PROBUSINESS SERVICES INC, 424B4, 1998-09-25

PROBUSINESS SERVICES INC
424B4, 1998-09-25
COMPUTER PROCESSING & DATA PREPARATION

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<PAGE>
PROSPECTUS

2,775,000 SHARES

[LOGO]

COMMON STOCK

All of the 2,775,000 shares of Common Stock offered hereby are being sold by
ProBusiness Services, Inc. ("ProBusiness" or the "Company").

The Company effected a 3-for-2 stock split in the form of a stock dividend
on August 7, 1998. All share and per share information in this Prospectus has
been adjusted to reflect this stock split.

The Common Stock offered hereby is quoted on the Nasdaq National Market
under the symbol "PRBZ." On September 24, 1998, the last reported sale price of
the Common Stock was $28.25. See "Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.

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

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $27.00 $1.415 $25.585
Total(3)................................. $74,925,000 $3,926,625 $70,998,375
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $670,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 416,250 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $86,163,750, $4,515,619 and $81,648,131, respectively.

The Common Stock is offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to their right to reject orders in
whole or in part. It is expected that delivery of the certificates for the
Common Stock will be made on or about September 30, 1998.

WILLIAM BLAIR & COMPANY

BANCBOSTON ROBERTSON STEPHENS

SG COWEN

THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1998

<PAGE>
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.

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 added value to large employers with its high quality and
cost-effective employee administrative services."

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 rectangular containing the logos of the following eight companies:
CCH Incorporated, Advanced Micro Devices, Inc., 3Com Corporation, AST Research,
Inc., Yahoo Inc., Oracle Corporation, Boise Cascade Corporation, First Allmerica
Financial Life Insurance Company and First Data Corporation.

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 corner 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 proprietary PC-based, distributed
architecture is reliable, flexible and scalable. This technology enables the
Company to provide high levels of client service and customized solutions 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.

Description #8: Description of the right section of the middle tier of the
gatefold: Rectangular photographs of an account manager assisting a client,
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, and human
resources software." This caption appears below the photograph in Description 8.

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

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."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

PROBUSINESS-REGISTERED TRADEMARK- AND THE PROBUSINESS LOGO ARE REGISTERED
TRADEMARKS OF THE COMPANY. BENESPHERE ADMINISTRATORS-TM- AND ENROLLNET-TM- ARE
TRADEMARKS OF THE COMPANY.
<PAGE>
PROSPECTUS 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 THE THREE-FOR-TWO SPLIT OF THE
COMPANY'S COMMON STOCK (THE "STOCK SPLIT") EFFECTED IN THE FORM OF A STOCK
DIVIDEND PAID ON AUGUST 7, 1998. 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. The Company's primary service offerings are payroll processing,
payroll tax filing, benefits administration, including the enrollment and
processing of flexible benefits plans and COBRA programs, and human resources
software. 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, 1998, the Company provided services to approximately
1,400 clients and provided payroll processing services to approximately 510
clients with an aggregate of approximately 575,000 employees and an average of
approximately 1,100 employees. In addition to providing tax filing services for
its payroll clients, as of June 30, 1998 the Company provided national tax
filing services to 72 clients with an aggregate of approximately 1.1 million
employees and an average of approximately 15,200 employees. For the quarter
ended June 30, 1998, the Company processed 4.3 million checks for the Company's
payroll clients. The Company's clients include: 3Com Corporation, Abbott
Laboratories, Airtouch Communications Inc., Amoco Corporation, Inc., Ascend
Communications, Inc., AST Research, Inc., Coach Leatherwear Co., Inc., Dell
Computer Corporation, E*TRADE Group, Inc., First Data Corporation, The Gap,
Inc., The Gillette Company, J.C. Penney Company, Inc., Kellogg USA Inc., LSI
Logic Corporation, Michaels Stores, Inc., Netscape Communications Corp., Oracle
Corporation, Sunglass Hut International, Inc., Toyota Motor Corporation, U.S.
Bancorp, Watkins-Johnson Company and Williams-Sonoma, Inc.

The demand for outsourcing employee administrative services has grown
significantly and is expected to continue to grow over the next several years.
According to G-2 Research, Inc., third-party payroll processing, payroll tax
filing and benefits administration are expected to generate approximately $3.9
billion in revenue in 1998 and approximately $9.3 billion in revenue in 2003.
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.

The Company differentiates itself from its competitors through its
proprietary PC-based 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 value-added and 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 focus on client
service are key factors in enabling it to achieve a high payroll client
retention rate, which was approximately 92% for fiscal 1998.

The Company's objective is to be the premier provider of employee
administrative services for large employers. The Company's strategy to
accomplish this objective includes expanding its client base by increasing its
direct sales force, developing a comprehensive and fully integrated suite of
employee administrative services, offering additional services to existing
clients, pursuing strategic acquisitions, investments and alliances and
extending its technology leadership. 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.

3
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company................... 2,775,000 shares
Common Stock to be Outstanding after this Offering.... 19,889,855 shares(1)
For general corporate purposes, including
capital expenditures and working capital, as
well as for potential acquisitions. See "Use
of Proceeds."
Use of Proceeds.......................................
Nasdaq National Market Symbol......................... PRBZ
</TABLE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................................................. $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services........................................................ 6,435 13,659 23,859
General and administrative expenses............................................... 2,054 4,282 6,727
Research and development expenses................................................. 1,257 2,841 4,585
Client acquisition costs.......................................................... 5,388 11,706 17,858
Acquisition of in-process technology.............................................. 711 -- --
--------- --------- ---------
Total operating expenses............................................................ 15,845 32,488 53,029
--------- --------- ---------
Loss from operations................................................................ (1,982) (5,114) (6,712)
Interest expense.................................................................... (473) (1,190) (557)
Other income........................................................................ 69 59 752
--------- --------- ---------
Net loss............................................................................ $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Historical basic and diluted net loss per share(2).................................. $ (4.91)
---------
---------
Shares used in computing historical basic and diluted net loss per share(2)......... 486
Pro forma basic and diluted net loss per share(2)................................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net loss per share(2).......... 10,533 15,722
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 13,771 $ 84,099
Payroll tax funds invested............................................................. 332,667 332,667
Working capital........................................................................ 3,323 73,651
Total assets........................................................................... 376,009 446,337
Payroll tax funds collected but unremitted............................................. 332,667 332,667
Capital lease obligations, less current portion........................................ 1,414 1,414
Total stockholders' equity............................................................. 26,746 97,074
</TABLE>

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

(1) As of June 30, 1998 (after giving effect to the Stock Split). Excludes (i)
1,800,416 shares of Common Stock subject to outstanding options; (ii)
229,500 shares of Common Stock issuable upon exercise of outstanding
warrants; (iii) 1,277,510 shares of Common Stock reserved for future grant
under the Company's 1996 Stock Option Plan; and (iv) 579,886 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan. See "Management -- Stock Plans," "Description of Capital
Stock -- Warrants" and Notes 6 and 7 of Notes to Financial Statements.

(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing historical and pro forma basic
and diluted net loss per share.

(3) Adjusted to reflect the sale of the 2,775,000 shares of Common Stock offered
hereby at a public offering price of $27.00 per share, after deducting the
estimated underwriting discount and estimated offering expenses payable by
the Company, and application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."

The Company was incorporated in California in October 1984 and
reincorporated in Delaware in September 1997. The Company's executive offices
are located at 4125 Hopyard Road, Pleasanton, California 94588, and its
telephone number is (925) 737-3500. The Company maintains a World Wide Web site
at www.probusiness.com. The information contained on the Company's Web site
shall not be deemed to be a part of this Prospectus.

4
<PAGE>
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 REVENUE

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, 1998, the Company had an accumulated deficit of
approximately $25.5 million. The establishment of new client relationships
involves lengthy and extensive sales and implementation processes. The sales
process generally takes three to twelve months or longer, and the implementation
process generally takes an additional three to nine 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 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 likely will incur in the future, costs associated with adding personnel,
integrating technology, increasing overhead to support the acquired businesses,
acquiring in-process technology and amortization expenses related to intangible
assets. Any future acquisitions 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."

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 the beginning of the tax year (the Company's third fiscal quarter)
and higher interest income earned on payroll tax funds invested. 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 the third quarter.

5
<PAGE>
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 condition of the
economy, client staff reductions, strikes and acquisitions of its clients by
other companies. 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 STRATEGIC ACQUISITIONS AND INVESTMENTS

While the Company has no current agreements or negotiations underway with
respect to any acquisition of, or investment in, businesses that provide
complementary services or technologies to those of the Company, the Company is
engaged in ongoing discussions and intends to make additional acquisitions of,
and investments in, such 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. Furthermore,
there can be no assurance that any strategic investment will succeed. The
initial cost of such an investment or the failure of such an investment to
succeed could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Seasonality; Fluctuations
in Quarterly Results," "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Strategy."

RISKS ASSOCIATED WITH PAYROLL TAX FILING SERVICE AND BENEFITS ADMINISTRATION
SERVICES

The Company's payroll tax filing 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
transfer to the Company contributed employer and employee tax funds. The Company
processes the data received from the clients 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 and 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.

The Company's payroll tax filing service is also dependent upon government
regulations, which are subject to continual 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 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

6
<PAGE>
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 an
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 revenues. As a result, the Company's business,
financial condition and results of operations are significantly impacted by
interest rate fluctuations. The Company enters into interest rate swap
agreements to minimize the impact of interest rate fluctuations. There can be no
assurance, however, that the Company's swap arrangements will protect the
Company from all interest rate risks. Under certain circumstances if interest
rates rise, the Company would have payment obligations under its interest rate
swap agreements which may not be offset by interest earned by the Company on
deposited funds. A payment obligation under the Company's swap arrangements
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, 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 its swap agreements 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 four years. The Company's number of employees has increased from 360 at
the end of fiscal 1997 to 500 at the end of fiscal 1998. This growth has placed,
and is expected to continue to place, 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 attract clients in

7
<PAGE>
new geographic regions, increase expenditures on research and development, and
invest in new equipment and 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 could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to open a satellite
sales and implementation center in New Jersey by the end of calendar 1998 and
may open additional sales offices in the future. In addition, the Company
intends to move its benefits administration center from its current location in
Bellevue, Washington to another location there, and the Company has leased
additional office space to be built adjacent to its Pleasanton headquarters.
There can be no assurance that the Company will be able to establish such
facilities on a timely basis. The Company's growth may depend to some extent on
its ability to successfully complete strategic acquisitions or investments to
expand or complement its existing business. There can be no assurance that
suitable acquisitions or investments 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 and 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,
certain 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, the failure of the Company to compete
successfully, pricing pressures, loss of market share and loss of clients could
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 or acquire 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 or acquire new
technologies in a timely manner, it may incur substantial costs in developing or
acquiring such technologies and in deploying new services and features to its
clients, including costs associated with acquiring in-process technology,
amortization expenses related to intangible assets and

8
<PAGE>
costs of additional personnel. If the Company is unable to develop or acquire
and successfully 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."

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 could damage the Company's
reputation and have a material adverse effect on the Company's business,
financial condition and results of operations.

DISASTER RECOVERY; RISK OF LOSS OF CLIENT DATA

The Company currently conducts substantially all of its payroll and payroll
tax processing at the Company's headquarters in Pleasanton, California and
divides the payroll printing and finishing between its Pleasanton and Irvine,
California facilities. The Irvine facility serves both as an alternative
processing center and a back-up payroll center. The Company's benefits
administration services are conducted solely in Bellevue, Washington, and no
benefits administration back-up facility exists. The Company establishes for
each payroll client a complete set of payroll data at the Pleasanton processing
center, as well as at the client's site. In the event of a disaster in
Pleasanton, clients would have the ability 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 payroll 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 has in the past and
may in the future experience difficulty in recruiting sufficient numbers of
qualified personnel. In particular, the Company's ability to find and train
implementation employees is critical to the Company's ability to

9
<PAGE>
achieve its growth objectives. 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 historically has been
derived from clients located in the western United States. The Company's ability
to achieve significant future revenue growth will in large part depend on its
ability to gain new clients throughout the United States. By the end of calendar
1998, the Company intends to open a satellite sales and implementation center in
New Jersey to service the eastern United States. The Company may open additional
sales offices in the future. Due to the time
required to sell and implement the Company's services and the fixed costs
associated with opening a new center, any revenue associated with a new center
will be significantly lower than the costs associated with it, potentially for a
significant period of time. Growth and geographic expansion have resulted in new
and increased responsibilities for management and have placed and continue 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 DEVELOPMENT AND INTRODUCTION OF NEW OR ENHANCED
SERVICES

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, integrate 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 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."

10
<PAGE>
IMPACT OF YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in 2000, these
date code fields will need to accept four digit entries in order to distinguish
21st century dates from 20th century dates. As a result, computer systems and/or
software used by many companies will need to be upgraded to comply with "Year
2000" requirements by the end of 1999. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance issues.

The Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to make its systems Year 2000 compliant. Based on this
preliminary review, the Company has discovered certain failures to comply with
Year 2000 requirements. The Company is taking action to correct the
non-complying features of its systems, and the Company believes that its
internal software systems will be Year 2000 compliant by 2000. There can be no
assurance, however, that the Company's systems will be fully Year 2000 compliant
in a timely manner, and a failure by the Company to make its internal systems
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has not
determined an estimate of the costs required to correct the non-complying
features, and such costs could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
currently have a contingency plan in the event that it is unable to make its
systems Year 2000 compliant.

The Company believes that its current products are, and future products will
be, fully Year 2000 compliant. There can be no assurance, however, that Year
2000 errors or defects will not be discovered in the Company's current and
future products. The Company's past software products, many of which are
currently used by clients, are not Year 2000 compliant. The Company has begun
the process of transitioning existing clients to its Year 2000 compliant
products; however, there can be no assurance that the Company will be successful
in providing all of its clients with Year 2000 compliant products by 2000. Any
failure by the Company to transition its clients to Year 2000 compliant products
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company is not assessing the Year 2000 compliance of its clients'
systems or the possible effects on its operations of the Year 2000 compliance of
its clients' systems. Due to the substantial integration between the Company's
computer systems and its clients' systems, the failure by the Company's clients
to have Year 2000 compliant systems could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is assessing the possible effects on its operations of the Year 2000 readiness
of key suppliers and subcontractors. The Company's reliance on suppliers and
subcontractors, and, therefore, on the proper functioning of their information
systems and software, means that failure by such suppliers and subcontractors to
address Year 2000 issues 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 -- Year
2000 Compliance."

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 limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the

11
<PAGE>
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 and results of operations. See "Business -- Proprietary
Rights."

UNALLOCATED NET PROCEEDS

The Company has not designated any specific use for the net proceeds of the
Offering. The Company currently expects to use the net proceeds for general
corporate purposes, including capital expenditures and working capital. 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 or
for strategic alliances with, or investments in, companies that provide
complementary products and services. Accordingly, management will have
significant discretion in applying the net proceeds of the Offering. See "Use of
Proceeds."

CONCENTRATION OF STOCK OWNERSHIP

Upon completion of this Offering, the Company's directors and executive
officers and their respective affiliates will beneficially own 36.1% (35.4% if
the Underwriters' over-allotment option is exercised in full) 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."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Company's Common Stock is likely to be highly
volatile following this Offering 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, 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.

SUBSTANTIAL DILUTION

The assumed public offering price is substantially higher than the 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 $22.61 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 at exercise prices per share lower than the price per share of Common
Stock offered hereby, and the Company expects that it will continue to grant a
substantial number of options in the future at the fair market value of the
Common Stock at such time, which possibly could be a price per share lower than
the price per share of Common Stock offered hereby. In addition, the Company's
employee stock purchase plan provides employees an opportunity to purchase
shares below

12
<PAGE>
prevailing market value. The Company also may issue shares of its Common Stock
in connection with strategic acquisitions or alliances. Any of the foregoing
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 19,889,855 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1998. Of these shares, all of the shares sold in this
Offering and the 4,312,500 shares sold in the Company's initial public offering
will be freely tradeable without restriction or further registration under the
Securities Act. There are currently outstanding 2,539,100 shares of Common Stock
issued pursuant to exercise of options granted under equity incentive plans of
the Company, all of which shares are freely tradeable pursuant to Rule 701 of
the Securities Act or have been registered for resale under the Securities Act.
The remaining 10,263,255 shares of Common Stock were issued and sold by the
Company in private transactions exempt from registration requirements of the
Securities Act and will be available for immediate sale in the public market in
accordance with Rule 144, in some cases subject to the volume and other resale
limitations of Rule 144, other than the one-year holding period. Approximately
5,127,890 of such shares are subject to lock-up agreements under which the
holders of such shares have agreed with William Blair & Company, L.L.C. not to
sell or otherwise dispose of any of such shares for a period of 90 days
following the date of this Prospectus, subject to certain limited exceptions.
See "Shares Eligible for Future Sale."

As of June 30, 1998, options to purchase 1,800,416 shares of Common Stock
were outstanding, of which options to purchase 414,884 shares were then
exercisable. As of June 30, 1998, options to purchase 1,277,510 shares of Common
Stock were available for grant pursuant to the Company's 1996 Stock Option Plan
and 579,886 shares of Common Stock were available for issuance pursuant to the
Company's 1997 Employee Stock Purchase Plan. In addition, as of June 30, 1998,
warrants to purchase 229,500 shares of Common Stock were outstanding, all of the
underlying shares of which will be eligible for sale in the public market upon
exercise of the warrants.

Pursuant to agreements between the Company and certain stockholders and
warrantholders (or their permitted transferees), approximately 9,571,976 shares
of Common Stock and 124,500 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 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.

13
<PAGE>
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."

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

Forward-looking statements contained in this Prospectus are subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995 and
are highly dependent upon a variety of important factors that could cause actual
results to differ materially from those reflected in such forward-looking
statements. When used in this document and documents referenced herein, the
words "intend," "anticipate," "believe," "estimate," and "expect" and similar
expressions as they relate to the Company are included to identify such
forward-looking statements. These forward-looking statements include statements
regarding the demand for outsourcing employee administrative services; the
Company's expansion of its client base; the Company's intention to increase its
direct sales force; the development of a comprehensive and fully integrated
suite of employee administrative services; the Company's ability to offer
additional services; the initiation or completion of any strategic acquisition,
investment or alliance; the Company's ability to extend its technology
leadership; the Company's ability to attract and retain new clients; market
acceptance of any new services offered by the Company; the Company's ability to
minimize the impact of interest rate fluctuations; the Company's ability to
develop its financial and managerial controls and systems; the opening of
additional facilities; the sufficiency of the Company's back-up facilities and
disaster recovery procedures; the Company's ability to develop or acquire new
technologies; the Company's ability to attract and retain experienced employees;
the ability of the Company to make its internal system Year 2000 compliant and
to transition its clients to Year 2000 compliant systems; the Company's ability
to maintain a high payroll client retention rate, and the Company's ability to
increase its national presence. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, those identified under
"Risk Factors" and elsewhere in this Prospectus and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially from
these forward-looking statements. In addition, important factors to consider in
evaluating such forward-looking statements include changes in external market
factors, changes in the Company's business or growth strategy or an inability to
execute its strategy due to changes in its industry or the economy generally,
the emergence of new or growing competitors and various other competitive
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Prospectus will in fact
occur.

14
<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the 2,775,000 shares of Common Stock
offered hereby are estimated to be approximately $70.3 million ($81.0 million if
the Underwriters' over-allotment option is exercised in full) at a public
offering price of $27.00 per share and after deducting the estimated
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds of this Offering for general
corporate purposes, including capital expenditures and working capital. The
Company also may use a portion of the net proceeds for acquisitions of, or
investments in, companies, technology or services that complement the business
of the Company or for strategic alliances with, or investments in, companies
that provide complementary products and services. No such transactions,
alliances or investments are currently planned. 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.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "PRBZ." The following table sets forth, for the fiscal periods indicated,
the high and low sales prices of the Common Stock as reported by the Nasdaq
National Market since the Company's initial public offering of Common Stock at
$7.33 per share on September 19, 1997 (after giving effect to the Stock Split).
Prior to September 19, 1997, there was no public trading market for the Common
Stock.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998:
First Quarter (from September 19, 1997).................................. $ 12.92 $ 7.67
Second Quarter........................................................... 15.33 12.08
Third Quarter............................................................ 20.00 14.00
Fourth Quarter........................................................... 32.58 17.33
FISCAL 1999:
First Quarter (through September 24, 1998)............................... $ 43.13 $ 22.38
</TABLE>

On July 31, 1998, there were 372 holders of record of the Company's Common
Stock. The Company believes that the number of beneficial owners of the Common
Stock is substantially greater than the number of record owners because a large
portion of the Common Stock is held of record in broker "street names." The last
reported sale price per share of the Common Stock on September 24, 1998 on the
Nasdaq National Market was $28.25.

15
<PAGE>
CAPITALIZATION

The following table sets forth the short-term indebtedness and total
capitalization of the Company as of June 30, 1998 on an actual basis and on an
as adjusted basis to give effect to the sale and issuance of the shares of
Common Stock offered hereby at a public offering price of $27.00 per share
(after deducting the estimated underwriting discount 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 Financial Statements and Notes thereto appearing elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of capital lease obligations............................................. $ 890 $ 890
---------- -----------
---------- -----------
Capital lease obligations, less current portion (1)...................................... 1,414 1,414
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares authorized, no shares issued and
outstanding........................................................................... -- --
Common Stock, $.001 par value; 60,000,000 shares authorized, 17,114,855 shares issued
and outstanding, actual; 19,889,855 shares issued and outstanding, as adjusted (2).... 17 20
Additional paid-in capital............................................................... 53,286 123,611
Accumulated deficit...................................................................... (25,469) (25,469)
Notes receivable from stockholders....................................................... (1,088) (1,088)
---------- -----------
Total stockholders' equity........................................................... 26,746 97,074
---------- -----------
Total capitalization............................................................... $ 28,160 $ 98,488
---------- -----------
---------- -----------
</TABLE>

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

(1) See Note 4 of Notes to Financial Statements.

(2) As of June 30, 1998 (after giving effect to the Stock Split). Excludes (i)
1,800,416 shares of Common Stock subject to outstanding options; (ii)
229,500 shares of Common Stock issuable upon exercise of outstanding
warrants; (iii) 1,277,510 shares of Common Stock reserved for future grant
under the Company's 1996 Stock Option Plan; and (iv) 579,886 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan. See "Management -- Stock Plans," "Description of Capital
Stock -- Warrants" and Notes 6 and 7 of Notes to Financial Statements.

16
<PAGE>
DILUTION

The net tangible book value of the Company as of June 30, 1998 was
approximately $17.0 million or $0.99 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total net tangible
assets less total liabilities, divided by the number of shares of Common Stock
issued and outstanding at that date. 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 as adjusted 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 a public offering price of $27.00 per share and after deduction of the
estimated underwriting discount and estimated offering expenses payable by the
Company, the net tangible book value of the Company as of June 30, 1998, would
have been approximately $87.3 million or $4.39 per share. This represents an
immediate increase in net tangible book value of $3.40 per share to existing
stockholders and an immediate dilution of $22.61 per share to new stockholders
purchasing Common Stock in this Offering. The following table illustrates this
per share dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $ 27.00
---------
Net tangible book value per share at June 30, 1998.............. $ 0.99
---------
Increase in net tangible book value per share attributable to
new stockholders.............................................. 3.40
---------
As adjusted net tangible book value per share after the
Offering......................................................... 4.39
---------
Dilution per share to new stockholders............................ $ 22.61
---------
---------
</TABLE>

17
<PAGE>
SELECTED FINANCIAL DATA

The following selected statements of operations data for the years ended
June 30, 1996, 1997 and 1998 and the balance sheet data at June 30, 1997 and
1998 are derived from the financial statements of the Company, which have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Prospectus. The statements of operations data for the years ended June
30, 1994 and 1995 and the balance sheet data at June 30, 1994, 1995 and 1996 are
derived from financial statements of the Company that have been audited by Ernst
& Young LLP that are not included 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 Financial
Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.................................................. $ 4,069 $ 7,095 $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services............................. 1,629 2,703 6,435 13,659 23,859
General and administrative expenses.................... 1,202 1,304 2,054 4,282 6,727
Research and development expenses...................... 1,202 1,038 1,257 2,841 4,585
Client acquisition costs............................... 1,467 2,943 5,388 11,706 17,858
Acquisition of in-process technology................... -- -- 711 -- --
---------- ---------- --------- --------- ---------
Total operating expenses................................. 5,500 7,988 15,845 32,488 53,029
---------- ---------- --------- --------- ---------
Loss from operations..................................... (1,431) (893) (1,982) (5,114) (6,712)
Interest expense......................................... (46) (86) (473) (1,190) (557)
Other income............................................. -- -- 69 59 752
---------- ---------- --------- --------- ---------
Net loss................................................. $ (1,477) $ (979) $ (2,386) $ (6,245) $ (6,517)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Historical basic and diluted net loss per share(1)....... $ (738.50) $ (139.86) $ (4.91)
---------- ---------- ---------
---------- ---------- ---------
Shares used in computing historical basic and diluted net
loss per share(1)....................................... 2 7 486
Pro forma basic and diluted net loss per share(1)........ $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net
loss per share(1)....................................... 10,533 15,722
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 114 $ 852 $ 4,041 $ 5,047 $ 13,771
Payroll tax funds invested........................... -- -- 106,339 177,626 332,667
Working capital (deficiency)......................... (119) 69 3,022 41 3,323
Total assets......................................... 2,019 4,134 117,228 200,435 376,009
Payroll tax funds collected but unremitted........... -- -- 106,339 177,626 332,667
Long-term debt and note payable to stockholder, less
current portion..................................... 394 1,016 8,072 8,917 --
Capital lease obligations, less current portion...... 174 168 253 1,898 1,414
Total stockholders' equity (deficit)................. 705 1,366 (136) 3,869 26,746
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the shares used in computing historical and pro forma basic
and diluted net loss per share.

18
<PAGE>
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, benefits administration, including the
enrollment and processing of flexible benefit plans and COBRA programs, and
human resources software. 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 $46.3 million in fiscal 1998. From June 30, 1994 to June 30,
1998, the client base for payroll processing services increased from 200 to
approximately 510 clients, while the average size of the Company's payroll
clients increased from approximately 400 employees to approximately 1,100
employees. The number of checks that the Company processed for its payroll
clients increased from 2.9 million to 4.3 million for the quarters ended June
30, 1997 and 1998, respectively. As of June 30, 1998, the Company provided
services to approximately 1,400 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 payroll clients (approximately 92% for fiscal 1998).
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
twelve months or longer, and the implementation process generally takes an
additional three to nine 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 the beginning of the tax year (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 the third quarter. 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, 1998, the Company had an
accumulated deficit of approximately $25.5 million. There can be no assurance
that the Company will achieve or sustain profitability in the future.

The Company derives its revenue from fees charged to clients for services
and income earned from investing payroll tax funds. The Company generally
recognizes revenue from services when such services are performed and recognizes
income from investments when earned. The Company typically invests these funds
in short-term financial instruments such as overnight U.S. government direct and
agency obligations

19
<PAGE>
repurchase agreements, commercial paper rated A-1 and/or P-1 and money market
funds with an underlying credit quality of AA or better, which are subject to
credit risks and interest rate fluctuations. See "Risk Factors -- Investment
Risks." Interest income earned on collected, but unremitted payroll tax funds
amounted to $1.9 million, $5.9 million and $11.5 million for fiscal 1996, 1997
and 1998, respectively. Payroll and payroll tax clients generally are subject to
contracts with an initial term of 36 months. 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.

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 sales and implementation expenses and, to a lesser extent, marketing
expenses.

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 likely will 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.

In January 1997, the Company acquired all of the outstanding capital stock
of BeneSphere Administrators, Inc. ("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
performance conditions are met. As of June 30, 1998, and in connection with the
financial performance conditions, $2.2 million of the $4.5 million additional
purchase price had been earned. In connection with the acquisition of
BeneSphere, the Company has recorded $4.5 million of goodwill, which is being
amortized ratably over 20 years and could be increased by up to an additional
$2.3 million if additional financial performance conditions are met. In May
1996, the Company acquired substantially all of the business and assets of
Dimension Solutions, Inc. ("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.

As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $17.2 million and $1.2 million, respectively. The
net operating loss carryforwards will expire at various dates beginning with
fiscal 1999 through 2013, 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 amended, 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>
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
reflected in the statements of operations expressed as a percentage of revenue.
There can be no assurance that the indicated trends in revenue growth or
operating results will continue in the future.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................................................. 100.0% 100.0% 100.0%
Operating expenses:
Cost of providing services............................................................. 46.4 49.9 51.5
General and administrative expenses.................................................... 14.8 15.6 14.5
Research and development expenses...................................................... 9.1 10.4 9.9
Client acquisition costs............................................................... 38.9 42.8 38.6
Acquisition of in-process technology................................................... 5.1 -- --
--------- --------- ---------
Total operating expenses............................................................. 114.3 118.7 114.5
--------- --------- ---------
Loss from operations..................................................................... (14.3) (18.7) (14.5)
Interest expense......................................................................... (3.4) (4.3) (1.2)
Other income............................................................................. 0.5 0.2 1.6
--------- --------- ---------
Net loss................................................................................. (17.2)% (22.8)% (14.1)%
--------- --------- ---------
--------- --------- ---------
</TABLE>

YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997

REVENUE. Revenue increased 69.2% to $46.3 million in fiscal 1998 from $27.4
million in fiscal 1997, primarily due to an increase in the number and average
size of the Company's payroll and tax clients and, to a lesser extent, the
inclusion of a full year's results of the Company's benefits administration
services which were introduced January 1997. Interest income earned on payroll
tax funds invested was $11.5 million and $5.9 million for fiscal 1998 and 1997,
respectively. This increase was primarily the result of higher average daily tax
balances in fiscal 1998.

COST OF PROVIDING SERVICES. Cost of providing services increased 74.7% to
$23.9 million in fiscal 1998 from $13.7 million in fiscal 1997 and increased as
a percentage of revenue to 51.5% from 49.9%. The increase in absolute dollars
was primarily due to the increase year-over-year in clients serviced. The
increase as a percentage of revenue was primarily due to building management
infrastructure in the Company's benefits operations and the opening of the
Company's production facility in Irvine, California in fiscal 1998.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 57.1% to $6.7 million in fiscal 1998 from $4.3 million in fiscal 1997
and decreased as a percentage of revenue to 14.5% from 15.6%. The increase in
absolute dollars was primarily due to the hiring of additional management and
administrative personnel to support the Company's growth and, to a lesser
extent, to costs associated with the Company's benefits administration services
which were introduced in January 1997 and included in general and administrative
expenses for the full year of fiscal 1998. The decrease as a percentage of
revenue was due primarily to the allocation of certain fixed costs over higher
revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 61.4% to $4.6 million in fiscal 1998 from $2.8 million in fiscal 1997
and decreased as a percentage of revenue to 9.9% from 10.4%. The increase in
absolute dollars was primarily a result of additional personnel and equipment to
develop enhancements and new features to the Company's existing services.
Research and development expenses decreased as a percentage of revenue due in
part to higher revenue and an increase in the amount of expenses capitalized in
fiscal 1998. Capitalized software development costs were $3.9 million and $1.4
million for fiscal 1998 and 1997, respectively.

21
<PAGE>
CLIENT ACQUISITION COSTS. Client acquisition costs increased 52.6% to $17.9
million in fiscal 1998 from $11.7 million in fiscal 1997 and decreased as a
percentage of revenue to 38.6% from 42.8%. The increase in absolute dollars was
primarily due to the expanded sales and implementation force for payroll and
national tax services, and inclusion of a full year's expenses related to the
Company's benefits administration services introduced in January 1997.

INTEREST EXPENSE. Interest expense decreased 53.2% to $557,000 in fiscal
1998 from $1.2 million in fiscal 1997. The decrease in interest expense was
primarily due to the repayment of subordinated debt and repayment of borrowings
under the Company's secured revolving line of credit with proceeds from the
Company's initial public offering in September 1997.

OTHER INCOME. Other income increased as a percentage of revenue to 1.6% in
fiscal 1998 from 0.2% in fiscal 1997. The increase as a percentage of revenue
was due to higher cash and investment balances resulting from the Company's
initial public offering in September 1997 when compared to the same period the
prior year.

YEARS ENDED JUNE 30, 1997 AND JUNE 30, 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, 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.

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.

22
<PAGE>
QUARTERLY RESULTS

The following table sets forth selected unaudited quarterly financial
information for each of the eight quarters in the period ended June 30, 1998, 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 necessarily indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
1996 1997
------------------------ --------------------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue...................................... $ 4,675 $ 5,524 $ 8,427 $ 8,748 $ 9,227 $ 10,325
Operating Expenses:
Cost of providing services................. 2,288 2,950 3,907 4,514 5,019 5,772
General and administrative expenses........ 622 869 1,441 1,350 1,768 1,600
Research and development expenses.......... 625 683 732 801 1,110 1,020
Client acquisition costs................... 2,215 2,413 3,664 3,414 3,978 4,092
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 5,750 6,915 9,744 10,079 11,875 12,484
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations......................... (1,075) (1,391) (1,317) (1,331) (2,648) (2,159)
Interest expense............................. (215) (305) (380) (290) (255) (119)
Other income................................. 11 1 2 45 26 234
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (1,279) $ (1,695) $ (1,695) $ (1,576) $ (2,877) $ (2,044)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------------
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Cost of providing services................. 48.9 53.4 46.4 51.6 54.4 55.9
General and administrative expenses........ 13.3 15.7 17.1 15.4 19.2 15.5
Research and development expenses.......... 13.4 12.4 8.7 9.2 12.0 9.9
Client acquisition costs................... 47.4 43.7 43.4 39.0 43.1 39.6
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..................... 123.0 125.2 115.6 115.2 128.7 120.9
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations......................... (23.0) (25.2) (15.6) (15.2) (28.7) (20.9)
Interest expense............................. (4.6) (5.5) (4.5) (3.3) (2.8) (1.2)
Other income................................. 0.2 0.0 0.0 0.5 0.3 2.3
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... (27.4)% (30.7 )% (20.1 )% (18.0 )% (31.2 )% (19.8)%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

1998
------------------------
MARCH 31 JUNE 30
----------- -----------

<S> <C> <C>
Revenue...................................... $ 13,611 $ 13,154
Operating Expenses:
Cost of providing services................. 6,424 6,644
General and administrative expenses........ 1,693 1,666
Research and development expenses.......... 1,213 1,242
Client acquisition costs................... 5,569 4,219
----------- -----------
Total operating expenses..................... 14,899 13,771
----------- -----------
Loss from operations......................... (1,288) (617)
Interest expense............................. (87) (96)
Other income................................. 242 250
----------- -----------
Net loss..................................... $ (1,133) $ (463)
----------- -----------
----------- -----------

Revenue...................................... 100.0% 100.0%
Operating Expenses:
Cost of providing services................. 47.2 50.5
General and administrative expenses........ 12.4 12.7
Research and development expenses.......... 9.0 9.4
Client acquisition costs................... 40.9 32.1
----------- -----------
Total operating expenses..................... 109.5 104.7
----------- -----------
Loss from operations......................... (9.5) (4.7)
Interest expense............................. (0.6) (0.7)
Other income................................. 1.8 1.9
----------- -----------
Net loss..................................... (8.3 )% (3.5 )%
----------- -----------
----------- -----------
</TABLE>

Revenue has increased over the last eight quarters primarily as a result of
the increase in the number and average size of the Company's payroll and tax
clients and the introduction of the Company's benefits administration services
in the third fiscal quarter in 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 fiscal quarters of 1998 primarily due to increases in account
management personnel and production costs related to the Company's expanded
client base.

23
<PAGE>
The Company's client acquisition costs typically fluctuate from quarter to
quarter in relation to the addition of new clients. Sales, marketing and
implementation costs incurred to provide services to new clients are expensed as
incurred over the implementation period which typically lasts three to nine
months or longer. A significant portion of these costs (including sales
commissions) are expensed at the time clients begin services. In the third
fiscal quarter of 1998, the increase in client acquisition costs in absolute
dollars was primarily due to commission costs and costs for payroll and national
tax services associated with clients beginning services in January.

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 sales of equity securities, private debt and bank borrowings, and
to a lesser extent, equipment leases. Prior to the initial public offering, the
Company raised approximately $23.4 million in private sales of equity securities
and raised approximately $27.0 million from its initial public offering in
September 1997.

At June 30, 1998, the Company had approximately $13.8 million of cash and
cash equivalents and a $20.0 million secured revolving line of credit, which
expires in December 2000. At June 30, 1998, the Company had no outstanding
borrowings under the line of credit. See Note 3 of Notes to Financial
Statements.

Net cash provided by operating activities for fiscal 1998 was $3.6 million
and net cash used in operating activities for fiscal 1997 and 1996 was $4.1
million and $202,000, respectively. Net cash provided by operating activities in
fiscal 1998 compared to net cash used in operating activities in fiscal 1997 was
primarily the result of increases in accrued liabilities, depreciation and
deferred revenue, and decreases in other assets in fiscal 1998, partially offset
by an increase in prepaid expenses and other current assets. 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 $14.3 million, $4.7 million and
$3.3 million for fiscal 1998, 1997 and 1996, respectively. The increase in net
cash used in investing activities in fiscal 1998 resulted primarily from (i)
capital expenditures for equipment, furniture and fixtures to support the
Company's

24
<PAGE>
increased personnel, (ii) the move of the Company's corporate headquarters in
early fiscal 1998 and (iii) the establishment of the Company's Irvine production
facility in early fiscal 1998. In addition, the Company capitalized software
development costs of $3.9 million, $1.4 million and $645,000 in fiscal 1998,
1997 and 1996 respectively. The Company expects to make additional capital
expenditures for furniture, equipment and fixtures to support the continued
growth of its operations. 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 $19.5 million, $9.8 million
and $6.7 million for fiscal 1998, 1997 and 1996, respectively. Net cash provided
by financing activities for fiscal 1998 related primarily to $27.0 million of
net proceeds from the Company's initial public offering of common stock and
$959,000 from the exercise of warrants. The increase was partially offset by the
payment of $3.9 million of outstanding subordinated debt and the net repayment
of $4.8 million of borrowings under the Company's secured revolving line of
credit. Net cash provided by financing activities for fiscal 1997 was primarily
a result of $9.9 million of net proceeds from the issuance of preferred stock in
March 1997. Net cash provided by financing activities for fiscal 1996 was
primarily the result of $4.0 million from subordinated debt and net proceeds of
$2.5 million from borrowings under line of credit agreements.

The Company believes that the net proceeds from this Offering, together with
existing cash balances, amounts available under its current credit facility 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.

YEAR 2000 COMPLIANCE

The Company has conducted a preliminary review of its internal computer
systems to identify the systems that could be affected by the Year 2000 issue
and to develop a plan to make its systems Year 2000 compliant. Based on this
preliminary review, the Company has discovered certain failures to comply with
Year 2000 requirements. The Company is taking action to correct the noncomplying
features of its systems, and the Company believes that its internal software
systems will be Year 2000 compliant by 2000. There can be no assurance, however,
that the Company's systems will be fully Year 2000 compliant in a timely manner,
and a failure by the Company to make its internal systems Year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company has not determined an estimate
of the costs required to correct the noncomplying features, and such costs could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company does not currently have a contingency
plan in the event that it is unable to make its systems Year 2000 compliant.

25
<PAGE>
effects on its operations of the Year 2000 readiness of key suppliers and
subcontractors. The Company's reliance on suppliers and subcontractors, and,
therefore, on the proper functioning of their information systems and software,
means that failure by such suppliers and subcontractors to address Year 2000
issues could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Impact of Year 2000
Compliance."

INTEREST RATE SWAP AGREEMENTS

During fiscal 1998, the Company entered into various interest rate swap
agreements with a financial institution. The purpose of these agreements is to
convert a portion of the interest the Company earns from collected but
unremitted payroll tax funds from a floating to a fixed rate basis. The Company
considers these agreements to be for "other than trading purposes" and has
accounted for these agreements on an accrual basis, with each net payment or
receipt due or owed under each agreement recognized in earnings during the
period to which the payment or receipt relates, with no recognition on the
balance sheet of the fair value of the agreements. At June 30, 1998, the
aggregate fair value of these agreements was $432,000.

These agreements, with fixed interest rates between 5.736% and 5.905%, each
have a term of two years, one of which has a cancellation option after one year,
and expire at various dates through April 2000. Interest is paid or received
based upon the product of the contractual notional balance multiplied by the
difference in the fixed interest rate and the contractual floating rate option.
The contractual notional balance varies on a monthly basis due to fluctuations
in projected holdings of collected but unremitted payroll tax funds. At June 30,
1998, the notional balance was $204.7 million and the average monthly notional
balance for the remaining term of the agreements was $242.0 million. The
agreements require collateral if interest rates increase and certain other
conditions are met as defined in the agreements. At June 30, 1998, no collateral
was required.

The primary market risk to which the Company is exposed related to these
agreements is interest rate risk. The Company has performed a sensitivity
analysis related to these agreements assuming both positive and negative
parallel shifts in interest rates of 50, 100 and 150 basis points. As a result
of this analysis, the Company has determined that due to its current use of
interest rate swap agreements, the Company would not experience a material
adverse affect in its business, financial condition and results of operations,
related to such hypothetical changes in interest rates during fiscal 1999. See
"Risk Factors -- Investment Risks."

26
<PAGE>
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. The Company's primary service offerings are payroll processing,
payroll tax filing, benefits administration, including the enrollment and
processing of flexible benefits plans and COBRA programs, and human resources
software. 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, 1998, the Company provided services to approximately
1,400 clients. As of June 30, 1998, the Company provided payroll processing
services to approximately 510 clients with an aggregate of approximately 575,000
active employees and an average of approximately 1,100 employees. For the
quarter ended June 30, 1998, the Company processed 4.3 million checks for the
Company's payroll clients. In addition to providing tax filing services for its
payroll clients, as of June 30, 1998 the Company provided national tax filing
services to 72 clients with an aggregate of approximately 1.1 million employees
and an average of approximately 15,200 employees.

The Company differentiates itself from its competitors through its
proprietary PC-based 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 1998.

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 G-2 Research, Inc., third-party payroll
processing, payroll tax filing and benefits administration is expected to
generate approximately $3.9 billion in revenue in 1998 and approximately $9.3
billion in revenue in 2003.

Payroll processing, payroll tax filing and benefits administration lend
themselves to outsourcing because they 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 benefits 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

27
<PAGE>
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.

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 make 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, benefits
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, benefits administration and human resources
software.

PC-BASED 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

28
<PAGE>
systems. In addition, multiple networked PCs facilitate exception processing and
rapid response that large employers require.

CLIENT SERVICE FOCUS. 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.

VALUE-ADDED SERVICES. The Company believes that it provides its clients
higher value-added and more cost-effective payroll services 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 1998.

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'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. 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.

INCREASE SERVICES TO EXISTING CLIENTS. The Company believes that there is a
significant opportunity for it to cross-sell its services to its existing client
base, as few of its current clients use all of the Company's

29
<PAGE>
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 broaden its range of services and service
features, enhance 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 benefits administration services
through the acquisitions of Dimension Solutions and BeneSphere, respectively.
During 1998, the Company formed alliances with SAP AG, a leading provider of
enterprise business solutions, and Sheakly UniService, a leading provider of
unemployment cost control services. See "-- Sales and Marketing."

EXTEND TECHNOLOGY LEADERSHIP. The Company is committed to investing
resources to enhance its industry-leading employee administrative services
technology. The Company is developing a client/server version of its system and
is broadening its administrative services offerings by developing Internet-based
applications. The Company believes that the introduction of such administrative
services offerings will enable it to address the growing demand for the
extension of its applications throughout the enterprise.

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, alliances and investments 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. Clients receive paychecks and reports 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 disputes or inquiries.
Substantially all existing payroll clients utilize the Company's payroll tax
service. In addition, as of June 30, 1998, the Company provided national tax
services to 72 clients with an aggregate of approximately 1.1 million employees
and an average of approximately 15,200 employees.

BENEFITS ADMINISTRATION. The Company's benefits administration services
include flexible benefits enrollment and processing, COBRA administration and
consolidated billing and eligibility tracking. Employees can enroll in and
choose their flexible spending benefits through traditional paper-based forms or
through Internet-accessible enrollment sites using the Company's Enrollnet-TM-
service.

HUMAN RESOURCES SOFTWARE. The Company's human resources software tracks and
reports general employee information, including compensation, benefits, skills,
performance, training, job titles and

30
<PAGE>
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.

The Company continually evaluates the addition of add-on service offerings
to expand the breadth of its solution through alliances, acquisitions or
internal development. Such additional services include administrative services
related to time and attendance, travel and entertainment, unemployment insurance
and 401(k) plans.

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 value-added solution. The Company
maintains an 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. The Company intends to continue providing its clients with a high
level of service by hiring professionals who are experienced in their fields.
Most service personnel have experience in payroll, accounting, human resources
or financial services industries, and many hold Certified Public Accountant or
Certified Payroll Professional accreditations.

The Company continually monitors 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
help develop, identify and optimize new service offerings 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.

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
twelve 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 nine 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.

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<PAGE>
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.

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 intuitive Windows-based interface makes navigation simple
and allows new users to be trained quickly. The Company is developing a new
suite of online self-service administrative services applications accessible
through the Internet that enable clients' employees to view paychecks and other
compensation and benefits data.

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<PAGE>
CLIENTS

The Company targets large companies with complex and changing business needs
in diverse industries. As of June 30, 1998, the Company provided services to
approximately 1,400 clients. Of these clients, approximately 510 were payroll
processing clients, with an aggregate of approximately 575,000 active employees
and an average of approximately 1,100 employees. For the quarter ended June 30,
1998, the Company processed 4.3 million payroll checks for the Company's payroll
clients. The Company began providing national tax filing services to clients in
1996 and, as of June 30, 1998, provided these services to 72 clients with an
aggregate of approximately 1.1 million employees and an average of approximately
15,200 employees. Substantially all existing payroll clients utilize the
Company's payroll tax filing service. For fiscal 1998, no client accounted for
more than 4% of the Company's revenue. Set forth below is a representative list
of the Company's clients, from each of which the Company recognized revenue of
at least $25,000 in fiscal 1998.

<TABLE>
<CAPTION>
TECHNOLOGY CONSUMER AND RETAIL FINANCIAL SERVICES
- -------------------------------- ----------------------------- ---------------------------
<S> <C> <C>
3Com Corporation Airtouch Communications, Inc. California Casualty Group
Advanced Micro Devices, Inc. Amoco Corporation E*TRADE Group, Inc.
Ascend Communications, Inc. Childrens Discovery Centers First Allmerica Financial
AST Research, Inc. of Life
Atmel Corporation America, Inc. Insurance Company
Bay Networks Inc. Coach Leatherwear Co., Inc. North American Title
Cadence Design Systems Inc. Dollar General Corporation Insurance Company
Cisco Systems Inc. Esprit de Corp. U.S. Bancorp
Dell Computer Corporation The Gap, Inc. OTHER
First Data Corporation The Gillette Company Abbott Laboratories
Fujitsu, Ltd. J. C. Penney Company, Inc. Allergan, Inc.
Hitachi America Ltd Koll Management Services, CCH Incorporated
Informix Corporation Inc. Clubcorp International
Integrated Device Technology, Michaels Stores, Inc. Federal Express Corporation
Inc. Natural Wonders, Inc. Pharmacia & Upjohn, Inc.
Intuit Inc. St. John Knits Inc. Raychem Corporation
KLA/Tencor Corporation Sunglass Hut Watkins-Johnson Company
LSI Logic Corporation International, Inc.
Netscape Communications Corp. Toyota Motor Corporation
Newbridge Networks, Inc. U.S. Computer Services
Novell, Inc. Williams-Sonoma, Inc.
Oracle Corporation Ziff Davis Publishing Company
Pacific Scientific Company FOOD PRODUCTS AND SERVICES
Quantum Corporation BonAppetit Management
Read-Rite Corporation Company
Siemens Business Communication Fresh Choice, Inc.
Systems, Inc. Kellogg USA Inc.
Silicon Graphics, Inc. OreIda Foods Inc.
Silicon Systems, Inc. Pacific Coast Producers
Solectron Corporation Specialty Restaurants Corp.
Storage Technology Corporation
Sybase, Inc.
VeriFone, Inc.
</TABLE>

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 1998.
Historically, the Company's client retention rates have been negatively

33
<PAGE>
impacted primarily due to clients ceasing to use the Company's services
following a merger or sale of the client. The Company does not have long-term
contracts with its clients, and the Company's existing contracts do not have
significant penalties for cancellation.

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, 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
twelve months or longer. The Company primarily utilizes insurance brokers to
attract new benefits administration clients.

The Company seeks to attract and retain experienced industry sales
representatives. The Company believes that its long-term competitiveness depends
on increasing further its national presence. The Company believes that
continuing to add direct sales representatives in major metropolitan areas
throughout the United States is the most effective means of increasing its
national client base. Over the past two years, the Company has added sales and
implementation representatives covering major metropolitan areas, including
Atlanta, Chicago, Dallas, New York and Seattle. To support its sales growth in
the eastern United States, the Company intends to open a satellite sales and
implementation center in New Jersey during the fourth quarter of calendar 1998.

The Company's marketing department provides support materials and marketing
communications to sales representatives, promotes public relations, conducts
direct mail campaigns, manages trade show participation, and develops and
manages corporate Web sites.

As part of its strategy to provide a comprehensive suite of employee
administrative services, the Company has recently entered into strategic
alliances with two industry leaders. The Company has formed an alliance with SAP
AG, a leading provider of enterprise business solutions, to offer customers high
levels of flexibility in managing payroll and payroll tax processes by linking
the Company's payroll and tax solution to SAP's HR System. The Company has also
formed an alliance to provide services to clients jointly with Sheakly
UniService, a leading provider of unemployment cost control services.

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. For example, the Company is developing a new suite of online
self-service administrative services applications accessible through the
Internet that enable clients' employees to view paychecks as well as other
compensation and benefits data. In addition, the Company expects to introduce an
integrated payroll and human resources system utilizing client/server technology
that will run on Windows 95 and Windows NT.

The foregoing information 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. See "Risk Factors -- Reliance
on Rapidly Changing Technology; Risks of Software Defects."

COMPETITION

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<PAGE>
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,
certain 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 and results of operations.

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.

PROPRIETARY RIGHTS

The Company's success is dependent in part upon its proprietary software
technology. The Company relies on a combination of contract, copyright and trade
secret laws to establish and protect its proprietary technology. The Company has
no patents, patent applications or registered copyrights. 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 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 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. See "Risk
Factors -- Reliance on Rapidly Changing Technology; Risks of Software Defects."

EMPLOYEES

As of June 30, 1998, the Company had 500 full-time employees. The Company
believes that its relations with its employees are good.

FACILITIES

The Company's headquarters are located in Pleasanton, California and consist
of approximately 130,000 square feet of office space leased through September
2008. The Company has signed a lease for a building to be built adjacent to its
headquarters which will consist of approximately 70,000 square feet, of which
approximately 35,000 square feet is expected to be available in mid-1999, and
the remainder is expected to be available in mid-2000.

The Company also has a sales, implementation and production facility and a
back-up payroll facility in Irvine, California, where it leases approximately
14,000 square feet under a lease which terminates May 2002. In addition, the
Company has a sales office in Kettering, Ohio pursuant to a lease which

35
<PAGE>

terminates in July 1999. The Company intends to open a satellite sales and
implementation center in New Jersey.

The Company's benefits administration processing operations are located in
Bellevue, Washington, where the Company leases approximately 6,500 square feet
under a lease that will terminate in June 2003. The Company is currently
negotiating a lease for a new building in Bellevue to house the Company's
benefits administration processing operations. Such lease is expected to
commence in early 1999.

The Company believes that its existing facilities are adequate for its
current needs and that additional facilities can be leased to meet future needs.

36
<PAGE>
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 1, 1998.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Thomas H. Sinton...................................... 50 Chairman of the Board, President, Chief
Executive Officer, Director
Jeffrey M. Bizzack.................................... 38 Senior Vice President, Sales
Leslie A. Johnson..................................... 49 Senior Vice President, Client Services and Chief
Service Officer
Steven E. Klei........................................ 38 Senior Vice President, Finance, Chief Financial
Officer and Secretary
Robert E. Schneider................................... 40 Senior Vice President, Product Development and
Chief Technical Officer
William T. Clifford(1)................................ 52 Director
David C. Hodgson(2)................................... 41 Director
Ronald W. Readmond(1)(2).............................. 55 Director
Thomas P. Roddy(1).................................... 63 Director
</TABLE>

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

(1) Member of the Audit Committee.

(2) Member of the Compensation 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.

MS. JOHNSON has served as Senior Vice President, Client Services and Chief
Service Officer 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.

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. 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, Product Development and
Chief Technical Officer of the Company since August 1997 and served as Vice
President, Research and Development and Chief

37
<PAGE>
Technical Officer 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, Atlantic Data Services, Inc.,
a publicly-traded information technology consulting 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 June 1998, Mr. Readmond has been President and Chief Operating Officer of
Wit Capital Group Incorporated and 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 since January, 1997. 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, GAP LLC and Thomas H. Sinton
and his affiliates, in connection with the sale of Preferred Stock by the
Company to GAP LLC. Under such agreement, GAP LLC and Mr. Sinton and his
affiliates agreed to vote their shares to elect one director to the Board of
Directors designated by GAP LLC until the third annual meeting of stockholders
after the Company's initial public 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. The Board of Directors is divided into three classes. One class
of directors is elected annually and its members hold office for a three-year
term or until their successors are duly elected and qualified, or until their
earlier removal or resignation. The number of directors may be changed by a
resolution of the Board of Directors. Executive officers are elected by the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.

The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee recommends the engagement of auditors and reviews
the results and scope of the audit and other services provided by the Company's
independent auditors, reviews and evaluates the Company's control functions and
reviews the Company's investment policy. The Compensation Committee makes
recommendations to the Board of Directors concerning salaries and incentive
compensation for employees

38
<PAGE>
and consultants of the Company. The Compensation Committee also administers the
Company's 1996 Stock Option Plan and 1997 Employee Stock Purchase Plan. 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 22,500, 22,500, 93,750, and 22,500 shares,
respectively, of the Company's Common Stock, at exercise prices ranging from
$0.16 to $6.00 per share.

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 years ended June 30, 1997 and June 30, 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(1)
-------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Thomas H. Sinton ................................................. 1998 $ 181,250 $ 120,000 52,500
President and Chief Executive Officer 1997 150,000 -- --
Jeffrey M. Bizzack ............................................... 1998 150,000 115,000 30,000
Senior Vice President, Sales 1997 131,250 82,000 --
Leslie A. Johnson ................................................ 1998 150,000 90,000 30,000
Senior Vice President, Client Services and Chief Service Officer 1997 131,250 30,000 19,500
Robert E. Schneider .............................................. 1998 150,000 75,000 15,000
Senior Vice President, Product Development and Chief Technical 1997 82,980 25,000 --
Officer
Steven E. Klei ................................................... 1998 150,000 50,000 30,000
Senior Vice President, Finance and Chief Financial Officer 1997 127,100 30,000 --
</TABLE>

39
<PAGE>
The following table sets forth information regarding stock options granted
during the fiscal year ended June 30, 1998 to each of the Named Executive
Officers.

OPTION GRANTS IN FISCAL 1998

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
---------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL EXERCISE PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO PRICE PER OPTION TERM ($)(4)
OPTIONS EMPLOYEES IN FISCAL SHARE ----------------------
NAME GRANTED(#)(1) 1998 (%)(2) ($)(3) EXPIRATION DATE 5% 10%
- -------------------------- ------------- ------------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton.......... 52,500 5.78 13.08 11/17/2007 1,902,075 3,321,675
Jeffrey M. Bizzack........ 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
Leslie A. Johnson......... 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
Robert E. Schneider....... 15,000 1.65 5.83 8/12/2007 641,400 1,025,550
Steven E. Klei............ 30,000 3.30 5.83 8/12/2007 1,282,800 2,051,100
</TABLE>

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

(1) 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 follows: 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 907,875 options granted to all employees, consultants
and directors during fiscal 1998.

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

(4) The potential realizable value at 5% and 10% appreciation is calculated by
assuming that the last reported sales price of $31.17 per share on June 30,
1998 appreciates at the indicated rate for the remaining portion of the 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. 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.

40
<PAGE>
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, 1998 and the number and value of securities underlying
unexercised options held by the Named Executive Officers at June 30, 1998.

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

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE- MONEY OPTIONS AT
END(#) FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Sinton................ -- -- -- 52,500 -- 949,377
Jeffrey M. Bizzack.............. -- -- -- 30,000 -- 760,001
Leslie A. Johnson............... -- -- 8,531 40,969 238,868 1,067,133
Robert E. Schneider............. -- -- -- 15,000 -- 380,001
Steven E. Klei.................. -- -- 18,250 46,250 563,986 1,262,181
</TABLE>

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

(1) The amount set forth represents the difference between the closing Common
Stock share price of $31.17 on June 30, 1998, as reported by the Nasdaq
National Market, and the applicable exercise price, multiplied by the
applicable number of options.

STOCK PLANS

1989 STOCK OPTION PLAN. The Company's 1989 Stock Option Plan (the "1989
Plan") provided 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. In February 1997, the
Board of Directors of the Company increased the shares available for future
grants under the 1989 Plan by 2,063,649 for a total of 4,480,872. Options
granted under the 1989 Plan before the effective date of the amendment and
restatement to the 1996 Plan in September, 1997, described below, remain
outstanding in accordance with their terms, but no further options were granted
under the 1989 Plan after the effective date of the amendment and restatement to
the 1996 Plan.

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 September 19, 1997, 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) 375,000 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. 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. As of June 30, 1998, the Company had granted an
aggregate of 4,894,788 shares of Common Stock under the 1996 Plan and the 1989
Plan. As of June 30, 1998, options to purchase an aggregate of 1,800,416 shares
of Common Stock were outstanding under the 1996 Plan and the 1989 Plan and
1,277,510 shares remained available for future grants under the 1996 Plan.

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,

41
<PAGE>
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 187,500
shares, and over the remaining term of the 1996 Plan such participant may not be
granted options to purchase more than 375,000 additional shares. Payments by
option holders 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 and September 1997. The Company has
reserved a total of 750,000 shares of Common Stock for issuance under the
Purchase Plan, of which 170,114 have been issued, 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) 225,000 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 initial offering period under the
Purchase Plan is approximately 26 months and commenced on September 19, 1997 and
will end on the last trading day on or before November 15, 1999. A second
offering period commenced on May 18, 1998 and will 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. 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

42
<PAGE>
statutorily prescribed annual limit of $10,000 in 1998). 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 has entered 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 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.

43
<PAGE>
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 interest rates of 10.0% per year. 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, 1998, 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, 1998, Mr. Bizzack had not paid any amount on
the note.

Lafayette Investments, Inc., an affiliate of the Company, is acting as an
Underwriter in the Offering and will receive a portion of the underwriting
discount. Thomas P. Roddy, a Director of the Company, is President and Chief
Executive Officer of Lafayette Investments, Inc. See "Underwriting."

Thomas H. Sinton and certain affiliates of GAP LLC are the sole stockholders
of InterPro Expense Systems, Inc., a Delaware corporation ("InterPro"), which in
April 1998 purchased rights to certain early-stage travel and entertainment
expense processing software. Mr. Sinton is the President, Chief Executive
Officer and Chairman of the Board of the Company. David C. Hodgson, a Director
of the Company, is a managing member of GAP LLC, affiliates of which hold more
than 5% of the Company's outstanding stock. Because Mr. Sinton and Mr. Hodgson
are officers and Directors of the Company, their investment in InterPro was
required to be, and was, approved by the disinterested directors of the Company.
Any future transaction or relationship between the Company and InterPro would be
entered into on an arms-length basis and would be approved by the Company's
disinterested directors.

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

44
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock, as of June 30, 1998, concerning (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).............................................................. 4,190,246 24.5% 21.1%
General Atlantic Partners, LLC(3)................................................ 2,174,199 12.7 10.9
Jeffrey M. Bizzack(4)............................................................ 180,061 1.1 *
Leslie A. Johnson(5)............................................................. 134,361 * *
Steven E. Klei(6)................................................................ 84,173 * *
Robert E. Schneider(7)........................................................... 118,081 * *
William T. Clifford(8)........................................................... 5,625 * *
David C. Hodgson(3).............................................................. 2,179,824 12.7 11.0
Ronald W. Readmond(9)............................................................ 17,881 * *
Thomas P. Roddy(10).............................................................. 314,731 1.8 1.6
All executive officers and directors as a group (9 persons)(11).................. 7,224,983 42.0 36.1
</TABLE>

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

* Represents beneficial ownership of less than one percent.

(1) Based on 17,114,855 shares of Common Stock outstanding prior to the Offering
and 19,889,855 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 June 30, 1998 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 June 30, 1998.

(2) Includes 14,219 shares issuable upon exercise of vested options and 46,875
shares subject to the Company's repurchase rights. Also includes shares held
by the Silas D. Trust Estate, the Silas Jack Sinton Family Trust, the Thomas
H. Sinton & Jane Nibley Sinton 1989 Irrevocable Trust and Jane N. Sinton as
a custodian for minor children.

(3) Includes 1,851,009 shares held by General Atlantic Partners 39, L.P. ("GAP
39") and 323,190 shares held by GAP Coinvestment Partners, L.P. ("GAP
Coinvestment"). The general partner of GAP 39 is GAP LLC. The managing
members of GAP LLC are Steven A. Denning, Stephen P. Reynolds, David C.
Hodgson, J. Michael Cline, William O. Grabe, William E. Ford, Peter L. Bloom
and Franchon M. Smithson. The same managing members of GAP LLC 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. Also includes with respect to Mr. Hodgson 5,625 shares issuable
upon exercise of vested options held personally by Mr. Hodgson. The address
for GAP 39, GAP Coinvestment, GAP LLC and Mr. Hodgson is c/o General
Atlantic Service Corporation, Three Pickwick Plaza, Greenwich, CT 06830.

45
<PAGE>
(4) Includes 7,500 shares issuable upon exercise of vested options and 17,031
shares subject to the Company's repurchase rights.

(5) Includes 16,844 shares issuable upon exercise of vested options and 6,249
shares subject to the Company's repurchase rights. Also includes 15,894
shares held by Weir L. Johnson, of which 6,843 shares are issuable upon
exercise of vested options and 3,281 shares are subject to the Company's
repurchase rights.

(6) Includes 28,250 shares issuable upon exercise of vested options and 16,406
shares subject to the Company's repurchase rights.

(7) Includes 3,750 shares issuable upon exercise of vested options and 65,625
shares subject to the Company's repurchase rights.

(8) Represents 5,625 shares issuable upon exercise of vested options held by Mr.
Clifford.

(9) Includes 8,437 shares issuable upon exercise of vested options held by Mr.
Readmond.

(10) Includes (i) 39,345 shares held by the Lafayette Investments Inc. of which
Mr. Roddy is President and Chief Executive Officer, (ii) 27,600 shares held
by the Lafayette Investments Inc. 401(k) Plan and Trust, (iii) 51,207 shares
held by Delaware Charter Guarantee FBO Thomas P. Roddy R-IRA, (iv) 24,000
shares held by Guarantee and Trust Co. TTEE FBO Thomas P. Roddy IRA and (v)
13,302 by Mary W. Roddy.

(11) Includes 97,093 shares issuable upon exercise of vested options and 155,467
shares subject to the Company's repurchase rights.

46
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists 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"). The
following summary is qualified in its entirety by reference of the Company's
Certificate of Incorporation, which is filed as an exhibit to the Registration
of which this Prospectus is a part.

COMMON STOCK

As of June 30, 1998, there were 17,114,855 shares of Common Stock
outstanding held of record by 376 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 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, the Company issued Coast Business
Credit ("Coast") a warrant to purchase 28,500 shares of the Company's Common
Stock at an exercise price of $2.65 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 28,500 shares of the Company's Common Stock
at an exercise price of $2.65 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 67,500 shares of Common Stock at an exercise price of
$2.65 per share, exercisable through September 24, 2002. In connection with its
acquisition of BeneSphere, the Company issued warrants to purchase an aggregate
of 75,000 shares of Common Stock to two former shareholders of BeneSphere at an
exercise price of $6.00 per share, exercisable at any time through January 7,
2002. On July 1, 1997, the Company issued a warrant to purchase an aggregate of
30,000 shares of Common Stock at a purchase price of $6.00 per share exercisable
through July 1, 2002.

47
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders (or their permitted transferees) of approximately 9,571,976
shares of Common Stock and 124,500 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. The
Holders have waived their registration right with respect 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, GAP
LLC may request the Company to file a registration statement under the
Securities Act with respect to 1,724,199 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 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 Officer, the President
of the Company, the Board of Directors or the holders of shares entitled to cast
not less than 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

48
<PAGE>
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 is the transfer agent and
registrar for the Company's Common Stock.

49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of Common Stock in the public market
following this Offering, or the perception that such sales could occur, could
adversely affect the market price for the Common Stock. Furthermore, sales of
substantial amounts of Common Stock in the public market after various resale
restrictions lapse could adversely affect the prevailing market price and the
ability of the Company to raise equity capital in the future.

Upon completion of this Offering, the Company will have outstanding an
aggregate of 19,889,855 shares of Common Stock, based upon the number of shares
outstanding as of June 30, 1998. Of these shares, all of the shares sold in this
Offering and the 4,312,500 shares sold in the Company's initial public offering
will be freely tradeable without restriction or further registration under the
Securities Act. There are currently outstanding 2,539,100 shares of Common Stock
issued pursuant to exercise of options granted under equity incentive plans of
the Company, all of which shares are freely tradeable pursuant to Rule 701 of
the Securities Act or registration on a previously filed Form S-8. The remaining
10,263,255 shares of Common Stock were issued and sold by the Company in private
transactions exempt from registration requirements of the Securities Act and
will be available for immediate sale in the public market in accordance with
Rule 144, in some cases subject to transfer restrictions in lock-up agreements
with William Blair & Company, L.L.C. described below and the volume and other
resale limitations of Rule 144, other than the one year holding period. In
addition, as of June 30, 1998, there were outstanding options to purchase
1,800,416 shares of Common Stock and warrants to purchase 229,500 shares of
Common Stock.

The Company and its directors, executive officers and certain stockholders
have agreed not to offer, sell, contract to sell or otherwise dispose of an
aggregate of 5,127,890 shares of Common Stock or any securities convertible into
shares of Common Stock or register for sale under the Securities Act any shares
of Common Stock for a period of 90 days after the date of this Prospectus
without the prior written consent of William Blair & Company, L.L.C., other than
the Company's sale of shares in this Offering, the issuance of Common Stock upon
the exercise of outstanding options and the Company's issuance of options and
shares under existing stock option and stock purchase plans.

The holders of approximately 9,571,976 shares of Common Stock and 124,500
shares of Common Stock issuable upon exercise of warrants are parties to
registration rights agreements with the Company that provide "piggyback"
registration rights that allow such holders, under certain circumstances, to
include shares of Common Stock in registration statements initiated by the
Company or other stockholders. Such registration rights agreements also permit
demand registrations on Form S-3 registration statements, provided the Company
is eligible to register securities on such form. The number of shares sold in
the public market could increase if any holders exercise such rights. See
"Description of Capital Stock -- Registration Rights."

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, for at least one year but less than two years, securities subject to Rule
144, is 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 195,898 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 the shares proposed to be sold for at least two years (including the
holding period of any prior owner except an affiliate) is entitled to sell such
shares pursuant to Rule 144(k) without complying with the requirements relating
to manner of sale, notice and information availability described above. In
general, under Rule 701 of the Securities Act as

50
<PAGE>
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 Company's initial
public offering (which was completed September 19, 1997) in reliance on Rule
144, but without compliance with certain restrictions, including the holding
period, contained in Rule 144.

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.

51
<PAGE>
UNDERWRITING

The several Underwriters named below (the "Underwriters"), for which William
Blair & Company, L.L.C., BancBoston Robertson Stephens Inc. and SG Cowen
Securities Corporation are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement by and among the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to each of the Underwriters, the respective number of shares of
Common Stock set forth opposite each Underwriter's name in the table below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
William Blair & Company, L.L.C................................................... 1,010,000
BancBoston Robertson Stephens Inc................................................ 1,010,000
SG Cowen Securities Corporation.................................................. 505,000
Lafayette Investments, Inc....................................................... 125,000
Needham & Company, Inc........................................................... 125,000
----------
Total...................................................................... 2,775,000
----------
----------
</TABLE>

The nature of the Underwriters' obligations under the Underwriting Agreement
is such that all shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, must be purchased if
any are purchased.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to select dealers at such
price less a concession of not more than $0.78 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 per
share to certain other dealers. After the public offering contemplated hereby,
the public offering price and other selling terms may be changed by the
Representatives.

The Company has granted to the Underwriters an option exercisable within 30
days after the date of this Prospectus, to purchase up to an additional 416,250
shares of Common Stock to cover over-allotments, at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any such additional shares pursuant to this option, each
of the Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the shares
of Common Stock offered hereby.

The Company, its directors and executive officers and certain stockholders
of the Company have agreed not to offer, sell, contract to sell or otherwise
dispose of an aggregate of 5,127,890 shares of Common Stock or any securities
convertible into shares of Common Stock or register for sale under the
Securities Act any shares of Common Stock for a period of 90 days after the date
of this Prospectus without the prior written consent of William Blair & Company,
L.L.C., other than the Company's sale of shares in this Offering, the issuance
of Common Stock upon the exercise of outstanding options and the Company's
issuance of options and shares under existing stock option and stock purchase
plans. See "Shares Eligible for Future Sale."

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
certain persons participating in the Offering may engage in transactions that
may stabilize, maintain or otherwise affect the market price of the Common
Stock, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids. A "stabilizing bid" is a bid for, or the purchase
of, the Common Stock on behalf of the Underwriters

52
<PAGE>
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 managing underwriter 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 Underwriters 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.

One or more of the Underwriters currently act as market makers for the
Common Stock and may engage in "passive market making" in such securities on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions,
underwriters participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market making
transactions during the period when Rule 103 would otherwise prohibit such
activity. Rule 103 prohibits underwriters engaged in passive market making
generally from entering a bid or effecting a purchase price that exceeds the
highest bid for those securities displayed on the Nasdaq National Market by a
market maker that is not participating in the distribution. Under Rule 103, each
underwriter engaged in passive market making is subject to a daily net purchase
limitation equal to the greater of (i) 30% of such entity's average daily
trading volume during the two full calendar months immediately preceding, or any
60 consecutive calendar days ending within the ten calendar days preceding, the
date of the filing of the registration statement under the Securities Act
pertaining to the security to be distributed or (ii) 200 shares of common stock.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

LEGAL MATTERS

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, 1998, certain
members of Wilson Sonsini Goodrich & Rosati, P.C. beneficially owned an
aggregate of 27,603 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 ProBusiness Services, Inc. as of June 30, 1997
and 1998 and for each of the three years in the period ended June 30, 1998
appearing in this Prospectus and elsewhere in the Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 and exhibits and schedules
thereto under the Securities Act, with respect to the 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

53
<PAGE>
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 the Commission upon the payment of
the fees prescribed by the Commission.

The Company is subject to the information requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Commission. Reports, proxy statements and other information filed by the Company
can be inspected and copied (at prescribed rates) at the locations listed above.
Quotations relating to the Company's Common Stock appear on the Nasdaq National
Market and such reports, proxy statements and other information concerning the
Company also can be inspected at the offices of the Nasdaq Stock Market, 1753 K
Street, N.W., Washington, D.C. 20006. 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.

54
<PAGE>
PROBUSINESS SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors............................................................................. F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Stockholders' Equity (Deficit)............................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-8
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
ProBusiness Services, Inc.

We have audited the accompanying balance sheets of ProBusiness Services, Inc. as
of June 30, 1997 and 1998 and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended June 30, 1998. 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 financial position of ProBusiness Services, Inc. at
June 30, 1997 and 1998 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Walnut Creek, California
July 23, 1998

F-2
<PAGE>
PROBUSINESS SERVICES, INC.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents............................................................... $ 5,047 $ 13,771
Accounts receivable, net of allowance of $365,000 at June 30, 1997 and $420,000 at June
30, 1998.............................................................................. 2,476 2,612
Prepaid expenses and other current assets............................................... 643 2,122
---------- ----------
8,166 18,505
Payroll tax funds invested................................................................ 177,626 332,667
---------- ----------
Total current assets...................................................................... 185,792 351,172
Equipment, furniture and fixtures, net.................................................... 7,623 13,958
Other assets.............................................................................. 7,020 10,879
---------- ----------
Total assets.............................................................................. $ 200,435 $ 376,009
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable........................................................................ $ 1,089 $ 1,750
Accrued liabilities..................................................................... 4,984 10,403
Deferred revenue........................................................................ 1,279 2,139
Current portion of capital lease obligations............................................ 773 890
---------- ----------
8,125 15,182
Payroll tax funds collected but unremitted................................................ 177,626 332,667
---------- ----------
Total current liabilities................................................................. 185,751 347,849
Note payable to stockholder............................................................... 250 --
Long-term debt............................................................................ 8,667 --
Capital lease obligations, less current portion........................................... 1,898 1,414
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; authorized: 5,000,000 shares; issued and outstanding:
3,228,034 shares at June 30, 1997..................................................... 3 --
Common stock, $.001 par value; authorized: 60,000,000 shares; issued and outstanding:
2,295,416 shares at June 30, 1997 and 17,114,855 shares at June 30, 1998.............. 2 17
Additional paid-in capital.............................................................. 23,904 53,286
Accumulated deficit..................................................................... (18,952) (25,469)
Notes receivable from stockholders...................................................... (1,088) (1,088)
---------- ----------
Total stockholders' equity................................................................ 3,869 26,746
---------- ----------
Total liabilities and stockholders' equity................................................ $ 200,435 $ 376,009
---------- ----------
---------- ----------
</TABLE>

See accompanying notes.

F-3
<PAGE>
PROBUSINESS SERVICES, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................................... $ 13,863 $ 27,374 $ 46,317
Operating expenses:
Cost of providing services..................................................... 6,435 13,659 23,859
General and administrative expenses............................................ 2,054 4,282 6,727
Research and development expenses.............................................. 1,257 2,841 4,585
Client acquisition costs....................................................... 5,388 11,706 17,858
Acquisition of in-process technology........................................... 711 -- --
--------- --------- ---------
Total operating expenses......................................................... 15,845 32,488 53,029
--------- --------- ---------
Loss from operations............................................................. (1,982) (5,114) (6,712)
Interest expense................................................................. (473) (1,190) (557)
Other income..................................................................... 69 59 752
--------- --------- ---------
Net loss......................................................................... $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Historical basic and diluted net loss per share (NOTE 1)......................... $ (4.91)
---------
---------
Shares used in computing historical basic and diluted net loss per share (NOTE
1).............................................................................. 486
Pro forma basic and diluted net loss per share (NOTE 1).......................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Shares used in computing pro forma basic and diluted net loss per share (NOTE
1).............................................................................. 10,533 15,722
</TABLE>

See accompanying notes.

F-4
<PAGE>
PROBUSINESS SERVICES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------- -------------------------------------
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995........ 2,613,301 $ 2 $ 11,682 20,142 $ -- $ 3 $ (10,321)
Issuance of Series E preferred
stock at $7.94 per share, net
of issuance costs.............. 40,000 -- 317 -- -- -- --
Exercise of stock options....... -- -- -- 1,802,334 2 365 --
Issuance of preferred stock
warrants....................... -- -- 200 -- -- -- --
Net loss........................ -- -- -- -- -- -- (2,386)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1996........ 2,653,301 2 12,199 1,822,476 2 368 (12,707)
Issuance of Series F preferred
stock at $17.40 per share, net
of issuance costs.............. 574,733 1 9,850 -- -- -- --
Exercise of stock options....... -- -- -- 472,940 - 1,166 --
Issuance of preferred stock
warrants....................... -- -- 321 -- -- -- --
Net loss........................ -- -- -- -- -- -- (6,245)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1997........ 3,228,034 3 22,370 2,295,416 2 1,534 (18,952)
Issuance of common stock in
connection with initial public
offering, net of offering
costs.......................... -- -- -- 4,312,500 4 27,005 --
Conversion of preferred stock
into common stock.............. (3,288,034) (3) (22,370) 9,684,102 10 22,363 --
Exercise of warrants............ -- -- -- 415,725 1 958 --
Exercise of stock options....... -- -- -- 236,998 -- 317 --
Issuance of stock under employee
stock purchase plan............ -- -- -- 170,114 -- 1,060 --
Issuance of warrants............ -- -- -- -- -- 49 --
Net loss........................ -- -- -- -- -- -- (6,517)
----------- --- ----------- ----------- ----- ----------- -------------
Balance at June 30, 1998........ -- $ -- $ -- 17,114,855 $ 17 $ 53,286 $ (25,469)
----------- --- ----------- ----------- ----- ----------- -------------
----------- --- ----------- ----------- ----- ----------- -------------

NOTES TOTAL
RECEIVABLE STOCKHOLDERS'
FROM EQUITY
STOCKHOLDERS (DEFICIT)
------------- -------------
<S> <C> <C>
Balance at June 30, 1995........ $ -- $ 1,366
Issuance of Series E preferred
stock at $7.94 per share, net
of issuance costs.............. -- 317
Exercise of stock options....... -- 367
Issuance of preferred stock
warrants....................... -- 200
Net loss........................ -- (2,386)
------------- -------------
Balance at June 30, 1996........ -- (136)
Issuance of Series F preferred
stock at $17.40 per share, net
of issuance costs.............. -- 9,851
Exercise of stock options....... (1,088) 78
Issuance of preferred stock
warrants....................... -- 321
Net loss........................ -- (6,245)
------------- -------------
Balance at June 30, 1997........ (1,088) 3,869
Issuance of common stock in
connection with initial public
offering, net of offering
costs.......................... -- 27,009
Conversion of preferred stock
into common stock.............. -- --
Exercise of warrants............ -- 959
Exercise of stock options....... -- 317
Issuance of stock under employee
stock purchase plan............ -- 1,060
Issuance of warrants............ -- 49
Net loss........................ -- (6,517)
------------- -------------
Balance at June 30, 1998........ $ (1,088) $ 26,746
------------- -------------
------------- -------------
</TABLE>

See accompanying notes.

F-5
<PAGE>
PROBUSINESS SERVICES, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,386) $ (6,245) $ (6,517)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 1,146 2,574 4,285
Acquisition of in-process technology............................................ 711 -- --
Change in operating assets and liabilities:
Accounts receivable, net...................................................... (521) (1,002) (136)
Prepaid expenses and other current assets..................................... (214) (254) (1,479)
Other assets.................................................................. 201 (1,782) 1,577
Accounts payable.............................................................. 360 438 661
Accrued liabilities........................................................... 650 1,990 4,338
Deferred revenue.............................................................. (149) 174 860
--------- --------- ---------
Net cash provided by (used in) operating activities......................... (202) (4,107) 3,589
INVESTING ACTIVITIES
Acquisition of BeneSphere Administrators, Inc., net of cash acquired.............. -- (245) --
Additional consideration paid in connection with the acquisition of BeneSphere
Administrators, Inc.............................................................. -- -- (1,127)
Purchase of equipment, furniture and fixtures..................................... (2,682) (2,775) (9,353)
Capitalization of software development costs...................................... (645) (1,409) (3,858)
Notes receivable from stockholders................................................ -- (295) --
--------- --------- ---------
Net cash used in investing activities....................................... (3,327) (4,724) (14,338)
FINANCING ACTIVITIES
Borrowings under bank line-of-credit agreements................................... 5,934 24,727 6,874
Repayments of borrowings under line-of-credit agreements.......................... (3,478) (23,831) (11,632)
Repayments under long-term debt................................................... -- -- (3,909)
Proceeds from note payable........................................................ 4,000 -- --
Repayments under note payable..................................................... -- (534) --
Proceeds from notes payable to stockholders....................................... 250 275 --
Repayments under notes payable to stockholders.................................... (227) (275) (250)
Principal payments on capital lease obligations................................... (128) (454) (955)
Proceeds from issuance of preferred stock......................................... -- 9,851 --
Proceeds from issuance of common stock............................................ 367 78 29,345
--------- --------- ---------
Net cash provided by financing activities......................................... 6,718 9,837 19,473
--------- --------- ---------
Net increase in cash and cash equivalents......................................... 3,189 1,006 8,724
Cash and cash equivalents, at beginning of year................................... 852 4,041 5,047
--------- --------- ---------
Cash and cash equivalents, at end of year......................................... $ 4,041 $ 5,047 $ 13,771
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-6
<PAGE>
PROBUSINESS SERVICES, INC.

STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest.......................................... $ 377 $ 1,507 $ 552
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment, furniture and fixtures under capital leases................ $ 210 $ 2,644 $ 588
--------- --------- ---------
--------- --------- ---------
Issuance of warrants.............................................................. $ 200 $ 161 $ 49
--------- --------- ---------
--------- --------- ---------
Notes receivable from stockholders issued in connection with stock option
exercises........................................................................ $ -- $ 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 $ --
Liabilities assumed............................................................. -- 2,445 --
Note payable to BeneSphere Administrators, Inc.................................. -- 250 --
--------- --------- ---------
$ -- $ 2,855 $ --
--------- --------- ---------
--------- --------- ---------
BeneSphere contingent consideration............................................... $ -- $ -- $ 2,208
--------- --------- ---------
--------- --------- ---------
</TABLE>

See accompanying notes.

F-7
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

ProBusiness Services, Inc. (the "Company") 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") for approximately
$1,300,000. The transaction was recorded under the purchase method of
accounting, and the results of operations of Dimension Solutions have been
included in the financial statements of the Company beginning May 24, 1996.

On January 1, 1997, the Company acquired all of the outstanding stock of
BeneSphere Administrators, Inc. ("BeneSphere"), a Washington corporation. The
transaction was recorded under the purchase method of accounting, and the
results of operations of BeneSphere have been included in the financial
statements of the Company beginning January 2, 1997 (Note 10).

PAYROLL PROCESSING AND PAYROLL TAX FILING SERVICES

In connection with its payroll tax filing services, the Company collects
funds from clients for payment of payroll taxes, holds such funds in financial
institution until payment is due (such funds being segregated from the Company's
other accounts), remits such funds to the appropriate taxing authorities, and
files related federal, state and local tax returns, coupons, or other required
payroll tax data ("payroll tax filings"). For such services, the Company derives
its payroll tax filing service revenue from fees charged and from interest
income it receives on payroll tax funds temporarily held pending remittance on
behalf of its clients to taxing authorities ("collected but unremitted payroll
tax funds"). These collected but unremitted payroll tax funds and the related
liability to clients for such funds are included in the accompanying 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 payroll tax funds in various financial
instruments which consisted of overnight U.S. government, agency and mortgage
backed repurchase agreements ($40,965,000), money market funds ($134,520,000)
and cash and cash equivalents ($2,141,000) at June 30, 1997, and of overnight
U.S. government, agency and mortgage backed repurchase agreements
($279,801,000), money market funds ($50,076,000) and cash and cash equivalents
($2,790,000) at June 30, 1998. As a result of the types of financial instruments
in which the Company invests, the carrying amount of such investments
approximates fair value. The Company's collected but unremitted payroll tax fund
investments are held primarily with one custodial financial institution.
Interest income earned on collected but unremitted payroll tax funds, which is
classified as revenue, amounted to approximately $1,896,000, $5,925,000, and
$11,521,000 for fiscal 1996, 1997 and 1998, respectively.

The Company's payroll tax filing service is subject to various risks
resulting from errors and omissions in the payment of payroll taxes and related
payroll tax filings. The Company processes data received from client's and
remits funds along with any required payroll tax filings 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 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

F-8
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will not have a material adverse effect on the Company's business, financial
condition or results of operations. At June 30, 1997 and 1998, the Company had
accrued approximately $586,000 and $971,000, respectively, for potential tax
penalties. There can be no assurance that the Company's accruals or insurance
for such penalties will be adequate. In addition, failure by the Company to make
timely or accurate payroll tax payments or filings when due 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
could 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 the investment of
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 of taxes owed to government authorities could 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 accruals 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'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.

INTEREST RATE SWAP AGREEMENTS

F-9
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from collected but unremitted payroll tax funds from a floating to a fixed rate
basis. The Company considers these agreements to be for "other than trading
purposes" and has accounted for these agreements on an accrual basis, with each
net payment or receipt due or owed under each agreement recognized in earnings
during the period to which the payment or receipt relates, with no recognition
on the balance sheet of the fair value of the agreements. At June 30, 1998, the
aggregate fair value of these agreements was $432,000.

These agreements, with fixed interest rates between 5.736% and 5.905%, each
have a term of two years, one of which has a cancellation option after one year,
and expire at various dates through April 2000. Interest is paid or received
based upon the difference in the fixed interest rate and the contractual
floating rate option times the contractual notional balance. The actual notional
balance varies on a monthly basis due to fluctuations in projected holdings of
collected but unremitted payroll tax funds. At June 30, 1998, the notional
balance was $204,700,000 and the average monthly notional balance for the
remaining term of the agreements was $242,000,000. The agreements require
collateral if interest rates increase and certain other conditions are met as
defined in the agreements. At June 30, 1998, no collateral was required.

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 estimates include, but are not
limited to, 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.

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 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.

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 United States. Credit
evaluations are performed as necessary and the Company does not require
collateral from customers.

F-10
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 as
described in FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS 123")
(Note 7).

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS
No. 130, "Reporting Comprehensive Income" ("FAS 130"), and FAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal 1999. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. The Company has not reached a conclusion as to the appropriate
segments, if any, it will be required to report to comply with the provisions of
FAS 131. Adoption of these statements is not expected to have a significant
impact on the Company's financial position, results of operations or cash flows.

In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). The Company is required to
adopt FAS 133 in fiscal 2000. FAS 133 established methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company has not yet
determined what the effect of FAS 133 will be on the operations and financial
position of the Company.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year presentation.

BASIC AND DILUTED NET LOSS PER SHARE (HISTORICAL AND PRO FORMA)

Historical net loss per share is presented under the requirements of FAS No.
128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share

F-11
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
excludes any dilutive effects of options, warrants, convertible securities and
shares subject to repurchase. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Common stock equivalent
shares from convertible preferred stock and from stock options and warrants are
not included in the calculation of diluted net loss per share as the effect is
anti-dilutive. All net loss per share amounts for all periods have been
presented to conform to the FAS 128 requirements.

In February 1998, Staff Accounting Bulletin No. 98 ("SAB 98") was issued and
amends the existing Securities and Exchange Commission ("SEC") staff guidance
primarily to give effect to FAS 128. Under SAB 98, certain shares of convertible
preferred stock, options and warrants to purchase shares of common stock, issued
at prices below the per share price of shares sold in the Company's initial
public offering in September 1997 and previously included in the computations of
shares used in computing net loss per share pursuant to previous staff
accounting bulletins have now been excluded from the computation.

Pro forma net loss per share has been computed as described above and also
gives effect, under SEC guidance, to the conversion of preferred stock to common
stock not included above that automatically converted upon completion of the
Company's initial public offering, using the if-converted method.

A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share follows (in thousands except share
and per share information):

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Historical:
Net loss........................................................................ $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Weighted average shares of common stock outstanding used in computing basic and
diluted net loss per share.................................................... 486 1,999 13,596
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per share............................................ $ (4.91) $ (3.12) $ (0.48)
--------- --------- ---------
--------- --------- ---------
Pro forma:
Net loss........................................................................ $ (6,245) $ (6,517)
--------- ---------
--------- ---------
Shares used in computing basic and diluted net loss per share (from above)...... 1,999 13,596
Pro forma adjustment to reflect the effect of the conversion of preferred stock
from the date of issuance..................................................... 8,534 2,126
--------- ---------
Weighted average shares used in computing pro forma basic and diluted net loss
per share..................................................................... 10,533 15,722
--------- ---------
--------- ---------
Pro forma basic and diluted net loss per share.................................. $ (0.59) $ (0.41)
--------- ---------
--------- ---------
</TABLE>

If the Company had reported net income, the calculation of diluted earnings
per share (historical and pro forma) would have included the shares used in the
computation of historical and pro forma net loss per share as well as an
additional 356,000, 466,000 and 797,000 common equivalent shares related to the
outstanding options and warrants not included above (determined using the
treasury stock method) for fiscal 1996, 1997 and 1998, respectively.

F-12
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. EQUIPMENT, FURNITURE AND FIXTURES

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

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Equipment and leasehold improvements.................................. $ 9,981 $ 18,172
Furniture and fixtures................................................ 1,973 3,239
---------- ----------
11,954 21,411
Less accumulated depreciation and amortization........................ (4,331) (7,453)
---------- ----------
$ 7,623 $ 13,958
---------- ----------
---------- ----------
</TABLE>

Equipment, furniture and fixtures include amounts for assets acquired under
capital leases, principally production, office and computer equipment, of
$3,515,000 and $3,863,000 at June 30, 1997 and 1998, respectively. Accumulated
amortization of these assets was $854,000 and $1,712,000 at June 30, 1997 and
1998, respectively.

3. LONG-TERM DEBT

LINE-OF-CREDIT AGREEMENTS

On June 30, 1998, the Company executed an Amended and Restated Loan and
Security Agreement with a financial institution. The agreement provides for
borrowings that are limited to the lesser of $20,000,000, or the sum of five
times the Company's average monthly net collections, as defined in the
agreement, plus the lesser of five times the Company's average monthly
collections of the interest on tax investment funds as defined in the agreement
or $5,000,000, plus $1,500,000. The agreement superseded all previous
line-of-credit agreements and amendments thereto with the financial institution
that existed as of June 30, 1997.

At June 30, 1998, no borrowings were outstanding under the agreement and the
amount available for borrowing under the agreement was approximately
$20,000,000. Borrowings outstanding under the agreement bear interest at the
bank's prime rate plus 1% (9.5% at June 30, 1998) and are collateralized by
substantially all of the Company's assets not otherwise encumbered. The
financial covenants of the agreement require the Company to maintain minimum net
worth and earnings to debt service ratios. The agreement expires on December 31,
2000, and is subject to automatic and continuous renewal unless termination
notice is given by either party in accordance with the agreement. All borrowings
outstanding at June 30, 1997 totaling $4,758,000, under the previous agreements,
were paid in September 1997 with the proceeds from the Company's initial public
offering.

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. The
subordinated notes and interest accrued thereon were repaid in their entirety in
September 1997 with proceeds from the Company's initial public offering.

F-13
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. LONG-TERM DEBT (CONTINUED)
NOTE PAYABLE TO STOCKHOLDER

A $250,000 subordinated note payable to a stockholder was assumed in the
acquisition of Dimension Solutions. The note was repaid in fiscal 1998.

4. LEASE OBLIGATIONS

The Company leases its facilities and various equipment under non-cancelable
operating leases which expire at various dates through 2010. The Company is also
obligated under a number of capital equipment leases expiring at various dates
through 2003. The future minimum lease payments under capital and operating
leases subsequent to June 30, 1998 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Year ending June 30,
1999................................................................... $ 1,180 $ 3,476
2000................................................................... 1,029 4,067
2001................................................................... 297 4,434
2002................................................................... 158 4,402
2003................................................................... 158 4,186
Thereafter............................................................. -- 25,710
--------- -----------
Total minimum lease payments......................................... 2,822 $ 46,275
-----------
-----------
Less amounts representing interest....................................... 518
---------
Present value of net minimum capital lease obligations................... 2,304
Less current portion..................................................... 890
---------
$ 1,414
---------
---------
</TABLE>

Rent expense was approximately $707,000, $1,487,000 and $3,028,000 for
fiscal 1996, 1997 and 1998, respectively.

5. INCOME TAXES

As of June 30, 1998, the Company had federal and state net operating loss
carryforwards of approximately $17,200,000 and $1,200,000, respectively. The
Company also had federal and state research and development tax credit
carryforwards of approximately $1,057,000 and $442,000, respectively. The
federal net operating loss and credit carryforwards will expire at various dates
beginning with the fiscal year ending 1999 through 2013, if not utilized. The
state net operating loss carryforwards will expire at various dates beginning
with the fiscal 1999 through 2003, if not utilized. The state credit
carryforwards do not expire.

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, as amended (the "Code"), and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.

F-14
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 4,965 $ 5,951
Research and development credit carryforwards.......................... 650 1,499
Depreciation........................................................... 428 1,010
Accrued liabilities and allowances..................................... 330 2,147
--------- ---------
Gross deferred tax assets................................................ 6,373 10,607
Less valuation allowance................................................. (5,988) (9,224)
--------- ---------
Deferred tax assets...................................................... 385 1,383
Deferred tax liabilities:
Capitalized software development costs................................. (313) (1,338)
Other.................................................................. (72) (45)
--------- ---------
Gross deferred tax liabilities........................................... (385) (1,383)
--------- ---------
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 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. The net valuation allowance increased by $2,391,000 and
$3,236,000, respectively during fiscal 1997 and 1998.

6. STOCKHOLDERS' EQUITY

In September 1997, the Company completed its initial public offering of
common stock. The offering consisted of 3,750,000 shares of common stock issued
to the public at $7.33 per share. Upon the closing of the initial public
offering, all outstanding shares of preferred stock were converted into common
stock.

In October 1997, the underwriters exercised an option to purchase an
additional 562,500 shares of common stock at the initial public offering price
of $7.33 per share to cover over-allotments in connection with the initial
public offering.

F-15
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS

The following tables represents a summary of warrants outstanding as of June
30, 1998:

<TABLE>
<CAPTION>
NUMBER OF
EXERCISE PRICE SHARES JUNE
DATE ISSUED EXPIRATION PER SHARE 30, 1998
- ------------------ ------------------ --------------- -------------
<S> <C> <C> <C>
April 1996 April 2001 $ 2.65 28,500
October 1996 October 2001 2.65 28,500
November 1996 September 2002 2.65 67,500
January 1997 January 2002 6.00 75,000
July 1997 July 2002 6.00 30,000
-------------
229,500
-------------
-------------
</TABLE>

In connection with the Company's initial public offering, the Company issued
367,288 shares of common stock upon the exercise of warrants, a portion of which
were exercised pursuant to a net exercise provision, for total proceeds of
$923,000. In addition, during fiscal 1998, the Company issued 48,437 shares of
common stock upon exercise of warrants, a portion of which were exercised
pursuant to net exercise provisions, for a total of $36,000. All other warrants
noted as exercised above were exercised pursuant to net exercise provisions.

STOCK SPLIT

On July 23, 1998, the Board of Directors approved a three-for-two split of
its $.001 par value common stock in the form of a 50% distribution to
stockholders of record as of July 31, 1998. As a result of the stock split,
authorized and outstanding common shares increased 50% and capital in excess of
par was reduced by the par value of the additional common shares issued. The
rights of the holders of these securities were not otherwise modified. All
references in the financial statements to number of shares, per share amounts,
stock option data and market prices of the Company's common stock have been
restated for the effect of the stock split.

7. STOCK OPTION AND STOCK PURCHASE PLANS

STOCK OPTION PLANS

The Company's 1989 Stock Option Plan (the "1989 Plan") provided for the
granting to employees (including officers and employee directors) of "incentive
stock options" within the meaning of the Code and for the granting to employees,
directors and consultants of nonstatutory stock options. In February 1997, the
Board of Directors of the Company increased the shares available for future
grants under the 1989 Plan by 2,063,649 for a total of 4,480,872. Options
granted under the 1989 Plan before the effective date of the amendment and
restatement to the 1996 Plan in September 1997, described below, remain
outstanding in accordance with their terms, but no further options were granted
under the 1989 Plan after the effective date of the amendment and restatement to
the 1996 Plan.

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

F-16
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
employees only. The Company has reserved 1,125,000 shares of common stock for
exercise of stock options under the Executive 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 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 and stockholders approved,
effective upon the initial public offering, an amendment and restatement of the
Executive Plan to rename the 1996 Executive Stock Option Plan to the 1996 Stock
Option Plan (the "1996 Plan") and authorized an increase in the number of shares
reserved for issuance under the 1996 Plan of any unused or canceled shares under
the 1989 Plan, and an annual increase equal to the lesser of (a) 375,000 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. Notes receivable for the purchase of common stock are included in
stockholders' equity (deficit).

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

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- ---------------
<S> <C> <C>
Outstanding at June 30, 1995.................................... 1,528,344 $ 0.17
Granted....................................................... 1,583,895 0.29
Exercised..................................................... (1,802,334) 0.22
Canceled...................................................... (345,703) 0.22
----------- ------
Outstanding at June 30, 1996.................................... 964,202 0.27
Granted....................................................... 994,005 4.83
Exercised..................................................... (472,940) 2.39
Canceled...................................................... (171,603) 2.51
----------- ------
Outstanding at June 30, 1997.................................... 1,313,664 2.67
Granted....................................................... 907,875 11.82
Exercised..................................................... (236,998) 1.34
Canceled...................................................... (184,125) 7.12
----------- ------
Outstanding at June 30, 1998.................................... 1,800,416 $ 6.97
----------- ------
----------- ------
</TABLE>

F-17
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)

As of June 30, 1998, options to purchase 414,884 shares of common stock were
vested and exercisable at an average exercise price of $2.03 per share and
options to purchase 1,277,510 shares were available for future grant. As of June
30, 1998, options to purchase approximately 317,000 shares of common stock had
been exercised which are subject to repurchase.

The weighted-average fair value of options granted during fiscal 1996, 1997
and 1998 was $0.06, $1.01 and $6.98 per share, respectively.

The following table summarizes information concerning currently outstanding
and exercisable options at June 30, 1998:

<TABLE>
<CAPTION>
OUTSTANDING
---------------------------------------- EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- ----------------------------------- ---------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
$0.13 - $0.26...................... 399,084 7.10 $ 0.26 231,235 $ 0.25
$0.83 - $4.83...................... 399,707 8.41 $ 4.02 141,932 $ 3.75
$5.83 - $6.00...................... 620,250 9.03 $ 5.91 40,967 $ 5.86
$12.08 - $31.17.................... 381,375 9.57 $ 18.84 750 $ 19.33
---------- --------- -----------
1,800,416 414,884
---------- ---------
---------- ---------
</TABLE>

STOCK-BASED COMPENSATION

As permitted under FAS 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 FAS 123, which also requires that the information be determined on
an "as adjusted" basis as if the Company had accounted for its stock-based
awards to employees granted subsequent to June 30, 1995, under the fair value
method of FAS 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

F-18
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected life (in years)......................................... 3 2 2
Expected volatility.............................................. 0.001 0.001 0.746
Risk-free interest rate.......................................... 6.2% 6.2% 5.5%
Expected dividend yield.......................................... 0.0% 0.0% 0.0%
</TABLE>

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 1998
--------- --------- ---------
<S> <C> <C> <C>
Net loss, as reported......................................... $ (2,386) $ (6,245) $ (6,517)
--------- --------- ---------
--------- --------- ---------
Net loss, as adjusted......................................... $ (2,403) $ (6,355) $ (7,427)
--------- --------- ---------
--------- --------- ---------
Historical net loss per share, as reported.................... $ (4.91) $ (3.12) $ (0.48)
--------- --------- ---------
--------- --------- ---------
Historical net loss per share, as adjusted.................... $ (4.94) $ (3.18) $ (0.55)
--------- --------- ---------
--------- --------- ---------
Pro forma net loss per share, as reported..................... $ (0.59) $ (0.41)
--------- ---------
--------- ---------
Pro forma net loss per share, as adjusted..................... $ (0.60) $ (0.47)
--------- ---------
--------- ---------
</TABLE>

Because FAS 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 1999.

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,
for which employees who work a minimum of 20 hours per week and for five months
in any calendar year are eligible. There were 750,000 shares of common stock
authorized 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) 225,000 shares, (b) 1.5% of the outstanding shares on such date or
(c) a lesser amount determined by the Board of Directors. As of June 30, 1998,
170,114 shares had been issued for the first purchase. Under the Purchase Plan,
the Company's employees, subject to certain restrictions, may purchase shares of
common stock at the lesser of 85% of the fair market value at either the
beginning of each two-year offering period or the end of each six-month purchase
period within the two-year offering period. Plan purchases are limited to 10% of
each employee's compensation.

F-19
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. EMPLOYEE BENEFIT PLAN

The Company maintains a tax deferred savings plan under section 401(k) of
the Code (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 1996, 1997 or 1998.

9. BALANCE SHEET DETAIL

Other assets consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Capitalized software development costs................................... $ 1,716 $ 5,247
Deferred financing costs................................................. 1,043 --
Prepaid lease expense.................................................... 161 133
Notes receivable from employees.......................................... 376 422
Goodwill and other intangible assets..................................... 2,627 4,493
Deposits and other....................................................... 1,097 584
--------- ---------
$ 7,020 $ 10,879
--------- ---------
--------- ---------
</TABLE>

Accumulated amortization for capitalized software development costs was
approximately $475,000 and $802,000 at June 30, 1997 and 1998, respectively.
Accumulated amortization for goodwill and other intangible assets was
approximately $80,000 and $384,000 at June 30, 1997 and 1998, respectively.

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.

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued expenses......................................................... $ 2,773 $ 4,408
Accrued tax penalties.................................................... 586 971
Accrued payroll and related expenses..................................... 1,361 3,322
Accrued acquisition costs................................................ 144 --
Accrued BeneSphere contingent consideration (Note 10).................... -- 1,081
Other.................................................................... 120 621
--------- ---------
$ 4,984 $ 10,403
--------- ---------
--------- ---------
</TABLE>

10. BUSINESS ACQUISITIONS

In January 1997, the Company acquired all of the outstanding stock of
BeneSphere. 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
75,000 shares of the Company's common stock at a price of $6.00 per

F-20
<PAGE>
PROBUSINESS SERVICES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. BUSINESS ACQUISITIONS (CONTINUED)
share and with an estimated fair value of $160,000, the assumption of $2,445,000
of BeneSphere's liabilities (including acquisition costs) plus additional
contingent consideration based on BeneSphere's revenues in excess of certain
base amounts, as defined in the agreement, over the next two calendar years
following the acquisition which cannot exceed $4,500,000. The contingent
consideration is 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.

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

<TABLE>
<CAPTION>
<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 is being amortized on a straight-line
basis over 20 years.

In January 1998, the Company accrued an additional $2,208,000 of contingent
consideration and recorded goodwill in the same amount related to the BeneSphere
acquisition as described above. As of June 30, 1998, the Company had made two
quarterly payments relating to the contingent consideration and had a remaining
outstanding balance of $1,081,000 which is classified as accrued liabilities.

11. SUBSEQUENT EVENTS

PUBLIC OFFERING

On July 23, 1998, the Board of Directors authorized the Company to proceed
with a public offering of the Company's common stock.

F-21
<PAGE>
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NO DEALER, SALESPERSON 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 OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Safe Harbor for Forward-Looking Statements................................ 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Price Range of Common Stock............................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 27
Management................................................................ 37
Certain Transactions...................................................... 44
Principal Stockholders.................................................... 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Index to Financial Statements............................................. F-1
</TABLE>

2,775,000 SHARES

[LOGO]

COMMON STOCK

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

PROSPECTUS

SEPTEMBER 25, 1998

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

WILLIAM BLAIR & COMPANY

BANCBOSTON
ROBERTSON STEPHENS

SG COWEN

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