINISTRATION SERVICES

The Company's payroll tax service is subject to various risks resulting
from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
calculate and transfer to the Company contributed employer and employee tax
funds. The Company processes the data received from the client and remits the
funds along with a tax return to the appropriate tax authorities when due.
Tracking, processing and paying such tax liabilities is complex. Errors and
omissions have occurred in the past and may occur in the future in connection
with such service. The Company is subject to large cash penalties imposed by tax
authorities for late filings or underpayment of taxes. To date, such penalties
have not been significant. However, there can be no assurance that any
liabilities associated with such penalties will not have a material adverse
effect on the Company's business, financial condition or results of operations.
There can be no assurance that the Company's reserves or insurance for such
penalties will be adequate. In addition, failure by the Company to make timely
or accurate tax return filings or pay tax liabilities when due on behalf of
clients may damage the Company's reputation and could adversely affect its
relationships with existing clients and its ability to gain new clients.

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financial condition and results of operations. In addition, since a significant
portion of the Company's revenue is derived from interest earned from investing
on collected but unremitted payroll tax funds, changes in policies relating to
withholding federal or state income taxes or reduction in the time allowed for
taxpayers to remit payment for taxes owed to government authorities would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's benefits administration services are subject to various risks
resulting from errors and omissions in processing and filing COBRA or other
benefit plan forms in accordance with governmental regulations and the
respective plans. The Company processes data received from employees and
employers and is subject to penalties for any late or misfiled plan forms. There
can be no assurance the Company's reserves or insurance for such penalties will
be adequate. In addition, failure to properly file plan forms would have a
material adverse effect on the Company's reputation, which could adversely
affect its relationships with existing clients and its ability to gain new
clients. The Company's benefits administration services are also dependent upon
government regulations which are subject to continuous changes that could reduce
or eliminate the need for benefits administration services.

The Company has access to confidential information and to client funds. As
a result, the Company is subject to potential claims by its clients for the
actions of the Company's employees arising from damages to the client's business
or otherwise. There can be no assurance that the Company's fidelity bond and
errors and omissions insurance will be adequate to cover any such claims. Such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Service Offerings."

INVESTMENT RISKS

The Company invests funds, including payroll tax funds transferred to it by
clients until the Company remits the funds to tax authorities when due. The
Company typically invests these funds in short-term financial instruments such
as overnight U.S. government direct and agency obligations repurchase
agreements, commercial paper rated A-1 and/or P-1 and money market funds with
underlying credit quality of AA or better. These investments are exposed to
several risks, including credit risks from the possible inability of the
borrowers to meet the terms of their obligations under the financial
instruments. The Company would be liable for any losses on such investments.

Interest income earned from investing these funds represents a significant
portion of the Company's results of operations. As a result, the Company's
business, financial condition and results of operations are significantly
impacted by interest rate fluctuations. The Company has recently entered into an
interest rate swap agreement to minimize the impact of interest rate
fluctuations. In the event the dollar amount of the Company's invested funds
falls below a specified threshold, the Company would have swap payment
obligations, which could have a material adverse effect on the Company's results
of operations. There can be no assurance that the Company would have sufficient
funds to meet any such swap payment obligations. A default by the Company under
the swap agreement could result in acceleration and set-off by the bank of all
outstanding contracts under the swap agreement, and could result in
cross-defaults of other debt agreements of the Company, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

MANAGEMENT OF GROWTH

The Company's business has grown significantly in size and complexity over
the past three years, which has placed significant demands on the Company's
management, systems, internal controls, and financial and physical resources. In
order to meet such demands, the Company intends to continue to hire new
employees, open new offices to gain clients in new geographic regions and invest
in new equipment or make other capital expenditures. In addition, the Company
expects that it will need to develop further its financial and managerial
controls and reporting systems and procedures to accommodate any future growth.
Failure to expand any of the foregoing areas in an efficient manner

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could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company is currently in the process of
integrating BeneSphere's business with the Company's business. The Company has
established a processing center in Southern California and intends to open new
sales offices to gain new clients. In addition, the Company has leased a larger
facility to house its operations in Pleasanton, California, which was completed
in September 1997. There can be no assurance that the Company will be able to
effectively integrate BeneSphere's business or establish such facilities on a
timely basis. In addition, the Company's growth may depend to some extent on its
ability to successfully complete strategic acquisitions to expand or complement
its existing business. There can be no assurance that suitable acquisitions can
be identified, consummated or successfully integrated into the Company's
operations. Any inability to manage growth effectively could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

SUBSTANTIAL COMPETITION

The market for the Company's services is intensely competitive, subject to
rapid change and significantly affected by new service introductions and other
market activities of industry participants. The Company primarily competes with
several public and private payroll service providers such as Automatic Data
Processing, Inc., Ceridian Corporation and Paychex, Inc., as well as smaller,
regional competitors. Many of these companies have longer operating histories,
greater financial, technical, marketing and other resources, greater name
recognition and a larger number of clients than the Company. In addition, many
of these companies offer more services or features than the Company and have
processing facilities located throughout the United States. The Company also
competes with in-house employee services departments and, to a lesser extent,
banks and local payroll companies. With respect to benefits administration
services, the Company competes with insurance companies, benefits consultants
and other local benefits outsourcing companies. The Company may also compete
with marketers of related products and services that may offer payroll or
benefits administration services in the future. The Company has experienced, and
expects to continue to experience, competition from new entrants into its
markets. Increased competition could result in pricing pressures, loss of market
share and loss of clients, any of which could have a material adverse effect on
the Company's business, financial condition or results of operations. The
failure of the Company to compete successfully would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."

RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; RISKS OF SOFTWARE DEFECTS

The technologies in which the Company has invested to date are rapidly
evolving and have short life cycles, which requires the Company to anticipate
and rapidly adapt to technological changes. In addition, the Company's industry
is characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The introduction of services embodying new technologies and the emergence of new
industry standards and practices can render existing services obsolete and
unmarketable. The Company's future success will depend, in part, on its ability
to develop advanced technologies, enhance its existing services with new
features, add new services that address the changing needs of its clients, and
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis. Several of the Company's competitors
invest substantially greater amounts in research and development than the
Company, which may allow them to introduce new services or features before the
Company. Even if the Company is able to develop new technologies in a timely
manner, it may incur substantial costs in deploying new services and features to
its clients, including costs of additional personnel. If the Company is unable
to develop and introduce new services and new features of existing services in a
timely or cost-effective manner, the Company's business, financial condition and
results of operations could be materially adversely affected. See
"Business -- Service Offerings" and "-- Research and Development."

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Application software used by the Company may contain defects or failures
when introduced or when new versions or enhancements are released. The Company
has in the past discovered software defects in certain of its applications, in
some cases only after its systems have been used by clients. There can be no
assurance that future defects will not be discovered in existing or new
applications or releases. Any such occurrence could have a material adverse
effect upon the Company's business, financial condition and results of
operations. See "Business -- Technology" and "-- Research and Development."

DEPENDENCE ON THIRD-PARTY PROVIDERS

The Company depends on third-party courier services to deliver paychecks to
clients. The Company does not have any formal written agreements with any of the
courier services that it uses. Such courier services have been in the past and
may be in the future unable to timely pick up or deliver the paychecks from the
Company to its clients for a variety of reasons, including employee strikes,
storms or other adverse weather conditions, earthquakes or other natural
disasters, logistical or mechanical failures or accidents. Failure by the
Company to deliver client paychecks on a timely basis would have a material
adverse effect on the Company's business, financial condition and results of
operations and could damage the Company's reputation and adversely affect its
relationships with existing clients and its ability to gain new clients.

DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA

The Company currently conducts substantially all of its payroll and payroll
tax processing and production at the Company's headquarters located in
Pleasanton, California. The Company has recently established an alternative
processing center in Irvine, California and is in the process of establishing a
back-up facility at that site. The Company establishes for each client a
complete set of payroll data at the Pleasanton processing center. In the event
of a disaster in Pleasanton, clients would be able to process payroll checks
based on the data they have on site if necessary. There can be no assurance that
the Company's disaster recovery procedures are sufficient or that the data
recovered at the client site would be sufficient to allow the client to
calculate and produce payroll in a timely fashion.

The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. No assurance can be given that the
precautions that the Company has taken to protect itself from or minimize the
impact of such events will be adequate. Any damage to the Company's data
centers, failure of telecommunications links or breach of the security of the
Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.

NEED TO ATTRACT AND RETAIN EXPERIENCED PERSONNEL

The Company's success depends to a significant degree on its ability to
attract and retain experienced employees. There is substantial competition for
experienced personnel, which the Company expects to continue. Many of the
companies with which the Company competes for experienced personnel have greater
financial and other resources than the Company. The Company may in the future
experience difficulty in recruiting sufficient numbers of qualified personnel.
The inability to attract and retain experienced personnel as required could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition," "-- Employees" and
"Management."

RISKS ASSOCIATED WITH GEOGRAPHIC EXPANSION

A substantial majority of the Company's revenue has been derived from
clients located in the western United States. The Company's ability to achieve
significant future revenue growth will in large

10
<PAGE> 11

part depend on its ability to gain new clients throughout the United States.
Currently, the Company has eight sales representatives located outside of
California, and the Company intends to locate additional sales representatives
in major metropolitan areas throughout the United States. The Company opened a
sales office in Irvine, California in February 1995. Substantially all
production for the Company's clients has been maintained at the Company's
headquarters in Pleasanton, California. The Company recently moved a portion of
the production services to its new facility in Irvine, California. The Company
also expects to open additional sales offices in the future. This growth has
resulted in new and increased responsibilities for management personnel and has
placed and continues to place a significant strain on the Company's management
and operating and financial systems. The Company will be required to continue to
implement and improve its systems on a timely basis and in such a manner as is
necessary to accommodate the increased number of transactions and clients and
the increased size of the Company's operations. Any failure to implement and
improve the Company's systems or to hire and retain the appropriate personnel to
manage its operations would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, an
increase in the Company's operating expenses from its planned expansion will
have a material adverse effect on the Company's business, financial condition
and results of operations if revenue does not increase to support such
expansion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales and Marketing."

RISKS ASSOCIATED WITH THE INTRODUCTION OF NEW SERVICES FEATURES

The Company's future business, financial condition and results of
operations will continue to depend upon the Company's ability to add new
services or enhancements to existing services that address the needs of the
market. Failure by the Company to successfully design, develop and introduce new
services or enhancements on a timely basis could prevent the Company from
maintaining existing client relationships, gaining new clients or expanding its
markets and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Research and
Development."

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend on the performance of the Company's
senior management and other key employees. The Company's senior management team
does not have prior executive management experience in publicly traded
companies. The loss of the services of any senior management or other key
employee could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company generally does not
enter into employment or noncompetition agreements with its employees. If one or
more of the Company's key employees resigns from the Company to join a
competitor or to form a competitor, the loss of such personnel and any resulting
loss of existing or potential clients to any such competitor could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event of the loss of any key personnel, there can
be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices, procedures or client
lists by a former employee or that such disclosure or use would not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."

LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company's success is dependent in part upon its proprietary software
technology. The Company has no patents, patent applications or registered
copyrights. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company
distributes its services under software license agreements that grant clients
licenses to use the Company's services and contain various provisions protecting
the Company's ownership and the confidentiality of the underlying technology.
The Company generally enters into confidentiality and/or license agreements with
its employees and existing and potential clients, and

11
<PAGE> 12

limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology. There can be no assurance
that the Company's services and technology do not infringe any existing patents,
copyrights or other proprietary rights of others, or that third parties will not
assert infringement claims in the future. If any such claims are asserted and
upheld, the costs of defense could be substantial and any resulting liability to
the Company could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Proprietary
Rights."

CONCENTRATION OF STOCK OWNERSHIP

Upon completion of this offering, the Company's directors and executive
officers and their respective affiliates will beneficially own over 45.9% of the
outstanding Common Stock. As a result, these stockholders, if they act together,
will be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and will have power to influence any
stockholder action or approval requiring a majority vote. Such concentration of
ownership may also have the effect of delaying, deferring or preventing a change
of control of the Company. See "Principal Stockholders" and "Description of
Capital Stock."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiation among the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of the market price of the Company's Common Stock following this
offering. The market price of the Company's Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new services by the Company or its competitors, market conditions in the
information services industry, quarterly fluctuations in the Company's operating
results, changes in financial estimates by securities analysts or other events
or factors, many of which are beyond the Company's control. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
and services companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In the past, following
periods of volatility in the marketplace for a company's securities, securities
class action litigation often has been instituted. Such litigation could result
in substantial costs and a diversion of management attention and resources,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.

BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS

This offering will provide substantial benefits to current stockholders of
the Company. Consummation of this offering is expected to create a public market
for the Common Stock held by the Company's current stockholders, including
directors and executive officers of the Company. Current stockholders paid
approximately $23.4 million for an aggregate of approximately 8,147,301 shares
of Common Stock. This offering will result in a gross unrealized gain to such
stockholders in the aggregate amount of approximately $66.2 million, based on
the initial public offering price of $11.00 per share. In addition, the Company
will use a portion of the net proceeds from the sale of Common Stock offered by
the Company in this offering to repay a substantial portion of the Company's
outstanding indebtedness, which consists of (i) approximately $4.0 million of
subordinated debt due to certain stockholders of the Company, (ii) $250,000 of
indebtedness incurred in connection with the acquisition of Dimension Solutions,
Inc. and (iii) approximately $1.9 million under the Company's line of credit.
The Company also may use a portion of the remainder of the net proceeds of this
offering to

12
<PAGE> 13

pay up to $4.5 million of the BeneSphere contingent purchase price, to the
extent certain financial conditions are met by BeneSphere. See "-- No Prior
Public Market for Common Stock; Possible Volatility of Stock Price," "Use of
Proceeds" and "Dilution."

SUBSTANTIAL DILUTION

The assumed initial public offering price is substantially higher than the
pro forma net tangible book value per share of the outstanding Common Stock. As
a result, purchasers of the Common Stock offered hereby will incur immediate,
substantial dilution in the amount of $8.80 per share. To the extent that
outstanding options or warrants to purchase the Company's Common Stock are
exercised, there will be further dilution. The Company has in the past granted a
substantial number of options to purchase Common Stock to employees as part of
compensation packages, and the Company expects that it will continue to grant a
substantial number of options in the future. In addition, the Company has
adopted an employee stock purchase plan that will provide employees an
opportunity to purchase shares below prevailing market value. The Company also
may issue shares of its Common Stock in connection with strategic acquisitions
or alliances, which could also result in dilution to stockholders. See
"Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding an
aggregate of 10,647,301 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1997. Of these shares, all of the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless such
shares are purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act ("Affiliates"). The remaining 8,147,301 shares
of Common Stock held by existing stockholders (the "Restricted Shares") are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 promulgated under the Securities Act. As a result of contractual
restrictions and the provisions of Rule 144 and Rule 701, additional shares will
be available for sale in the public market as follows: (i) 2,000 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus; (ii)
1,000 Restricted Shares will be eligible for sale 90 days after the date of this
Prospectus; (iii) 8,144,301 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus.
In addition, certain of the Restricted Shares are subject to vesting.

As of June 30, 1997, options to purchase 875,776 shares of Common Stock
were outstanding, of which options to purchase 186,301 shares were then
exercisable. The Company intends to file a Form S-8 registration statement under
the Securities Act immediately after the date of this Prospectus to register
2,206,971 shares of Common Stock reserved for issuance under the Company's 1996
Stock Option Plan and 500,000 shares of Common Stock reserved for issuance under
the Company's 1997 Employee Stock Purchase Plan. In addition, as of June 30,
1997, warrants to purchase 171,892 shares of Common Stock were outstanding, all
of which will be eligible for sale 180 days after the date of this Prospectus.

Pursuant to agreements between the Company and certain stockholders and
warrantholders (or their permitted transferees), approximately 6,349,026 shares
of Common Stock and 121,892 shares issuable upon exercise of warrants are
entitled to certain registration rights under the Securities Act. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."

ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW

The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's stockholders. The rights of

13
<PAGE> 14

the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. In addition, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock, and, as a result, the issuance thereof could have a material adverse
effect on the market value of the Common Stock. The Company has no present plans
to issue shares of Preferred Stock.

In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company. Further, certain
other provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws and of Delaware law could delay or make more difficult
a merger, tender offer or proxy contest involving the Company. These provisions
include a classified board, advance notice procedures for stockholders to
nominate candidates for election as directors of the Company, authorization of
the Board of Directors to alter the number of directors without stockholder
approval, limitations on persons who can call stockholder meetings, lack of
cumulative voting and prohibition of stockholder actions by written consent. See
"Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and
Certain Charter and Bylaw Provisions."

14
<PAGE> 15

USE OF PROCEEDS

The net proceeds from the sale of the 2,500,000 shares of Common Stock in
this offering are estimated to be approximately $24.0 million ($27.8 million if
the Underwriters' over-allotment option is exercised in full) at the initial
public offering price of $11.00 per share and after deducting the underwriters'
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to use approximately $6.2 million of the net
proceeds to repay a substantial portion of the Company's outstanding
indebtedness, which consists of (i) approximately $4.0 million of subordinated
debt due in 1998 or 30 days after the completion of this offering, which bears
interest at 8.0% per annum, (ii) $250,000 of indebtedness incurred in connection
with the acquisition of Dimension Solutions, Inc. ("Dimension Solutions"), which
is due in 1999 and bears interest at the prime rate plus 2.5%, and (iii) $1.9
million of the $3.1 million of indebtedness outstanding at August 14, 1997 under
the Company's line of credit, which expires April 1998 and bears interest at the
prime rate plus 1%. See "Certain Transactions" and Note 3 of Notes to the
Consolidated Financial Statements -- ProBusiness Services, Inc.

The remainder of the net proceeds to the Company of this offering,
approximately $17.8 million, will be used for general corporate purposes,
including capital expenditures and working capital. The Company also may use a
portion of the net proceeds to pay up to $4.5 million of the BeneSphere
contingent purchase price, to the extent certain financial conditions are met by
BeneSphere. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 10 of Notes to the Consolidated Financial
Statements -- ProBusiness Services, Inc. The Company also may use a portion of
the net proceeds for the acquisition of companies, technology or services that
complement the business of the Company, however, no such transactions currently
are planned or being negotiated. The amounts actually expended may vary
depending upon numerous factors. Pending the foregoing uses, the Company intends
to invest the net proceeds from this offering in investment-grade, short-term,
interest-bearing securities, money market funds or similar short-term
investments.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings, if any, for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's working capital line of credit
agreement prohibits the payment of cash dividends without the lender's prior
approval.

15
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997 on an actual basis and on a pro forma as adjusted basis to give effect
to (i) the conversion of all outstanding shares of Preferred Stock into Common
Stock automatically upon the completion of this offering and (ii) the sale and
issuance of the shares of Common Stock offered hereby at the initial public
offering price of $11.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) and receipt
and application of the estimated net proceeds therefrom. See "Use of Proceeds."
This table should be reviewed in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and notes payable to stockholders, less current
portion(1)........................................................ $ 8,917 $ 2,858
Capital lease obligations, less current portion(1).................. 1,898 1,898
Stockholders' equity:
Preferred Stock, $.01 par value; 6,000,000 shares authorized,
3,228,034 shares issued and outstanding, actual; $.001 par
value; 5,000,000 shares authorized, no shares issued and
outstanding, pro forma as adjusted............................. 33 --
Common Stock, $.01 par value; 20,000,000 shares authorized,
1,530,277 shares issued and outstanding, actual; $.001 par
value; 60,000,000 shares authorized, 10,647,301 shares issued
and outstanding, pro forma as adjusted(2)...................... 15 11
Additional paid-in capital.......................................... 23,861 47,888
Accumulated deficit................................................. (18,952) (19,043)
Notes receivable from stockholders.................................. (1,088) (1,088)
-------- --------
Total stockholders' equity.............................. 3,869 27,768
-------- --------
Total capitalization............................... $ 14,684 $ 32,524
======== ========
</TABLE>

- ---------------
(1) See Notes 3 and 4 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.

(2) Excludes as of June 30, 1997 (i) 875,776 shares of Common Stock subject to
outstanding options; (ii) 171,892 shares of Common Stock issuable upon
exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan and;
(iv) 500,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan. Also excludes a warrant issued
after June 30, 1997 to purchase 20,000 shares of the Company's Common Stock
and 350,250 shares of Common Stock issuable upon exercise of options granted
after June 30, 1997 with an exercise price of $9.00 per share. See
"Management -- Stock Plans," "Description of Capital Stock -- Warrants" and
Notes 3, 4, 6, 7 and 10 of Notes to Consolidated Financial
Statements -- ProBusiness Services, Inc.

16
<PAGE> 17

DILUTION

The pro forma net tangible book value (deficit) the Company as of June 30,
1997 was approximately $(540,000) or $(0.07) per share of Common Stock. Pro
forma net tangible book value per share represents the amount of the Company's
total net tangible assets less total liabilities, divided by the pro forma
number of shares of Common Stock issued and outstanding at that date, after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock automatically upon the completion of this offering. Net
tangible book value dilution per share to new stockholders represents the
difference between the amount paid by purchasers of shares of Common Stock in
the offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after the completion of this offering. After giving
effect to the sale of the shares of Common Stock offered hereby at the initial
public offering price of $11.00 per share and after deduction of the
underwriting discounts and commissions and estimated offering expenses payable
by the Company, the pro forma net tangible book value of the Company as of June
30, 1997, would have been approximately $23.5 million or $2.20 per share. This
represents an immediate increase in net tangible book value of $2.27 per share
to existing stockholders and an immediate dilution of $8.80 per share to new
stockholders purchasing Common Stock in this offering. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $11.00
Pro forma net tangible book value (deficit) per share at June 30,
1997............................................................ $(0.07)
Increase in pro forma net tangible book value per share
attributable to new stockholders................................ 2.27
------
Pro forma net tangible book value per share after the offering..... 2.20
------
Dilution per share to new stockholders............................... $ 8.80
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by purchasers of the shares offered hereby, before deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, at the initial public offering price of $11.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 8,147,301 76.5% $23,388,000 46.0% $ 2.87
New stockholders............................ 2,500,000 23.5 27,500,000 54.0 11.00
---------- ------ ----------- ------
Total............................. 10,647,301 100.0% $50,888,000 100.0%
========== ====== =========== ======
</TABLE>

The foregoing assumes no exercise of options to purchase Common Stock after
June 30, 1997. Excludes, as of June 30, 1997 (i) 875,776 shares of Common Stock
subject to outstanding options; (ii) 171,892 shares of Common Stock issuable
upon exercise of outstanding warrants; (iii) 1,331,195 shares of Common Stock
reserved for future grant under the Company's 1996 Stock Option Plan; and (iv)
500,000 shares of Common Stock reserved for issuance under the Company's 1997
Employee Stock Purchase Plan. Also excludes a warrant issued after June 30, 1997
to purchase 20,000 shares of the Company's Common Stock and 350,250 shares of
Common Stock issuable upon exercise of options granted after June 30, 1997 with
an exercise price of $9.00 per share. See "Management -- Stock Plans,"
"Description of Capital Stock -- Warrants" and Notes 3, 4, 6, 7 and 10 of Notes
to Consolidated Financial Statements -- ProBusiness Services, Inc.

17
<PAGE> 18

SELECTED FINANCIAL DATA

The following selected statements of operations data for the years ended
June 30, 1995, 1996, and 1997 and the balance sheet data at June 30, 1996 and
1997 are derived from the consolidated financial statements of the Company,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus. The statement of operations data for the
year ended June 30, 1994 and the balance sheet data at June 30, 1994 and 1995
are derived from consolidated financial statements of the Company that have been
audited by Ernst & Young LLP that are not included in this Prospectus. The
statement of operations data for the year ended June 30, 1993 and the balance
sheet data at June 30, 1993 are derived from unaudited consolidated financial
statements not included in this Prospectus. The pro forma statement of
operations data for the year ended June 30, 1997 has been derived from selected
unaudited pro forma condensed consolidated financial information which is
included elsewhere in this Prospectus. The following selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(1)
------- ------- ------ ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................ $ 1,864 $ 4,069 $7,095 $13,863 $27,374 $29,030
Operating expenses:
Cost of providing services....................... 1,117 1,629 2,703 6,435 13,659 14,541
General and administrative expenses.............. 1,023 1,202 1,304 2,054 4,282 5,719
Research and development expenses................ 787 1,202 1,038 1,257 2,841 2,841
Client acquisition costs......................... 701 1,467 2,943 5,388 11,706 12,514
Acquisition of in-process technology............. -- -- -- 711 -- --
------- ------- ------- ------ ------- -------
Total operating expenses....................... 3,628 5,500 7,988 15,845 32,488 35,615
------- ------- ------- ------ ------- -------
Loss from operations............................... (1,764) (1,431) (893) (1,982) (5,114) (6,585)
Interest expense................................... -- (46) (86) (473) (1,190) (1,212)
Other income....................................... 4 -- -- 69 59 59
------- ------- ------- ------ ------- -------
Net loss........................................... $(1,760) $(1,477) $ (979) $(2,386) $(6,245) $(7,738)
======= ======= ======= ====== ======= =======
Pro forma net loss per share(2).................... $ (0.74) $ (0.92)
======= =======
Shares used in computing pro forma net loss per
share(2)......................................... 8,451 8,451
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 277 $ 114 $ 852 $ 4,041 $ 5,047
Payroll tax funds invested.......................... -- -- -- 106,339 177,626
Working capital (deficiency)........................ 255 (119) 69 3,022 534
Total assets........................................ 1,213 2,019 4,134 117,228 200,435
Payroll tax funds collected but unremitted.......... -- -- -- 106,339 177,626
Long-term debt and note payable to stockholder, less
current portion................................... 22 394 1,016 8,072 8,917
Capital lease obligations, less current portion..... 83 174 168 253 1,898
Total stockholders' equity (deficit)................ 832 705 1,366 (136) 3,869

PRO FORMA
AS ADJUSTED 1997(1)(3)
----------------------

<S> <C<C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 22,887
Payroll tax funds invested.......................... 177,626
Working capital (deficiency)........................ 18,374
Total assets........................................ 218,275
Payroll tax funds collected but unremitted.......... 177,626
Long-term debt and note payable to stockholder, less
current portion................................... 2,858
Capital lease obligations, less current portion..... 1,898
Total stockholders' equity (deficit)................ 27,768
</TABLE>

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

(1) The pro forma statement of operations for the year ended June 30, 1997 has
been prepared as if the acquisition of BeneSphere had occurred as of July 1,
1996. See Selected Unaudited Pro Forma Condensed Consolidated Financial
Information.

(2) See Note 1 of Notes to Consolidated Financial Statements -- ProBusiness
Services, Inc. and Note 4 of Notes to Selected Unaudited Pro Forma Condensed
Consolidated Financial Information for explanations of the determination of
the pro forma shares used in computing pro forma net loss per share.

(3) Adjusted to reflect the sale of the shares of Common Stock offered hereby at
the initial public offering price of $11.00 per share and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."

18
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion also should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.

OVERVIEW

ProBusiness Services, Inc. is a leading provider of employee administrative
services for large employers. The Company's primary service offerings are
payroll processing, payroll tax filing, human resources software and benefits
administration, including the enrollment and processing of flexible benefit
plans and COBRA programs. The Company's proprietary PC-based payroll system
offers the cost-effective benefits of outsourcing and high levels of client
service, while providing the flexibility, control, customization and integration
of an in-house system.

Since 1994, the Company has experienced significant growth of its revenue,
client base and average client size. Revenue increased from $4.1 million in
fiscal 1994 to $27.4 million in fiscal 1997. From June 30, 1994 to June 30,
1997, the client base for payroll processing services increased from 200 to 425
clients, while the average size of the Company's payroll clients increased from
approximately 400 employees to approximately 900 employees. The number of checks
that the Company processed for its payroll clients increased from 566,000 to 2.9
million for the quarters ended June 30, 1996 and 1997, respectively. As of June
30, 1997, the Company serviced approximately 1,100 clients. The Company's
revenue growth is primarily due to continued growth in its client base, the
introduction of its payroll tax service in fiscal 1996, an increase in the
average size of its clients, the introduction of new features and other services
and a high retention rate of existing clients (approximately 92% for fiscal year
1997). The Company does not anticipate it will sustain this rate of growth in
the future.

The establishment of new client relationships involves lengthy and
extensive sales and implementation processes. The sales process generally takes
three to nine months or longer, and the implementation process generally takes
three to six months or longer. In connection with the acquisition of each new
client, the Company incurs substantial client acquisition costs, which consist
primarily of sales and implementation expenses and, to a lesser extent,
marketing expenses. In addition, the Company's revenue is subject to significant
seasonal fluctuations, with the largest percentage of annual revenue being
realized in the third and fourth fiscal quarters primarily due to new clients
beginning services in January (the beginning of the tax year and the Company's
third fiscal quarter) and higher interest income earned on tax funds. Further,
the Company's operating expenses are typically higher as a percentage of revenue
in the first and second fiscal quarters as the Company increases personnel to
acquire new clients and to implement and provide services to such new clients, a
large percentage of which begin services in January. The Company expects this
pattern to continue. The Company has experienced significant operating losses
since its inception and expects to incur significant operating losses in the
future due to continued client acquisition costs, investments in research and
development and costs associated with expanding its sales efforts and operations
to new geographic regions. As of June 30, 1997, the Company had an accumulated
deficit of approximately $19.0 million. There can be no assurance that the
Company will achieve or sustain profitability in the future.

The Company has made acquisitions of businesses in the past and intends to
pursue acquisitions in the future. In connection with acquisitions, the Company
has in the past incurred and will likely incur in the future costs associated
with adding personnel, integrating technology, increasing overhead to support
the acquired businesses, acquiring in-process technology and amortizing expenses
related to intangible assets. As a result, such acquisitions have had and any
future acquisition could have an adverse effect on the Company's results of
operations.

19
<PAGE> 20

In January 1997, the Company acquired all of the outstanding capital stock
of BeneSphere for an initial purchase price of $3.1 million, with up to an
additional $4.5 million to be paid in quarterly installments, beginning April
1998 through January 2000, if certain financial conditions are met. In
connection with the acquisition of BeneSphere, the Company recorded $2.3 million
of goodwill, which will be amortized ratably over 20 years and could be
increased by up to an additional $4.5 million if the purchase price increases.
In May 1996, the Company acquired substantially all of the business and assets
of Dimension Solutions for a purchase price of $1.3 million. In connection with
the acquisition of Dimension Solutions, the Company recorded a one-time charge
of $711,000 in fiscal 1996 relating to the purchase of in-process technology.

The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. The Company typically
invests payroll tax funds collected from clients and their employees in
federally insured or investment-grade securities, which are subject to credit
risks and interest rate fluctuations. See "Risk Factors -- Investment Risks."
The Company generally recognizes revenue from services when such services are
performed and recognizes income from investments when earned. Payroll and
payroll tax clients generally are subject to contracts with an initial term of
36 months. Interest income earned on collected, but unremitted payroll tax funds
amounted to $5.9 million, $1.9 million and none, for fiscal years 1997, 1996 and
1995, respectively. Benefits administration and human resources software clients
generally are subject to contracts with an initial term of 12 months. The
Company's contracts generally do not have significant penalties for
cancellation. In fiscal 1997, no client accounted for more than 4% of the
Company's revenue.

The Company's cost of providing services consists primarily of ongoing
account management, tax and benefits administration operations and production
costs and, to a lesser extent, amortization of capitalized software development
costs. The Company capitalizes software development costs after technological
feasibility of the software relating to a service has been established and
amortizes such costs using the greater of (i) the straight-line basis over the
estimated useful life of the software, which is generally 36 months, or (ii) the
ratio of current revenue to the total of current revenue and anticipated future
revenue over the life of the related product. General and administrative
expenses consist primarily of personnel costs, professional fees and other
overhead costs for finance and corporate services. Research and development
expenses consist primarily of personnel costs. Client acquisition costs consist
of all sales and implementation expenses and, to a lesser extent marketing
expenses.

As of June 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $14.0 million and $3.9 million, respectively. The
net operating loss carryforwards will expire at various dates beginning in the
tax year 1998 through 2012, if not utilized. The Company's utilization of the
net operating loss carryforwards may be subject to annual limitations under the
Internal Revenue Code as a result of changes in the Company's ownership, which
limitations could significantly restrict or partially eliminate their
utilization. No income tax expense has been recorded since the Company's
inception.

20
<PAGE> 21

RESULTS OF OPERATIONS

The following table sets forth certain financial data as a percentage of
revenue for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue......................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Cost of providing services.................................... 38.1 46.4 49.9
General and administrative expenses........................... 18.4 14.8 15.6
Research and development expenses............................. 14.6 9.1 10.4
Client acquisition costs...................................... 41.5 38.9 42.8
Acquisition of in-process technology.......................... -- 5.1 0.0
----- ----- -----
Total operating expenses................................... 112.6 114.3 118.7
----- ----- -----
Loss from operations............................................ (12.6) (14.3) (18.7)
Interest expense................................................ (1.2) (3.4) (4.3)
Other income.................................................... -- 0.5 0.2
----- ----- -----
Net loss........................................................ (13.8)% (17.2)% (22.8)%
===== ===== =====
</TABLE>

YEARS ENDED JUNE 30, 1997 AND 1996

Revenue. Revenue increased 97.5% to $27.4 million in fiscal 1997 from
$13.9 million in fiscal 1996, primarily due to an increase in the number and
average size of the Company's payroll clients, the introduction of the Company's
payroll tax service in January 1996 and, to a lesser extent, the introduction of
the Company's benefits administration services in January 1997. Interest income
earned on payroll tax funds invested was $5.9 million and $1.9 million for
fiscal 1997 and 1996, respectively.

Cost of Providing Services. Cost of providing services increased 112.3% to
$13.7 million in fiscal 1997 from $6.4 million in fiscal 1996 and increased as a
percentage of revenue to 49.9% from 46.4%. The increases were primarily due to
hiring additional managers for payroll account management, operations expense
related to the Company's benefits administration services and, to a lesser
extent, production expenses related to an increase in the number of payroll
clients and increased personnel expenses related to the Company's payroll tax
service, which was introduced in January 1996.

General and Administrative Expenses. General and administrative expenses
increased 108.5% to $4.3 million in fiscal 1997 from $2.1 million in fiscal 1996
and increased as a percentage of revenue to 15.6% from 14.8%. The increases were
primarily a result of the hiring of additional management and administrative
personnel to support the Company's growth.

Research and Development Expenses. Research and development expenses
increased 126.0% to $2.8 million in fiscal 1997 from $1.3 million in fiscal 1996
and increased as a percentage of revenue to 10.4% from 9.1%. The increases were
primarily a result of additional personnel and equipment to develop enhancements
and new features to the Company's existing services. Capitalized software
development costs were $1.4 million in fiscal 1997 and $645,000 in fiscal 1996.

Client Acquisition Costs. Client acquisition costs increased 117.3% to
$11.7 million in fiscal 1997 from $5.4 million in fiscal 1996 and increased as a
percentage of revenue to 42.8% from 38.9%. The increases were primarily due to
expenses resulting from the establishment of a separate sales force to market
the Company's payroll tax service on a stand-alone basis, increased expenses
resulting from the expansion of the Company's payroll sales force and, to a
lesser extent, implementation expenses related to an increased number of new
clients that started services in January 1997.

21
<PAGE> 22

Interest Expense. Interest expense increased 151.6% to $1.2 million in
fiscal 1997 from $473,000 in fiscal 1996, primarily due to increased borrowing
under the Company's line of credit, the issuance of promissory notes to certain
investors in October and December 1995 and an increased amount of capitalized
equipment leases.

YEARS ENDED JUNE 30, 1996 AND 1995

Revenue. Revenue increased 95.4% to $13.9 million in fiscal 1996 from $7.1
million in fiscal 1995, primarily due to an increase in the number and average
size of the Company's payroll clients and the introduction of the Company's
payroll tax service in January 1996. Interest income earned on payroll tax funds
invested amounted to $1.9 million in fiscal 1996. No interest income was earned
in fiscal 1995.

Cost of Providing Services. Cost of providing services increased 138.1% to
$6.4 million in fiscal 1996 from $2.7 million in fiscal 1995 and increased as a
percentage of revenue to 46.4% from 38.1%. The increases were primarily due to
hiring personnel for the introduction of the Company's payroll tax service in
January 1996, hiring additional managers for payroll account management and, to
a lesser extent, hiring account management personnel for the Company's human
resources software.

General and Administrative Expenses. General and administrative expenses
increased 57.5% to $2.1 million in fiscal 1996 from $1.3 million in fiscal 1995,
but decreased as a percentage of revenue to 14.8% from 18.4%. The increase in
absolute dollars resulted primarily from the hiring of additional management and
administrative personnel to support the Company's growth.

Research and Development Expenses. Research and development expenses
increased 21.1% to $1.3 million in fiscal 1996 from $1.0 million in fiscal 1995,
but decreased as a percentage of revenue to 9.1% from 14.6%. Research and
development expenses decreased as a percentage of revenue due in part to higher
revenue and an increase in the amount of expenses that were capitalized in
fiscal 1996. Capitalized software development costs were $645,000 in fiscal 1996
and $137,000 in fiscal 1995.

Client Acquisition Costs. Client acquisition costs increased 83.1% to $5.4
million in fiscal 1996 from $2.9 million in fiscal 1995 but decreased as a
percentage of revenue to 38.9% from 41.5%. The increase in absolute dollars was
primarily due to increased expenses resulting from the expansion of the
Company's payroll sales force and, to a lesser extent, implementation expenses
relating to an increased number of new clients.

Acquisition of In-Process Technology. In fiscal 1996, the Company recorded
a one-time charge of $711,000 relating to the purchase of in-process technology
in connection with the Company's acquisition of Dimension Solutions in May 1996.

Interest Expense. Interest expense increased to $473,000 in fiscal 1996
from $86,000 in fiscal 1995, primarily due to increased borrowings under the
Company's line of credit and the issuance of promissory notes to certain
investors in October and December 1995.

22
<PAGE> 23

QUARTERLY RESULTS

The following table sets forth selected unaudited quarterly financial
information for each of the seven quarters in the period ended June 30, 1997, as
well as such data expressed as a percentage of the Company's revenue for the
periods presented. This information has been derived from unaudited statements
of operations data that, in the opinion of management, are stated on a basis
consistent with the audited financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The Company's results of operations for any quarter are
not necessar-ily indicative of the results to be expected in any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
1995 1996 1997
------- --------------------------------------- ------------------
DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
------- -------- ------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue....................... $2,676 $4,056 $ 4,701 $ 4,675 $ 5,524 $ 8,427 $ 8,748
Operating expenses:
Cost of providing
services................. 1,253 1,955 2,202 2,288 2,950 3,907 4,514
General and administrative
expenses................. 409 533 720 622 869 1,441 1,350
Research and development
expenses................. 174 421 538 625 683 732 801
Client acquisition costs.... 1,100 1,488 1,832 2,215 2,413 3,664 3,414
Acquisition of in-process
technology............... -- -- 711 -- -- -- --
------ ------ ------- ------- ------- -------
Total operating expenses...... 2,936 4,397 6,003 5,750 6,915 9,744 10,079
------ ------ ------- ------- ------- -------
Loss from operations.......... (260) (341) (1,302) (1,075) (1,391) (1,317) (1,331)
Interest expense.............. (88) (159) (175) (215) (305) (380) (290)
Other income.................. 22 38 9 11 1 2 45
------ ------ ------- ------- ------- -------
Net loss...................... $ (326) $ (462) $(1,468) $ (1,279) $(1,695) $(1,695) $(1,576)
====== ====== ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
1995 1996 1997
------- --------------------------------------- ------------------
DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services... 46.8 48.2 46.8 48.9 53.4 46.4 51.6
General and administrative
expenses.................. 15.3 13.1 15.3 13.3 15.7 17.1 15.4
Research and development
expenses.................. 6.5 10.4 11.5 13.4 12.4 8.6 9.2
Client acquisition costs..... 41.1 36.7 39.0 47.4 43.7 43.5 39.0
Acquisition of in-process
technology................ -- -- 15.1 -- -- -- --
----- ----- ----- ----- ----- -----
Total operating expenses....... 109.7 108.4 127.7 123.0 125.2 115.6 115.2
----- ----- ----- ----- ----- -----
Loss from operations........... (9.7) (8.4) (27.7) (23.0) (25.2) (15.6) (15.2)
Interest expense............... (3.3) (3.9) (3.7) (4.6) (5.5) (4.5) (3.3)
Other income................... 0.8 0.9 0.2 0.2 0.0 0.0 0.5
----- ----- ----- ----- ----- -----
Net loss....................... (12.2)% (11.4)% (31.2)% (27.4)% (30.7)% (20.1)% (18.0)%
===== ===== ===== ===== ===== =====
</TABLE>

23
<PAGE> 24

Revenue has increased during the last seven quarters primarily as a result
of the increase in the Company's payroll clients, the introduction of the
Company's payroll tax service in January 1996 and, to a lesser extent, the
introduction of the Company's human resources software in May 1996. The increase
in the Company's revenue for the third fiscal quarter in 1997 also was partially
attributable to the introduction of the Company's benefits administration
services in January 1997. The Company's revenue is subject to significant
seasonal fluctuations, with the largest percentage of annual revenue being
realized in the third and fourth fiscal quarters primarily due to new clients
beginning services at the beginning of the tax year in January and higher
interest income earned on tax funds.

The Company's operating expenses typically are higher as a percentage of
revenue in the first and second fiscal quarters as the Company increases
personnel to acquire new clients and to implement and provide services to such
new clients, a large percentage of which begin services in January. The Company
expects this pattern to continue. Cost of providing services increased in the
second and fourth quarters of fiscal 1997 primarily due to increases in account
management personnel and production costs related to the Company's expanded
client base. In the third fiscal quarter of 1997, the increase in general and
administrative expenses was partially due to the addition of management
infrastructure related to the acquisition of BeneSphere in January 1997, and the
increase in client acquisition costs in absolute dollars was primarily
attributable to higher sales commissions and the introduction of the Company's
benefits administration services.

The Company's quarterly operating results have in the past and will in the
future vary significantly depending on a variety of factors, including the
number and size of new clients starting services, the decision of one or more
clients to delay or cancel implementation or ongoing services, interest rates,
seasonality, the ability of the Company to design, develop and introduce new
services and features for existing services on a timely basis, transition costs
to new technologies, expenses incurred for geographic expansion, risks
associated with payroll tax and benefits administration services, price
competition, a reduction in the number of employees of its clients, and general
economic factors. Revenue from new clients represents a significant portion of
quarterly revenue in the third and fourth fiscal quarters. A substantial
majority of the Company's operating expenses, particularly personnel and related
costs, depreciation and rent, is relatively fixed in advance of any particular
quarter. The Company's agreements with its clients generally do not have
significant penalties for cancellation. As a result, any decision by a client to
delay or cancel implementation of the Company's services or the Company's
underutilization of personnel may cause significant variations in operating
results in a particular quarter and could result in losses for such quarter. As
the Company secures larger clients, the time required for implementing the
Company's services increases, which could contribute to larger fluctuations in
revenue. Interest income earned from investing payroll tax funds, which is a
significant portion of the Company's revenue, is vulnerable to fluctuations in
interest rates. In addition, the Company's business may be affected by shifts in
the general health of the economy, client staff reductions, strikes,
acquisitions of its client by other companies and other downturns. There can be
no assurance that the Company's future revenue and results of operations will
not vary substantially.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
a combination of private sales of equity securities, private debt and bank
borrowings, and to a lesser extent, capital equipment leases. As of June 30,
1997, the Company had raised approximately $23.4 million in private sales of
equity securities. In October and December 1995, the Company issued an aggregate
principal amount of $4.0 million in subordinated promissory notes with an
interest rate of 8% per annum due on the earlier of three years from the date of
issuance of the note or 30 days after completion of this offering. In March
1997, General Atlantic purchased $10.0 million of Preferred Stock of the
Company. In August 1997, the Company entered into an interest rate swap
agreement which has a two-year term and provides for a fixed rate of 5.9%. See
"Risk Factors -- Investment Risks."

At June 30, 1997, the Company had approximately $5.0 million of cash and
cash equivalents and a $10.0 million secured revolving line of credit, which
expires April 1998. At June 30, 1997, the Company

24
<PAGE> 25

had outstanding borrowings of approximately $4.8 million, leaving an
availability of $5.2 million under the line of credit, based on borrowing
restrictions, and had borrowed $1.9 million under a secured equipment lease. See
Note 3 of Notes to Consolidated Financial Statements -- ProBusiness Services,
Inc. The Company intends to repay a substantial portion of such outstanding debt
from the net proceeds of this offering.

Net cash used in operating activities for fiscal 1997, 1996 and 1995 was
$4.1 million, $202,000 and $444,000, respectively. The increase in cash used in
operating activities in fiscal 1997 compared to fiscal 1996 was primarily the
result of net losses and, to a lesser extent, increases in accounts receivable
and other assets, partially offset by depreciation and amortization and an
increase in accrued liabilities.

Net cash used in investing activities was $4.7 million, $3.3 million and
$1.4 million for fiscal 1997, 1996 and 1995, respectively. The increases in net
cash used in investing activities during these periods resulted primarily from
capital expenditures for equipment, furniture and fixtures to support the
Company's increased personnel. In addition, the Company capitalized software
development costs of $1.4 million, $645,000 and $137,000 in fiscal 1997, 1996
and 1995, respectively. The Company expects to make additional capital
expenditures for furniture, equipment and fixtures in connection with the move
of its corporate headquarters and the recent establishment of an additional
processing center, both planned to occur in late 1997. In addition, the Company
anticipates that it will continue to expend funds for software development in
the future.

Net cash provided by financing activities was $9.8 million, $6.7 million
and $2.6 million for the fiscal years ended 1997, 1996 and 1995, respectively.
Net cash provided by financing activities for fiscal 1997 related primarily to
$9.9 million of net proceeds from the issuance of preferred stock in March 1997.
Net cash provided by financing activities for fiscal 1996 related primarily to
borrowings under the Company's credit facilities and the issuance of $4.0
million of subordinated debt in October and December 1995. Financing activities
provided cash for fiscal 1995 primarily from the issuance of equity securities
and borrowings under credit agreements.

The Company believes that the net proceeds from this offering, together
with existing cash balances and anticipated cash flows from operations, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 12 months. The Company may also utilize cash to acquire or
invest in complementary businesses or to obtain the right to use complementary
technologies, although the Company does not have any pending plans to do so. The
Company may sell additional equity or debt securities or obtain additional
credit facilities.

25
<PAGE> 26

BUSINESS

The following Business section contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

ProBusiness is a leading provider of employee administrative services for
large employers, typically with over 250 employees. The Company's primary
service offerings are payroll processing, payroll tax filing, human resources
software and benefits administration, including the enrollment and processing of
flexible benefit plans and COBRA programs. The Company's proprietary PC-based
payroll system offers the cost-effective benefits of outsourcing and high levels
of client service, while providing the flexibility, control, customization and
integration of an in-house system. As of June 30, 1997, the Company provided
services to approximately 1,100 clients and provided payroll processing services
to 425 clients with an aggregate of approximately 380,000 active employees and
an average of approximately 900 employees. For the quarter ended June 30, 1997,
the Company processed 2.9 million checks for the Company's payroll clients.

INDUSTRY BACKGROUND

Many large businesses have found that outsourcing non-core functions
reduces costs, improves service, quality and efficiency, allows personnel to
focus on core competencies and enhances productivity through access to advanced
technologies. As a result, the demand for outsourcing employee administrative
services has grown significantly and is expected to continue to grow over the
next several years. According to a third-party industry study, it is estimated
that third-party payroll and payroll tax services alone generated approximately
$3.4 billion in revenue in 1995 and will generate approximately $7.4 billion in
revenue in 2000.

Payroll processing and benefits administration lend themselves to
outsourcing because both are complex and costly for employers to conduct
internally. Payroll processing involves tracking employee data, calculating
payroll data and producing paychecks and direct deposits, remitting and filing
payroll taxes and generating management reports. Benefits administration
consists of many human resources functions, such as the enrollment and
processing of flexible benefits plans and the administration and management of
COBRA programs. In recent years, payroll processing and benefits administration
have increased in complexity due to continual changes in regulations and
increasingly sophisticated employee benefit plans. For example, large employers
must have the ability to calculate taxes for multiple federal, state and local
government agencies, collect garnishments based on different state laws and make
numerous agency filings. In addition, payroll and benefits administration
systems must keep pace with rapidly evolving business operations as companies
increase in size, expand geographically or add new operations. Finally, these
systems must be flexible and scalable to integrate with increasingly advanced
computer systems as companies adopt new technologies.

26
<PAGE> 27

Despite the complexities of payroll processing and the advantages provided
by outsourcing, most large employers continue to process payroll in-house
because they believe their unique business needs require the control and
integration of an in-house system. These in-house payroll systems generally run
on expensive mainframe or minicomputer systems and require customization and
significant ongoing technical support. In addition, such systems typically are
operated and maintained by large payroll departments, which are supported by
dedicated programmers, systems analysts and production personnel. As their
payroll needs change, employers that process their payroll in-house must
continue to make significant investments in personnel, hardware and software to
maintain and upgrade their payroll systems.

Large employers that have outsourced their payroll processing needs have
looked primarily to traditional payroll service providers, which process payroll
data received from clients utilizing mainframe computers located at multiple
regional data centers. This approach utilizes two systems, the client's and the
service provider's, which have different hardware, operating systems, software
applications and data configurations. Maintaining and synchronizing two separate
systems makes it difficult for these service providers to update code, add
features and functionality and provide clients with customization and
integration with their other systems. In addition, the complexities presented by
operating two separate systems often impede the timely identification and
resolution of client payroll processing problems.

Many large employers that choose to outsource their employee administration
functions require a payroll provider that offers a high level of flexibility and
client service. In addition, these employers prefer to have a single service
provider of comprehensive and integrated services for their payroll and other
employee administrative needs. Given the inherent limitations of the technology
used by traditional payroll processing providers, such providers are unable to
deliver a highly responsive and flexible solution. As a result, the Company
believes a significant opportunity exists for service providers that can furnish
large employers with high quality client service and a payroll system that
offers the cost-effective benefits of outsourcing, while providing the same
level of control, customization and integration as an in-house system.

THE PROBUSINESS SOLUTION

The Company's solution provides large employers with the cost-effective
benefits of outsourcing and high levels of client service, while providing the
flexibility, system control, customization and integration of an in-house
system. The Company combines its PC-based technology and personalized client
service to provide a broad range of service offerings, including payroll
processing, payroll tax filing, human resources software and benefits
administration.

Technology. The Company's proprietary PC-based technology for its payroll
services provides a platform for delivering high levels of service together with
the flexibility and control of an in-house system. The Company creates a
mirrored version of each client's system, which allows the Company's account
managers to access client information using the same data, programs and screens
as the client uses on its PC network. This enables the Company to quickly and
easily identify client problems or modify application programs in response to
client requests. The client maintains control by having direct access to all
calculation programs and all historical and transactional data, which also
provides the client with flexibility to respond quickly to employee and
third-party inquiries, to fully analyze payroll data and to generate management
reports.

The Company's system architecture is designed to distribute payroll
processing tasks to multiple low cost, high performance PCs, which enables the
Company to scale its system continually to handle increasing transaction
volumes. The Company's PC-based application software supports the development of
customized solutions for each client that can be easily upgraded and integrated
with a client's other systems. In addition, multiple networked PCs facilitate
exception processing and rapid response that large employers require.

27
<PAGE> 28

Client Service. The Company delivers high quality, responsive and
professional service by establishing a business partnership with each client.
The Company assigns each client a personal account manager, who proactively
manages the account and marshals the resources of a strategic team of
specialists to meet the client's specific needs. The Company maintains a low
client-to-account manager ratio to offer clients accessible and responsive
account management. The Company supports each client with functional and
regulatory expertise in payroll, payroll tax and employee benefits, as well as
specialists in pay data interfaces, general ledger interfaces, paid-time-off,
report writing and systems integration. The Company uses its systems integration
expertise to facilitate the integration of its payroll processing system with
the client's existing hardware and software. To support and provide high quality
service, the Company focuses on hiring experienced accounting and technical
professionals from the payroll, accounting, human resources and financial
services industries. The Company promotes its client service culture by
instilling a sense of ownership in each employee through incentive compensation
and recognition of achievements based on providing high quality service to
clients.

Cost Effectiveness. The Company believes that it provides its clients with
a more cost-effective payroll solution than most other third-party providers.
During the implementation process, the Company reengineers the client's payroll
processes and designs a payroll system that integrates with the client's other
systems. Once implementation is completed, integration between payroll and other
systems is improved, eliminating manual tasks and allowing a client to redeploy
specialized personnel to other functions within the organization.

STRATEGY

The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy is to
continue providing clients with high levels of personal service and developing a
comprehensive and fully integrated suite of employee administrative services.
The Company also intends to expand its client base and provide additional
services to its existing clients. The Company's ongoing strategy includes the
following key factors:

- PROVIDE PREMIER SERVICE. The Company is committed to providing high
levels of personal service and proactive account management,
including maintaining a low client-to-account manager ratio. The
Company believes that its ability to consistently deliver high
quality service is a competitive advantage in the large employer
market and is a key factor in enabling the Company to achieve a high
payroll client retention rate, which was approximately 92% for
fiscal year 1997.

- EXPAND CLIENT BASE. The Company intends to continue adding to its
client base by expanding its direct sales force and locating sales
representatives in major metropolitan areas throughout the United
States, as well as increasing its penetration in existing markets
and pursuing strategic alliances and acquisitions.

- PROVIDE A COMPREHENSIVE AND INTEGRATED SOLUTION. The Company
intends to continue investing substantial resources to further
develop a comprehensive and fully integrated suite of employee
administrative services and extend the functionality of its existing
proprietary technology. The Company's goal is to create a single
data processing system that it can use as a platform to offer a full
range of services to clients, thereby strengthening client
relationships and improving efficiencies for both the Company and
its clients.

- INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that
there is a significant opportunity for it to cross-market its
services to its existing client base, as few of its current clients
use all of the Company's services. In addition, the Company intends
to leverage its relationships with existing clients to market new
services and features.

- PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. The Company intends to
pursue acquisitions and alliances to increase the range of services
and service features it offers, add industry and technical
expertise, and acquire complementary technology. For example, during
fiscal 1996, the Company introduced its human resources software and
during fiscal 1997, its

28
<PAGE> 29

benefits administration services through the acquisitions of Dimension
Solutions and BeneSphere, respectively.

- ATTRACT AND RETAIN HIGHLY QUALIFIED EMPLOYEES. The Company seeks to
continue providing its clients with a high level of service by hiring
professionals who are experienced in their fields. Service personnel
are recruited from payroll, accounting, human resources and financial
services industries, and many have professional experience as
accounting managers or hold Certified Public Accountant or Certified
Payroll Professional accreditations. The Company's employees receive
incentive compensation and recognition of achievements based on
providing high quality service to clients.

The Company's strategy involves substantial risks and uncertainties. There
can be no assurance that the Company will be successful in implementing its
strategy or that its strategy, even if implemented, will lead to successful
achievement of the Company's objectives. If the Company is unable to implement
its strategy effectively, the Company's business, financial condition and
results of operations will be materially adversely affected. See "Risk Factors."

SERVICE OFFERINGS

The Company provides a broad range of employee administrative services,
including payroll processing, payroll tax filing, benefits administration and
human resources software. The Company intends to expand its service offerings
through future acquisitions and to develop enhancements to its existing services
internally.

Payroll Processing. The Company processes time and attendance data to
calculate and produce employee paychecks, direct deposits and reports for its
clients. The Company delivers the paychecks and reports to clients within 24 to
48 hours of the Company's receipt of the data electronically submitted from the
client. The Company's system is highly configurable to meet the specialized
needs of each client yet maintains the ability to provide high volume
processing. The system integrates easily with the client's general ledger, human
resources and time and attendance systems. In addition, the Company offers many
sophisticated features, including the automatic enrollment and tracking of paid
time off, proration of compensation for new hires and integrated garnishment
processing.

Payroll Tax Filing. The Company collects contributed employer and employee
tax funds from clients, deposits such funds with tax authorities when due, files
all tax returns and reconciles the client's account. The Company will also
represent the client before tax authorities in any dispute or inquiry. The
Company introduced its payroll tax service in January 1996 to existing payroll
clients and to corporations who process their payroll in-house.

Benefits Administration. In January 1997, the Company introduced its
benefits administration services through the acquisition of BeneSphere. Such
services include flexible benefits enrollment and processing, COBRA
administration, consolidated billing and eligibility tracking and premium
payment services. Employees can enroll in and choose their flexible spending
benefits through traditional paper-based forms or through World Wide
Web-accessible enrollment sites using the Company's recently introduced
Enrollnet(TM) service.

Human Resources Software. In May 1996, the Company introduced its human
resources software through the acquisition of Dimension Solutions. The Company's
human resources software tracks and reports general employee information,
including compensation, benefits, skills, performance, training, job titles and
medical history. For clients that also use the Company's payroll service, the
human resources data can be transferred to the payroll services system, thus
eliminating the need for duplicate data entry.

CLIENT SERVICE

The Company believes that its focus and dedication to providing high levels
of client service is a competitive advantage in the large employer market.
ProBusiness develops a business partnership with each client by assessing each
client's payroll processing needs, reengineering and designing the client's
payroll system and process and implementing a cost-effective solution. The
Company maintains an

29
<PAGE> 30

ongoing relationship with each client using a strategic team that includes a
sales representative, a sales analyst, an implementation manager, an account
manager and numerous functional, regulatory and technical support specialists.

Sales. The Company believes that client service begins with the sales
process. A sales representative and a sales analyst work together to assess a
potential client's payroll processing needs. Based on this assessment, the sales
team then identifies opportunities to reengineer the prospective client's
payroll processes and to design a payroll solution that integrates effectively
with its other systems. The payroll sales cycle typically ranges from three to
nine months or longer.

Implementation. Upon engagement by a client, the Company assigns a team of
technical support specialists, headed by an implementation manager who leads the
transition from the client's former payroll system to the Company's system. The
implementation manager works with the client, the sales analyst and technical
support specialists to integrate the Company's payroll system with the client's
other systems and to customize the system to improve the client's payroll
processes. The Company uses its systems integration expertise to facilitate the
integration of its payroll processing system with the client's existing hardware
and software. The implementation process generally takes three to six months or
longer, depending on the complexity of the client's payroll processes and
systems and the size of the client.

Account Management. An account manager is assigned to each client during
the implementation process and serves as the client's day-to-day contact at the
Company. The account manager coordinates the efforts of the Company's
functional, regulatory and technical support specialists as necessary. The
account manager visits each client regularly and establishes an annual business
plan with the client that details scheduled payroll events such as open
enrollment periods for employee benefits plans or software system changes. This
annual business plan allows the Company to provide clients with uninterrupted
payroll services during these periods. Account managers use the Company's
proprietary CallLog system to record and track all client calls, record client
feedback and help ensure that the client's needs are addressed promptly and
thoroughly. The Company maintains a low client-to-account manager ratio to offer
clients accessible and responsive account management.

Support Specialists. The Company supports each client with functional and
regulatory specialists in payroll, payroll tax and employee benefits, as well as
pay data interfaces, general ledger interfaces, paid-time-off, report writing
and system integration. Each of these specialists is available to speak directly
with clients as needed, meet with clients onsite or support clients indirectly
through the account manager.

The Company is committed to continually monitoring the quality of its
service through client feedback mechanisms. The Company obtains valuable
insights into the needs of its clients through its partnership with each client
and from client responses to surveys, which are conducted semi-annually. The
Company uses this information to develop new technologies, identify new service
offerings, optimize the services provided to existing clients and improve the
level of service provided to clients. The Company also uses client feedback as a
basis for incentive compensation and recognition of achievements.

TECHNOLOGY

The Company's proprietary PC-based technology for its payroll services
provides a platform for delivering high levels of service together with the
flexibility and control of an in-house system. The Company creates a mirrored
version of each client's system, which allows the Company's account managers to
access client information using the same data, programs and screens as the
client uses on its PC network. This enables the Company to quickly and easily
identify client problems or modify application programs in response to client
requests. The client maintains control by having direct access to all
calculation programs and all historical and transactional data, which also
provides the client with flexibility to respond quickly to employee and
third-party inquiries, to fully analyze payroll data and to generate management
reports.

30
<PAGE> 31

CLIENTS

The Company targets large companies, typically with over 250 employees,
with complex and changing business needs in diverse industries. As of June 30,
1997, the Company provided services to approximately 1,100 clients. Of these
clients, 425 were payroll processing clients, with an aggregate of approximately
380,000 active employees and an average of approximately 900 employees. For the
quarter ended June 30, 1997, the Company processed 2.9 million payroll checks
for the Company's payroll clients. Although the Company is extending its
national presence, most of the Company's revenue historically has been derived
from clients located in the western United States. For fiscal 1997, no client
accounted for more than 4% of the Company's revenue. The Company's agreements
with its clients generally do not have significant penalties for cancellation.
Set forth below is a representative list of the Company's clients as of July 31,
1997, each of which has over 1,000 employees and from which the Company expects
revenue of at least $25,000 in fiscal 1998.

TECHNOLOGY

3Com Corporation
Advanced Micro Devices, Inc.
Airtouch Communications, Inc.
Ascend Communications Inc.
AST Research, Inc.
Atmel Corporation
Bay Networks Inc.
Cadence Design Systems Inc.
Cisco Systems Inc.
Dell Computer Corporation
Fujitsu, Ltd.
Hitachi America Ltd
Informix Corporation
Integrated Device
Technology, Inc.
Intuit Inc.
KLA Instruments Corporation
LSI Logic Corporation
Netscape Communications
Corp.
Novell, Inc.
Pacific Scientific Company
Quantum Corporation
Read-Rite Corporation
Siemens Business
Communication Systems, Inc.
Silicon Graphics, Inc.
Silicon Systems, Inc.
Solectron Corporation
Storage Technology
Corporation
Sybase, Inc.
TCI Cablevision
VeriFone, Inc.

RETAIL

Childrens Discovery Centers
of America, Inc.
Coach Leatherwear Co., Inc.
Dollar General Corporation
Esprit de Corp.
Michaels Stores, Inc.
Natural Wonders, Inc.
St. John Knits Inc.
Sunglass Hut International, Inc.
Williams-Sonoma, Inc.

SERVICES/PUBLISHING

California Casualty Group
CCH Incorporated
Clubcorp International
First Allmerica Financial Life
Insurance Company
Koll Management Services, Inc.
North American Title
Insurance Company
U.S. Computer Services
Ziff Davis Publishing Company

FOOD PRODUCTS AND SERVICES

Bon Appetit Management
Company
Fleming Companies, Inc.
Fresh Choice, Inc.
Kellogg USA Inc.
OreIda Foods Inc.
Pacific Coast Producers
Specialty Restaurants Corp.

OTHER

Abbott Laboratories
Allergan, Inc.
The Gillette Company
Pharmacia & Upjohn, Inc.
Raychem Corporation
Toyota Motor Corporation
Watkins-Johnson Company

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<PAGE> 32

SALES AND MARKETING

The Company employs a direct sales force to gain new payroll and payroll
tax clients and increase the number of services provided to existing clients.
The Company currently targets large employers through direct marketing,
seminars, trade shows and active participation in local chapters of the American
Payroll Association. The Company uses a team selling approach, whereby sales
analysts and sales representatives collaborate to assess a potential client's
needs and develop a cost-effective solution. The payroll sales cycle typically
ranges from three to nine months or longer. The Company primarily utilizes
insurance brokers to attract new benefits administration clients.

The Company believes that its long-term competitiveness depends on
increasing its national presence. The Company believes that locating direct
sales representatives in major metropolitan areas throughout the United States
is the most effective means of increasing its national client base. The Company
seeks to attract and retain experienced industry sales representatives.

The Company's marketing department provides support materials and marketing
communications to sales representatives and promotes public relations, performs
direct mailings and participates in seminars and trade shows.

COMPETITION

The Company believes that the principal competitive factors affecting its
market include client service, system functionality and performance, system
scalability, reputation, system cost and geographic location. The failure of the
Company to compete successfully would have a material adverse effect on the
Company's business, financial condition and results of operations.

RESEARCH AND DEVELOPMENT

The Company intends to continue investing substantial resources to further
develop a comprehensive and fully integrated suite of employee administrative
services and extend the functionality of its proprietary payroll processing
systems. The Company has committed resources to the following development
initiatives:

- WINDOWS VERSION PAYROLL. The Company expects to introduce a new version
of its payroll system that will run under Windows 95 and Windows NT.

- ON-LINE SERVICES. The Company intends to provide secure on-line employee
access to its payroll and benefits systems through the World Wide Web
that will provide services such as benefits enrollment, W-4 changes and
time and attendance tracking.

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<PAGE> 33

- INTEGRATED PAYROLL AND HUMAN RESOURCES SYSTEM. The Company expects to
introduce an integrated payroll and human resources system utilizing
client/server technology that will run under Windows 95 and Windows NT.

- JAVA-BASED OBJECT ORIENTED SYSTEM. As a long-term initiative, the
Company is developing a second generation integrated payroll and human
resources system based on object and Inter/intranet technology.

The information discussed above in "Research and Development" contains
forward-looking statements that involve risks and uncertainties. Actual events
could differ materially from those anticipated in these forward-looking
statements, as a result of certain factors including those discussed in the
paragraph below.

The technologies in which the Company has invested to date are rapidly
evolving and have short life cycles, which requires the Company to anticipate
and rapidly adapt to technological changes. In addition, the Company's industry
is characterized by increasingly sophisticated and varied needs of clients,
frequent new service and feature introductions and emerging industry standards.
The Company's future success will depend, in part, on its ability to develop
advanced technologies, enhance its existing services with new features, add new
services that address the changing needs of its clients, and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. If the Company is unable to develop and introduce new
services and new features of existing services in a timely or cost-effective
manner, the Company's business, financial condition and results of operations
could be materially adversely affected. In addition, application software used
by the Company may contain defects or failures when introduced or when new
versions or enhancements are released. The Company has in the past discovered
software defects in certain of its applications, in some cases, only after its
systems have been used by clients. There can be no assurance that future defects
will not be discovered in existing or new applications or releases. Any such
occurrence could have a material adverse effect upon the Company's business,
financial condition and results of operations.

PROPRIETARY RIGHTS

There can be no assurance that the Company's services and technology do not
infringe any existing patents, copyrights or other proprietary rights of others,
or that third parties will not assert infringement claims in the future. If any
such claims are asserted and upheld, the costs of defense could be substantial
and any resulting liability to the Company could have a material adverse effect
on the Company's business, financial condition and results of operations.

EMPLOYEES

As of June 30, 1997, the Company had 377 full-time employees. The Company
believes that its relations with its employees are good.

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<PAGE> 34

FACILITIES

The Company's headquarters are located in Pleasanton, California and
consist of approximately 52,000 square feet of office space leased pursuant to
multiple leases which terminate between March 1999 and February 2001. In
September 1996, the Company entered into a build-to-suit lease, whereby the
Company will lease approximately 130,000 square feet of office space located in
Pleasanton, California. The Company will relocate its headquarters to the new
facility in September 1997. The term of the build-to-suit lease expires
approximately 11 years from completion of the facility.

The Company also has a sales, implementation and production office in
Irvine, California, where it leases approximately 14,000 square feet under a
lease which terminates May 2002. The Company is in the process of establishing
back-up facilities at its Irvine location.

BeneSphere's processing operations are located in Bellevue, Washington,
where BeneSphere leases approximately 6,500 square feet under a lease that will
terminate on June 1, 2003.

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<PAGE> 35

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 14, 1997.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- --------------------------------------------------------
<S> <C> <C>
Thomas H. Sinton.............. 49 Chairman of the Board, President, Chief Executive
Officer, Director
Jeffrey M. Bizzack............ 37 Senior Vice President, Sales
Mitchell W. Everton........... 40 Senior Vice President, Tax & Operations
Leslie A. Johnson............. 48 Senior Vice President, Client Services
Steven E. Klei................ 37 Senior Vice President, Finance, Chief Financial Officer
and Secretary
Robert E. Schneider........... 39 Senior Vice President, Research & Development
William T. Clifford(2)........ 51 Director
David C. Hodgson(1)........... 40 Director
Ronald W. Readmond(1)(2)...... 54 Director
Thomas P. Roddy(2)............ 62 Director
</TABLE>

- ---------------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

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

Mr. Bizzack has served as Senior Vice President, Sales of the Company since
July 1993. From October 1992 to July 1993, Mr. Bizzack served as Vice President,
Sales of the Company. From October 1988 to October 1992, Mr. Bizzack served as a
District Sales Manager of the Company. Mr. Bizzack attended Saint Mary's
College.

Mr. Everton has served as Senior Vice President, Tax & Operations of the
Company since August 1995, and from July 1993 to July 1995, he served as
Executive Vice President, Operations of the Company. From July 1992 to July
1993, Mr. Everton served as Vice President, Operations of the Company. From June
1986 to July 1992, Mr. Everton held various management positions with Systems
Tax Service, a payroll tax filing company that was acquired by Ceridian
Corporation in 1993. Mr. Everton holds a B.A. degree in Business Economics from
the University of California, Santa Barbara and an M.B.A. degree from the
University of California, Berkeley.

Ms. Johnson has served as Senior Vice President, Client Services of the
Company since August 1997 and served as Vice President, Client Services of the
Company from September 1993 to August 1997. From May 1992 to September 1993, Ms.
Johnson was Director, National Accounts for Automatic Data Processing. From
January 1976 until her division was acquired by Automatic Data Processing in May
1992, Ms. Johnson held several positions at BankAmerica Corporation, most
recently as Vice President, Northern California National Accounts. Ms. Johnson
holds a B.A. degree in Communications from the University of Colorado.

35
<PAGE> 36

Mr. Klei has served as Senior Vice President, Finance of the Company since
August 1997, as Chief Financial Officer of the Company since July 1995 and as
Secretary of the Company since August 1996. Mr. Klei served as Vice President,
Finance from July 1995 to August 1997. From April 1993 to July 1995, Mr. Klei
was Corporate Controller for Esprit de Corp, an apparel company. From December
1990 to April 1993, Mr. Klei provided consulting services to financially
troubled companies based on his experience at New Home Interiors ("New Home"), a
regional operator of showrooms for home products and services. In such capacity,
Mr. Klei joined Rainbow Records ("Rainbow"), a retailer of records and videos,
as a consultant in December 1990 at which time Rainbow was contemplating a
liquidation. Mr. Klei presided over the orderly liquidation of Rainbow as Chief
Financial Officer from April 1991 to February 1992. Subsequently, Rainbow
entered into involuntary bankruptcy and received final approval from the
bankruptcy court in the Northern District of California in Oakland. Mr. Klei
joined Comfort Zone, a retailer of bedroom furnishings in February 1992 as a
consultant and subsequently served as Vice President and Chief Financial Officer
until April 1993. From May 1988 to December 1990, Mr. Klei was a minority owner
and served as Chief Financial Officer of New Home. In connection with his
position at New Home, Mr. Klei personally guaranteed certain obligations of New
Home, which became due upon New Home's liquidation in 1991. As a result of such
obligations, in September 1993, Mr. Klei applied for and was granted a full
discharge of all debts under Chapter 7 of the federal Bankruptcy Code. Mr. Klei
holds a B.S. degree in Accounting from Central Michigan University and is a
Certified Public Accountant.

Mr. Schneider has served as Senior Vice President, Research & Development
of the Company since August 1997 and served as Vice President, Research &
Development of the Company from November 1996 to August 1997. From April 1995 to
July 1996, Mr. Schneider served as Senior Vice President of Product Development
at Premenos Technology Corporation, an electronic commerce software company.
From February 1989 to March 1995, Mr. Schneider held several positions at Sybase
Inc., most recently as Vice President and Business Unit Manager of the Server
Products Group. Mr. Schneider holds a B.S. degree in Computer Science from the
University of San Francisco.

Mr. Clifford has served as a Director of the Company since August 1997. Mr.
Clifford has been the President of Gartner Group Research and the Chief
Operating Officer of Gartner Group, Inc. since April 1995 and Executive Vice
President, Operations of Gartner Group, Inc. since October 1993. From December
1988 to October 1993 Mr. Clifford held various positions at Automatic Data
Processing, Inc., including President of National Accounts and Corporate Vice
President, Information Services. Mr. Clifford holds a B.A. degree in Economics
from the University of Connecticut.

Mr. Hodgson has served as a Director of the Company since March 1997. Mr.
Hodgson is a Managing Member of General Atlantic Partners LLC ("GAP LLC") and
has been with GAP LLC since 1982. Mr. Hodgson is also a director of Baan
Company, N.V., a publicly-traded software company, Walker Interactive, a
publicly-traded software company, and several other privately-held software
companies, in which GAP LLC or one of its affiliates is an investor. Mr. Hodgson
holds an A.B. degree in Mathematics from Dartmouth College and an M.B.A. degree
from Stanford University.

Mr. Readmond has served as a Director of the Company since February 1997.
Since January 1997, Mr. Readmond has been an advisor of Barbour Griffith &
Rogers, a lobbying firm, and Chairman of International Equity Partners, L.P., a
private equity and project development company. From August 1989 to December
1996, Mr. Readmond held various positions at Charles Schwab & Co. Inc., most
recently serving as Vice Chairman. Mr. Readmond holds a B.A. degree in Economics
from Western Maryland College.

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

Mr. Hodgson was nominated and elected as a Director of the Company pursuant
to an agreement entered into between the Company, General Atlantic and Thomas H.
Sinton and his affiliates, in

36
<PAGE> 37

connection with the sale of Preferred Stock by the Company to General Atlantic.
Under such agreement, General Atlantic and Mr. Sinton and his affiliates agreed
to vote their shares to elect one director to the Board of Directors designated
by General Atlantic until the third annual meeting of stockholders after this
offering.

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

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the results and scope of the audit and other services provided by the
Company's independent auditors, reviews and evaluates the Company's control
functions and reviews the Company's investment policy. The Compensation
Committee was established in November 1996 and will make recommendations to the
Board of Directors concerning salaries and incentive compensation for employees
and consultants of the Company. The Compensation Committee will also administer
the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase Plan.
Prior to November 1996, the Board of Directors made recommendations regarding
compensation for employees and consultants of the Company. See "-- Stock Plans."

DIRECTOR COMPENSATION

Members of the Company's Board of Directors do not receive compensation for
their services as directors. Certain directors have been granted options to
purchase Common Stock in the past, and options may be granted to Directors of
the Company in the future. Mr. Clifford, Mr. Hodgson, Mr. Roddy and Mr. Readmond
have received options to purchase 15,000, 15,000, 62,500, and 15,000 shares,
respectively, of the Company's Common Stock, at exercise prices ranging from
$0.19 to $9.00 per share.

37
<PAGE> 38

EXECUTIVE COMPENSATION

The following table sets forth the compensation paid to (i) the Chief
Executive Officer and (ii) the Company's four other most highly compensated
executive officers (collectively with the Chief Executive Officer, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the fiscal year ended June 30, 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
------------------------ NO. OF SECURITIES
NAME AND PRINCIPAL POSITION SALARY COMMISSIONS UNDERLYING OPTIONS
- --------------------------------------------- -------- ----------- ------------------
<S> <C> <C> <C>
Thomas H. Sinton............................. $150,000 $ 0 0
President and Chief Executive Officer
Jeffrey M. Bizzack........................... 131,250 52,000 0
Senior Vice President, Sales
Mitchell W. Everton.......................... 131,250 0 0
Senior Vice President, Tax & Operations
Leslie A. Johnson............................ 131,250 0 13,000
Senior Vice President, Client Services
Steven E. Klei............................... 127,100 0 0
Senior Vice President, Finance and Chief
Financial Officer
</TABLE>

The following table sets forth information regarding stock options granted
during the fiscal year ended June 30, 1997 to each of the Named Executive
Officers.

OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE TERM($)(4)
OPTIONS EMPLOYEES IN PER EXPIRATION ------------------------
NAME GRANTED(#)(1) FISCAL 1997(%)(2) SHARE($)(3) DATE 5% 10%
- -------------------- ------------- ----------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton.... -- -- -- -- -- --
Jeffrey M.
Bizzack........... --........ -- -- -- -- --
Mitchell W.
Everton........... -- -- -- -- -- --
Leslie A. Johnson... 13,000 2.0% 4.75 9/24/2006 171,182 309,155
Steven E. Klei...... -- -- -- -- -- --
</TABLE>

- ---------------
(1) These options were granted under either the Company's Executive Stock Option
Plan. The options granted are immediately exercisable, but are subject to
repurchase in the event the optionee's employment with the Company ceases
for any reason. The options generally vest over four years, as to 25% of the
shares one year from the grant date and as to 1/48th of the shares in each
successive month thereafter, with full vesting occurring on the fourth
anniversary date. The options have a term of ten years, subject to earlier
termination in certain situations related to termination of employment. See
"Stock Plans."

(2) Based on a total of 662,670 options granted to all employees, consultants
and directors during fiscal 1997.

(3) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.

38
<PAGE> 39

(4) The potential realizable value is calculated based on the term of the option
at the time of grant (ten years) and the initial public offering price of
$11.00. Stock price appreciation of 5% and 10% is assumed pursuant to rules
promulgated by the Securities and Exchange Commission and does not represent
the Company's prediction of its stock price performance. The potential
realizable value at 5% and 10% appreciation is calculated by assuming that
the initial public offering price appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.

The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended June 30, 1997 and the number and value of securities underlying
unexercised options held by the Named Executive Officers at June 30, 1997:

FISCAL YEAR AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS
ON VALUE --------------------------- AT FISCAL YEAR END($)(1)
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE ---------------------------
NAME (#) ($) (#) (#) EXERCISABLE UNEXERCISABLE
- ------------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton........ -- -- -- -- -- --
Jeffrey M. Bizzack...... -- -- -- -- -- --
Mitchell W. Everton..... -- -- 22,625 27,128 189,032 226,654
Leslie A. Johnson....... -- -- -- 13,000 -- 52,000
Steven E. Klei.......... 7,000 60,235 2,167 20,833 18,105 174,060
</TABLE>

- ---------------
(1) The amount set forth represents the difference between the estimated fair
market value of $8.75 per share of Common Stock on June 30, 1997, as
determined by the Company's Board of Directors, multiplied by the applicable
number of options.

STOCK PLANS

1989 Stock Option Plan. The Company's 1989 Stock Option Plan (the "1989
Plan") provides for the granting to employees (including officers and employee
directors) of "incentive stock options" within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code") and for the granting to employees,
directors and consultants of nonstatutory stock options. As of June 30, 1997,
options to purchase an aggregate of 775,023 shares of Common Stock were
outstanding under the 1989 Plan. In February 1997, the Board of Directors of the
Company increased the shares available for future grants under the 1989 Plan by
1,375,766, for a total of 1,293,615 shares available for future grants under the
1989 Plan. Options granted under the 1989 Plan before the effective date of the
1996 Plan described below will remain outstanding in accordance with their
terms, but no further options will be granted under the 1989 Plan after this
offering.

1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors in February 1996 under the name
"Executive Stock Option Plan." The 1996 Plan provides for the granting to
employees (including officers and employee directors) of incentive stock options
and for the granting to employees, directors and consultants of nonstatutory
stock options. In November 1996 and February 1997, the Board of Directors of the
Company approved, effective upon the offering and subject to stockholder
approval, an amendment and restatement of the 1996 Plan to (i) rename the
Executive Stock Option Plan as the "1996 Stock Option Plan" and (ii) authorize
an increase in the number of shares reserved for issuance under the plan of any
unused or canceled shares under the 1989 Plan plus annual increases equal to the
lesser of (a) 250,000 shares, (b) two percent (2%) of the number of outstanding
shares of Common Stock on such date or (c) a lesser amount determined by the
Board. As of June 30, 1997, options to purchase an aggregate of

39
<PAGE> 40

100,753 shares of Common Stock were outstanding under the 1996 Plan and
1,331,195 (including the number of shares available for future grants under the
1989 Plan) shares remained available for future grants under the 1996 Plan. The
1996 Plan is administered by the Board of Directors or a committee appointed by
the Board (the "Administrator") and has a term of ten years.

Subject to the provisions of the 1996 Plan, the Administrator has the
authority to determine the individuals to whom stock options are to be granted,
the number of shares to be covered by each option, the exercise price, the fair
market value of the Common Stock, the type of option, the term of the option,
the restrictions, if any, on the exercise of the option, the terms for the
payment of the option price and other terms and conditions. Incentive stock
options granted under the 1996 Plan must have an exercise price of (i) at least
110% of fair market value of the Common Stock on the date of grant if granted to
an employee who owns stock representing more than 10% of the voting power of all
classes of stock of the Company, any parent or any subsidiary or (ii) at least
100% of fair market value of the Common Stock on the date of grant if granted to
any other employee. In the case of a nonstatutory stock option, the per share
exercise price is determined by the Administrator. No participant may be granted
in any fiscal year of the Company an option to purchase more than 125,000
shares, and over the remaining term of the 1996 Plan such participant may not be
granted options to purchase more than 250,000 additional shares. Payments by
optionholders upon exercise of an option may be made (as determined by the
Administrator) in cash or such other form of payment as permitted under the 1996
Plan, including without limitation, by promissory note or by surrender of
certain shares of Common Stock. In addition, an optionee may pay the exercise
price by means of a so-called "cashless exercise." In the event of a proposed
merger of the Company with or into another corporation, outstanding options may
be assumed or equivalent options may be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. In the
event that such successor corporation does not agree to assume options or
substitute equivalent options, optionees will have the right to exercise their
options as to all shares subject to such options, including shares as to which
options would not otherwise be exercisable.

1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
November 1996 and amended in August, 1997, subject to stockholder approval. The
Company has reserved a total of 500,000 shares of Common Stock for issuance
under the Purchase Plan, with the number of shares to be increased annually on
each anniversary date of the adoption of the Purchase Plan by a number of shares
equal to the lesser of (i) 150,000 shares, (ii) one and one-half percent (1.5%)
of the outstanding number of shares on such date or (iii) a lesser number
determined by the Board. The Purchase Plan, which is intended to qualify under
Section 423 of the Code, permits eligible employees of the Company to purchase
Common Stock through payroll deductions of up to 10% of their base straight time
gross earnings and commissions, including payments for overtime, shift premiums,
incentive compensation, incentive payments, bonuses or other payments. An
eligible employee's right to purchase stock under the Purchase Plan may not
accrue at a rate that exceeds $25,000 worth of stock in any calendar year. The
price of Common Stock purchased under the Purchase Plan will be 85% of the lower
of the fair market value of the Common Stock on the first day of an offering
period or last day of the applicable purchase period. Employees may end their
participation in the Purchase Plan at any time during an offering period, and
they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with the Company. Rights granted
under the Purchase Plan are not transferable by a participant other than by
will, the laws of descent and distribution, or as otherwise provided under the
plan. The Purchase Plan will be implemented by an initial offering period of up
to 26 months commencing on the first trading day on or after the effective date
of the offering and ending on the last trading day on or before November 15,
1999, and the second Offering Period under the Plan shall commence on or before
the first Trading Day on or after May 16, 1998 and shall end on the last Trading
Day on or before May 15, 2000. Subsequent offering periods will last 24 months
and will commence on the first trading day on or after November 16 and May 16 of
each year during which the Purchase Plan is in effect, and will terminate on the
last trading day in the periods ending 24 months later. Each 24-month offering
period will consist of four purchase periods of approximately six months
duration.

40
<PAGE> 41

The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if they
are customarily employed by the Company or any designated subsidiary for at
least 20 hours per week and for more than five months in any calendar year.

401(K) PLAN

The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
The 401(k) Plan provides that each participant may contribute up to 18% of his
or her pre-tax gross compensation (up to a statutorily prescribed annual limit
of $9,500 in 1997). The percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed by employee
participants and earnings on these contributions are fully vested at all times.
Employee participants may elect to invest their contributions in various
established funds.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which a director derives an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and agents to the fullest extent
permitted by law.

The Company intends to enter into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Amended and Restated Certificate of Incorporation and Bylaws. These agreements,
among other things, indemnify the Company's directors and officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of the Company, arising out of such person's services as a
director or officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee was formed in November 1996 and is composed of
Messrs. Hodgson and Readmond. No interlocking relationship exists between any
member of the Company's Board of Directors and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.

41
<PAGE> 42

CERTAIN TRANSACTIONS

Between May 1994 and September 1995, Thomas H. Sinton, a director and
officer of the Company, and his immediate family loaned an aggregate of
$1,040,000 to the Company at an interest rate of 10.0% per annum. The Company
has paid all such loans in full.

On December 5, 1996, the Company loaned $544,000 under a full recourse note
agreement at an interest rate of 6.31% per year to Robert E. Schneider, an
officer of the Company, to permit Mr. Schneider to exercise options to purchase
Common Stock of the Company. All principal and interest is due December 5, 2000.
As of June 30, 1997, Mr. Schneider had not paid any amount on the note.

On January 31, 1997, the Company loaned $250,000 under a full recourse note
agreement at an interest rate of 6.1% per year to Jeffrey M. Bizzack, an officer
of the Company, to permit Mr. Bizzack to purchase a residence. Accrued interest
must be paid on a monthly basis beginning two years from the date of the note.
All principal and accrued but unpaid interest is due January 31, 2001 unless Mr.
Bizzack's employment with the Company terminates, in which case, the note may
become due earlier. As of June 30, 1997, Mr. Bizzack had not paid any amount on
the note.

Lafayette Investments, Inc., an affiliate of the Company, will be an
Underwriter in the offering and will receive a portion of the underwriting
discounts and commissions. Thomas P. Roddy, a director of the Company, is
President and Chief Executive Officer of Lafayette Investments, Inc. See
"Underwriting."

Information with respect to compensation to directors and executive
officers is set forth under "Management -- Directors Compensation" and
"-- Executive Compensation."

42
<PAGE> 43

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of August 14, 1997 (assuming the automatic
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock effective upon the completion of this offering), and as adjusted to
reflect the sale of the shares of Common Stock offered hereby by (a) each person
or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (b) each director of the Company, (c) each
of the Named Executive Officers, and (d) all directors and executive officers of
the Company as a group. Unless otherwise noted in the footnotes to the table,
(i) the Company believes that the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock indicated as
being beneficially owned by them and (ii) officers and directors can be
contacted at the principal offices of the Company.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(1)
SHARES --------------------
BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNERS OWNED OFFERING OFFERING
- ------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Thomas H. Sinton(2)(3)....................................... 2,840,068 34.9% 26.7
General Atlantic Partners, LLC(4)............................ 1,149,466 14.1 13.6
Jeffrey M. Bizzack(5)........................................ 124,400 1.5 1.2
Mitchell W. Everton (6)...................................... 76,492 * *
Leslie A. Johnson(7)......................................... 73,000 * *
Steven E. Klei(8)............................................ 56,001 * *
William T. Clifford.......................................... -- * *
David C. Hodgson(4).......................................... 1,149,466 14.1 13.6
Ronald W. Readmond(9)........................................ 2,012 * *
Thomas P. Roddy(10).......................................... 209,821 2.6 2.0
All directors and executive officers as a group (10
persons)(11)............................................... 4,606,260 56.3 45.9
</TABLE>

- ---------------
* Represents beneficial ownership of less than one percent.
(1) Based on 8,147,843 shares of Common Stock outstanding prior to the offering
and 10,647,843 outstanding upon completion of the offering. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days of August 14, 1997 upon the exercise of warrants
or vested options. Calculations of percentage of beneficial ownership
assume the exercise by only the respective named stockholder of all options
and warrants for the purchase of Common Stock held by such stockholder
which are exercisable within 60 days of August 14, 1997.
(2) Includes shares held by the Silas D. Sinton Trust Estate, the Silas Jack
Sinton Family Trust and as a custodian for minor children.
(3) The address of Mr. Sinton is c/o ProBusiness Services, Inc., 5934 Gibraltar
Dr., Pleasanton, CA 94588. As of September 22, 1997, Mr. Sinton's address
will be c/o ProBusiness Services, Inc., 4125 Hopyard Road, Pleasanton, CA
94588.
(4) Includes 978,368 shares held by General Atlantic Partners 39, L.P. ("GAP
39") and 171,098 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment"). The general partner of GAP 39 is General Atlantic. The
managing members of General Atlantic are Steven A. Denning, Stephen P.
Reynolds, David C. Hodgson, J. Michael Cline, William O. Grabe and William
E. Ford. The same managing members of General Atlantic are the general
partners of GAP Coinvestment. Mr. Hodgson is a director of the Company. Mr.
Hodgson disclaims beneficial ownership of shares owned by GAP 39 and GAP
Coinvestment, except to the extent of his pecuniary interests therein. The
address for GAP 39, GAP Coinvestment, General Atlantic and Mr. Hodgson is
c/o General Atlantic Service Corporation, Three Pickwick Plaza, Greenwich,
CT 06830. The percentage of shares beneficially owned after the offering
includes an additional 300,000 shares which funds managed by General
Atlantic intend to purchase in the offering.
(5) Includes 21,000 shares subject to the Company's repurchase rights.
(6) Includes 26,045 shares issuable upon exercise of vested options.
(7) Includes 6,750 shares issuable upon exercise of vested options and 12,448
shares subject to the Company's repurchase rights.
(8) Includes 4,667 shares issuable upon exercise of vested options and 18,958
shares subject to the Company's repurchase rights.
(9) Includes 2,012 shares issuable upon net exercise of warrants.
(10) Includes 26,230 shares held by the Lafayette Investments Inc. of which Mr.
Roddy is President and Chief Executive Officer and 18,400 shares held by
the Lafayette Investments Inc. 401(k) Plan and Trust.
(11) Includes 37,462 shares issuable upon exercise of vested options, 2,012
shares issuable upon exercise of warrants and 52,406 shares subject to the
Company's repurchase rights. The percentage of shares beneficially owned
after the offering includes an additional 300,000 shares which funds
managed by General Atlantic intend to purchase in the offering.

43
<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, par value $0.001 per
share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$0.001 per share ("Preferred Stock").

COMMON STOCK

As of June 30, 1997, there were 8,147,301 shares of Common Stock (including
Preferred Stock that will be converted and the issuance of Common Stock upon the
net exercise of warrants upon the closing of this offering) outstanding held of
record by 278 stockholders. The holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
stockholders. The holders of Common Stock are not entitled to cumulative voting
rights with respect to the election of directors, and as a consequence, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to preferences that may be applicable to any then outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefore. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors will have the authority, without further action by
the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of Preferred Stock could adversely
affect the voting power of holders of Common Stock and the likelihood that such
holders will receive dividend payments and payments upon liquidation and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

In connection with a loan agreement, which terminated in April 1996,
between Silicon Valley Bank ("SVB") and the Company, the Company issued SVB a
warrant to purchase 9,446 shares of the Company's Series E Preferred Stock at an
exercise price of $7.94 per share, exercisable at any time through January 13,
2000. In connection with an equipment lease, the Company issued LINC Capital
Management ("LINC") a warrant to purchase 10,000 shares of the Company's Series
E Preferred Stock at an exercise price of $7.94 per share, exercisable at any
time through July 31, 2001. In connection with a loan agreement, the Company
issued Coast Business Credit ("Coast") a warrant to purchase 9,500 shares of the
Company's Series E Preferred Stock at an exercise price of $7.94 per share,
exercisable at any time through April 30, 2001. In connection with an amendment
to the loan agreement between Coast and the Company to extend the line of
credit, the Company issued a warrant to Coast to purchase an additional 9,500
shares of the Company's Series E Preferred Stock at an exercise price of $7.94
per share, exercisable through October 25, 2001. In connection with a built-to-
suit lease, the Company issued Britannia Hacienda V Limited Partnership
("Britannia Hacienda") and its partners warrants to purchase an aggregate of
22,500 shares of Series E Preferred Stock at an exercise price of $7.94 per
share, exercisable from the date that part of the construction to be performed
under the lease is substantially complete until the earlier of either five years
from the date

44
<PAGE> 45

of the consummation of a public offering or November 14, 2004. The warrants to
purchase Series E Preferred Stock shall represent the right to purchase shares
of Common Stock upon completion of this offering, at a conversion rate of two
shares of Common Stock for each share of Series E Preferred Stock. In connection
with its acquisition of BeneSphere, the Company issued warrants to purchase an
aggregate of 50,000 shares of Common Stock to two former shareholders of
BeneSphere at an exercise price of $9.00 per share, exercisable at any time
through January 7, 2002. After June 30, 1997, the Company issued a warrant to
purchase an aggregate of 20,000 shares of Common Stock at a purchase price of
$9.00 per share.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

Upon completion of this offering, the holders (or their permitted
transferees) of approximately 6,349,026 shares of Common Stock and 121,892
shares issuable upon exercise of warrants (collectively the "Holders") are
entitled to certain rights with respect to the registration of such shares under
the Securities act of 1933, as amended (the "Securities Act"). If the Company
proposes to register its Common Stock, subject to certain exceptions, under the
Securities Act, the Holders are entitled to notice of the registration and are
entitled to include, at the Company's expense, such shares therein, provided
that the managing underwriter has the right to limit a certain number of such
shares included in the registration. These rights do not apply to this offering.
In addition, certain of the Holders may require the Company at its expense on no
more than two occasions to file a registration statement under the Securities
Act with respect to their shares of Common Stock. Such rights may not be
exercised until 180 days after the completion of this offering. In addition,
General Atlantic may request the Company to file a registration statement under
the Securities Act with respect to 1,149,466 shares of Common Stock on one
occasion as long as certain conditions are met. If the Holders, by exercising
their demand registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. Moreover, if the
Company were to include in a Company initiated registration shares held by the
Holders pursuant to exercise of their piggyback registration rights, such sales
may have an adverse effect on the Company's ability to raise additional capital.

DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.

The Company's Amended and Restated Certificate of Incorporation (the
"Charter") provides for the division of the Board of Directors into three
classes with staggered three-year terms. See "Management -- Executive Officers
and Directors." Under the Charter, any vacancy on the Board of Directors,
however occurring, including a vacancy resulting from an enlargement of the
Board, may only be filled by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the removal
of directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.

The Charter also provides that after the completion of this offering, any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before such meeting and may not be taken by written action in
lieu of a meeting. The Charter further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive

45
<PAGE> 46

Officer, the President of the Company, the Board of Directors or the holders of
shares entitled to cast not less than forty percent (40%) of the votes at that
meeting. Under the Bylaws, in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with certain requirements
regarding advance notice to the Company. The foregoing provisions could have the
effect of delaying until the next stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities of
the Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.

The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
a corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. The Charter requires the affirmative vote of the
holders of at least 66 2/3% of the shares of capital stock of the Company issued
and outstanding and entitled to vote to amend or repeal any of the foregoing
Charter provisions. The 66 2/3% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series Preferred Stock that might be outstanding at the time any such
amendments are submitted to stockholders. The Bylaws also may be amended or
repealed by a majority vote of the Board of Directors subject to any limitations
set forth in the Bylaws.

TRANSFER AGENT AND REGISTRAR

Norwest Bank Minnesota, National Association has been appointed as the
transfer agent and registrar for the Company's Common Stock.

46
<PAGE> 47

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company will have outstanding an
aggregate of 10,647,301 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1997. Of these shares, all of the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless such shares are purchased by "affiliates"
("Affiliates") of the Company, as that term is defined in Rule 144 under the
Securities Act as amended on April 29, 1997. The remaining 8,147,301 shares of
Common Stock held by existing stockholders (the "Restricted Shares") are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 promulgated under the Securities Act. As a result of contractual
restrictions and the provisions of Rule 144 and Rule 701, additional shares will
be available for sale in the public market as follows: (i) 2,000 Restricted
Shares will be eligible for immediate sale on the date of this Prospectus; (ii)
1,000 Restricted Shares will be eligible for sale 90 days after the date of this
Prospectus; and (iii) 8,144,301 Restricted Shares will be eligible for sale upon
expiration of the lock-up agreements, 180 days after the date of this
Prospectus. In addition, certain of the Restricted Shares are subject to the
Company's repurchase right.

As of June 30, 1997, options to purchase 875,776 shares of Common Stock
were outstanding, of which options to purchase 186,301 shares were then
exercisable. The Company intends to file a Form S-8 registration statement
immediately after the date of this Prospectus of this offering under the
Securities Act to register 2,206,971 shares of Common Stock reserved for
issuance under the Company's 1989 Plan and 1996 Plan and 500,000 shares of
Common Stock reserved for issuance under the Company's Purchase Plan thus
permitting the resale of such shares by non-affiliates in the public market
without restriction under the Securities Act. Such registration statement will
become effective immediately upon filing. In addition, as of June 30, 1997,
warrants to purchase 171,892 shares of Common Stock were outstanding, all of
which will be eligible for sale 180 days after the date of this Prospectus.

In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year but less than two years, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of the Common Stock
(approximately 106,473 shares immediately after the offering) or (ii) the
average weekly trading volume during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above. In
general, under Rule 701 under the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other written
agreement related to compensation is eligible to resell such shares 90 days
after the effective date of the offering in reliance on Rule 144, but without
compliance with certain restrictions contained in Rule 144.

Prior to this offering, there has been no public market for the Common
Stock of the Company and no predictions can be made as to the effect, if any,
that market sales of shares of Common Stock prevailing from time to time may
have on the market price of the Common Stock. Nevertheless, sales of significant
numbers of shares of the Common Stock in the public market may adversely affect
the market price of the Common Stock offered hereby and could impair the
Company's future ability to raise capital through an offering of its equity
securities.

47
<PAGE> 48

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and William Blair & Company, L.L.C. (the
"Representatives"), have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement, to purchase the numbers of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC............................... 1,062,500
William Blair & Company, L.L.C. ................................ 1,062,500
Lafayette Investments, Inc. .................................... 125,000
Needham & Company, Inc. ........................................ 125,000
Unterberg Harris................................................ 125,000
---------
Total................................................. 2,500,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
to offer shares of the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $0.44 per share, of which $0.10
may be reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock, at the same price per share as will be paid
for the 2,500,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 2,500,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,500,000 shares are being
sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each officer and director and certain holders of shares of the Company's
Common Stock have agreed with the Representatives, for a period of 180 days
after the date of this Prospectus (the "Lock-Up Period"), subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of Common Stock,
any options or warrants to purchase any shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock owned as
of the date of this Prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of Robertson, Stephens & Company
LLC. However, Robertson, Stephens & Company LLC may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to lock-up agreements. There are no agreements between the Representatives and
any of the Company's stockholders providing consent by the Representatives to
the sale of shares prior to the expiration of the Lock-Up Period. The Company
has agreed that during the Lock-Up Period, the Company will not, subject to
certain exceptions, without the prior written consent of Robertson, Stephens &
Company LLC, (i) consent to the disposition of any shares held by stockholders
prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to
sell or otherwise dispose of, any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock, other

48
<PAGE> 49

than the Company's sale of shares in this offering, the issuance of Common Stock
upon the exercise of outstanding options and warrants and the Company's issuance
of options and stock under the existing stock option and stock purchase plans.
See "Shares Eligible for Future Sale."

The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby was determined through negotiations between the
Company and the Representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.

Entities affiliated with General Atlantic Partners, LLC intend to purchase
300,000 shares in the offering on the same terms as shares are being sold to
other investors, for investment purposes only and with no present intention to
resell the shares.

Certain persons participating in this offering may engage in transactions,
including syndicate covering transactions or the imposition of penalty bids,
which may involve the purchase of Common Stock on the Nasdaq National Market or
otherwise. Such transactions may stabilize or maintain the market price of the
Common Stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

49
<PAGE> 50

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. As of June 30, 1997, certain members and investment partnerships of
Wilson Sonsini Goodrich & Rosati, P.C., beneficially owned an aggregate of
18,402 shares of the Company's Common Stock. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Cooley Godward
LLP, San Francisco, California.

EXPERTS

The financial statements of (i) ProBusiness Services, Inc. as of June 30,
1996 and 1997 and for each of the three years in the period ended June 30, 1997
(ii) BeneSphere Administrators, Inc. as of June 30, 1996 and for the year then
ended and (iii) Dimension Solutions, Inc. as of April 30, 1996 and for the year
then ended appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.

CHANGE IN ACCOUNTANTS

Effective June 1996, the Company engaged Ernst & Young LLP as its principal
independent auditors to replace Coopers & Lybrand LLP ("Coopers & Lybrand"), who
were dismissed as auditors of the Company effective January 1996. The decision
to change independent auditors was approved by the Company's Audit Committee and
Board of Directors. In connection with audits of the two fiscal years ended June
30, 1995, and in the subsequent interim period, there were no disagreements with
Coopers & Lybrand on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of Coopers & Lybrand, would have caused them to make reference
to the matter in their report. The reports of Coopers & Lybrand on the financial
statements of the Company for the past two years did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Certain items are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference to such exhibit. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.

50
<PAGE> 51

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROBUSINESS SERVICES, INC.
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)............................. F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-8
BENESPHERE ADMINISTRATORS, INC.
Report of Independent Auditors........................................................ F-23
Balance Sheets........................................................................ F-24
Statements of Operations.............................................................. F-25
Statements of Shareholders' Deficit................................................... F-26
Statements of Cash Flows.............................................................. F-27
Notes to Financial Statements......................................................... F-28
DIMENSION SOLUTIONS, INC.
Report of Independent Auditors........................................................ F-32
Balance Sheet......................................................................... F-33
Statement of Operations............................................................... F-34
Statement of Shareholders' Deficit.................................................... F-35
Statement of Cash Flows............................................................... F-36
Notes to Financial Statements......................................................... F-37
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction.......................................................................... F-39
Consolidated Statement of Operations for the year ended June 30, 1997................. F-40
Notes to Consolidated Financial Statements............................................ F-41
</TABLE>

F-1
<PAGE> 52

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
ProBusiness Services, Inc.

We have audited the accompanying consolidated balance sheets of ProBusiness
Services, Inc. as of June 30, 1996 and 1997 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ProBusiness
Services, Inc. at June 30, 1996 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.

ERNST & YOUNG, LLP

Walnut Creek, California
August 1, 1997,
except for Note 11, as to which the date is
August 11, 1997

F-2
<PAGE> 53

PROBUSINESS SERVICES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
JUNE 30, EQUITY
--------------------- JUNE 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 4,041 $ 5,047
Accounts receivable, net of allowance of none and $365,000 at
June 30, 1996 and 1997....................................... 1,354 2,969
Prepaid expenses................................................ 327 643
------- --------
5,722 8,659
Payroll tax funds invested...................................... 106,339 177,626
------- --------
Total current assets.............................................. 112,061 186,285
Equipment, furniture and fixtures, net............................ 3,992 7,623
Other assets...................................................... 1,175 6,527
------- --------
Total assets............................................ $117,228 $200,435
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 623 $ 788
Accrued liabilities............................................. 1,458 5,285
Deferred revenue................................................ 224 1,279
Notes payable to stockholder.................................... 284 --
Current portion of capital lease obligations.................... 111 773
------- --------
2,700 8,125
Payroll tax funds collected but unremitted...................... 106,339 177,626
------- --------
Total current liabilities............................... 109,039 185,751
Note payable to stockholder, non-current.......................... 250 250
Long-term debt, less current portion.............................. 7,822 8,667
Capital lease obligations, less current portion................... 253 1,898
Commitments
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized: 6,000,000 shares;
issued outstanding: 2,653,301 shares at June 30, 1996 and
3,228,034 shares at June 30, 1997 (aggregate liquidation
preference: $12,078 at June 30, 1996 and $22,078 at June 30,
1997); pro forma: $.001 par value; authorized: 5,000,000
shares; no shares issued and outstanding..................... 27 33 $ --
Common stock, $.01 par value; authorized: 20,000,000 shares;
issued and outstanding: 1,214,984 shares at June 30, 1996 and
1,530,277 shares at June 30, 1997; pro forma: $.001 par
value; authorized: 60,000,000 shares; issued and outstanding:
7,986,345 shares............................................. 12 15 8
Additional paid-in capital...................................... 12,532 23,861 23,901
Accumulated deficit............................................. (12,707) (18,952) (18,952)
Notes receivable from stockholders.............................. -- (1,088) (1,088)
------- -------- --------
Total stockholders' equity (deficit).................... (136) 3,869 $ 3,869
------- -------- ========
Total liabilities and stockholders' equity (deficit).... $117,228 $200,435
======= ========
</TABLE>

See accompanying notes.

F-3
<PAGE> 54

PROBUSINESS SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Revenue.................................................................. $7,095 $13,863 $27,374
Operating expenses:
Cost of providing services............................................. 2,703 6,435 13,659
General and administrative expenses.................................... 1,304 2,054 4,282
Research and development expenses...................................... 1,038 1,257 2,841
Client acquisition costs............................................... 2,943 5,388 11,706
Acquisition of in-process technology................................... -- 711 --
------ ------- -------
Total operating expenses............................................ 7,988 15,845 32,488
------ ------- -------
Loss from operations..................................................... (893) (1,982) (5,114)
Interest expense......................................................... (86) (473) (1,190)
Other income............................................................. -- 69 59
------ ------- -------
Net loss................................................................. $ (979) $(2,386) $(6,245)
====== ======= =======
Pro forma net loss per share (Note 1).................................... $ (0.74)
=======
Shares used in computing pro forma
net loss per share (Note 1)............................................ 8,451
=======
</TABLE>

See accompanying notes.

F-4
<PAGE> 55

PROBUSINESS SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- ------------------------------- NOTES TOTAL
ADDITIONAL ADDITIONAL RECEIVABLE STOCKHOLDERS'
PAID-IN PAID-IN ACCUMULATED FROM EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS (DEFICIT)
--------- ------ ---------- --------- ------ ---------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June
30, 1993.... 2,163,189 $ 22 $ 8,675 700 $ -- $ -- $ (7,865) $ -- $ 832
Issuance of
Series D
preferred
stock at
$5.94 per
share, net
of
issuance
costs..... 236,996 2 1,347 -- -- -- -- -- 1,349
Exercise of
stock
options... -- -- -- 2,920 -- 1 -- -- 1
Net loss.... -- -- -- -- -- -- (1,477) -- (1,477)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1994.... 2,400,185 24 10,022 3,620 -- 1 (9,342) -- 705
Issuance of
Series E
preferred
stock at
$7.94 per
share, net
of
issuance
costs..... 213,116 3 1,635 -- -- -- -- -- 1,638
Exercise of
stock
options... -- -- -- 9,808 -- 2 -- -- 2
Net loss.... -- -- -- -- -- -- (979) -- (979)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1995.... 2,613,301 27 11,657 13,428 -- 3 (10,321) -- 1,366
Issuance of
Series E
preferred
stock at
$7.94 per
share, net
of
issuance
costs..... 40,000 -- 317 -- -- -- -- -- 317
Exercise of
stock
options... -- -- -- 1,201,556 12 355 -- -- 367
Issuance of
preferred
stock
warrants... -- -- 200 -- -- -- -- -- 200
Net loss.... -- -- -- -- -- -- (2,386) -- (2,386)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1996.... 2,653,301 27 12,174 1,214,984 12 358 (12,707) -- (136)
Issuance of
Series F
preferred
stock at
$17.40 per
share, net
of
issuance
of
costs..... 574,733 6 9,845 -- -- -- -- -- 9,851
Exercise of
stock
options... -- -- -- 315,293 3 1,163 -- (1,088) 78
Issuance of
preferred
stock
warrants... -- -- 321 -- -- -- -- -- 321
Net loss.... -- -- -- -- -- -- (6,245) -- (6,245)
--------- --- ------- --------- --- ---- -------- ----- -------
Balances, June
30, 1997.... 3,228,034 $ 33 $ 22,340 1,530,277 $ 15 $1,521 $ (18,952) $(1,088) $ 3,869
========= === ======= ========= === ==== ======== ===== =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 56

PROBUSINESS SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................................... $ (979) $(2,386) $(6,245)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 517 1,146 2,574
Acquisition of in-process technology...................................... -- 711 --
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (210) (521) (1,495)
Prepaid expenses....................................................... (77) (214) (254)
Other assets........................................................... (22) 201 (1,289)
Accounts payable....................................................... (1) 360 137
Accrued liabilities.................................................... 273 650 2,291
Deferred revenue....................................................... 55 (149) 174
------- ------- -------
Net cash used in operating activities....................................... (444) (202) (4,107)
INVESTING ACTIVITIES
Acquisition of Benesphere Administrators, Inc., net of cash acquired........ -- -- (245)
Purchases of equipment, furniture and fixtures.............................. (1,281) (2,685) (2,775)
Capitalization of software development costs................................ (137) (645) (1,409)
Notes receivable from stockholders.......................................... -- -- (295)
Other....................................................................... -- 3 --
------- ------- -------
Net cash used in investing activities....................................... (1,418) (3,327) (4,724)
FINANCING ACTIVITIES
Net decrease in restricted cash............................................. (41) -- --
Borrowings under line of credit agreements.................................. 1,402 5,934 24,727
Repayments of borrowings under line of credit agreements.................... (157) (3,478) (23,831)
Proceeds from note payable.................................................. -- 4,000 --
Repayments under note payable............................................... (75) -- (534)
Proceeds from notes payable to stockholders................................. 500 250 275
Repayments under notes payable to stockholders.............................. (566) (227) (275)
Principal payments on capital lease obligations............................. (103) (128) (454)
Proceeds from issuance of preferred stock................................... 1,638 -- 9,851
Proceeds from issuance of common stock...................................... 2 367 78
------- ------- -------
Net cash provided by financing activities................................... 2,600 6,718 9,837
------- ------- -------
Net increase in cash and cash equivalents................................... 738 3,189 1,006
Cash and cash equivalents, beginning of year................................ 114 852 4,041
------- ------- -------
Cash and cash equivalents, end of year...................................... $ 852 $ 4,041 $ 5,047
======= ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE> 57

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................................. $ 136 $ 377 $ 1,507
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of equipment, furniture and fixtures under capital leases........ $ 126 $ 210 $ 2,644
======= ======= =======
Issuance of warrants in connection with debt.............................. $ -- $ 200 $ 161
======= ======= =======
Notes receivable from stockholders issued in connection with stock option
exercise............................................................... $ -- $ -- $ 1,088
======= ======= =======
ACQUISITION OF DIMENSION SOLUTIONS, INC.:
Issuance of Series E preferred stock...................................... $ -- $ 317 $ --
Liabilities assumed....................................................... -- 947 --
------- ------- -------
$ -- $ 1,264 $ --
======= ======= =======
Acquisition of BeneSphere Administrators, Inc.:
Issuance of warrants...................................................... $ -- $ -- $ 160
Net liabilities assumed................................................... -- -- 2,445
Note payable to BeneSphere Administrators, Inc. .......................... -- -- 250
------- ------- -------
$ -- $ -- $ 2,855
======= ======= =======
</TABLE>

See accompanying notes.

F-7
<PAGE> 58

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

ProBusiness Services, Inc. provides employee administrative services for
large employers. The Company's primary service offerings are payroll processing,
payroll tax filing, human resources software and benefits administration,
including the enrollment and processing of flexible benefit plans and COBRA
programs.

On May 23, 1996, the Company acquired substantially all of the business and
assets of Dimension Solutions, Inc. ("Dimension Solutions"), a California
corporation, for $1,264,000. The transaction was recorded under the purchase
method of accounting, and the results of operations of Dimension Solutions have
been included in the consolidated financial statements of the Company beginning
May 24, 1996 (Note 10).

On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. ("BeneSphere"), a Washington Corporation, for
$3,105,000, plus contingent payments, should certain financial conditions be
met, of up to $4,500,000. The transaction was recorded under the purchase method
of accounting, and the results of operations of BeneSphere have been included in
the consolidated financial statements of the Company beginning January 2, 1997
(Note 10).

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the period. Such complex estimates include
provisions for doubtful accounts and penalties and interest relating to payroll
tax processing and estimates regarding the recoverability of capitalized
software. Actual results could differ from these estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. Cash and
cash equivalents have a carrying amount which approximates fair value. The
Company's cash, cash equivalents and payroll tax funds invested are held
primarily with two financial institutions.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF

In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," ("SFAS No. 121"), which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount of the assets. The Company
adopted SFAS No. 121 in fiscal year 1997, and such adoption has not had a
material impact.

EQUIPMENT, FURNITURE AND FIXTURES

Equipment, furniture and fixtures are stated at cost, net of accumulated
depreciation and amortization. Depreciation of equipment, furniture and fixtures
is computed using the straight-line method over the estimated

F-8
<PAGE> 59

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

useful lives of the assets which range from three to seven years. Leasehold
improvements and assets under capital leases are amortized over the shorter of
the life of the asset or the term of the lease.

PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES

In connection with its payroll processing and payroll tax filing services,
the Company collects funds from clients for payment of payroll taxes, holds such
funds with a financial institution which are segregated from the Company's other
accounts until payment is due, remits the funds to the appropriate taxing
authority and files federal, state and local tax returns. For such services, the
Company derives its payroll tax filing revenue from fees charged and from
interest income it receives on tax filing deposits temporarily held pending
remittance on behalf of its clients to taxing authorities. These collected but
unremitted funds and the related liability to clients for such funds are
included in the accompanying consolidated balance sheets as current assets and
current liabilities. The amount of funds held under these arrangements with
customers may vary significantly during the year. The Company invests collected
but unremitted funds in various financial instruments which consisted of
overnight U.S. government direct and agency obligations repurchase agreements
($101,824,000) and cash and cash equivalents ($4,515,000) at June 30, 1996, and
of overnight U.S. government direct and agency obligations repurchase agreements
($40,965,000), commercial paper rated A-1 and/or P-1 and money market funds with
underlying credit quality of AA or better ($134,520,000) and cash and cash
equivalents ($2,141,000) at June 30, 1997. The Company's investments are subject
to interest rate fluctuations. As a result, the Company's results of operations
may be impacted by interest rate fluctuations. Due to the types of financial
instruments in which the Company invests, money market funds, overnight
repurchase agreements and cash and cash equivalents, the carrying amount of such
investments approximates fair value. The Company's payroll tax fund investments
are held primarily with one financial institution. Interest income earned on
collected but unremitted funds, which is classified as revenue, amounted to
approximately none, $1,896,000 and $5,925,000, for fiscal years 1995, 1996 and
1997 respectively.

The Company's payroll tax service is subject to various risks resulting
from errors and omissions in filing client tax returns and paying tax
liabilities owed to tax authorities on behalf of clients. The Company's clients
calculate and transfer to the Company contributed employer and employee tax
funds. The Company processes the data received from the client and remits the
funds along with a tax return to the appropriate tax authorities when due.
Tracking, processing and paying such tax liabilities is complex. Errors and
omissions have occurred in the past and may occur in the future in connection
with such service. The Company is subject to large cash penalties imposed by tax
authorities for late filings or underpayment of taxes. To date, such penalties
have not been significant. However, there can be no assurance that any
liabilities associated with such penalties will not have a material adverse
effect on the Company's business, financial condition or results of operations.
At June 30, 1997, the Company had accrued $586,000 for potential tax penalties.
There can be no assurance that the Company's reserves or insurance for such
penalties will be adequate. In addition, failure by the Company to make timely
or accurate tax return filings and pay tax liabilities when due on behalf of
clients may damage the Company's reputation and adversely affect its
relationships with existing clients and its ability to gain new clients.

The Company's payroll tax service is also dependent upon government
regulations, which are subject to continuous changes. Failure by the Company to
implement these changes into its services and technology in a timely manner
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, since a significant portion of
the Company's revenue is derived from interest earned from investing payroll tax
funds, changes in policies relating to withholding federal or state income taxes
or reduction in the time allowed for taxpayers to remit payment for taxes owed
to government authorities would have a material adverse effect on the Company's
business, financial condition and results of operations.

F-9
<PAGE> 60

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

insurance will be adequate to cover any such claims. Such claims could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's operations are dependent on its ability to protect its
computer systems against damage from a major catastrophe (such as an earthquake
or other natural disaster), fire, power loss, security breach,
telecommunications failure or similar event. The Company currently conducts
substantially all of its payroll and payroll tax processing and production at
the Company's headquarters in Pleasanton, California. No assurance can be given
that the precautions that the Company has taken to protect itself from or
minimize the impact of such events will be adequate. Any damage to the Company's
data centers, failure of telecommunications links or breach of the security of
the Company's computer systems could result in an interruption of the Company's
operations or other loss which may not be covered by the Company's insurance.
Any such event could have a material adverse effect on the Company's business,
financial condition and results of operations.

REVENUE RECOGNITION

Revenue from payroll processing and payroll tax filing services under
client contracts is recognized as the services are performed. Interest income
earned on unremitted payroll tax funds invested is recognized as earned.

The Company's sales are primarily to customers in the western United
States. Credit evaluations are performed as necessary and the Company does not
require collateral from customers.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed."

The Company capitalizes software development costs incurred after
establishing technological feasibility of the product prior to the general
release of the service using the product. Costs incurred in connection with the
enhancement of the Company's existing products or after the general release of
the service using the product are expensed in the current period and included in
the research and development costs within the statement of operations. The
Company amortizes the capitalized software development costs using the greater
of the straight-line basis over the estimated product life, which is generally a
36 month period, or the ratio of current revenue to the total of current revenue
and anticipated future revenue over the life of the related product. Such
amortization is included in cost of providing services within the statement of
operations.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the "disclosure only" alternative
described in Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("SFAS No. 128"), which is required to be adopted
on December 31, 1997. At that time the Company will be required to change the
method currently used to compute earnings (loss) per share and to restate
earnings (loss) per share for all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of common stock
equivalents will be excluded. The Company has determined that the impact of SFAS
No. 128 will not be significant to the calculation of primary or fully diluted
earnings loss per share.

F-10
<PAGE> 61

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NET LOSS AND PRO FORMA NET LOSS PER SHARE

Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares are
excluded from the computation as their effect is antidilutive, except that,
pursuant to applicable Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares (stock options,
warrants and preferred stock) issued during the period commencing 12 months
prior to the initial filing of a proposed public offering at prices below the
assumed public offering price have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method for
stock options and warrants and the as if-converted method for preferred stock at
the estimated initial public offering price). Per share information calculated
on this basis is as follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss per share.............................................. $ (0.32) $ (0.76) $ (1.94)
====== ====== ======
Shares used in calculating net loss per share................... 3,019 3,141 3,224
====== ====== ======
</TABLE>

Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from convertible preferred stock issued
more than 12 months prior to the proposed initial public offering that will
automatically convert upon completion of the Company's initial public offering
(using the as if-converted method) from the original date of issuance.

2. EQUIPMENT, FURNITURE AND FIXTURES

Equipment, furniture and fixtures consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Equipment and leasehold improvements...................................... $ 5,145 $ 9,403
Furniture and fixtures.................................................... 1,060 1,973
Construction in progress.................................................. -- 578
------- -------
6,205 11,954
Less accumulated depreciation and amortization............................ (2,213) (4,331)
------- -------
$ 3,992 $ 7,623
======= =======
</TABLE>

Equipment, furniture and fixtures include amounts for assets acquired under
capital leases, principally production, office and computer equipment, of
$644,000 and $3,515,000 at June 30, 1996 and 1997, respectively. Accumulated
amortization of these assets was $313,000 and $854,000 at June 30, 1996 and
1997, respectively.

F-11
<PAGE> 62

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. LONG-TERM DEBT

The carrying amounts of the Company's long-term debt instruments
approximate their fair value. The fair value of the Company's debt instruments
are estimated using discounted cash flow analysis, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Borrowings under line of credit agreements................................ $ 3,984 $ 4,758
Subordinated notes payable................................................ 3,838 3,909
------- -------
7,822 8,667
Less current portion...................................................... -- --
------- -------
$ 7,822 $ 8,667
======= =======
</TABLE>

LINE OF CREDIT AGREEMENT

The Company has a line of credit agreement (the "Agreement") with a
financial institution which provides for borrowings that are limited to the
lesser of $10,000,000, of which $1,000,000 is designated as an equipment
acquisition loan, or four times the Company's average monthly cash collections,
as defined, (decreased by a factor of one month for each 30% decrease in the
Company's revenue, measured on a quarterly basis) over the four month period
prior to the borrowing date, less $150,000. The amount available for borrowing
under the line of credit agreement was approximately $10,000,000 at June 30,
1997. Borrowings outstanding under the Agreement bear interest at the bank's
prime rate plus 1% (9.5% at June 30, 1997) and interest is payable monthly. The
Company is required to pay a minimum of $30,000 in interest quarterly plus other
renewal fees under the Agreement. Borrowings outstanding under the Agreement are
collateralized by substantially all of the Company's assets not otherwise
encumbered. The financial covenants of the Agreement require the Company to
maintain a minimum cash balance. The cash balance requirement at June 30, 1997
was not material. The Agreement expires in April 1998, but is subject to
automatic renewal for an additional year at the option of the Company. The
Company has classified the $3,984,000 and $4,758,000 of borrowings under the
Agreement as non-current liabilities at June 30, 1996 and 1997, respectively, as
management expects to maintain adequate cash collections during the next 12
months to support at least such level of borrowings.

Equipment acquisition loans bear interest at the bank's prime rate plus 1%.
Borrowings are to be repaid over a 36 month period following a six month period
of payments for interest only. There were no borrowings under the equipment
acquisition loans during fiscal years 1996 or 1997.

In connection with line of credit agreements, the Company issued warrants
in 1995 and 1996 to purchase 9,446 and 9,500 shares, respectively, of the
Company's Series E preferred stock with an exercise price of $7.94 per share
which expire in January 2000 through April 2001. The Company deemed the fair
value of these warrants to be immaterial at the date of issuance. In October
1996, in connection with an amendment of a line of credit agreement, the Company
issued warrants to purchase 9,500 shares of the Company's Series E preferred
stock with an exercise price of $7.94 per share which expire in October 2001.
The Company deemed the fair value of the warrants to be $36,000.

SUBORDINATED NOTES PAYABLE

In October 1995 and December 1995, the Company issued $1,100,000 and
$2,900,000, respectively of subordinated notes payable to investors
("Subordinated Notes"). The Subordinated Notes and interest accrued thereon are
due and payable on demand upon the earlier of three years from the date of the
notes or, at the option of the Company or the Subordinated Notes holders, within
30 days after the completion of a public offering of the Company's common stock
which triggers the automatic conversion of the Company's outstanding

F-12
<PAGE> 63

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

preferred stock into common stock. The Subordinated Notes accrue interest at the
rate of 8% per annum, and such interest is payable on a quarterly basis.

In connection with the issuance of the Subordinated Notes, the Company
issued warrants to purchase 125,926 shares of the Company's Series E Preferred
Stock at $7.94 per share. The warrants, to the extent not previously exercised,
shall expire on the earlier of (i) the date the underlying Subordinated Notes
are repaid in full, (ii) immediately prior to the completion of a public
offering of the Company's common stock which triggers the automatic conversion
of the Company's outstanding preferred stock into common stock, or (iii) any
sale, consolidation or merger of the Company in which the holders of the
Company's securities before the transaction beneficially own less than 50% of
the outstanding voting securities of the surviving entity after the transaction.
The Company deemed the fair value of warrants to be $200,000, which amount has
been recorded as a reduction of the carrying amount of the Subordinated Notes
and is being amortized using the effective interest method over the term of the
Subordinated Notes.

NOTES PAYABLE TO STOCKHOLDERS

Notes payable to stockholder at June 30, 1996 and June 30, 1997, includes
notes due to a director and stockholder of the Company. The notes are due on
demand and bear interest at the rate of 10%. The amounts due under these notes
were $284,000 and none at June 30, 1996 and 1997, respectively.

Note payable to stockholder, non-current at June 30, 1996 and June 30, 1997
includes a $250,000 subordinated note payable, which is payable to a
stockholder, assumed in the acquisition of Dimension Solutions, Inc. The note is
due in fiscal 1999 and bears interest at the prime rate plus 2.5% per annum
(Note 10).

EQUIPMENT LEASE LINE

In July 1996, the Company entered into an equipment lease line agreement
under which the Company could have acquired up to $2,000,000 of equipment
through June 1997. In connection with the equipment lease line, the Company
issued a warrant to purchase 10,000 shares of the Company's Series E Preferred
Stock at an exercise price of $7.94 per share. The warrant is exercisable for
five years from the date of the final equipment purchase. The Company deemed the
fair value of this warrant to be immaterial at the date of issuance. As of June
30, 1997, the Company had used approximately $1,870,000 of the equipment lease
line. Amounts outstanding under the agreement are classified as capital lease
obligations in the balance sheet and are secured by the related equipment.

F-13
<PAGE> 64

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LEASE OBLIGATIONS

The Company leases its facilities and various equipment under
non-cancellable operating leases which expire at various dates through 2002. The
Company is also obligated under a number of capital equipment leases expiring at
various dates through 2001. The future minimum lease payments under capital and
operating leases subsequent to June 30, 1997 are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
------------------------------------------------------------------------- ------- ---------
<S> <C> <C>
1998..................................................................... $1,139 $ 2,588
1999..................................................................... 1,114 2,966
2000..................................................................... 1,127 2,646
2001..................................................................... 16 2,429
2002..................................................................... -- 2,254
----- ------
Total minimum lease payments............................................. 3,396 $12,883
======
Less amounts representing interest....................................... 725
-----
Present value of net minimum capital lease obligations................... 2,671
Less current portion..................................................... 773
-----
$1,898
=====
</TABLE>

In September 1996, the Company entered into a lease arrangement under which
the lessor will build a facility into which the Company will move its corporate
headquarters. This operating lease will expire approximately eleven years from
completion of the facility and will require the Company to pay a minimum average
monthly lease payment of approximately $167,000 over the life of the lease. Such
lease payments are not included in the above table as the completion date is not
known. As part of the build to suit lease agreement, the Company issued a
warrant to purchase 22,500 shares of its Series E Preferred Stock at an exercise
price of $7.94 per share. The warrant is exercisable for the lesser of eight
years from the date of completion or five years from the date of an initial
public offering which triggers conversion of Series E Preferred Stock. The
Company valued the warrants at $125,000.

Rent expense was $407,000, $707,000 and $1.5 million for fiscal years 1995,
1996 and 1997, respectively.

5. INCOME TAXES

As of June 30, 1997, the Company had federal and state net operating loss
carryforwards of approximately $13,913,000 and $3,850,000, respectively. The
Company also had federal and state research and development tax credit
carryforwards of approximately $451,000 and $199,000, respectively. The federal
net operating loss and credit carryforwards will expire at various dates
beginning with the fiscal year ending 1999 through 2012, if not utilized. The
state net operating loss carryforwards and credit carryforwards will expire at
various dates beginning with the fiscal year ending 1998 through 2012, if not
utilized.

Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

F-14
<PAGE> 65

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................ $ 3,279 $ 4,965
Research and development credit carryforwards................................... 397 650
Fixed assets.................................................................... 109 428
Accruals and reserves........................................................... 53 330
------- -------
Gross deferred tax assets......................................................... 3,838 6,373
Less valuation allowance.......................................................... (3,597) (5,988)
------- -------
Deferred tax assets............................................................... 241 385
Deferred tax liabilities:
Capitalized software development costs.......................................... (130) (313)
Other........................................................................... (111) (72)
------- -------
Gross deferred tax liabilities.................................................... (241) (385)
------- -------
Net deferred taxes................................................................ $ -- $ --
======= =======
</TABLE>

A valuation allowance has been established and, accordingly, no benefit has
been recognized for the Company's net operating losses and other deferred tax
assets. The net valuation allowance increased by $2,391,000 during the year
ended June 30, 1997. The Company believes that, based on a number of factors,
the available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception and expected near-term future losses. The Company will
continue to assess the realizability of the deferred tax assets based on actual
and forecasted operating results.

6. STOCKHOLDERS' EQUITY

PREFERRED STOCK

As of June 30, 1997, the Company has authorized 6,000,000 shares of
preferred stock, of which 1,500,000 shares have been designated as Series A, B
and C shares, 500,000 shares have been designated as Series D and E shares and
500,000 shares are undesignated.

F-15
<PAGE> 66

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Preferred stock consists of the following (dollars in thousands):

<TABLE>
<CAPTION>
SHARES LIQUIDATION
OUTSTANDING PREFERENCE
----------- -----------
<S> <C> <C>
Series
A:.......................................................... 920,000 $ 3,501
B........................................................... 919,400 3,497
C........................................................... 260,785 1,288
D........................................................... 300,000 1,782
E........................................................... 253,116 2,010
F........................................................... 574,733 10,000
--------- -------
Total.................................................. 3,228,034 $22,078
========= =======
</TABLE>

Holders of the Company's Series A, B, C, D and E preferred stock are
entitled to receive non-cumulative dividends in the amount of $.02 per share per
annum in preference to holders of the Company's common stock at the discretion
of the Board of Directors. No dividends were declared during fiscal years 1995,
1996 and 1997.

Each holder of preferred stock may, at any time, convert such holder's
preferred stock to shares of common stock. Holders of preferred stock generally
have the same voting rights as holders of common stock. Preferred stock is
initially convertible at the ratio of one share of preferred stock to two shares
of common stock, subject to adjustment to prevent dilution in the event that the
Company issues additional shares. Additionally, conversion is automatic upon the
completion of an underwritten public offering of common stock in which the price
per share is not less than $3.50 per share with aggregate gross proceeds to the
Company of at least $7,000,000.

In the event of the liquidation of the Company, holders of Series A, B, C,
D and E preferred stock are entitled to receive an amount per share equal to
$3.805, $3.804, $4.94, $5.94 and $7.94, respectively, prior and in preference to
any distribution of Company assets to holders of common stock, plus all declared
and unpaid dividends.

In March 1997, the Company issued 574,733 shares of $.01 par value Series F
preferred stock to entities affiliated with General Atlantic Partners LLC at
$17.40 per share resulting in gross proceeds of approximately $10 million.
Holders of Series F preferred stock are entitled to receive non-cumulative
dividends in the amount of $.02 per share per annum in preference to holders of
the Company's common stock at the discretion of the Board of Directors. In the
event dividends are paid on any share of common stock, an additional dividend
shall be paid with respect to all outstanding shares of Series F preferred in an
amount equal per share of Series F preferred (on an as-if-converted to common
stock basis) to the amount paid or set aside for each share of common stock.

Each holder of Series F preferred stock, may, at any time, convert such
holder's preferred stock to shares of common stock. Holders of Series F
preferred stock generally have the same voting rights as holders of common
stock. Series F preferred stock is initially convertible at the ratio of one
share of preferred stock to two shares of common stock, subject to adjustment to
prevent dilution in the event that the Company issues additional shares.
Additionally, conversion of Series F preferred stock is automatic upon the
completion of an underwritten public offering of common stock in which the price
per share is not less than $8.70 per share with aggregate gross proceeds to the
Company of at least $10,000,000.

In the event of liquidation of the Company, holders of Series F preferred
stock are entitled to receive an amount per share equal to $17.40 prior and in
preference to any distribution of the Company assets to holders of common stock,
plus all declared and unpaid dividends.

F-16
<PAGE> 67

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK SPLIT

In November 1994, the Company's stockholders authorized a two-for-one split
of its common stock. All references in the accompanying financial statements to
the number of shares of common have been restated to reflect the stock split.

PROPOSED PUBLIC OFFERING OF COMMON STOCK

On November 15, 1996, the Board of Directors authorized the Company to
proceed with an initial public offering of the Company's common stock. If the
offering is consummated under the terms presently anticipated, all of the
currently outstanding preferred stock will automatically convert into 6,456,068
shares of common stock. Prior to the offering, the Company plans to
reincorporate in Delaware and authorize 5,000,000 shares of undesignated
preferred stock, increase the number of authorized shares of common stock to
60,000,000 and adopt a par value of $.001 per share for common and preferred
shares. In addition, the Company will change its name from ProBusiness, Inc. to
ProBusiness Services, Inc. The unaudited pro forma stockholders' equity
(deficit) at June 30, 1997 gives effect to the conversion of all outstanding
shares of convertible preferred stock into 6,456,068 shares of common stock upon
the completion of the Company's initial public offering of shares.

NOTES RECEIVABLE

In December 1996, the Company advanced $544,000 in the form of a note
receivable from a stockholder, who is also an executive officer, in connection
with the exercise of options to purchase common stock. The note is due on
December 2000, bears interest at 6.31% and is full recourse.

In January 1997, the Company advanced $544,000 in the form of a note
receivable from a stockholder in connection with the exercise of options to
purchase common stock. The note is due on January 2001, bears interest at 6.10%
and is full recourse.

In January 1997, the Company advanced $250,000 in the form of a note
receivable from a stockholder who is also an executive officer. The note is due
in January 2001, bears interest at 6.10% and is full recourse.

7. STOCK OPTION AND STOCK PURCHASE PLANS

STOCK OPTION PLANS

The Company's 1989 Stock Option Plan (the "1989 Plan") provides for the
granting to employees (including officers and employee directors) of "incentive
stock options" within the meaning of the Internal Revenue Code of 1986, as
amended (the "Code") and for the granting to employees, directors and
consultants of nonstatutory stock options. The Company has reserved 2,987,248
shares of common stock for the exercise of stock options under the 1989 Plan.
Individuals owning more than 10% of the Company's stock are not eligible to
participate in the plan unless the option's price is at least 110% of the fair
market value of the common stock at the date of grant. Options issued to
employees owning less than 10% of the Company's stock may be granted at prices
of at least 100% (85% for nonemployees) of the fair market value of the stock at
the grant date. Under the terms of the plan, options generally vest at the rate
of 25% on the first anniversary of the vesting commencement date as defined by
the option agreement and ratably on a monthly basis for the remaining shares
thereafter until fully vested at the end of the fourth year. The options expire
at the earlier of ten years from date of grant or six months after termination
of employment with the Company and are not transferable.

In 1996, the Company established the 1996 Executive Stock Option Plan
("Executive Plan") which provides for stock options to employees and
consultants. Under the Executive Plan, the Board of Directors may grant
nonstatutory stock options to employees and consultants and incentive stock
options to employees only. The Company has reserved 750,000 shares of common
stock for exercise of stock options under the 1996 Plan. The grant of incentive
stock option to an employee who owns stock representing more than 10% of the
voting power of all classes of stock of the Company must be no less than 110% of
the fair market value per share on the

F-17
<PAGE> 68

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

date of grant. Fair market value is determined by the Board of Directors. For
all other employees the options must be no less than 100% of the fair market
value per share on the date of grant. All nonstatutory stock options granted are
at a price that is determined by the Board of Directors. The options generally
expire ten years from the date of grant and are exercisable as determined by the
Board of Directors.

In November 1996, the Board of Directors approved, effective upon the
offering and subject to stockholder approval, an amendment and restatement of
the Executive Plan to rename 1996 Executive Stock Option Plan to the 1996 Stock
Option Plan (the "1996 Plan") and authorized for issuance under the 1996 Plan a
total of 750,000 shares plus any unused or cancelled shares under the 1989 Plan,
and an annual increase to be added on each anniversary date of the adoption of
the 1996 Plan equal to the lesser of (a) 250,000 shares, (b) 2% of the
outstanding shares of common stock on such date or (c) a lesser amount
determined by the Board. The 1996 Plan provides for grants to employees
(including officers and employee directors) of incentive stock options and for
the granting to employees, directors and consultants of nonqualified stock
options.

A summary of the activity under the 1989 and 1996 Plans is set forth below:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE PER NUMBER EXERCISE
SHARE OF SHARES PRICE
------------------ ----------- --------
<S> <C> <C> <C>
Outstanding at June 30, 1994.............. 0.190 - 0.395 882,446 0.23
Granted................................. 0.295 - 0.395 164,436 0.39
Exercised............................... 0.190 - 0.395 (9,808) 0.27
Canceled................................ 0.190 - 0.395 (18,178) 0.28
--------------- ---------- ------
Outstanding at June 30, 1995.............. 0.190 - 0.395 1,018,896 0.26
Granted................................. 0.395 - 1.25 1,055,930 0.43
Exercised............................... 0.190 - 0.435 (1,201,556) 0.33
Canceled................................ 0.190 - 0.395 (230,469) 0.33
--------------- ---------- ------
Outstanding at June 30, 1996.............. 0.190 - 4.35 642,801 0.41
Granted................................. 4.75 - 8.75 662,670 7.25
Exercised............................... 0.190 - 7.25 (315,293) 3.59
Canceled................................ 0.247 - 8.75 (114,402) 3.77
--------------- ---------- ------
Outstanding at June 30, 1997.............. $0.190 - $ 8.75 875,776 $ 4.00
=============== ========== ======
</TABLE>

As of June 30, 1997, options to purchase 198,422 shares of common stock
were vested and exercisable at an average exercise price of $0.43 per share and
options to purchase 1,331,195 shares were available for future grant. At June
30, 1997, options to purchase 380,316 shares of Common Stock had been exercised
which are subject to repurchase.

The weighted-average fair value of options granted during 1996 and 1997 was
$0.09 and $1.51 per share, respectively.

F-18
<PAGE> 69

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes information concerning currently outstanding
and exercisable options:

<TABLE>
<CAPTION>
OUTSTANDING
------------------------ EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
NUMBER CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE AND VESTED PRICE
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.19 - $0.297 70,563 5.65 0.261 66,441 $0.258
$0.395 - $1.25 370,093 8.44 0.515 131.460 0.505
$4.75 - $4.75 51,000 9.21 4.75 521 4.75
$7.25 - $8.75 384,120 9.63 7.81 -- --
----------- --------
875,776 198,422
=========== ========
</TABLE>

STOCK-BASED COMPENSATION

As permitted under SFAS 123, the Company has elected to continue to follow
APB 25 in accounting for stock-based awards to employees. Under APB 25, the
Company has not recognized any compensation expense with respect to such awards,
since the exercise price of the stock options awarded are equal to the fair
market value of the underlying security on the grant date.

Disclosure of information regarding net loss and net loss per share is
required by SFAS 123 for the Company's awards granted after June 30, 1995 as if
the Company had accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated as of the date of the grant using a Black-Scholes option
pricing model. Limitations on the effectiveness of the Black-Scholes option
valuation model are that it was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable
and that the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The Company has plans which award employees
stock options. These plans are discussed in the note above. The fair value of
the Company's stock-based awards to employees was estimated using the following
weighted-average assumptions:

<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------
YEAR ENDED JUNE 30,
-------------------
1996 1997
----- -----
<S> <C> <C>
Expected life (in years).......................................... 3.00 2.00
Expected volatility............................................... 0.001 0.001
Risk free interest rate........................................... 6.18% 6.18%
Expected dividend yield........................................... 0.00% 0.00%
</TABLE>

F-19
<PAGE> 70

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period for
options. The Company's adjusted information follows (in thousands, except for
per share information):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1996 1997
------- -------
<S> <C> <C>
Net income (loss), as reported.................................. $(2,386) $(6,245)
======= =======
Net income (loss), as adjusted.................................. $(2,403) $(6,355)
======= =======
Historical net income (loss) per share, as reported............. $ (0.76) $ (1.94)
======= =======
Historical net income (loss) per share, as adjusted............. $ (0.77) $ (1.97)
======= =======
Pro forma net income (loss) per share, as reported.............. $ (0.29) $ (0.74)
======= =======
Pro forma net income (loss) per share, as adjusted.............. $ (0.29) $ (0.75)
======= =======
</TABLE>

Because SFAS 123 is applicable only to the Company's stock-based awards
granted subsequent to June 30, 1995, its effect will not be fully reflected
until approximately fiscal year 1999.

1996 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1996, effective upon the offering
and subject to stockholder approval. The Company has reserved a total of 500,000
shares of common stock for issuance under the Purchase Plan, with an annual
increase to be added on each anniversary date of the adoption of the Purchase
Plan equal to the lesser of (a) 150,000 shares, (b) 1.5% of the outstanding
shares on such date or (c) a lesser amount determined by the Board. The price of
common stock purchased under the Purchase Plan will be 85% of the lower of the
fair market value of the common stock on the first or last day of each purchase
period. The Purchase Plan will be implemented by an initial offering period of
approximately 24 months commencing on the first trading day on or after the
effective date of the offering and ending on the last trading day on or before
October 31, 1999. Subsequent offering periods will last 24 months and will
commence on the first trading day on or after November 1 and May 1 of each year
during which the Purchase Plan is in effect, and will terminate on the last
trading day in the periods ending 24 months later. Each 24-month offering period
will consist of 4 purchase periods of approximately 6 months duration. The
Purchase Plan will be administered by the Board of Directors or by a committee
appointed by the Board. Employees are eligible to participate if they are
customarily employed by the Company or any designated subsidiary for at least 20
hours per week and for more than 5 months in any calendar year.

8. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the
benefit of certain qualified employees. Employees may elect to contribute to the
Plan, through payroll deductions of up to 18% of their compensation, subject to
certain limitations. The Company, at its discretion, may make additional
contributions. The Company did not make any contributions to the Plan in fiscal
years 1995, 1996 or 1997.

F-20
<PAGE> 71

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. BALANCE SHEET DETAIL

Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------ ------
<S> <C> <C>
Capitalized software development costs, net......................... $ 835 $1,859
Deferred financing costs............................................ -- 1,043
Prepaid lease expense............................................... -- 161
Notes receivable from employees..................................... 83 81
Notes receivable from stockholders.................................. -- 295
Goodwill and other intangible assets................................ 41 2,484
Deposits and other.................................................. 216 604
------ ------
$1,175 $6,527
====== ======
</TABLE>

Accumulated amortization for capitalized software development costs was
approximately $172,000 and $475,000 at June 30, 1996 and 1997, respectively.
Accumulated amortization for goodwill and other intangible assets was
approximately $8,000 and $80,000 at June 30, 1996 and 1997, respectively.

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1997
------ ------
<S> <C> <C>
Accrued expenses.................................................... $ 552 3,074
Accrued tax penalties............................................... -- 586
Accrued payroll and related expenses................................ 486 1,361
Accrued acquisition costs........................................... 172 144
Other............................................................... 248 120
------ ------
$1,458 $5,285
====== ======
</TABLE>

10. BUSINESS ACQUISITIONS

On May 23, 1996, the Company acquired substantially all of the business and
assets of Dimension Solutions, Inc. The total purchase price of $1,264,000
consisted of the issuance of 40,000 shares of Series E convertible preferred
stock with a fair value of $317,000 and the assumption of $947,000 of Dimension
Solutions, Inc. liabilities (including acquisition costs).

A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
<S> <C>
Current and other assets...................................................... $ 318
In-process technology (charged to operations)................................. 711
Developed software............................................................ 175
Covenant-not-to-compete....................................................... 60
------
Total purchase price allocation............................................... $1,264
======
</TABLE>

On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. The purchase price consisted of $500,000 in
cash, of which $250,000 was paid upon closing and $250,000 was paid in April
1997, warrants to purchase 50,000 shares of common stock at a price of $9.00 per
share with an estimated fair value of $160,000 and are exercisable for five
years from the date of grant, the assumption of $2,445,000 of BeneSphere's
liabilities (including acquisition costs) plus contingent payments based on
BeneSphere's revenues in excess of certain base amounts, as defined in the
agreement, over the next two calendar years following the

F-21
<PAGE> 72

PROBUSINESS SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

acquisition which cannot exceed $4,500,000. The contingent payments are payable
in cash in four quarterly payments beginning April 1, 1998 for the calendar year
1997 payment and April 1, 1999 for the calendar year 1998 payment. Interest
shall accrue at a rate of 9% per annum on all earned but unpaid balances.
Included in the liabilities assumed from BeneSphere was a promissory note for
$275,000 issued by BeneSphere on December 31, 1996 to an officer of the Company.
The note bears interest at a rate of 9% per annum and was paid in full in April
1997.

A summary of the purchase price allocation is as follows (in thousands):

<TABLE>
<S> <C>
Current and other assets...................................................... $ 517
Goodwill...................................................................... 2,278
Customer list................................................................. 310
------
Total purchase price allocation............................................... $3,105
======
</TABLE>

Goodwill arising from the acquisition will be amortized on a straight-line
basis over 20 years.

The following unaudited pro forma information represents the combined
results of operations as if the acquisitions of Dimension Solutions and
BeneSphere had occurred as of the beginning of the periods presented and does
not purport to be indicative of what would have occurred had the acquisitions
been made as of that date or the results which may occur in the future.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma net revenues................................. $ 8,642 $ 17,341 $ 29,030
Pro forma net loss..................................... (1,498) (2,149) (7,738)
Pro forma net loss per share........................... $ (0.18) $ (0.26) $ (0.92)
</TABLE>

The pro forma results include the historical operations of the Company and
the historical operations of the acquired businesses adjusted to reflect certain
pro forma adjustments including the amortization of intangible assets,
capitalized software development costs and interest expense related to a
$250,000 short term note payable, resulting from the acquisitions totaling
$254,000 for both the years ended June 30, 1995 and 1996 and $86,000 for the
year ended June 30, 1997, respectively. The pro forma results do not include the
write off of in-process technology of $711,000 for the year ended June 30, 1996
since it is a non-recurring charge. The pro forma results do not include any
adjustments for the Company's proposed initial public offering.

11. SUBSEQUENT EVENTS

Warrant

After June 30, 1997, the Company issued a warrant to purchase an aggregate
of 20,000 shares of its Common Stock at a purchase price of $9.00 per share.

Interest Rate Swap

In August 1997, the Company entered into an interest rate swap agreement
with a financial institution with a fixed interest rate of 5.905% for a two year
period. Although the actual notional amounts vary on a monthly basis due to
fluctuations in projected investments, the average monthly notional amount of
funds subject to the fixed interest rate is $62,288,000. In the event the dollar
amount of the Company's invested funds falls below the required monthly notional
amount, the Company will have payment obligations, which could have a material
adverse effect on the Company's results of operations and financial condition.
The interest rate swap agreement also requires the Company to make a $350,000
deposit, which is being held by the financial institution as collateral for
obligations under the agreement.

F-22
<PAGE> 73

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
BeneSphere Administrators, Inc.

We have audited the accompanying balance sheet of BeneSphere
Administrators, Inc. as of June 30, 1996 and the related statements of
operations, shareholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BeneSphere Administrators,
Inc. at June 30, 1996 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Seattle, Washington
December 20, 1996

F-23
<PAGE> 74

BENESPHERE ADMINISTRATORS, INC.

BALANCE SHEETS
(In thousands, except share amounts)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2 $ 5
Accounts receivable, net of allowance of none at June 30, 1996 and
December 31, 1996.......................................................... 116 120
Prepaid sales commissions.................................................. 200 155
Prepaids and deposits...................................................... 22 63
----- -------
Total current assets......................................................... 340 343
Furniture, equipment, and improvements, at cost less accumulated depreciation
of $195 and $254 at June 30, 1996 and December 31, 1996, respectively...... 259 330
----- -------
Total assets....................................................... $ 599 $ 673
===== =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit............................................ $ 111 $ 188
Accounts payable........................................................... 125 243
Accrued liabilities........................................................ 68 507
Customer deposits.......................................................... 724 1,032
Bonus payable to shareholder............................................... -- 275
----- -------
Total current liabilities.......................................... 1,028 2,245
Commitments and contingencies
Shareholders' deficit:
Common stock, no par value:
50,000 shares authorized; 20,000 and 27,156 shares issued and
outstanding at June 30, 1996 and December 31, 1996, respectively....... 68 332
Accumulated deficit........................................................ (497) (1,904)
----- -------
Total shareholders' deficit........................................ (429) (1,572)
----- -------
Total liabilities and shareholders' deficit........................ $ 599 $ 673
===== =======
</TABLE>

See accompanying notes.

F-24
<PAGE> 75

BENESPHERE ADMINISTRATORS, INC.

STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, ------------------
1996 1995 1996
---------- ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.............................................................. $2,424 $1,046 $ 1,656
Costs and expenses:
Operating costs..................................................... 873 364 882
Selling, general, and administrative................................ 1,614 776 2,170
------ ------ ------
Total costs and expenses.............................................. 2,487 1,140 3,052
------ ------ ------
Loss from operations.................................................. (63) (94) (1,396)
Other expense, net.................................................... 8 3 11
------ ------ ------
Net loss.............................................................. $ (71) $ (97) $(1,407)
====== ====== ======
Net loss per common share............................................. $(3.55) $(4.85) $(70.21)
====== ====== ======
Number of shares used in calculation of net loss per common share..... 20,000 20,000 20,039
====== ====== ======
</TABLE>

See accompanying notes.

F-25
<PAGE> 76

BENESPHERE ADMINISTRATORS, INC.

STATEMENTS OF SHAREHOLDERS' DEFICIT
(In thousands, except share amounts)

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ACCUMULATED
SHARES CAPITAL DEFICIT TOTAL
------ ------- ----------- -------
<S> <C> <C> <C> <C>
Balances at June 30, 1995.................................. 20,000 $ 68 $ (375) $ (307)
Distributions paid to shareholders....................... -- -- (51) (51)
Net loss................................................. -- -- (71) (71)
------ ---- ------- -------
Balances at June 30, 1996.................................. 20,000 68 (497) (429)
Issuance of common stock to shareholder in lieu of cash
compensation (unaudited).............................. 7,156 264 -- 264
Net loss (unaudited)..................................... -- -- (1,407) (1,407)
------ ---- ------- -------
Balances at December 31, 1996 (unaudited).................. 27,156 $ 332 $(1,904) $(1,572)
====== ==== ======= =======
</TABLE>

See accompanying notes.

F-26
<PAGE> 77

BENESPHERE ADMINISTRATORS, INC.

STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------
1996 1995 1996
---------- ----- -------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $ (71) $ (97) $(1,407)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Noncash items:
Depreciation and amortization.................................... 90 44 59
Loss on disposal of furniture and equipment...................... 8 -- --
Issuance of common stock to shareholder in lieu of cash
compensation.................................................... -- -- 264
Changes in operating assets and liabilities:
Accounts receivable.............................................. (86) (21) (4)
Prepaid sales commissions........................................ (98) (147) 45
Prepaids and deposits............................................ (11) (2) (41)
Accounts payable................................................. 90 9 118
Accrued liabilities.............................................. (96) (44) 439
Customer deposits................................................ 348 454 308
Bonus payable to shareholder..................................... -- -- 275
----- ----- -----
Net cash provided by operating activities............................. 174 196 56
INVESTING ACTIVITY -- purchases of furniture and equipment............ (234) (100) (130)
FINANCING ACTIVITIES
Proceeds from line of credit borrowings............................... 439 60 651
Repayments of line of credit borrowings............................... (339) (71) (574)
Distributions paid to shareholders.................................... (51) -- --
----- ----- -----
Net cash provided by (used in) financing activities................... 49 (11) 77
----- ----- -----
Net (decrease) increase in cash and cash equivalents.................. (11) 85 3
Cash and cash equivalents, beginning of period........................ 13 13 2
----- ----- -----
Cash and cash equivalents, end of period.............................. $ 2 $ 98 $ 5
===== ===== =====
Supplemental disclosure of cash flow information:
Interest paid on line of credit borrowings.......................... $ 3 $ -- $ 11
===== ===== =====
</TABLE>

See accompanying notes.

F-27
<PAGE> 78

BENESPHERE ADMINISTRATORS, INC.

NOTES TO FINANCIAL STATEMENTS

YEAR ENDED JUNE 30, 1996

(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE SIX-MONTHS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED)

1. REPORTING ENTITY

BeneSphere Administrators, Inc. is the successor corporation to A-Plus
Administrators, Inc. d.b.a. Benefits-Plus Administrators (APA), a Washington
Corporation, and Baransky Reppond, Inc. d.b.a. Benefits-Plus Administrators
(BRI), a California Corporation. In December 1995, BRI was merged into APA (see
Note 3). Subsequent to June 30, 1996, APA's name was changed to BeneSphere
Administrators, Inc. (BAI).

BAI provides benefits administration services which include flexible
benefits enrollment and processing, COBRA administration, and consolidated
billing and eligibility tracking and premium payment services for small and
medium-sized companies located in the Pacific Northwest and northern California.

2. SIGNIFICANT ACCOUNTING POLICIES

UNAUDITED FINANCIAL INFORMATION

The financial statements as of December 31, 1996 and for the six-months
ended December 31, 1996 and 1995 are unaudited. The unaudited financial
statements include all normal recurring adjustments which BAI's management
considers necessary for a fair presentation. Operating results for the six
months ended December 31, 1996 are not necessarily indicative of the results
that may be expected for any future periods.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates include provisions for doubtful accounts and
estimates of accrued liabilities to be paid. Actual results could differ from
those estimates.

CASH AND CASH EQUIVALENTS

All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents.

FURNITURE, EQUIPMENT, AND IMPROVEMENTS

Furniture, equipment, and improvements are recorded at cost. Depreciation
is computed utilizing accelerated depreciation methods over the estimated useful
lives of the assets, which range from five to seven years.

CUSTOMER DEPOSITS AND PREPAID SALES COMMISSIONS

Customer deposits for set-up and administrative services and related
revenues are deferred and amortized ratably on a monthly basis over a period
that does not exceed the initial term of the contract. Sales commissions
associated with set-up and administrative services are prepaid and recognized
ratably on a monthly basis over the same contract period.

FINANCIAL INSTRUMENTS

BAI's financial instruments consist of cash and cash equivalents, accounts
receivable and payable, and short-term borrowings. The fair values of these
instruments approximate their recorded values.

F-28
<PAGE> 79

BENESPHERE ADMINISTRATORS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

CONCENTRATIONS OF CREDIT RISK

BAI's cash balances are maintained in checking accounts with one financial
institution and, as such, are subject to federal deposit insurance limitations.

Credit evaluations of BAI's customers are performed as necessary, and BAI
does not require collateral from its customers. No individual customer or
industry comprises a significant concentration of business for BAI.

PER SHARE DATA

Net loss per common share is computed based on the weighted average number
of common shares outstanding during the period.

3. BUSINESS COMBINATIONS

APA and BRI were members of a controlled group of corporations. Effective
December 31, 1995, BRI was merged into APA through the issuance of 10,000 shares
of APA's common stock for all of BRI's outstanding common stock. The merger has
been accounted for in a manner similar to pooling of interests and, accordingly,
the accompanying financial statements include the accounts of BRI on a
historical cost basis and its operations for all periods prior to the merger.
Details of the results of operations of the previously separate companies for
the six-month period ended December 31, 1995 follow:

<TABLE>
<CAPTION>
REVENUES NET LOSS
-------- --------
(IN THOUSANDS)
<S> <C> <C>
APA.............................................. $335 $(72)
BRI.............................................. 711 (25)
------ ----
Combined......................................... $1,046 $(97)
====== ====
</TABLE>

The shareholders believe that the merger of BRI and APA was a tax-free
transaction. However, should the Internal Revenue Service successfully challenge
BAI on this matter, BAI's shareholders have agreed to reimburse BAI and its
successors for any required tax payments. As a result, no amounts have been
accrued in the accompanying financial statements related to the potential
payment and reimbursement of taxes from the merger.

Under a stock acquisition agreement (the Agreement), BAI's shareholders
agreed to sell all of their outstanding common stock shares to ProBusiness
Services, Inc. (PBI) for cash and additional future consideration as of January
1, 1997. Since the acquisition occurred subsequent to December 31, 1996, no
adjustments to recorded amounts have been included in the historical balance
sheet or results of operations. PBI, a privately held California corporation
which provides payroll processing services, has committed to fund the operations
of BAI through at least January 1, 1998.

4. LINE OF CREDIT

BAI has a line of credit with a bank on which it could borrow up to a
maximum of $275,000 at June 30, 1996 (increased to $425,000 in October 1996).
Outstanding borrowings on the line of credit bear interest at the bank's prime
rate plus 1%, (9.25% at June 30, 1996), are collateralized by substantially all
assets of BAI, and are guaranteed by certain shareholders. Interest on the
outstanding borrowings is payable monthly. All outstanding principal borrowings
are due upon demand or, if no demand is made, on January 31, 1997. The line of
credit agreement also provides, among other matters, restrictions on additional
financing, mergers, and acquisitions.

5. INCOME TAXES

BRI was a C Corporation under the Internal Revenue Code (IRC) and was,
therefore, subject to corporate income tax. Amounts related to income taxes
payable and temporary differences between the carrying amounts of

F-29
<PAGE> 80

BENESPHERE ADMINISTRATORS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

assets and liabilities for financial reporting and income tax purposes prior to
and at the date of merger were immaterial.

APA, with the consent of its shareholders, elected to be taxed as an S
Corporation under the IRC. As a result, BAI, as APA's successor, is generally
not subject to corporate income tax, and the shareholders separately report
their respective pro rata shares of BAI's income, deductions, losses, and
credits on their personal income tax returns. It is BAI's practice to accrue and
pay cash distributions to shareholders in amounts sufficient for them to meet
their personal income tax obligations resulting from the S Corporation status.
Retained earnings (accumulated deficit) are charged at the time the estimated
distributions are accrued.

6. RELATED-PARTY TRANSACTIONS

BAI is charged and allocated certain administrative and overhead costs
incurred and paid by various controlled group members on BAI's behalf. These
costs totaled $206,000 for the year ended June 30, 1996, and $62,000 and
$177,000 for the six months ended December 31, 1995 and 1996, respectively, and
are included in selling, general, and administrative expenses.

Effective December 31, 1996, BAI issued 7,156 shares of common stock to an
existing shareholder for past services rendered. A value of $264,000 was
assigned to the common stock by BAI, which was derived by an independent third
party utilizing a discounted cash flows analysis, less a marketability discount.
Payroll withholding taxes in the amount of $240,000 have been accrued by BAI at
December 31, 1996 and will be paid by BAI on behalf of the shareholder. BAI also
agreed to pay a one-time $275,000 cash bonus to the shareholder. Compensation
expense in the amount of $779,000 was recorded in selling, general, and
administrative expenses for the six months ended December 31, 1996 related to
the stock and bonus transactions.

7. 401(k) PLAN

BAI participates in a 401(k) plan sponsored by a controlled group member.
The plan is available to all employees meeting certain eligibility requirements.
Contributions by BAI are based on a matching formula as defined in the plan.
Contribution expense related to the plan totaled $4,000 for the year ended
June 30, 1996.

8. LEASE COMMITMENTS

BAI leases office space under noncancelable operating leases which contain
rent escalation clauses and renewal options. In addition to base rent, BAI is
required to pay a pro rata portion of the building's monthly taxes and operating
costs as additional rent. Future minimum base lease payments under noncancelable
operating leases at June 30, 1996 are as follows:

<TABLE>
<CAPTION>
YEARS ENDING
JUNE 30 (IN THOUSANDS)
-----------------------------------------------
<S> <C>
1997........................................... $115
1998........................................... 115
1999........................................... 87
2000........................................... 88
2001........................................... 100
Thereafter..................................... 194
----
$699
====
</TABLE>

Rent expense totaled $97,000 for the year ended June 30, 1996, and $41,000
and $55,000 for the six months ended December 31, 1995 and 1996, respectively.

F-30
<PAGE> 81

BENESPHERE ADMINISTRATORS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Accrued taxes payable on shareholder stock compensation...... $ -- $240
Other accrued liabilities.................................... 68 267
--- ----
$ 68 $507
=== ====
</TABLE>

F-31
<PAGE> 82

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Dimension Solutions, Inc.

We have audited the accompanying balance sheet of Dimension Solutions, Inc.
as of April 30, 1996 and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dimension Solutions, Inc. at
April 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.

Ernst & Young LLP

Walnut Creek, California
November 20, 1996

F-32
<PAGE> 83

DIMENSION SOLUTIONS, INC.

BALANCE SHEET

APRIL 30, 1996
(In thousands, except share amounts)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash........................................................................................ $ 4
Accounts receivable......................................................................... 99
Prepaid expenses............................................................................ 3
-----
Total current assets.......................................................................... 106
Equipment, furniture and fixtures (less accumulated depreciation of $50)...................... 69
Other assets.................................................................................. 5
-----
Total assets........................................................................ $ 180
=====
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................................ $ 59
Accrued expenses............................................................................ 88
Customer deposits........................................................................... 320
Note payable to shareholder................................................................. 25
-----
Total current liabilities........................................................... 492
Note payable to shareholder................................................................... 250
Commitments
Shareholders' equity:
Common stock, no par value, authorized: 100,000 shares; issued and outstanding: 10,000
shares................................................................................... 30
Accumulated deficit......................................................................... (592)
-----
Total shareholders' deficit......................................................... (562)
-----
Total liabilities and shareholders' deficit......................................... $ 180
=====
</TABLE>

See accompanying notes.

F-33
<PAGE> 84

DIMENSION SOLUTIONS, INC.

STATEMENT OF OPERATIONS

YEAR ENDED APRIL 30, 1996
(In thousands, except share and per share amounts)

<TABLE>
<S> <C>
Revenues..................................................................................... $ 1,054
Cost of revenues............................................................................. 492
-------
Gross profit................................................................................. 562
Operating expenses
Research and development................................................................... 225
Selling, general and administrative expenses............................................... 458
-------
Total operating expenses..................................................................... 683
-------
Loss from operations......................................................................... (121)
Interest expense, net........................................................................ 28
-------
Net loss..................................................................................... $ (149)
=======
Net loss per share........................................................................... $(14.90)
=======
Number of shares used in calculation of the net loss per share............................... 10,000
=======
</TABLE>

See accompanying notes.

F-34
<PAGE> 85

DIMENSION SOLUTIONS, INC.

STATEMENT OF SHAREHOLDERS' DEFICIT
YEAR ENDED APRIL 30, 1996
(In thousands, except share amounts)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------- ------- ------------ --------------
<S> <C> <C> <C> <C>
Balances, April 30, 1995.................................. 10,000 $30 $ (443) $ (413)
Net loss................................................ -- -- (149) (149)
------ --- ------- -----
Balances, April 30, 1996.................................. 10,000 $30 $ (592) $ (562)
====== === ======= =====
</TABLE>

See accompanying notes.

F-35
<PAGE> 86

DIMENSION SOLUTIONS, INC.

STATEMENT OF CASH FLOWS

YEAR ENDED APRIL 30, 1996
(In thousands)

<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss...................................................................................... $(149)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation................................................................................ 25
Changes in operating assets and liabilities:
Accounts receivable...................................................................... 12
Prepaid expenses......................................................................... (3)
Other assets............................................................................. 1
Accounts payable......................................................................... (23)
Accrued expenses......................................................................... 2
Customer deposits........................................................................ (133)
-----
Net cash used in operating activities......................................................... (268)
INVESTING ACTIVITIES
Additions to equipment, furniture and fixtures................................................ (32)
-----
Net cash used in investing activities......................................................... (32)
FINANCING ACTIVITIES
Borrowings under line of credit agreement..................................................... 185
Proceeds from note payable to shareholder..................................................... 25
-----
Net cash provided by financing activities..................................................... 210
-----
Net change in cash and cash equivalents....................................................... (90)
Cash, beginning of year....................................................................... 94
-----
Cash, end of year............................................................................. $ 4
=====
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................................... $ 25
=====
Supplemental disclosure of noncash financing activities:
Obligation under line-of-credit agreement exchanged for note payable to a shareholder....... $ 250
=====
</TABLE>

See accompanying notes.

F-36
<PAGE> 87

DIMENSION SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS

APRIL 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

Dimension Solutions, Inc. (the "Company") is a California corporation which
sells personal computer-based human resource management software and maintenance
support to small to medium sized employers throughout the United States.

On May 23, 1996, substantially all of the Company's business and assets
were acquired by ProBusiness, Inc. (the "Purchaser" or "ProBusiness"). No
adjustments to recorded amounts of assets or liabilities resulting from the
acquisition have been included in the accompanying financial statements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during any reported period. Actual
results could differ from these estimates.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation of property and equipment is computed using the
double declining balance method over the estimated useful lives of the assets
which range from three to seven years.

REVENUE RECOGNITION AND DEFERRED IMPLEMENTATION COSTS

The Company recognizes revenue from the sale of human resource management
software when a noncancellable license agreement has been signed, the product
has shipped and all significant contractual obligations have been satisfied. The
Company's revenue recognition policy is in compliance with the provisions of the
American Institute of Certified Public Accountants Statement of Position 91-1,
"Software Revenue Recognition."

Human resource software maintenance revenue is billed annually, in advance.
Customer deposits for software maintenance are deferred and recognized ratably
over the term of the maintenance agreement.

INCOME TAXES

The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."

PER SHARE DATA

Net loss per common share is computed based on the weighted average number
of common shares outstanding during the year.

2. NOTES PAYABLE TO SHAREHOLDER

On October 15, 1995, the Company received $25,000 in cash in exchange for a
note payable to a shareholder which is due on January 31, 1997. Interest is
payable monthly at a rate equal to the lesser of the prime rate plus 2 1/2
percent or the maximum allowable rate under California law. The entire principal
amount is payable on the due date.

F-37
<PAGE> 88

DIMENSION SOLUTIONS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

During the year ended April 30, 1996, the Company had a balance of $250,000
outstanding under a line of credit agreement. This liability was assumed by a
shareholder of the Company. In exchange, the Company signed a note payable with
the shareholder for $250,000. Interest on the note is payable by the Company
from time to time at a rate equal to the lesser of prime plus 2 1/2 percent or
the maximum allowed rate based on California law. The total outstanding
principal is due on the earlier of the closing of an initial public offering by
ProBusiness or December 31, 1999.

3. LEASE OBLIGATIONS

The Company leases its facilities and various equipment under
noncancellable operating leases which expire at various dates through September
1999. The future minimum lease payments under operating leases subsequent to
April 30, 1996 are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, (IN THOUSANDS)
------------------------------------------------------- --------------
<S> <C>
1997................................................... $ 60
1998................................................... 57
1999................................................... 57
2000................................................... 24
----
Total minimum lease payments........................... $198
====
</TABLE>

Rent expense for the year ended April 30, 1996 was $67,000.

4. INCOME TAXES

Effective June 16, 1994, the Company's stockholders elected to have the
Company taxed as an S Corporation for federal and state income tax purposes,
whereby taxable income is allocated to the individual stockholders. The Company
is subject to a state franchise tax of 1.5% of taxable income.

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). Under Statement No. 109, the liability method is used to
account for income taxes. Temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes are immaterial.

5. SHAREHOLDERS' EQUITY

The Company was originally capitalized on June 16, 1994 with $30,000 in
consideration paid by investors who received a total of 10,000 shares of common
stock. No additional capital transactions occurred through April 30, 1996.

6. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Tax Deferred Savings Plan (the "Plan"), for the
benefit of certain qualified employees. Employees may elect to contribute to the
Plan, through payroll deductions subject to certain limitations. The Company may
make contributions in accordance with the Plan. The Company did not make any
contributions to the Plan in 1996.

F-38
<PAGE> 89

SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION

The selected unaudited pro forma condensed consolidated financial
information for the Company set forth below gives effect to the acquisition of
certain assets and liabilities of BeneSphere Administrators, Inc. (BeneSphere).
The historical financial information set forth below has been derived from, and
is qualified by reference to, the financial statements of the Company and
BeneSphere and should be read in conjunction with those financial statements and
the notes thereto included elsewhere herein. The selected unaudited pro forma
condensed consolidated statement of operations data for the year ended June 30,
1997 set forth below gives effect to the acquisition as if it occurred on July
1, 1996. The selected unaudited pro forma condensed consolidated financial
information set forth below reflects certain adjustments, including, among
others, adjustments to reflect the amortization of the excess purchase prices
and the inclusion of interest expense for debt issued in connection with the
acquisition of BeneSphere. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements -- the Company and
BeneSphere Administrators, Inc." The selected unaudited pro forma condensed
consolidated financial information set forth below does not purport to represent
what the consolidated results of operations or financial condition of the
Company would actually have been if the BeneSphere acquisition and related
transactions had in fact occurred on such date or to project the future
consolidated results of operations or financial condition of the Company.

F-39
<PAGE> 90

SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
BENESPHERE (1)(2)
COMPANY FOR THE SIX PRO FORMA PRO FORMA
FOR THE MONTHS ENDED BUSINESS FOR THE
YEAR ENDED DECEMBER 31, COMBINATION YEAR ENDED
JUNE 30, 1997 1996 COMBINED ADJUSTMENTS JUNE 30, 1997
------------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenue................................. $27,374 $ 1,656 $29,030 -- $29,030
Operating expenses:
Cost of providing services............ 13,659 882 14,541 -- 14,541
General and administrative expenses... 4,282 1,362 5,644 75 5,719
Research and development expenses..... 2,841 -- 2,841 -- 2,841
Client acquisition costs.............. 11,706 808 12,514 -- 12,514
------- ------- ------- ---- ----------
Total operating expenses........... 32,488 3,052 35,540 75 35,615
------- ------- ------- ---- ----------
Loss from operations.................... (5,114) (1,396) (6,510) (75) (6,585)
Interest expense........................ (1,190) (11) (1,201) (11) (1,212)
Other income............................ 59 -- 59 -- 59
------- ------- ------- ---- ----------
Net loss................................ $(6,245) $(1,407) $(7,652) $ (86) $(7,738)
======= ======= ======= ==== ==========
Pro forma net loss per common
share(3).............................. $ (0.92)
==========
Number of shares used to compute pro
forma net loss per common share(4).... 8,451
==========
</TABLE>

See accompanying notes.

F-40
<PAGE> 91

NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION

Pro forma and offering adjustments for statement of operations for the year
ended June 30, 1997 are as follows:

(1) Reflects the amortization of the cost over the fair value of net assets
acquired for the BeneSphere acquisition as follows:

<TABLE>
<CAPTION>
COST OVER
THE FAIR VALUE
OF NET AMORTIZATION
ASSETS ACQUIRED PERIOD
--------------- ------------
(IN THOUSANDS)
<S> <C> <C>
BeneSphere:
Goodwill.............................................. 2,278 20 yrs
Customer list......................................... 310 8 yrs
</TABLE>

(2) Reflects interest expense of $11,000 for the year ended June 30, 1997
related to a $250,000 short term note payable which represents part of the
payment for the purchase of all of the outstanding stock of BeneSphere
Administrators, Inc. See Note 10 of the ProBusiness Services, Inc. Consolidated
Financial Statements.

(3) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding. Such pro forma net loss reflects
the impact of the adjustments above.

(4) Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding plus common equivalent shares from
convertible preferred stock, that will be converted upon the closing of the
Company's proposed initial public offering (using the if-converted method), have
been included in the computation whether dilutive or anti-dilutive. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at proceeds below the assumed
public offering price for the twelve-month period prior to the offering have
been included in the computation as if they were outstanding for all periods
presented (using the treasury stock method at the estimated initial public
offering price) whether dilutive or anti-dilutive.

See Note 10 of the ProBusiness Services, Inc. Consolidated Financial
Statements regarding contingent payments related to the BeneSphere acquisition.

F-41
<PAGE> 92
APPENDIX -- DESCRIPTION OF GRAPHICS

COVER:

The Front Cover of the Prospectus includes the ProBusiness logo at the
top of the page.

Description of LOGO: The ProBusiness logo consists of the word
"ProBusiness," all in black letters and all in lower case letters except the
"P" and the "B," with a red triangle to the left of a triangular space in the
side of the "P."

INSIDE FRONT COVER:

The Inside Front Cover of the Prospectus includes text stating,
"ProBusiness is a leading provider of outsourced payroll processing, payroll
tax filing and benefits administration services to large employers." Below the
text is an arrow pointing to the ProBusiness logo at the bottom right side of
the page. The background photo behind the text depicts ProBusiness service
personnel assisting a client.

At the bottom of the page is the following:

"CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
'UNDERWRITING.'"

GATEFOLD:

The Gatefold consists of three horizontal tiers, the top and the middle
containing text and photographs and the bottom containing text related to the
text and photographs in the middle tier. The top tier consists of captions
accompanying the following: the ProBusiness logo, a rectangular collage of
photographs and a rectangle containing client logos. In the background of the
top tier is a photograph of ProBusiness service personnel assisting a client.
The middle tier consists of the words "Business Partnership" at the far left in
italics, then three equal-size rectangular photographs and, at the far right, a
collage of four overlapping rectangular photographs. The middle tier
photographs are connected by downward arrows to corresponding captions, which
are in the bottom tier of the gatefold.

Description #1: Description of the left section of the upper tier of
the gatefold: The ProBusiness logo with text below it stating, "ProBusiness
focuses on providing high quality and cost-effective employee administrative
services to large employers."

Description #2: Description of the center section of the upper tier of
the gatefold: A collage of photographs depicting various documents and items
related to the services provided by ProBusiness.

Description #3: Description of the right section of the upper tier of
the gatefold: A rectangle containing the logos of the following eight
companies: CCH Incorporated, Sunglass Hut
<PAGE> 93
International, Inc., Fujitsu, Ltd., Informix Corporation, Advanced Micro
Devices, Inc., 3Com Corporation, AST Research, Inc., and AllAmerica.

Caption: "ProBusiness's clients include many large employers in diverse
industries." This caption appears below the rectangle containing the clients'
logos in Description #3.

Description #4: Description of the left section of the middle tier of
the gatefold: "Business Partnership."

Caption: "ProBusiness differentiates itself from its competitors by
establishing a business partnership with each client. The Company develops
relationships with each client by assessing payroll processing needs,
reengineering and designing payroll systems and processes and implementing a
cost-effective solution. The Company maintains an ongoing relationship by
providing proactive account management and technical support." This caption
appears below the text described in Description #4.

Description #5: Description of the left center section of the middle
tier of the gatefold: A rectangular photograph of an account manager of
ProBusiness assisting a client.

Caption: "Client Service - Delivering high quality, responsive and
professional client service is a key competitive advantage of the Company.
Each client works with a personal account manager who serves as the client's
day-to-day contact and is responsible for meeting the client's needs. The
Company believes that its low client-to-account manager ratio is a key factor
in enabling the Company to achieve a high payroll client retention rate." This
caption appears below the photograph in Description #5.

Description #6: Description of the center section of the middle tier of
the gatefold: A rectangular photograph of two employees of the Company using
personal computers in the Company's production facility.

Caption: "Technology - ProBusiness's PC-based, distributed architecture
is reliable, flexible and scalable. This technology enables the Company to
provide high levels of client service and customized solutions for each client
that can be easily upgraded and integrated with the client's other systems."
This caption appears below the photograph in Description #6.

Description #7: Description of the right center section of the middle
tier of the gatefold: A rectangular photograph of a ProBusiness specialist
diagramming a client's payroll system on a white board.

Caption: "Expertise - ProBusiness delivers technical expertise through
specialists in design, process, implementation and systems integration.
The Company delivers functional and regulatory expertise in payroll, payroll tax
and employee benefits." This caption appears below the photograph in
Description #7.
<PAGE> 94
Description #8: Description of the right section of the middle tier of
the gatefold: Rectangular photographs of documents and a computer screen, all
of which relate to the service offerings provided by ProBusiness.

Caption: "Comprehensive Solutions - ProBusiness provides employers with
a broad range of employee administrative services: payroll processing; payroll
tax filing, human resources software and employee benefits administration,
including flexible benefits enrollment and processing and COBRA administration."
This caption appears below the photograph in Description 8.

BACK COVER:

The Back Cover of the Prospectus includes the ProBusiness logo in the
center of the page.